Revised July 31, 2006
PENSION CONFERENCE AGREEMENT SETS UNDESIRABLE PRECEDENT FOR EXTENDING TAX CUTS PERMANENTLY WITHOUT PAYING FOR THEM
Statement by Robert Greenstein
Executive Director,
Center on Budget and Policy Priorities
The pension conference agreement announced today includes the permanent
extension of provisions enacted in 2001 that expand tax-preferred retirement
and education savings accounts. But the conference agreement includes no
offsets to pay for the cost of these tax cuts. It uses deficit financing
instead.Robert Greenstein, executive
director of the Center on Budget and Policy Priorities, said: “The pension
conference agreement marks the first time that tax cuts enacted in 2001 have
been made permanent, and it sets an extremely undesirable precedent by failing
to pay for their cost. Given the serious long-term fiscal problems the
nation faces, this reliance on deficit financing is irresponsible. As the
retirement of the baby-boom generation approaches, it is deeply troubling that
policymakers keep passing more debt to future generations by extending costly
tax cuts without paying for them.”
“If this approach of making tax cuts permanent
without offsetting their costs is subsequently followed for other expiring tax
cuts, it would add as much as $3.3 trillion to deficits and debt over the next
decade,” Greenstein continued. Former Federal Reserve Chairman Alan
Greenspan, among others, has counseled that expiring tax cuts should be extended
only if their costs are offset. Indeed, the Administration itself has
recently acknowledged that the cost of its tax cuts eventually will need to be
offset if the tax cuts are made permanent.
The Joint Committee on Taxation estimates that
extending the tax cuts for retirement and education savings would cost $52.6
billion between 2007 and 2016. The largest component of this cost reflects
the extension of the higher contribution limits enacted in 2001 for
tax-preferred retirement accounts such as 401(k)s and IRAs. The increases
in these contribution limits are regressive, benefiting only six percent of U.S.
households, primarily those who can afford to sock away large amounts each year.
Furthermore, the increases in the contribution
limits are not slated to expire until 2010 — so there is no need to extend them
now — and there is no evidence that these provisions are achieving their
purported goal of increasing saving. Rather, the increases in the
contribution limits primarily encourage high-income households to shift funds
they already are saving from taxable investment accounts to tax-preferred
retirement accounts in order to take advantage of the tax breaks, without
increasing the overall amount that they save.
Conference Agreement Improves the Saver’s Credit
The conference agreement also makes permanent the
saver’s credit, the sole provision in the 2001 law intended to boost retirement
saving among low- and moderate-income households. In contrast to the
provisions that increase the contribution limits for IRAs and 401(k)s, there is
evidence that savings incentives which are targeted on low- and moderate-income
households are effective. The conference agreement also indexes the income
limits in the saver’s credit to inflation, thereby addressing a flaw in the
credit’s original design. The conference agreement does not, however, index the
saver’s credit contribution limits for inflation, so the value of the maximum
allowable contribution will erode over time. In contrast, under the
conference agreement, both the income and the contribution limits for savings
accounts benefiting higher-income households would be indexed for inflation.
Greenstein noted that “The saver’s credit is an
important mechanism for encouraging low- and moderate-income families to save
for retirement. Indexing the income limits will ensure that the effects of
inflation will not restrict access to the saver’s credit over time. The
conferees should be commended for taking this step to strengthen this savings
incentive. Even here, however, offsets should have been included to pay
for the cost of the improvements.”
# # #
The Center on Budget and Policy Priorities
is a nonprofit, nonpartisan research organization and policy institute that
conducts research and analysis on a range of government policies and programs.
It is supported primarily by foundation grants. |