Obama’s 2015 Budget Is a House of Cards

The following is a statement from Brian H. Graff, Executive Director/CEO of the American Society of Pension Professionals & Actuaries (ASPPA) in response to the proposed fiscal year 2015 budget President Barack Obama released today:

“Unfortunately, this year’s budget proposal includes the same wrong-headed attacks on employer-sponsored retirement plans as last year. The double tax on contributions to 401(k) plans and the misguided $3 million cap on the value of retirement benefits do not close any loopholes or curb any abuse. They punish small business owners who sponsor retirement plans for themselves and their employees. It is disappointing that an administration that claims to be concerned about giving more American workers access to retirement savings would discourage small business owners from maintaining the 401(k) plans they have now.

Under the “double taxation” budget proposal, small business owners earning more than $250,000 would have to pay tax on contributions in the year the contributions are made, and then pay tax at the full rate when contributions are distributed at retirement. This amounts to a penalty for saving through a 401(k) plan. Who could blame a small business owner for thinking that if the government is going to penalize them for saving in a retirement plan, maybe they should not have that plan?

In addition, if a small business owner has saved $3 million in his or her 401(k) account, or has a pension from another plan and a modest amount in their 401(k) or IRA, they won’t be allowed to save any more. Without any further incentive to keep the plan, many small business owners will now either shut down the plan or reduce contributions for workers. This means that employees of small businesses will now lose out not only on the opportunity to save at work, but also on contributions the owner would have made on their behalf to pass nondiscrimination rules.

The proposed retirement savings cap in the president’s budget is not closing a loophole and is not correcting some perceived abuse of the rules. There are already caps on contributions and a cap on the pay that can be used to calculate benefits. This proposed cap would basically punish savers for starting to save for retirement when they are young or investing “too successfully.” EBRI estimates that even at current low interest rates, 1 in 10 current 401(k) participants will likely hit the cap if they continue to save in a 401(k) plan until retirement. Since the cap shrinks as interest rates increase, while account balances will grow faster, the higher interest rates climb, the more savers will end up being affected by the cap.

We think it is grossly unfair that this proposal would limit a small business owner to retirement benefits that are nowhere near as valuable as executives’ at large corporations. Small business can’t use the nonqualified deferred compensation arrangements that provide millions - even billions - of dollars in retirement benefits to big corporate executives. Every time retirement plan limits are cut, the corporate CEOs get more nonqualified retirement benefits. It’s the small business owners and their employees who lose out, and that just isn’t fair.

President Obama’s own pension, based on reasonable actuarial assumptions, is worth at least $5 million. That’s 40% more than the small business retirement savings cap permitted under the president’s budget. Is the president saying his own pension is a loophole too? It’s simply wrong to attack small business owners who have responsibly maintained retirement plans for themselves and their workers.”