Would a Tax Tweak Make the 401(k) Fairer?
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What is the main topic discussed in this episode?
Here's your Money Briefing for Friday, September 18th. I'm Charlie Turner for The Wall Street Journal.
How unequal is retirement savings in the U.S. and who holds most of the $17 trillion?
An increasing share of America's retirement assets are held by higher-income people. Our Heard on the Street columnist Spencer Jacobs says that's setting the nation up for a retirement crisis.
If you're someone making $30,000 or $40,000 a year, you probably don't work at a place that has a 401k or are much less likely to. you probably have a lot less tax savvy, and you're much more likely to encounter the kind of emergency in your life where you have to borrow from or cash out part of your 401k and pay a big penalty in the process.
So what can be done about it? Coming up, we'll talk about some proposals to address the inequalities in retirement savings. That's after the break.
Retirement benefits such as 401 s and IRAs hold a whopping $17 trillion. But that money is not distributed evenly.
Why do lower‑income workers have far less access to 401(k) plans and tax savings?
Most of the money is held by higher income earners. In fact, half of American families have no retirement savings at all. Presidential candidate Joe Biden has put forward a tax proposal to change this. Joining us to talk about Biden's plan is Wall Street Journal Heard on the Street columnist Spencer Jacob. Spencer, thanks for joining us. Thanks. Thanks for having me. So, Spencer, first off, let's get a sense of the problem here. Why are retirement savings so unevenly distributed?
Well, part of the problem should be obvious is that income and wealth are not even in this country. They're less even than they used to be.
What specific tax subsidy currently benefits higher earners in 401(k) plans?
But that's not the only issue. I mean, if you make more, you can afford to save more. If you're less than 50, you can put $19,500 into a 401k plan. And if you're above that age, you can put in a catch-up contribution. That's a lot of money for someone of median income. So you probably would put in quite a bit less or not be able to afford to put in that much. But that's far from the only problem. If you're an upper middle class person or even a wealthy person, you're probably given a match by your company. You have the tax savvy and the knowledge and the financial backing to be able to do that.
What change does Joe Biden propose—how would a 26% tax credit replace deductibility?
And when you change jobs, you know to move it to another firm or cash it out to an IRA. You have some financial knowledge in terms of how to invest it appropriately. If you're someone making $30,000 or $40,000 a year, you probably don't work at a place that has a 401k or are much less likely to. You probably have a lot less tax savvy, and you're much more likely to encounter the kind of emergency in your life where you have to borrow from or cash out part of your 401k and pay a big penalty in the process.
Okay, so in response, Joe Biden wants to tweak the tax benefit, which is at the heart of the 401k savings plan. Tell us first what change he wants to make.
Well, basically, the way the subsidy that you're given for contributing to a 401k is a tax benefit. Whatever your marginal tax rate, if you... take part of your income and put it into the 401k, then it comes out before taxes. If your marginal tax rate is 35% and you put in a thousand dollars, you get a $350 subsidy. If it's 10%, then you get a hundred dollars subsidy.
What are the main criticisms and industry reactions to Biden’s tax‑credit proposal?
And so basically the more you make, the less subsidy you get. And so his idea is to do away with the tax deductibility altogether and to give everyone a a flat tax credit, even if you make so little that you don't owe any tax. And there are a lot of people who make so little that they don't pay federal tax. So he wants to give a flat 26% tax credit. Basically, you get 26% of your contribution back as a tax credit. It's like a matching contribution instead of having it be tax deductible. Because the way that it works now is the more you earn, the more of an upfront benefit you get from contributing to a 401k, which is sort of perverse. The more you earn, the more secure you should be in retirement. The less you earn, the less secure you're going to be.
But the benefit of that tax deferral... is less and less as you earn less and less.
Would Biden’s plan be enough—what additional reforms could increase participation?
And so it's sort of a backwards type of incentive.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:05–0:11
2
How unequal is retirement savings in the U.S. and who holds most of the $17 trillion?
0:11–1:06
3
Why do lower‑income workers have far less access to 401(k) plans and tax savings?
1:06–1:40
4
What specific tax subsidy currently benefits higher earners in 401(k) plans?
1:40–2:14
5
What change does Joe Biden propose—how would a 26% tax credit replace deductibility?
2:14–3:16
6
What are the main criticisms and industry reactions to Biden’s tax‑credit proposal?
3:16–4:08
7
Would Biden’s plan be enough—what additional reforms could increase participation?
4:08–5:18
8
What alternative policy ideas exist (pooled investments, portability, auto‑enroll) to make 401(k)s fairer?
5:18–8:39
Speakers
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