Congress’ recent adoption of a so-called “dynamic scoring” prognosticating tool to determine the economic and tax consequences of legislation misses the mark in taking into account the yields from tax-deferred retirement savings, annuities and life insurance. Congress’ current budgeting rules set the outlook on the cost of tax deferrals at 10 years, the same benchmark as those given for one-time tax breaks for mortgage interest and charitable giving.
Dynamic scoring attempts to factor in market behavior in response to tax law, as opposed to static scoring, which measures only the tax gain or loss on a fixed picture of the market.
Robert Reynolds, president and CEO of Putnam Investments, wrote in a Feb. 13 op-ed in The Boston Globe that this overstates the cost to the government of savings deferrals. Admittedly, as a leader of a major retirement planning firm, he has a big dog in this fight. But he also has a point.
There are two problems with the 10-year window on tax-deferred retirement plans. First, the window is far too short to measure the real impact of many long-term retirement savings plans (and the longer-term they are, the better). Second, it fails to take into account that eventually, those deferred taxes will come back to the IRS as people draw down their retirement nest eggs. And that isn’t even taking into account post-tax Roth IRAs. So it is hardly the same thing as the mortgage-interest tax deduction, which is a flat-out giveaway, year in and year out. A tax break on savings programs this year is not gone forever – it will eventually come back.
Not only that, but a strong household savings picture now stands to reduce future dependency on means-tested social and health programs.
The major concern that Reynolds notes in his column is that savings incentive programs present a target for budget-cutters, as has already been proposed in the last Congress, but which failed to pass.
If the budget-makers in the federal government can’t discern the difference between taxes deferred and taxes denied, we have a big, big fiscal problem in this country.
Employer-sponsored, tax-deferred retirement plans benefit those of moderate means, as well as the more affluent. Cutting back on employer incentives to offer them not only curtails a benefit that now attracts and retains employees – it would also limit savings opportunities for millions of savers, who might then have to resort to higher-cost or lower-performing savings vehicles to secure their long-term futures.
Defenders of the mortgage interest tax deduction are many and powerful. Defenders of tax-deferred savings plans have had a much lower profile to date. Not to mention savers in general, who have been suffering the effects of low- to zero-interest rates for years.
If the lawmakers who are crafting the budgets that will determine the way millions determine their financial future can’t tell the difference between a tax break and a tax postponement, we can’t blame the private sector once the budget scissors come out.
