Money lost to retirement plan tax breaks vastly overstated, say actuaries

Federal revenue losses due to tax breaks for retirement savings plans are being greatly exaggerated, according to a group that is urging Congress not to eliminate so-called retirement tax expenditures.

In a study released today, the American Society of Pension Professionals and Actuaries said that the method that the Treasury Department and the congressional Joint Committee on Taxation use to estimate the impact of tax expenditures inflates their costs by as much as 77%.

Currently, the expenditures are calculated as the difference between current taxes deferred and revenues from prior-year deferrals. But the actuarial group said that this cash-flow accounting is only appropriate for tax deductions in which the benefit occurs in the year of the deduction, such as those for employer-sponsored health care and the mortgage tax deduction.

The calculation, however, misses the tax benefits of retirement savings — and makes the tax breaks look larger than other tax expenditures, according to ASPPA.

The group says that a better approach is to calculate the tax spending for retirement savings on a present-value basis, which would allow an “apples-to-apples” comparison with other expenditures.

The congressional tax committee estimates that retirement tax expenditures for defined-contribution plans totaled about $42 billion in 2010. The Treasury Department’s estimate is $67.4 billion. In ASPPA’s present-value calculation, the cost is $27 billion.

“The present-value estimates for retirement savings provisions capture the effect of the retirement savings contribution, the accumulation of tax-free earnings and the withdrawal of retirement savings contributions later,” the ASPPA report states.

The congressional Joint Committee on Taxation declined to comment on the ASPPA retirement-savings-tax-expenditure report.

The Treasury Department acknowledged that cash-based accounting can overstate the cost of retirement-savings tax expenditures. The agency provided both cash-based and present-value estimates in the government’s fiscal 2012 budget proposal.

“The Obama administration strongly supports opportunities for all Americans to save for retirement, including appropriate tax provisions designed to encourage such saving, and will continue to work to strengthen employment-based retirement security,” Sandra Salstrom, a Treasury spokeswoman, said in an e-mail statement.

As Congress focuses on deficit reduction, some lawmakers have advanced the notion of eliminating tax expenditures as a way to lower tax rates, broaden the tax base and raise government revenues.

The presidential deficit commission in December recommended zeroing-out expenditures. The group did support some leeway for retirement savings tax deductions — but at a level that proponents argue would still undermine retirement security for most Americans.

ASPPA started circulating its report on Capitol Hill today.
“We wanted to look at [the tax expenditure issue] because we’re a deferral, not a permanent exemption,” said Judy Miller, chief of actuarial issues and director of retirement policy at ASPPA. “That adds a different twist to this.”