The American retirement system is built for the rich - The Washington Post - 0 views
www.washingtonpost.com/...tirement-ira-inequality-budget
retirement system rich wealth IRA benefits inequality politics history policy tax tax shelter
shared by Javier E on 24 Apr 22
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While loudly and proudly proclaiming that their goal is to nurture nest eggs for the working class, lawmakers have constructed a complex of tax shelters for the well-to-do. The lopsided result is that as of 2019, nearly 29,000 taxpayers had amassed “mega-IRAs” — individual retirement accounts with balances of $5 million or more — while half of American households had no retirement accounts at all.
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according to the Congressional Budget Office, the top 10th of households reap a larger share of the income tax subsidy for retirement savings than the bottom 80 percent.
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It’s working out just fine for the financial institutions that manage assets in IRAs and 401(k)s. The combined amount in those vehicles reached $21.6 trillion at the end of 2021 — up fivefold since 2000 — and the more money that pours in, the more that managers collect in fees
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University of Virginia law professor Michael Doran — who held tax policy roles at the Treasury Department under Presidents Bill Clinton and George W. Bush — calls the current state of affairs “the great American retirement fraud.”
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Secure 2.0 would take the fraud to a new level: Its congressional supporters have engaged in Enron-style accounting gimmicks to mask the bill’s effects on deficit
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from the outset, IRAs were a generous gift to the upper class. At the time, very few low- and middle-income individuals could afford to stash $1,500 in a retirement account each year — median income for U.S. households was $11,100 in 1974 — so the people taking full advantage of the new IRAs tended to be relatively rich
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since the benefit was structured as a deduction, it was worth more to taxpayers in higher income brackets.
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In the nearly half-century since, Congress has continually expanded the amount that individuals can pour into tax-deferred savings accounts.
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Now, the JCT estimates that 401(k)s and other similar defined-contribution plans cost the federal government $200 billion per year.
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individuals can contribute up to $6,000 per year to an IRA ($7,000 if age 50 or older), plus $20,500 to a 401(k) ($27,000 for 50-year-olds and up), with their employers potentially chipping in to bring the 401(k) total to $61,000 ($67,500 for the over-50 set).
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In 2018, the most recent year for which data is available, 58 percent of taxpayers with wage income made no contribution to 401(k)-style plans, and less than 4 percent bumped up against the contribution cap.
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I calculated that an individual who made the maximum 401(k) contributions since 1990, investing exclusively in an S&P 500 index fund, would have more than $7 million in her account today.
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When JCT released data last summer showing that 28,615 taxpayers had accumulated $5 million or more in IRAs, lawmakers cried foul. Rep. Richard Neal (D-Mass.), who as chairman of the Ways and Means Committee is the top tax writer in the House, lamented the “exploitation” of IRAs. “IRAs are intended to help Americans achieve long-term financial security, not to enable those who already have extraordinary wealth to avoid paying their fair share in taxes,”
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(The very largest IRAs, like PayPal co-founder Peter Thiel’s reported $5 billion account, result from a different loophole: the ability of founders and early-stage investors to stuff IRAs with start-up stock
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Forbes revealed more than a decade ago that Thiel and another PayPal co-founder were using their IRAs to shelter entrepreneurial earnings; the Government Accountability Office flagged the IRA-stuffing phenomenon in 2014; and rather than clamping down, lawmakers from both parties sat on their hands.)
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The Secure 2.0 bill, sponsored by Neal, doubles down on the inequities of the status quo. It will inevitably result in even more of the mega-IRAs that Neal and other Democrats decry.
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Under current law, taxpayers must begin to take withdrawals from their 401(k)s and traditional IRAs at age 72. (It had been 70½ before Secure 1.0, signed into law by President Donald Trump in 2019, raised the age by a year and a half.
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Secure 2.0 would bump that up to age 75. The change would mean that taxpayers with supersize IRAs could enjoy three extra years of tax-free growth before they needed to take money out
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Lower-income retirees wouldn’t benefit because they don’t have the luxury of holding off on withdrawals, which they need to cover living expenses.
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Another provision would lift the cap on 401(k) catch-up contributions at ages 62, 63 and 64 from $6,500 to $10,000. Factoring in employer matching contributions, that would raise the maximum 401(k) inflow to $71,000 per year.
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if lawmakers were genuinely concerned about retirement security for people who need it, they wouldn’t start by aiding taxpayers who can afford to save more each year than most Americans earn. The higher limit on catch-up contributions will simply allow high-income taxpayers to race further ahead.
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The top-weighted benefits of Secure 2.0 might be tolerable if they were offset by other tax increases on the rich — if this were all just moving money from one deep pocket to another. But the items audaciously labeled as “revenue provisions” in the bill generate revenue as real as Monopoly money.
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The Rothification provisions in Secure 2.0 bring $35 billion of revenue into the 10-year window — ostensibly offsetting the cost of the bill’s giveaways — but the $35 billion is pure make-believe: It comes at the expense of an equivalent amount of revenue down the road.
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If lawmakers from either party were truly concerned about the plight of low-income retirees, they would focus on strengthening Social Security, which actually provides a safety net for older people, rather than adding more deficit-financed bells and whistles to retirement accounts for the rich.