House Democrats contemplate abolishing 401(k) tax breaks
Mandatory contributions from workers considered
By Sara Hansard
October 12, 2008
Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.
House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee's Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.
A plan by Teresa Ghilarducci, professor of economic-policy analysis at The New School for Social Research
in New York, contains elements that are being considered. She testified last week before Mr. Miller's Education and Labor Committee on her proposal.
At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.
Under Ms. Ghilarducci's plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5% of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3% a year, adjusted for inflation.
The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
"I want to stop the federal subsidy of 401(k)s," Ms. Ghilarducci said in an interview. "401(k)s can continue to exist, but they won't have the benefit of the subsidy of the tax break."
Under the current 401(k) system, investors are charged relatively high retail fees, Ms. Ghilarducci said.
"I want to spend our nation's dollar for retirement security better. Everybody would now be covered" if the plan were adopted, Ms. Ghilarducci said.
She has been in contact with Mr. Miller and Mr. McDermott about her plan, and they are interested in pursuing it, she said.
"This [plan] certainly is intriguing," said Mike DeCesare, press secretary for Mr. McDermott.
"That is part of the discussion," he said.
While Mr. Miller stopped short of calling for Ms. Ghilarducci's plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.