ERIC Urges Ways & Means Committee Working Group to Proceed with Caution on Any Tax Reform Changes to Employer Retirement System

April 15, 2013

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ERIC News Release

For Immediate Release:  April 15, 2013

Washington, D.C. – In a letter submitted today to the House Ways and Means Committee’s Tax Reform Working Group on Pensions and Retirement, The ERISA Industry Committee (ERIC) urged the policymakers to proceed with caution when considering any possible changes to the nation’s very successful voluntary employer-provided retirement system. 

“Changing the current tax treatment of employer-sponsored plans would jeopardize the retirement security of tens of millions of workers, impact the role of retirement assets in the capital markets, and create challenges for future generations of retirees in maintaining their quality of life,” states Kathryn Ricard, ERIC’s Senior Vice President for Retirement Policy. 

ERIC’s letter points out that the current tax treatment of retirement savings is one of the central foundations upon which the system has been successfully built, and the effects of such a change for individuals, employers and the system as a whole are simply too harmful and must be avoided.

Ricard explains that employers voluntarily establish retirement plans for a variety of reasons, such as competing for and keeping quality workers, and ensuring workers can retire from their workplace with adequate retirement savings.  The letter notes that the voluntary nature of the private sector retirement system is critical to its success, and because employers come in all shapes and sizes, a “one-size-fits-all” approach to rules and regulations often will not address the challenges of companies who want to offer retirement benefits to their workers.

To that end, ERIC urges Congress to continue to include reasonable flexibility for employers in any changes to the rules for retirement plans, arguing that flexibility allows companies to design plans that work effectively and efficiently based on the needs of their workforces and the industries in which they operate. 

The letter further explains that the current retirement system involves a delicate balance between the needs of companies and their workers, and that government agencies, including the U.S. Department of Labor, Treasury Department, and Pension Benefit Guaranty Corporation, issue detailed regulations and guidance to ensure that workers’ interests are well-protected. For example, there are requirements that ensure fairness and nondiscrimination, including rules governing vesting, coverage, and the allocation of benefits in retirement plans. 

“Uncertainty with respect to retirement plan rules and regulations undermines an employer’s ability to offer and maintain a plan for its workers and risks undercutting the success of the system,” Ricard states.

ERIC’s letter further points out that, when measuring the cost of the tax deferrals into retirement plans, such as 401(k) plans, the calculations performed by the Joint Committee on Taxation (JCT) and the Treasury Department do not consider that there is only a deferral of taxation.  Because workers generally withdraw money from these plans only in retirement, the majority of the taxes paid show up outside the 10-year time frame used by the JCT and Treasury Department.  “The approach used by the JCT and Treasury Department significantly exaggerates the actual cost to the government with respect to the tax incentives for retirement plans and ignores the real long term value of the plans to the country and working Americans,” Ricard said.

Moreover, ERIC notes that the elective deferral limit works well and should be maintained, contending that workers need flexibility to be able to save more when they are able and less when under financial constraints.  For example, the letter explains that an individual may be able to save more when they are younger or once their children become adults, but have less money to contribute when paying for their children’s college education or caring for their elderly parents. It is critical that Congress recognize the value of the current system that reflects typical lifetime savings habits and maintain the elective deferral limit, the letter urged. 

Finally, ERIC points out that President Obama’s proposal to limit the amount American workers could save for retirement would adversely impact overall retirement savings, as changes to the rules and regulations associated with saving for retirement often have unintended consequences, including a “chilling effect” on savings even by individuals who are unaffected by the rule changes. 

“Any changes to retirement savings incentives must focus on policy that will result in better long-term retirement outcomes for Americans, rather than on short-term deficit reduction,” Ricard concluded.

To access ERIC’s letter, click on the following link:

ERIC Letter to Ways and Means Committee