August 28, 2003
Tax-deferred saving vehicles like individual retirement accounts (IRAs), private pensions including 401(k)s, certain life insurance products, and government pensions have all expanded remarkably over the past 20 years.
- According to Federal Reserve data, assets in tax-deferred savings vehicles have increased roughly tenfold since 1981 (before adjusting for inflation), compared to only 350 percent in Gross Domestic Product.
- They currently total about $11 trillion.
- Rough estimates suggest $400 billion per year is contributed and a similar amount withdrawn each year.
- From 1981 to 1992, the growth in this already-accrued deferred tax asset was equal to 40 percent to 50 percent of the growth in the national debt; since then, it has become a multiple of the more slowly growing debt.
- At current marginal tax rates in the high twenties, the deferred taxes would equal about $3 trillion, about the size of the national debt held outside the government.
The Treasury Department proposes a major expansion, simplification and reorientation of tax-deferred saving. Three new vehicles would be created: one for employer retirement plans, one for households' retirement plans, and one for any purpose from which withdrawals would be made preretirement without penalty.
The growth in taxes on withdrawals relative to Gross Domestic Product is not fully included in long-run government revenue forecasts, says Boskin.
Source: Michael J. Boskin (Hoover Institution), "Baby Boomers Have the Last Word," Wall Street Journal, August 28, 2003.
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