Killing 401(k) Tax Benefits Could Help Save Social Security, New Research Shows
- College Graduates Could Have an Easier Time Getting Jobs Next Year
- Spirit Airlines Bankruptcy: Are Flights Canceled? What About Rewards? Your FAQs, Answered
- When Will Bitcoin Hit $100K? Here's What Crypto Experts Predict
- Here Are the Top 10 Tax-Friendly States in the U.S.
- Time Is Running Out to Claim Up to $2,500 in a Cash App Settlement
- Olympians Can't Pay Their Bills. Celebrities and Crowdfunding Are Coming to the Rescue
- How Much Is an Olympic Gold Medal Worth? Less Than You'd Think
- Credit Scores Fall and Bankruptcies Climb in States With Legal Sports Gambling
- To Lower Home Prices, Builders Are Cutting Back on… Hallways?
- 8 Things People Have Stopped Buying (and Why)
A new idea for addressing Social Security’s looming funding gap proposes that Congress eliminate tax advantages for 401(k)s to come up with funds to continue paying retirees’ benefits.
Ending certain tax preferences for retirement plans could correlate to a $185 billion annual increase in tax revenues, which would cover most of Social Security’s funding shortfall, according to a brief published by the Center for Retirement Research at Boston College.
Social Security is facing a funding gap. If no action is taken, Social Security benefits are at risk of being cut by 20% in 2034 — the projected depletion date for surpluses in Social Security trust funds.
While that’s a decade away, Alicia Munnell, management sciences professor and director of the center, says the goal of the research is to spur action from lawmakers who haven’t shown much progress on any other solutions to fix Social Security.
“The argument usually is over benefit cuts versus tax increases," Munnell says. "This seemed like a way to avoid that debate and break the deadlock."
Repeal 401(k) tax benefits to fund Social Security?
Tax benefits for 401(k)s allow you to contribute pre-tax earnings to your account — often with an employer match of a few percent of your salary. Typically, you delay paying any taxes until withdrawal in retirement, when you tend to be in a lower tax bracket. More than a third of working-age Americans have 401(k)-style retirement accounts, according to Census Bureau data.
The brief from Boston College's retirement research center supports the argument for repealing 401(k) tax benefits with statistics showing that high earners benefit most from them.
"Upper-income taxpayers are more likely to have access to employer-sponsored retirement plans, are more likely to participate in their employer’s plan, and contribute more when they do participate," Munnell and coauthor Andrew Biggs, senior fellow at the American Enterprise Institute, wrote in the brief.
The fact that higher-income people benefit more from 401(k) tax benefits has been recognized by both Democrats and Republicans in Washington over the years, but in different contexts. Some Democrats have called to increase 401(k) tax benefits for lower-income people, while there have been Republican pushes to reduce 401(k) tax subsidies.
It’s unclear whether the idea of repealing 401(k) tax benefits would be any more appealing to the public than other proposed fixes that are usually unpopular, like raising taxes or increasing the retirement age.
The brief authors contend that 401(k) tax benefits do not incentivize Americans to save more for retirement — or at least not by a significant amount, and mainly benefit upper-income people.
But many Americans love their 401(k)s and consider them central to their retirement planning. Experts are already concerned that Americans aren't saving enough for retirement in accounts like 401(k)s, and eliminating tax benefits could be a further setback.
More from Money:
When Social Security Recipients Will Get Their Checks in February
