Have Congressional Retirement Reforms Only Boosted Savings for the Wealthy?

Legislative changes that aimed to increase retirement assets for moderate- and low-income individuals have disproportionally benefited high-income earners, a law professor argues in a recent academic paper. 

Policymakers’ retirement reform efforts over 25 years that have primarily aimed to encourage retirement savings among low- and moderate-income individuals have been ineffective by disproportionately benefiting the wealthy and high-earners, according to a recent academic paper.

The retirement-reform road map undertaken by Congress, beginning in 1996, has failed, University of Virginia Law Professor Michael Doran argues in the paper, “The Great American Retirement Fraud.”

“The retirement-reform project of the past 25 years has been and continues to be a policy scam,” Doran writes. “Neither the aim nor the effect of the legislative changes has been to increase retirement security for the great majority of American workers.”

Rather than improving retirement security for low- and moderate-income workers, Doran argues that the congressional reforms to boost retirement savings in employer-sponsored plans and individual retirement accounts (IRAs)—which have included raising contribution limits and expanding tax subsidies—have largely benefitted affluent individuals who have both the means and the inclination to save for retirement whether or not federal law provides retirement savings incentives.

Doran argues that Congress started navigating onto the wrong course in 1996. That year, Congress pushed through a package of reform proposals that loosened the regulation of retirement plans and increased retirement savings subsidies as part of the Small Business Job Protection Act of 1996.

New contribution limits and tax subsides have been included in four retirement reform measures initially championed by now-Senators Ben Cardin, D-Maryland, and Rob Portman, R-Ohio, who got retirement reform rolling. Importantly, such measures have seen bipartisan support, Doran writes.

This was a departure from Congress’ earlier retirement policy goals that prioritized protecting employees from abusive practices by employers and financial services companies and limiting the costs of retirement savings subsidies, according to Doran.

Congress has enacted additional raises to the limits for retirement contributions and tax incentives in subsequent years, including the 2006 Pension Protection Act, which made permanent the raise for retirement limit contributions enacted by Portman and Cardin’s second legislative effort.

As a result of 25 years of congressional action that have steadily relaxed the restrictions on retirement savings, federal retirement-savings subsidies have increased dramatically, Doran writes.

Tax incentives and contribution limits that have steadily increased since 1996 are, in effect, a trade-off between encouraging retirement savings and reduced revenues flowing to the U.S. Treasury Department, the paper argues.

Doran calculated that, in 1996, the annual revenue loss to the federal government from employer-sponsored retirement plans and IRAs was about $145 billion in 2020 dollars. Today, the annual revenue loss to the federal government from employer-sponsored retirement plans and IRAs is just under $380 billion, he says.

“This is not just a question of benign neglect,” Doran writes. “The enormous retirement-savings subsidies that Congress has directed to higher-income earners have diverted federal resources from other policies that would increase retirement security for lower-income and middle-income earners, whether through private savings or through improvements to Social Security. These lost opportunities have left middle-income earners scarcely better off than they were in the early 1990s. Remarkably, the retirement-account balances of lower-income earners have decreased over the past 25 years.”

Several industry stakeholders disagreed with the law professor’s argument. The National Association of Plan Advisors (NAPA) published a counterargument article on the group’s website.  

Another expressed that, while the U.S. retirement system isn’t perfect, Doran eschews the broader point.

“By any measure, its voluntary components—employer-sponsored plans and IRAs—are the most successful in the world, with assets greater than $37 trillion,” says Peter Brady, senior economic adviser at the Investment Company Institute (ICI). “Indeed, recent research shows U.S. retirees get as much income from these plans as they get from Social Security. The defined contribution [DC] plans that are the focus of the paper are extremely popular with workers because of the investment options they provide, as well as their flexibility and portability.”

He adds, “And tax deferral—the government delaying collecting taxes on retirement plan contributions until the money is withdrawn in retirement—is the key incentive on which the whole voluntary system is built.”

Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council gave the following statement:

“For more than five decades the American Benefits Council has worked with all stakeholders to advance retirement security for workers of all incomes and backgrounds,” she wrote. “Dating back to ERISA [the Employee Retirement Income Security Act], these bipartisan efforts have dramatically increased retirement outcomes for innumerable Americans. The deliberative, bipartisan process ensures that many different voices are heard and, in the case of retirement policy, has resulted in a stable, popular and highly trusted system.