POLITICO: "How your 401k ate the federal budget"

[Tass]

https://www.politico.com/news/2024/04/13/how-your-401k-ate-the-federal-budget-00150319

"The success of the retirement industry and its advocates in Congress has put a sinkhole in the federal budget at a time when entitlements are under threat. While the cost to the Treasury for tax-advantaged retirement savings was $81 billion in 1995, it has since swelled to over $369 billion in 2023 and, in the wake of Secure 1.0 and 2.0, is expected to nearly double to $659 billion in 2027.

...

The latest expansion of private retirement savings comes at a time when Social Security, which the majority of American seniors rely on to cover basic living expenses, faces insolvency in 2034. Secure 2.0 sailed through Congress shortly before lawmakers convened working groups to try to fix Social Security’s $119 billion cash shortfall, which amounted to less than half of a single year’s worth of tax benefits for retirement savings that mostly go to higher earners."

Long thorough article summarizing the history of tax-advantaged retirement savings in the US and illustrating just how many people make money off of its existence.

[uniwelder]

I'm all for incentivizing retirement savings, but something that really struck me is how ineffective the Saver's Credit is, particularly because its nonrefundable.

"The bill also saw the birth of a tax credit for low-income savers. The so-called saver’s credit was maxed out at a government match of $1,000 but research found that few ended up claiming the credit because those who qualified owed little to no tax to begin with.

After these changes, assets in IRAs and defined contribution plans accelerated sharply, growing by 72 percent in just six years. But Federal Reserve data was showing that the bottom quintile of earners was getting close to nothing of the action.

Between 1995 and 2007, the percentage of the lowest-income savers with retirement accounts grew only slightly from 8.9 percent to 10.7 percent. Meanwhile, the median account balances for the lowest-income savers dropped from $19,350 to $9,300. By contrast, the median balances for highest-income savers more than doubled."

[Chris Pascale]

Googled politico, not enouhg in 401k and see that they've been working this angle in odd ways over the years.

[Tass]

Googled politico, not enouhg in 401k and see that they've been working this angle in odd ways over the years.

If you have a critique, I'd love to hear it spelled out... Just googling that did not clarify your point for me.

[Telecaster]

One of the things that isn't talked about much in the MMM/FIRE community is that we are in this weird, small segment of society that for the most part do not have high incomes but benefit from portions of the tax code designed to benefit high income earners. 

One example is the 401(k).   The stated purpose is to make it easier to save for retirement.   But as the article points out, most of the benefits flow to high income people who do not need help saving.  Another example is the beloved HSA.   Does not help people who cannot afford to pay higher out of pocket costs.  Only helps high income people in higher tax brackets.  On and on. 

I believe it is ethical to follow the tax code as written, however the tax code is designed to mostly benefit rich people. 

[Fru-Gal]

I believe it is ethical to follow the tax code as written, however the tax code is designed to mostly benefit rich people.

Exactly. If we’re exploiting “loopholes” by using tax-advantaged savings and using ACA, the billionaires and corporations are exploiting MANY MORE that cost our country far more.

Personally I have always understood that we were doing exactly that, using portions of the code that benefitted the rich (capital gains) and others that benefit the poor (ACA). Where I would draw the line for myself is not going to the food bank, for example (though you’d be amazed at all the nice cars lining up for the food bank in some places).

And to Chris’s point, these are evergreen click-bait themes: Blame a minority of people succeeding at something for the travails of a larger group of people failing to make sensible choices, in this case people successfully using their 401(k) WHICH REPLACED ALL PENSIONS somehow being responsible for Federal mismanagement of funds.

[uniwelder]

One of the things that isn't talked about much in the MMM/FIRE community is that we are in this weird, small segment of society that for the most part do not have high incomes but benefit from portions of the tax code designed to benefit high income earners. 

Yup, that describes my wife and I completely.  With her 70k salary, we paid $0 federal tax this past year.  We would have owed $700, but the Saver's Credit took care of that.  When both of us were working, we were maxing our 403b, 457b, Roth IRA, and HSA.  That was something like 100k being packed away tax free (I believe our Roth wasn't taxed either), plus we'd usually qualify for the Saver Credit then too.

