Are Retirement Programs Affecting Your Social Security Payments? What Financial Experts Say
Written by
Vance Cariaga
Edited by
Daria Uhlig
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Private retirement plans such as 401(k)s and IRAs are designed to help Americans bolster their nest eggs so they don’t have to depend too heavily on Social Security checks. Although private plans don’t directly impact your Social Security payments, they could have an indirect effect.
As previously reported by GOBankingRates, a recent paper from the Center for Retirement Research at Boston College suggests that eliminating tax preferences included in 401(k)s and other employer-sponsored retirement programs could help fix Social Security’s looming funding shortfall.
That shortfall involves Social Security’s Old Age and Survivors Insurance (OASI) Trust Fund, which is expected to run out of money within a decade. When it does, Social Security will be solely reliant on payroll taxes for funding — and those taxes only cover about 77% of current benefits.
The Center for Retirement Research paper, published in January, proposes to repeal retirement saving tax preferences on employer-sponsored plans and use the ensuing revenue to address Social Security’s long-term funding gap. Researchers cited U.S. Treasury Department estimates showing that tax preferences for employer-sponsored retirement plans and IRAs reduced federal income taxes, and thus revenue, by about $185 billion to $189 billion in 2020.
“Ultimately, reducing tax expenditures for retirement plans could be an effective way to help address other pressing demands on the federal budget, such as Social Security’s financing shortfall,” the paper’s authors wrote.
The implication is that while private retirement plans have no direct connection to Social Security payments, ending their tax advantages could have an impact by keeping Social Security fully funded for a longer period of time. In turn, Social Security recipients might not face the threat of benefit cuts when the OASI fund goes broke.
Supporters of ending tax preferences for employer-sponsored plans point to data showing that 401(k)s mainly help the wealthy, USA Today reported, citing Survey of Consumer Finances data showing that the median retirement account for households in the top 10% by income held $559,000 as of 2022. Ninety-three percent of those top-earning households had retirement plans.
In contrast, the median retirement plan for middle-income Americans held only $39,000 — and nearly half of these Americans had no retirement savings. The inequities are even more pronounced for lower income Americans, few of whom even have retirement plans.
But tax-advantaged retirement programs have plenty of supporters, especially in the financial services and employee benefits industries.
“It’s not only the rich [who benefit],” Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, told USA Today. “A lot of middle-class people have 401(k)s, and typically, that’s the bulk of their savings outside of their homes.”
Instead of eliminating the tax benefits, some experts recommend that Congress modify them so middle-class Americans can save for retirement while eliminating unfair tax breaks for the wealthy.
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