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A One-Two Knock on Retirement

Retirement as we know it is getting hit with two enormous threats.

To reduce the $14 trillion U.S. deficit, the National Commission on Fiscal Responsibility and Reform has recommended that the combined employee and employer pre-tax 401(k) contributions 401(k)s be capped at 20% of income or $20,000 a year, whichever is lower.

That would be a substantial blow to contributions, since there currently is no income cap for employees and even an additional "catch-up" allowance for those 50 or over.

Currently, the cap for employees under 50 is $16,500. Those 50 or over can contribute another $5,500 a year, for a total of $22,000. If their employer kicks in additional money, that could amount to several thousand dollars a year on top of these two limits.

Put into perspective, if the 20% cap were imposed, someone earning $50,000 a year would only be allowed to put $10,000 into their 401(k). And if their employer matched 100% of this employee's first 4% of contributions, they'd lose out on an additional $2,000 invested into their 401(k) plan.

While the Employee Benefit Research Institute doesn't expect lower limits on 401(k) contributions to become a viable debate, the government is giving the idea air time. The Office of Management and Budget estimates that the retirement saving deductions for pensions and defined contribution plans cost the government $143 billion in lost tax revenue in 2010. Earlier this month, the House Subcommittee on Health, Employment, Labor and Pensions heard testimony on limiting the retirement deduction.

The American Benefits Council testified against lowering the deductions at that hearing, and the American Society of Pension Professionals and Actuaries has issued a study disputing the OMB's calculation on lost tax revenue.

On top of this, the government is also considering reducing Social Security and Medicare benefits to ameliorate the deficit, prompting the AARP to launch a television advertising campaign this month urging Congress not to cut these critical benefits. To date, AARP has collected nearly 1.5 million signatures petitioning Congress to protect Social Security and Medicare.

To avert a retirement crisis in this nation, the government needs to motivate Americans to save more-not less-and with Social Security comprising 41% of the income of the elderly, without a doubt, it must be protected.