[Michael in ABQ]

I started to read that article yesterday but after 5-10 minutes I realized I was only about half-way through, and it seemed to just be a mixture of the history of the 401k along with how evil lobbying is and a drumbeat of billions of dollars lost because people got investments gains without the federal government taking a cut. I scrolled through the rest but didn't see anything worthwhile. Just a bunch of complaining that poor people don't get to take advantage of 401ks while mostly ignoring Roth IRAs or traditional IRAs or the fact that plenty of people with tax-advantaged accounts at their job fail to take advantage of them.

As a company commander I was constantly encouraging my Soldiers to put aside part of their paycheck in the Thrift Savings Plan (federal government 401k) - especially when we were deployed, and you could make tax free contributions to a Roth 401k (tax free going in and coming out). But the average Soldier was 20-25 and had little or no interest in saving for retirement. You can lead a horse to water, but you can't make them drink.

[Tass]

I believe it is ethical to follow the tax code as written, however the tax code is designed to mostly benefit rich people.

Exactly. If we’re exploiting “loopholes” by using tax-advantaged savings and using ACA, the billionaires and corporations are exploiting MANY MORE that cost our country far more.

Personally I have always understood that we were doing exactly that, using portions of the code that benefitted the rich (capital gains) and others that benefit the poor (ACA). Where I would draw the line for myself is not going to the food bank, for example (though you’d be amazed at all the nice cars lining up for the food bank in some places).

And to Chris’s point, these are evergreen click-bait themes: Blame a minority of people succeeding at something for the travails of a larger group of people failing to make sensible choices, in this case people successfully using their 401(k) WHICH REPLACED ALL PENSIONS somehow being responsible for Federal mismanagement of funds.

I agree with Telecaster--I don't have any moral qualms about using a 401k. I suppose the article headline (which I acknowledge I reproduced) places the blame on the individual, and that's not really fair.

I don't think the article itself makes this connection though (remember journalists often do not write their own headlines). The point isn't "It's bad to use your 401k!," it's to put in perspective that the existence of these tax breaks are decisions with real repercussions made by our representative government. Specifically, the tax breaks were recently expanded with no pushback from the same deficit hawks who want to cut Social Security; does that decision make sense? Just because a decision benefits me doesn't mean it's a wise decision overall.

You can lead a horse to water, but you can't make them drink.

I think this is a cop out. It's true when counseling individuals, sure, but this is about designing systems to benefit millions of people. If the system is failing to serve a large number of those people, it's worth considering whether the failure is in the system. A system that's designed to reward people who behave perfectly and fail those who behave like average humans is a hostile system.

We know, for example, that wayyyy more people will save money in their 401k when enrollment is opt-out, rather than opt-in. To overuse your metaphor, leading those horses one step closer to water meant that way more of them started drinking. If half your horses are dying of thirst, I submit that you should investigate why they are having such trouble instead of throwing your hands up and saying that making them drink isn't your responsibility.

To be clear, I'm sharing my takeaway from the article here, not necessarily trying to evangelize about it; I'm eager to hear counter points and open to changing my mind.

[Fru-Gal]

I agree with the opt-out approach. I don’t remember when I started with my 401(k), but I was in my 20s. My first one I cashed out, also in my 20s. Learned from that mistake. Second one, I only started contributing to after overhearing a same-age colleague talking about how much they were putting in. I don’t know how much I put in, but whatever it was it was sufficient for FIRE 25 years later. (We also had a pension, but that ended while I was at that job (20+ years ago), and it was rolled over into an IRA which is now my biggest chunk of savings.)

Through tons of difficult financial times, people encouraged me to borrow/cash out my IRA/401(k). I never did, thankfully.

[reeshau]

One of the things that isn't talked about much in the MMM/FIRE community is that we are in this weird, small segment of society that for the most part do not have high incomes but benefit from portions of the tax code designed to benefit high income earners. 

