NCPA - National Center for Policy Analysis

Taxing Retirement Funds

June 30, 2003

One of the hottest documents circulating around Washington today is a highly technical, statistics-laden, 131-page paper by Hoover Institution economist Michael Boskin. First reported by Jim McTague in Barron's on June 16, it estimates that the taxation of pension assets, including Individual Retirement Accounts and 401(k) plans, will yield a $12 trillion (in today's dollars) windfall to the federal government between now and 2040.

Business Week followed up with a major story in its June 30 issue. It noted that if Boskin's numbers are correct, this unexpected revenue stream would make up the entire shortfall in Social Security and Medicare through 2040. This possibility led Congressman Jim Saxton, New Jersey Republican, to declare that gloom over the government's long-term fiscal imbalance is "exaggerated."

We can get a back-of-the envelope estimate of what Boskin did by looking at the total assets in tax-deferred accounts today, which amount to $10.5 trillion according to the Federal Reserve.

  • These will generate about $3 trillion in tax revenue (in today's dollars) even if no one makes another contribution.
  • This revenue stream will rise in future years by the same rate of return that individuals receive on their investments.
  • With new contributions of some $400 billion annually, $12 trillion in revenue between now and 2040 from taxing withdrawals actually seems like a rather conservative estimate.

Experts are already pouring over Boskin's numbers and they may well be revised before he publishes his paper. The important thing is not the precise estimate, but the order of magnitude and the acknowledgement of a future revenue stream for the government that was previously unacknowledged.

Source: Bruce Bartlett, "Taxing Retirement Funds," National Center for Policy Analysis, June 30, 2003.


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