Bucks Blog: Making Your Retirement Savings Plan More Equitable

How about spurring retirement savings by swapping tax breaks based on income for flat-rate tax credits?

That’s the crux of an idea floated, once again, by Peter Orszag, now an executive at Citigroup and a former budget director in the Obama administration. Mr. Orszag, in an opinion piece published recently by Bloomberg, argues that the current system of tax rewards for retirement saving unduly benefits the wealthy, providing a significantly smaller incentive for middle-income earners to sock away cash for a nest egg.

If a person with a high income puts $1 in his retirement plan, he saves 35 cents in income taxes, Mr. Orszag writes. But a middle-income person putting the same amount into a retirement plan saves only 15 cents in income taxes. The system, he says, is upside-down because evidence suggests upper-income people likely would have saved the money anyway, in a taxable account.

“It would be better,” he wrote, “if both people got the same tax break per dollar.”

He suggests replacing the current deduction for retirement saving with, say, an 18 percent matching contribution from the federal government for every dollar put into a tax-preferred retirement account. Such a plan, he says, creates more incentive for middle-income earners to save, while lessening the draw for upper-income earners, who would put less into tax-advantaged accounts. The Tax Policy Center, he says, estimates that level of a match would raise about $400 billion in revenue over the next ten years, without increasing marginal tax rates.

He says such an idea has had bipartisan support in the past.

What do you think? Is replacing tax breaks with flat-rate tax credits a good idea?

Article source: http://feeds.nytimes.com/click.phdo?i=c60119653e5491e616d8d90c2e19cc54