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Congress Considers Ending Retirement Tax Breaks: A Boost for Social Security?

In approximately a decade, the Social Security retirement program is projected to encounter challenges in fulfilling its commitment to provide full benefits as promised.

In response to this impending issue, Andrew Biggs, a former deputy administrator of the Social Security Administration, and Alicia Munnell, a prominent figure with extensive experience in various high-ranking positions including the White House, the US Treasury, and the Federal Reserve Bank of Boston, propose a solution. 

They advocate for a reduction in tax subsidies allocated to private retirement savings, reallocating these funds to bolster the public Social Security system. 

According to Biggs and Munnell, this proposed exchange offers two significant advantages.

Shortcomings in Private Retirement Plans

In approximately a decade, the Social Security retirement program is projected to encounter challenges in fulfilling its commitment to provide full benefits as promised.

Initially, the proposal aims to repurpose tax incentives primarily benefiting higher-income earners to safeguard future Social Security payouts. 

Given that the public Social Security program constitutes a vital income source for individuals with lower to moderate incomes, who typically receive modest benefits from Individual Retirement Accounts (IRAs) or employer-sponsored retirement plans, redirecting these tax subsidies is deemed essential.

Additionally, this influx of funds would provide a temporary respite, allowing Congress the opportunity to implement necessary structural reforms within the Social Security system.

According to estimates by the Tax Policy Center (TPC), nearly 60 percent of these benefits in 2020 accrued to households earning at least $167,000 annually, with one-third directed to households earning $245,000 or more per year.

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Proposal to Redirect Retirement Savings Subsidies

Consequently, they advocate for Congress to consider either a complete or partial repeal of tax subsidies allocated to retirement savings, directing the resultant new revenue toward fortifying the Social Security system.

While their proposal is thought-provoking, it also presents notable shortcomings.

Firstly, abolishing these tax incentives could eliminate an essential motivator for employers to sponsor retirement plans, which serve as a significant avenue for savings for many employees. Although a substantial portion of the benefits from these plans tends to accrue to higher-income earners, their lower-paid counterparts also benefit by saving funds they might otherwise not set aside. 

While auto-enrollment initiatives may not ensure workers save adequately, they do facilitate increased savings compared to scenarios where 401(k)-type plans are absent.

Moreover, this approach would necessitate a shift in the investment landscape of retirement savings. 

Assets held in Individual Retirement Accounts (IRAs) and 401(k) accounts, particularly those belonging to affluent individuals, typically follow a prudent long-term investment strategy, involving a diversified portfolio of stocks and bonds. 

In contrast, assets within the Social Security framework are exclusively invested in US Treasury bonds, thereby altering the investment dynamics of retirement savings.

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