September 14, 2017

Senators Draw Line On Tax Reform: Workers’ Retirement Savings Will Not Bankroll Corporate Tax Cuts

Cardin, Brown, Wyden, Stabenow, Casey Say No to Proposals to Tax Retirement Savings for Working Families

WASHINGTON – U.S. Senator Ben Cardin (D-Md.) and other top Democrats on the Senate Finance Committee – Senators Sherrod Brown (D-Ohio), Ron Wyden (D-Ore.), Debbie Stabenow (D-Mich.) and Bob Casey (D-Pa.) – have warned the White House and Senate and House leaders against funding corporate tax breaks by slapping new taxes on retirement savings for workers. The senators sent a letter today in opposition to a reported Republican corporate tax break pay-for that would force all workers into Roth retirement savings plans, reducing workers’ take home pay and curtailing the freedom workers currently have to choose the best plan for themselves – making it more expensive for workers to save.

“At a time when working families are already struggling to get ahead, reducing or taking away tax-deferred retirement savings options could have significant long-term consequences,” the Senators wrote. “Tax reform should increase working families’ take-home pay, encourage savings, grow jobs and the economy, reward companies that invest in American workers and their communities, and maintain sound fiscal policy. So-called ‘rothification’ of retirement savings fails that test on all counts.”

So-called ‘rothification,’ would take away the freedom Americans currently have to choose the retirement savings plan that works best for them. Instead, it would force everyone into a Roth account. Unlike 401ks, IRAs or other retirement savings plans many Americans currently use, Roth savings are taxed up front, reducing workers’ take home pay and making it more expensive for Americans to save for retirement.

Roth plans are also more expensive for employers to offer and would make it harder for small businesses to provide retirement plans for their employees.

Further, the Senators also pointed out that rothification is fiscally irresponsible and would add to the federal deficit. “This proposal is a budget gimmick that lets Congress raise revenue by pushing income recognition from outside the ten-year budget window to inside the ten-year budget window,” the Senators wrote.

The letter was sent to Treasury Secretary Steve Mnuchin, White House Chief Economic Advisor Gary Cohn, Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, Finance Chairman Orrin Hatch and House Ways and Means Chairman Kevin Brady.

Full text of the letter is below.

Dear Secretary Mnuchin, Mr. Cohn, Leader McConnell, Speaker Ryan, Chairman Hatch and Chairman Brady:

As you consider options for building a fair and progressive tax code, while maintaining fiscal responsibility, we urge you to reject any proposal that would reduce or eliminate incentives for working families to save for retirement.  Millions of Americans rely on 401(k)s, IRAs, and other plans to save for their retirement and their family’s future. Putting those savings vehicles – and the financial security of seniors – at risk is antithetical to the spirit of tax reform.  Tax cuts for corporations and the wealthiest Americans should not be paid for by increasing taxes on middle class families saving for retirement.

For many hardworking Americans, the tax incentive for retirement savings is a critically-important tool for building long-term financial security. Four out of five households say the incentives and favorable tax treatment of their retirement accounts encourage them to save.  At a time when working families are already struggling to get ahead, reducing or taking away tax-deferred retirement savings options could have significant long-term consequences.

We are particularly concerned about rumored proposals to eliminate the traditional, tax-deferred treatment of 401(k) and IRA contributions and mandate the use of after-tax, Roth accounts.  Roth accounts can be a better tool under certain circumstances for retirement saving.  However, this is not always the case for all families.  The current practice of allowing families the freedom to choose the type of retirement tool that is most beneficial for them based on their unique circumstances makes sense given this dynamic.  Tax reform should preserve this freedom and not end it. 

Families today are already not saving enough for retirement, and we are concerned that mandating Roth savings will diminish their ability to save even further. Those with limited discretionary income will need to reduce their current level of saving to afford the immediate taxes due on their savings, or they will need to reduce other necessary spending, such as on education, child care and housing costs.  To the extent that these affected savers are small business owners, they may decide it is not worth the annual cost and time to establish and maintain a retirement plan at all, which will have the cascading effect of reducing workplace saving options and saving rates for their employees. 

Importantly, both the tax-cut and the revenue generated by mandating Roth accounts is a mirage and will not deliver an immediate income boost for many in the middle class.   Even if you assume that all of the benefits of tax reform will accrue to the middle-class, the “rothification” proposal makes those tax cuts a shell game – reducing current take-home pay with one hand for those that need to maintain their current level of savings while cutting their tax rates with the other. At worst, it is theft, reducing the take home pay for working families to finance tax cuts for the wealthy.

We are also concerned that from a fiscal perspective mandating Roth savings is a sham. As you know, retirement plan contributions are tax deferred, not tax exempt.  This proposal is a budget gimmick that lets Congress raise revenue by pushing income recognition from outside the ten-year budget window to inside the ten-year budget window.  This is not revenue on which tax cuts should be based.  Using this revenue to pay for tax cuts will require future taxes to make up for revenue lost outside the budget window, or will require painful budget cuts to critical programs, such as in Medicaid, assistance for higher education, and disaster recovery.

Tax reform should increase working families’ take-home pay, encourage savings, grow jobs and the economy, reward companies that invest in American workers and their communities, and maintain sound fiscal policy. So-called “rothification” of retirement savings fails that test on all counts.

Sincerely, 

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