Republicans Consider Sharp Cut in 401(k) Contribution Limits

The proposals under discussion would potentially cap the annual amount workers can set aside to as low as $2,400 for 401(k) accounts, several lobbyists and consultants said on Friday. Workers may currently put up to $18,000 a year in 401(k) accounts without paying taxes upfront on that money; that figure rises to $24,000 for workers over 50. When workers retire and begin to draw income from those accounts, they pay taxes on the benefits.

.. Reducing contribution limits would be, in effect, an accounting maneuver that would create space for tax cuts by collecting tax revenue now instead of in the future.

.. Such a move would be likely to push Americans to shift their savings to so-called Roth accounts, where contributions are taxed immediately, and not when they are drawn out as benefits. That would increase federal tax receipts for the short run.

.. Under the rules of budget reconciliation — the method Republicans are employing to avoid a Democratic filibuster of the bill — legislation cannot increase budget deficits after a decade. Shifting revenue by lowering 401(k) limits “raises money early, but loses money late, and that’s exactly the opposite of what you want in a reconciliation bill,”

The Champions of the 401(k) Lament the Revolution They Started

The dominant vehicle for retirement savings has fallen short of its early backers’ rosy expectations; longer life spans, high fees and stock-market declines

Herbert Whitehouse was one of the first in the U.S. to suggest workers use a 401(k). His hope in 1981 was that the retirement-savings plan would supplement a company pension that guaranteed payouts for life.

.. Some early 401(k) backers are now calling for changes that either force employees to save more or require companies to funnel additional money into their workers’ retirement plans.

.. Just 61% of eligible workers are currently saving, and most have never calculated how much they would need to retire comfortably

.. Financial experts recommend people amass at least eight times their annual salary to retire.

For people ages 50 to 64, the bottom half of earners have a median income of $32,000 and retirement assets of $25,000

.. Roughly 45% of all households currently have zero saved for retirement

.. “It’s a very simple formula,” he says. “If you save at 10% plus a year and participate in your plan, you will have more than 100% of your annual income for retirement.”

.. Traditional pension plans, on the other hand, had weaknesses: Company bankruptcies could wipe them out or weaken them, and it was difficult for workers to transfer them if they switched employers.

.. Two bull-market runs in the 1980s and 1990s pushed 401(k) accounts higher.

.. she offered assurances at union board meetings and congressional hearings that employees would have enough to retire if they set aside just 3% of their paychecks in a 401(k). That assumed investments would rise by 7% a year.

.. Ms. Ghilarducci wants to ditch the 401(k) altogether. She and Blackstone Group PresidentTony James are recommending a mandated, government-run savings system that would be administered by the Social Security Administration and managed by investment professionals.

.. “There are a lot of governors and mayors who are Republicans, and the first wave of the crisis will affect states and cities,” Ms. Ghilarducci says.

.. Others are calling for a national mandate on savings or requiring companies to automatically enroll participants at 6% of pay.