IMHO: Fiscal Therapy?

December 13, 2010 ( - This week I will undergo one of those “you’re getting older” physicals.   

This has been scheduled for about six months now (yes, that’s how long it takes to get in for a physical these days) – and I have dreaded it, more or less consistently (and, more recently, constantly) ever since the appointment was made.   

I know that I’m eating too much of the wrong things, and not exercising enough (at all?) – and while I sincerely meant to alter some of those behaviors over the past six months, other things have taken priority.  What remains to be seen is what my doctor will see/say – and what, if any, lifestyle changes lie ahead.  

In random conversations over the past several weeks, it was easy to find people who were supportive of the need to do something about the yawing federal deficit – and even easier to find folks who had problems with one – or more – of the recommendations of the so-called Deficit Commission that were made formal last week.  Like my trip to the doctor, we all knew that we had some fiscal behavioral imbalances that needed to be addressed – we just didn’t know how painful the cure might be (1).  

Those in our industry were primarily focused on two things – the reduction of tax favored treatment for benefits (impacting both workplace retirement and health benefits), and Social Security.  The latter drew a lot of focus  and angst though, at least as I read them, they seemed relatively modest, certainly compared with the 1983 moves (though, make no mistake, in my reading a large number of decidedly middle-income workers will pay much more and get less in benefits under the proposal).    

My issues with the proposed Social Security reform were that they ultimately seemed to be just one more step down the path of institutionalizing it as a kind of uber-welfare program, rather than one that retains at least a modest cognizance of individual contributions to the system.  But the real pushback on Social Security reform seemed mostly of the type that has staved off serious discussion for decades(2); to wit, the program is not REALLY in trouble, because it can keep paying benefits for a long time with no changes at all (clearly Social Security isn’t hemmed in by the accounting rules that have been brought to bear on the funding premises of defined benefit pension programs).    

Regardless of this proposal’s fate (or its inevitable progeny), sooner or later we all know that the “normal” retirement age will be lifted, the rate of FICA tax withholding imposed will be raised, and more of the benefits paid will be taxed.  Like my exercise regimen, the longer we put that off, the bigger the changes will have to be.  

The implications for workplace benefit programs that would be sheared of much of their current tax-advantage is more complex.  Now, I’ve certainly had in mind the tax preferences accorded my pre-tax contributions when I make them (and the future of tax rates as I begin to slide some into my Roth account) – and, if I’m reading the recommendation correctly (and there’s less than a paragraph of the 66-page report devoted to this(3)), the individual limitations would still allow most workers to save at the pace they do at present (there’s also a call for an expansion of the Savers’ Credit in the report).    

The presumption by some industry advocates was that once the tax preferences for employers sponsoring the programs were removed, employers would longer sponsor the programs.  Secondly, that the aforementioned change, along with the limitation of tax preferences for individual savings to the lower of $20,000 or 20% of income would (4), in the words of the American Society of Pension Professionals and Actuaries (ASPPA), “effectively eliminate employer sponsored profit-sharing plans, shifting responsibility for retirement savings to workers”. 

Indeed, one has to wonder – if the federal tax incentives for sponsoring workplace retirement (and health care) programs were removed – would employers still sponsor the programs?     

The answer to that question is key  – because while some of the changes advocated by the proposal might have unforeseen consequences (5), I’m reasonably certain that if employers don’t continue to sponsor these programs, private retirement savings will almost certainly go on a crash diet. 


(1) On an unrelated note, the editor in me was completely perturbed by the Commission report’s misspelling of “Pension Benefit Guarantee Corporation” (it’s “Guaranty”).  Perhaps a Freudian slip?  

(2) Many opponents this time around claimed that since Social Security doesn’t technically contribute to the deficit, it shouldn’t have been on the table for consideration by this particular commission.      

(3) you can read the report at 

(4) Those limits might well fall above the thresholds of most participant-savers, but IMHO, it shouldn’t. However, I think it sends a message – and a bad one at that.

(5) In all likelihood this effort was doomed from the beginning – the problem it is trying to solve – a $13 TRILLION deficit – is daunting both in its size and scope.  Not that the proposal claims to solve the whole problem, rather it just takes a good “whack” at it (a whack in this case being $4 trillion in savings, through 2020).  To get to that result the proposal cuts a broad swathe through the nation’s tax system and structure, calls for caps, though not cuts, in discretionary spending (albeit at 2011 levels and not until 2012), calls for a near doubling in the federal gasoline tax, and a three-year freeze (though again, no cut) on federal worker pay, among other things.