The lucky participants in one of the best retirement plans around are coming after yours with a meat cleaver.
In the early stages of negotiating tax reform, Congress is already considering whether to reduce the benefits of contributing to a 401(k) and similar retirement plans — even as U.S. representatives and senators bask in the safety of the pension system that taxpayers fund for federal employees.
Alongside several million U.S. government workers, members of Congress participate in the Federal Employees Retirement System, which wraps their current savings and future pensions in a cushion of comfort that most American workers can only dream of.
Only about 13% of employees nationwide are covered by both a 401(k) and a traditional pension that assures stable, lifelong income, according to the Center for Retirement Research at Boston College; all 535 members of Congress are.
In 2015, the average taxpayer-funded annual pension received by recently retired members of Congress was $41,316. A representative or senator retiring in 2014 after 30 years in Congress would earn an annuity of roughly $104,600 to $130,500, according to the Congressional Research Service.
Retirement savers in the private workforce pay outlandish management fees that can exceed 1% annually on lousy investment choices; members of Congress pay a maximum of 0.039% for funds that all but guarantee matching the market.
Those expenses on a $10,000 investment can easily eat up at least $100 a year for regular retirement savers; fees on the same amount in a U.S. representative or senator’s account can’t exceed $3.90.
Fewer than one in 10 corporate retirement plans match 5% of employees’ contributions dollar-for-dollar, according to the Plan Sponsor Council of America. Every member of Congress gets that match — funded by the taxpayers.
Even if a member of Congress won’t set aside any of his or her own money, the public automatically contributes an amount equaling 1% of that legislator’s salary to the federal retirement fund. Nearly all members of Congress earn $174,000 annually.[wsj-responsive-more-in tag="The Intelligent Investor" category="" ]
A reliable retirement is “a four-legged stool,” says David Kabiller, co-founder of AQR Capital Management in Greenwich, Conn., and co-author of a recent article on how to design retirement programs. Those four legs are a traditional pension, a 401(k)-type plan, Social Security and supplemental savings in taxable accounts. “Eliminate or restrict any of those,” he says, “and you make achieving a secure retirement more challenging.”
Yet that is what Congress, perched securely on its taxpayer-funded four-legged stool, is considering for the rest of us.
At a meeting with members of the Senate Banking Committee earlier this month, Gary Cohn, the director of the White House National Economic Council, discussed ideas that would remove pre-tax benefits from retirement accounts including 401(k)s and shift them to after-tax benefits, according to people familiar with the discussions. It wasn’t clear how seriously the administration is evaluating any specific proposal, these people said.
Some are confident change is afoot. In the next round of tax reform, “it’s not really a question of whether retirement plans will get a haircut, but of how much,” says Bradford Campbell, a partner in the law firm of Drinker Biddle & Reath in Washington, D.C., who served as assistant Secretary of Labor under Pres. George W. Bush.
That’s because the money you contribute to 401(k)s and several other types of retirement plans isn’t subject to current income tax. Nor are your future earnings on those accounts — until you take them out to live on in retirement, when your withdrawals will be taxed as ordinary income.
If your retirement dollars were treated, instead, like contributions to a Roth Individual Retirement Account or Roth 401(k), they would be taxed before you put them in. You could ultimately withdraw the money tax-free in retirement, but the incentive of getting an upfront tax break would be gone.
Taxing retirement-plan contributions Roth-style would generate roughly $1.5 trillion over the next decade the way the government reckons the numbers, estimates Mr. Campbell. So giant a pot of honey may be hard for Congress not to raid.
“We definitely need comprehensive tax reform,” says Mr. Campbell. Unfortunately, when lost revenue has to be replaced, “it’s a game of winners and losers, and the retirement system is poised to be one of the losers.”
It’s hard for most people to save for a goal that glimmers faintly decades in the future. Take away the tax incentive, and many savers might no longer see the point of even trying.
Fully 39% of Americans don’t feel very confident in their ability to fund a comfortable retirement, according to a recent survey. It’s safe to say none of those worried folks are members of Congress.
Instead of penalizing retirement saving, lawmakers should be making it easier, perhaps even mandatory — as it is for members of Congress.
For workers struggling to set money aside, says Mr. Kabiller, “mandatory savings could help impose the discipline of giving up compensation today in order to fund your longevity down the road.”
At a bare minimum, if Congress is going to hack away some of the tax advantages of private retirement plans, it should make matching cuts to the cushy federal system.
“There should be equal sacrifice,” says Mr. Campbell. “It’d be very hard for them to justify not doing that.”
If you have a pitchfork in your garage, keep it handy. Your 401(k) might need defending.
– Nick Timiraos contributed to this column.