Tax reform shouldn’t fuel the Keynesian war on seniors
In recent days, much of the talk in Washington, D.C. has centered upon the prospect of Congress reducing the maximum tax-advantaged contribution to 401(k) retirement savings plans to $2,400, down from $18,000 this year. Let’s be clear, though: lifting the tax exemption cap on these plans would, without question, be a hidden tax on American workers, particularly seniors.
Proponents of this deductibility change argue that it will help the middle class because blue-collar workers will start paying taxes on their investment now rather than during withdrawal. On multiple fronts, this line of reasoning is far from the truth.
Consider the pure mathematics of the situation. On average, 401(k)s provide an annual rate of return of five to eight percent. Suppose a 50-year-old woman put $18,000 in her 401(k) and received an average return of seven percent. Per CNBC, over the course of the next 15 years, her $18,000 investment would have blossomed to $49,663.
{mosads}Now suppose the 401(k) rule-change went into effect, making only $2,400 of each annual contribution not taxable up front. She then only puts $2,400 in, which, over the course of 15 years, only amounts to $6,622, a difference of over $30,000 just from one year’s investment.
This case is not just theoretical talk; such a scenario is consistent with the psychology of the average human brain. The reason that many Americans invest in 401(k)s is to shelter money from taxation, so changing the deductibility in such a dramatic fashion will bring equally noticeable effects.
Thankfully, it appears that the GOP now recognizes how taxing something as crucial as 401(k)s would weaken their great tax plan.
Last Monday, President Trump tweeted that “there will be NO change to your 401(k). Although the president has been less firm on this pledge in recent days, stating that retirement accounts may now be used as a negotiating tool for Republicans, his original message seems to have resonated with some of the Republican tax reform leaders. While refraining from taking it off the table, Ways and Means Committee Chair Kevin Brady (R-Texas) said that he does “have a worry” regarding the change, because “not enough Americans are saving.” A Monday report confirmed that the savings rate in September fell to 3.1 percent, the lowest point since December 2007.
While the idea of reducing deferred 401(k) taxation might now be an idea of the past, it is important that Trump and Congress do not replace it with a plan comparable in harm to American seniors. One such idea that appeared today on the Washington Post’s short list is changing the expensing of advertising from being 100-percent deductible — as every other American business expense is — to only half deductible in the first ten years. Similarly, this tax could be billed as “The New American Worker Tax.”
Most stores utilize co-op advertising, in which they feature one manufacturer’s product on the ad and in exchange, typically receive between 30-50 percent of the ad money back from the manufacturer. What do you think will happen to a store like Walmart, which only has a three percent profit margin, or the average grocery store, which has a one percent profit margin, if a company like Pepsi cuts back on its co-op advertising budget? You guessed it: they will be forced to impose drastic price hikes on consumer goods. Seniors and those on fixed incomes will be the ones hurt the most.
This decades’ long Keynesian war on seniors — and saving in general — should be stopped by the new administration, not encouraged. Because of the out-of-control “spend-spend-spend” policies of recent years — a zero to near-zero interest rate, fantasy-like environment — 44 percent of the country does not have enough savings to afford an unexpected $400 expense. Per one report, less than 25-percent of those in the Baby Boomer generation believe they have enough in retirement savings to last their whole lifetime. It would be a shame if entitlement spending will need to be raised on seniors in the coming years because of a Republican tax reform bill.
President Trump and his allies in Congress have already created a tax reform outline that puts American workers — including senior citizens — first. Now, they just need to keep it that way.
Denison Smith is chairman of Longevity Health Foundation, a new start-up devoted to lowering health care costs through research and education. Smith is a former assistant attorney general for the state of Idaho, staffer for Sen. James McClure (R-Idaho), and trustee of the Reason Foundation. He has over three decades of experience in investment banking, including as the former regional vice president of the Pioneer Fund of Boston, the fourth oldest mutual fund in the United States.