America’s retirement system is coming up short: too few savers, too little being saved. Maybe so, but the system is paying off in spades for millions of retirees.
The best-off have tens of thousands of dollars pressed into their hands, year after year. They’re taking minimum required distributions, mandatory starting at age 70 ½ for holders of tax-deferred retirement accounts. The others make voluntary withdrawals, which can begin at age 59 ½.
Almost from the start though, retirement accounts have suffered from Rodney Dangerfield-itis: they don’t get no respect. Let’s take a close look at the reasons, and discover why Erisa richly deserves the nation’s thanks.
The central complaint is that the law triggered the move from defined-benefit pensions to defined-contribution accounts—which are less dependable, and shift the risks from employers to workers. The complaint may be valid, but it leaves out huge chunks of the truth. Most workers never had retirement plans in the first place, and Erisa set out expressly to fix that.
The first Individual Retirement Accounts (IRAs) were open only to employees not covered at work. By the thousands, they walked into brokerage offices and set up their own, first-ever accounts. Rollovers, which workers could carry from job to job, were also created by Erisa. Congress later authorized employer-sponsored IRAs, prodding companies without pensions to offer a retirement benefit—and, ironically, setting off the account conversions.
Another criticism holds that the tax breaks on the accounts (pre-tax contributions and tax-deferred growth) cost too much, and drive up the federal deficit. The Joint Committee on Taxation ranks retirement accounts as the second most-expensive tax break in America.
Except that they aren’t, actually. The short time frame for the numbers compiled by the Joint Committee overstates the cost of tax-deferred retirement accounts. The retirement break is a fiscal chameleon: generous for decades, demanding on the back end. It’s the only tax break that pays the Treasury back, by the billions, every tax season—exactly as it was designed to do. The case could be made that the retirement break effectively costs America nothing. After all, the Treasury ultimately gets its cut of both contributions and investment growth.
Consider the billions the accounts are already repaying. For 2013, the latest available figures from the Internal Revenue Service show that about 13 1/2 million returns reported more than $213 billion in taxable income from tax-deferred accounts. Straight ahead, two inexorable trends are set to drive the numbers ever higher.
In 2011, Americans 65-and-over represented 13.3 percent of the population; by 2060 it’s expected to reach 20 percent. Separately, the first of America’s 78 million baby boomers will reach the minimum distribution age of 70 ½ in 2016. That will touch off annual required distributions for the most affluent, continuing into the 2030s and beyond. As more and more boomers take required distributions, and more and more simply tap into their accounts, the Treasury will be reaping what Erisa sowed over 40 years ago.
The law’s middle initials stand for “retirement income security.” Congress could reaffirm that high purpose by dedicating the inflow to Social Security, which is under pressure from the same demographics. Social Security provides most of the cash income for almost two-thirds of beneficiaries. The extra tens of billions in annual revenue from retirement accounts could help it out of a fiscal tight spot, without cutting benefits. (Of course the stock market will have a major influence on the revenue numbers, and there are no guarantees on that score.)
Getting back to the complaints about the accounts, nothing has caused more grousing and grumbling than minimum required distributions. They add nicely to income, but they also add, not so nicely, to taxes: the haves take a hit of 39.6 percent.
Justice Oliver Wendell Holmes Jr. laid down the classic case for taxes, calling them “what we pay for a civilized society.” In this case they’re simply a payback for the break we get throughout our working lives. The break compounds as well, helping fatten our accounts over all those years.
Much is continually made of the flaws in America’s retirement system; little is ever made of its successes. Here’s to Erisa for helping make the golden years more golden for millions—and depositing more gold in the Treasury in the bargain.
Scorse writes on tax issues for numerous publications nationwide.