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 May 31, 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%.
The expenditures are calculated as the difference between current taxes deferred and revenue from prior-year deferrals. But this cash flow accounting is appropriate only for tax deductions in which the benefit occurs in the year of the deduction, ASPPA said.
The calculation, however, misses the tax benefits of retirement savings and makes the tax breaks look larger than other tax expenditures, according to ASPPA. 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 group said.
Retirement tax expenditures for defined-contribution plans totaled about $42 billion last year, the congressional tax committee estimated.
The Treasury Department's estimate is $67.4 billion. In ASPPA's present-value calculation, the cost is $27 billion.
Treasury officials acknowledged that cash-based accounting can overstate the revenue lost because of retirement savings tax breaks.
“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, wrote in an e-mail statement.
WEAPON AGAINST DEFICIT
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 revenue.
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 some say would still undermine retirement security for most Americans.
ASPPA started circulating its report on Capitol Hill last week.
“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.”
E-mail Mark Schoeff Jr. at [email protected].
