Thursday, September 2, 2021
Examining Use and Misuse of Tax-Exempt or Deferred Financial Retirement Savings Plans As Increasing Economic Disparity
Check out "America is Spending A Fortune to Help Rich People Retire in Luxury," authored by Michael Mechanic. Published this week in Mother Jones, the article examines how "America's most affluent" use Roth IRAs and similar "federally subsidized retirement accounts meant for middle-class savers" to maximize their wealth.
But it turns out IRAs are only the tip of the iceberg. The bigger problem, according to Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center, is that, thanks to a series of bipartisan bills Congress has passed over the past quarter-century, the government spends a fortune subsidizing a whole range of retirement plans whose benefits flow overwhelmingly to America’s most affluent. “It’s unbelievable the amounts of dollars at stake, and how tilted they are to the high end,” Rosenthal told me. “It’s just staggering.”
Indeed, such subsidies are the federal government’s single biggest tax-related expense, costing hundreds of billions of dollars per year. From 2020 through 2024, the JCT estimates, tax breaks and deferrals for retirement contributions will cost the Treasury $1.9 trillion—far more than the cost of the child/dependent or earned income tax credits, tax deductions for charitable donations, tax exclusions on long-term capital gains, or corporate tax breaks for employer-provided health and life insurance benefits. “These retirement reform packages are exceptionally confusing and technical and long and really hard for anyone to sort out,” says Rosenthal, a former JCT staff lawyer himself. “But embedded in every one are easter eggs: big giveaways to the retirement industry and to high-net-worth individuals.”
There is a lot to unpack here, and I could certainly see a seminar course built around this topic, including the complexity of finding solutions that don't harm the more-modest investor who will need every dime in retirement.
My thanks to University of Virginia Law Professor Naomi Cahn for sharing the article, and to her colleague at UVA, Professor Michael Doran, who is prominently cited in the article for his critiques of so-called savings reforms that "delivered expensive and unnecessary tax subsidies," that benefited higher income families and the financial services industry.