Retirement Tax Breaks Help Different People Than Widely Believed

One of the biggest tax expenditures in the Internal Revenue Code of the United States is for retirement savings. These have been sold on the claim that they help middle class people who are struggling to save enough to supplement Social Security benefits in their old age. 

But to a great extent, this is not who benefits from these tax breaks. Instead, it heavily benefits affluent people who would have saved in or out of tax preferred options. It also provides them with significant asset protection that they would not otherwise enjoy.

One obvious solution would be to set the Social Security withholding cap and the maximum income that can be considered for retirement savings programs to the same level.

Over the past twenty-five years, Congress has enacted several major reforms for employer-sponsored retirement plans and individual retirement accounts (“IRAs”), always with large bipartisan, bicameral majorities. In each case, legislators have claimed that the reforms would improve retirement security for millions of Americans, especially rank-and-file workers. But the supposed interest in helping lower-income and middle-income earners has been a stalking horse for the real objective of expanding the tax subsidies available to higher-income earners.

The legislation has repeatedly raised the statutory limits on contributions and benefits for retirement plans and IRAs, delayed the start of required distributions, and weakened statutory non-discrimination rules — all to the benefit of affluent workers and the financial-services companies that collect asset-based fees from retirement savings. 

The result has been spectacular growth in the retirement accounts of higher-income earners but modest or even negative growth in the accounts of middle-income and lower-income earners. Despite the benign but misleading rhetoric about enhancing retirement security for everyone, the real beneficiaries of the retirement-reform legislation have been higher-income earners, who would save for retirement even without tax subsidies, and the financial-services industry, whose lobbyists have driven the retirement-reform legislative agenda.

Michael Doran, The Great American Retirement Fraud (January 1, 2022).