Yup, that describes my wife and I completely.  With her 70k salary, we paid $0 federal tax this past year.  We would have owed $700, but the Saver's Credit took care of that.  When both of us were working, we were maxing our 403b, 457b, Roth IRA, and HSA.  That was something like 100k being packed away tax free (I believe our Roth wasn't taxed either), plus we'd usually qualify for the Saver Credit then too.

0% LTCG, baby!  I'm living the decade before 59 1/2 almost the same as if I was withdrawing from my Roth, rather than a taxable account.  Each year I nibble at my traditional IRA balance with a Roth conversion, to soak up those tax credits and balance out my ACA subsidies.

Usually, if I get so far as to discuss the specifics of our situation in a conversation, people (working or retired) are flabbergasted that this kind of scenario exists.

[Fru-Gal]

Hmm, I’m confused about this saver’s credit. Are you saying the rollover I did from my IRA to my Roth could count as savings for this credit? I am not sure if we got this credit or not. Plus spouse is still contributing to 401(k). I will go back and look I guess. Our AGI was pretty dang low for 4 people.

[uniwelder]

Hmm, I’m confused about this saver’s credit. Are you saying the rollover I did from my IRA to my Roth could count as savings for this credit? I am not sure if we got this credit or not. Plus spouse is still contributing to 401(k). I will go back and look I guess. Our AGI was pretty dang low for 4 people.

What I'm reading says rollovers don't count.  There are various levels of diminishing return, based on AGI, with a maximum allowed income of 73k if filing jointly, in order to get anything from the credit.

[Chris Pascale]

Googled politico, not enouhg in 401k and see that they've been working this angle in odd ways over the years.

If you have a critique, I'd love to hear it spelled out... Just googling that did not clarify your point for me.

I saw that they have stories with this slant going back quite a few years. That's all. They do it like in the same way someone might pretend they aren't gossiping about someone, but just sharing their concern.

[Sanitary Stache]

I skipped the lengthy section of the article that works to convince me that members of congress and their staff are unduly influenced by industry groups with lots of money. Who needs that explained to them?

I was looking for the explanation of how different income level groups (e.g below 20th percentile, 21-40th percentile, etc. ) benefit from this tax code subsidy. Specifically, how much subsidy do the income groups receive and how does that compare to tax code and safety net subsidizes that the lower income groups use. Some kind of answer to the question

How do the revenue costs of tax advantaged savings for rich people compare to the revenue costs of government subsidy for poor people?


The only number I saw that might compare was something like 389 billion in 2023 in lost tax revenue because of tax advantaged retirement savings, but that doesn’t say who benefitted. Presumably those with high enough income or capital gains to have needed to pay taxes on that money if it wasn’t tax sheltered.  I googled an estimate of 119 billion in SNAP benefit in 2023.  In 2022, about 112 billion was refunded under the CTC and EITC (according to very cursory google search). And 71.9 billion for all of HUD in 2023?  I’m leaving out a bunch of subsidy for poor people, but these numbers are starting to look comparable.

I also agree that everyone should use all of the government subsidy available to them. I think that we should do more to limit the subsidy available to the richest segment of our society. I mean, I understand the instinct to resist actively taking money away from the very richest, I don’t agree but I understand. I can’t understand actually giving money to the richest in the form of these tax subsidies.

[Michael in ABQ]

I skipped the lengthy section of the article that works to convince me that members of congress and their staff are unduly influenced by industry groups with lots of money. Who needs that explained to them?

I was looking for the explanation of how different income level groups (e.g below 20th percentile, 21-40th percentile, etc. ) benefit from this tax code subsidy. Specifically, how much subsidy do the income groups receive and how does that compare to tax code and safety net subsidizes that the lower income groups use. Some kind of answer to the question

How do the revenue costs of tax advantaged savings for rich people compare to the revenue costs of government subsidy for poor people?


The only number I saw that might compare was something like 389 billion in 2023 in lost tax revenue because of tax advantaged retirement savings, but that doesn’t say who benefitted. Presumably those with high enough income or capital gains to have needed to pay taxes on that money if it wasn’t tax sheltered.  I googled an estimate of 119 billion in SNAP benefit in 2023.  In 2022, about 112 billion was refunded under the CTC and EITC (according to very cursory google search). And 71.9 billion for all of HUD in 2023?  I’m leaving out a bunch of subsidy for poor people, but these numbers are starting to look comparable.

