Congressional Republicans have proposed to tax contributions to 401k retirement plans in a move that amounts to a stealth tax hike on the middle class. The proposed tax on 401ks is also part of the trend of business attempting to shed benefits offered to their workers.
Employees are not taxed on money they contribute to 401k plans, but those contributions are taxed upon withdrawal from the account during retirement. The tax benefits to tax deferral are two. One taxes paid during retirement are generally paid at a lower marginal rate because income is lower during retirement. Secondly, because of the time value of money a dollar in taxes paid today is worth more than a dollar of taxes in the future. Descriptions of the proposed change in 401k taxation as a mere accounting gimmick are misleading and inexcusable from a publication like the New York Times.
The other benefit to a 401k plan to employees is that employers can match employee contributions and employers can get a tax deduction for that contribution. The proposed changes in 401k taxation are expected to lead to an increase in popularity of Roth IRAs. Roth IRAs tax contributions but do not tax withdrawal. Employers can offer and contribute to Roth IRAs, but employer contributions in Roth IRA are taxable for the employer as well, so few employers match Roth IRA contributions like they do with 401ks.
401k or defined contribution plans largely replaced defined benefit or pension plans. The shift from pensions to 401ks has reduced income for many current retirees and will continue to do so for future retirees. The effective end of the pension in the private sector, which coincides with decline in union membership, coupled with reductions in the purchasing power of Social Security retirement benefits resulted in a substantial increase in senior citizens who are forced to work in retirement. This increase in senior citizen employment driven by reduced retirement income forced some senior citizens, who are deemed “work campers,” to become migrant laborers who travel the country in recreational vehicles from temporary job to temporary job.
Curtailing 401k accounts would continue and worsen these trends as the 401k account has essentially replaced traditional pensions. The prospective end of 401ks may be the first tangible result of more draconian employee benefit reforms in the 2010s and 2020s. The emergence of the gig economy will probably be the catalyst for any new round of anti-worker reforms.
The emergence of the gig economy has led to an increase in fights over employee classification. Gig economy workers, like Uber and Lyft drivers, tend to be classified as independent contractors who aren’t eligible for even rudimentary employment benefits like unemployment and workers compensation insurance.
Courts and legislators have yet to conclusively answer whether gig economy workers are employees or independent contractors. No less a luminary than former Treasury Secretary Robert Rubin lead a panel of prominent Democratic economists and elected officials in a forum about modernizing labor laws to promote the gig economy. Anyone who remembers the results of the financial reforms promoted by Rubin in the 1990, should shudder when Rubin discusses reforming laws governing the employer-employer relationship.
The rise of the gig economy is leading to calls for portable benefits not tied to the employee-employer relationship as a way to address concerns about how to classify gig economy workers. Portable benefits are an old idea in the political arena. The Affordable Care Act increased portability of health insurance through health care exchanges. Even business groups critical of the ACA praised how the ACA increased portability of health care benefits. Many employers like the idea of “portable benefits” as it reduces employee costs.
But it would be unfair to dismiss the potential good from portable benefits. Proponents of portable benefits argue that portable benefits help low wage employees who do not but do not have employee benefits like retirement and health insurance even if they are classified as employees. If portable benefit schemes gain traction, they should be implemented in a way that helps workers rather than as a way to reduce income and benefits going to workers.
There are valid criticisms of 401k accounts. Matt Bruenig of People’s Policy Project states that tax deferral benefits of 401k accounts accrue to wealthier Americans. Progressive lawmakers like former Iowa Senator Tom Harkin have proposed Universal Savings Accounts (USAs) that would give employees a low-cost way to save for retirement independent of an employer-provided retirement account like a 401k. USA accounts could be a good replacement for 401k accounts if there was a realistic chance they could be implemented. As it stands now it is likely 401k accounts will be curtailed without the prospect for the adaptation of USA accounts in the near future.
While Congressional Republicans are working to curtail the 401k plan as an employee benefit, some Democrats are also anxious to help employers shed benefits traditionally offered to employees. These benefits can be voluntary benefits like health insurance or mandatory benefits like workers compensation and unemployment insurance. Either way workers need to filter out the noise of politics as entertainment and support political candidates who unambiguously put workers ahead of political donors from big business.