401k plans do not "subsidize saving"
By Scott Sumner
USA Today reports:
Most workers who have access to 401(k) plans will be able to invest up to $18,500 next year, plus an additional $6,000 in catch-up contributions if they are 50 and over.
But lawmakers in Washington have been discussing possibly lowering that limit to as low as $2,400 amid the debate over tax reform. . . .
When Thaler was asked on Twitter whether a $2,400 limit to pretax savings would indicate the government was endorsing that amount as adequate for retirement savings, he said other options, such as a 10% deferral, could offset that.
“No reason to subsidize saving by the rich,” Thaler said.
This is a rare issue where I agree with Trump (who opposes the change). Thaler is simply wrong when he claims that 401k plans “subsidize saving”. There is no subsidy at all; 100% of the income set aside, plus all interest, dividends and capital gains, is fully taxable after age 70. In fact, the real problem is that non-401k savings is double-taxed. Basic fairness suggests that savers be taxed at the same rate as spenders. Without tax deferred savings plans, the lifetime consumption of savers would be taxed at a higher rate than the lifetime consumption of spenders.There should be no limit at all to contributions to 401k plans, and no requirement that money be withdrawn at age 70.
I would add that it’s misleading to suggest that this is a program that favors the rich. Obviously the wealthy save more on average, but I was fully maxing out my contributions when I made in the $50,000 to $100,000 range, and I’d guess there were plenty of other people like me. Indeed there was a time when behavioral economists like Thaler sought to encourage people to use these plans.
The fact that the GOP is even considering cutting the limit back to $2400 speaks volumes about the priorities of the modern GOP. It’s the sort of proposal I’d expect from Bernie Sanders.
PS. I can’t emphasize enough the need to look past the media’s framing of the tax issue. It’s not about rich vs. poor, it’s about spenders vs. savers. Treat those two groups the same, and then make the system progressive based on lifetime consumption.