A lot of people have been asking whether the current debt limit debate, and in particular the proposal by the so-called Gang of Six, will impact retirement plans. The short answer is not directly–but it is complicated.
Let me dispense with the debt limit issue. In the end, I do not expect the legislation to increase the debt ceiling to get into specifics on tax issues. There may be an instruction to the tax-writing committees (House Ways and Means and Senate Finance) to pursue tax reform. It is possible that they may go a bit further and indicate something like there should be no net revenue increase or a limited one or that in general rates should be lower, but that would be the extent of it. And its quite possible the debt ceiling could be completely silent on taxes.
Now lets get to the Gang of Six proposal. It’s important to keep in mind that it’s just a proposal. So, it would need to pass the Senate first, and then get through the House, and we are far from that. Additionally, the time frames in the Gang of Six Proposal are particularly unrealistic. It would require to do tax reform, Social Security reform and Medicare reform in six months–really?
Further, since its very short on details, I think it is better described as a framework. Either way it does not “directly” impact retirement plans. What I mean by that is they leave it up to the tax-writing committees to decide what to do with retirement savings incentives. Specifically, it would instruct the tax-writing committees to reform the tax code, with the following guidelines:
Report tax reform within six months that would deliver real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth as follows:
- Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent, and 23–29 percent.
- Permanently repeal the $1.7 trillion Alternative Minimum Tax.
- Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund.
- To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending.
- Reform, not eliminate, tax expenditures for health, charitable giving, homeownership,and retirement, and retain support for low-income workers and families.
- Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries.
- Maintain or improve the progressivity of the tax code.
- Establish a single corporate tax rate between 23 percent and 29 percent, raise as much revenue as the current corporate tax system, and move to a competitive territorial tax system.
So, the proposal basically presents nothing more than what we already knew. Namely, there appears to be bi-partisan consensus to do tax reform at some point. Further, there seems to be consensus that tax reform should include lowering rates and substantially reforming or eliminating the AMT. Third, to accomplish tax reform politically it will need to be either revenue neutral or raise a relatively small amount of net revenue (something south of a trillion over ten years).
So, much like in 1986, the way the math works the only way to lower rates, fix the AMT, and maintain something close to revenue neutrality, is to go after tax expenditures. And even though retirement savings incentives should not be considered tax expenditures, we will be lumped in with them for this purpose. That is what we will be fighting and it’s not a question of if, but when.
-Brian H. Graff
ASPPA CEO / Executive Director