I also agree that everyone should use all of the government subsidy available to them. I think that we should do more to limit the subsidy available to the richest segment of our society. I mean, I understand the instinct to resist actively taking money away from the very richest, I don’t agree but I understand. I can’t understand actually giving money to the richest in the form of these tax subsidies.

I'm curious how they came up with $389 billion in "lost tax revenue". In the case of 401ks is that just taking the total of all contributions to 401k plans and assuming that every dollar of that would have been taxed at 20-25% on average?

Meanwhile, according to one estimate by the Joint Committee on Taxation — which is used by lawmakers to evaluate tax proposals and assesses the immediate loss to the government’s bottom line — the cost of retirement tax expenditures to the government is expected to nearly double in just four years from $369 billion in 2023 to $659 billion in 2027.

Here's a page from the Estimates Of Federal Tax Expenditures For Fiscal Years 2023-2027 https://www.jct.gov/publications/2023/jcx-59-23/ the numbers don't quite match up with the Politico article but they may be counting other lines.

[Sanitary Stache]

@Michael in ABQ thanks for sharing that source.

I would also read a follow up to that article that goes into more detail on how they came up with estimates. 

[roomtempmayo]

I'm curious how they came up with $389 billion in "lost tax revenue". In the case of 401ks is that just taking the total of all contributions to 401k plans and assuming that every dollar of that would have been taxed at 20-25% on average?

Another version of the question is, As opposed to what?

I don't think anyone wants to live in a world where everything currently going into 401ks goes into personal income, where it promptly gets spent.

The only reasonable alternative to private tax-advantaged savings accounts would be defined benefit pensions, which often have/had even greater tax advantages.

It turns out that any society that doesn't implicitly tell people to plan on working until the day they die is going to spend some money (or forego taxes) to help people retire.  Taking zero retirement as a baseline produces a dramatic effect without being a realistic option.

[Tass]

It turns out that any society that doesn't implicitly tell people to plan on working until the day they die is going to spend some money (or forego taxes) to help people retire.  Taking zero retirement as a baseline produces a dramatic effect without being a realistic option.

I don't think zero retirement is the baseline. The article talks about the recent expansion of tax benefits for retirement accounts; the baseline is the previous level of tax breaks. I'm not asking "Should we abolish 401ks for something else?" but rather "Was it appropriate for us to expand 401ks in this way?"

However, it's a fair point that the article only ever mentions the new total cost without comparing it to the cost if no changes had been made.

[simonsez]

Agree on the opt-out vs opt-in initial default position in a 401k.

When I started my fed career, I know the default for the 401k equivalent (TSP) was G fund at I think either 3% or 5% (the max match).  The G fund is fine IMO for a % of your allocation if that's your preference but for 100%, that's crazy!  You would hear rumors back in the day on clueless people in their 40s and 50s going to check on their TSP balance for the first time and dismayed at the total because it had been in the G fund the entire time (I guess that's one knock on DC systems vs DB systems for the financially challenged - if you had/have a pension you don't worry about the balance or what it's invested in, you may or may not even know what you're owed but at some magical point in time, you get paid every month).  That initial system is still better than having to manually opt in and/or increase the % if it started lower but they have since changed the starting TSP allocation to be in the L funds which roughly correspond to a traditional person's retirement and the associated risk profile that changes over time.  You're invested in domestic and international stock funds, bonds, and the G fund.  That's a much better default position to put the clueless into.

Yeah, don't care for the title and how it's repeated here as if any of the 401k users had any agency over the vehicle existing in the first place.  But I suppose it has done its purpose of generating discussion.  For the most part, educated (w.r.t. financial literacy) middle, upper middle, and upper class folks will use the optional tools legally available to them to build wealth.  Uneducated folks of all backgrounds will not use the tools unless the barriers to entry are removed and it becomes a default entry (which I suppose if everyone maxed out their 401k, that the author of this article would have even more to bitch about from a federal budget perspective).