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Forget the 401(k) – Let's Invent a New Retirement Plan (wsj.com)
29 points by Reedx 35 days ago | hide | past | web | favorite | 61 comments

One of the most interesting ideas I've ever heard was to make any and all savings deposits and investments tax-deductible, just like traditional IRA and 401(k) contributions--with the caveat that future withdrawals or returns are, themselves, taxable income. This transforms the income tax into a consumption tax, incentivizes savings of all kinds, and allows existing deductions and tax credits to potentially keep the tax progressive.

You could argue that people with higher incomes would pay a smaller proportion of their income as taxes, but this is beside the point--the only part of your income you can actually use is whatever you don't save or invest, and though you can just keep your savings and investments compounding indefinitely, you have absolutely no incentive to do so unless you are planning or anticipating for some future point in time where you or your heir withdraws and spends some of that money, which is exactly the point when that (typically much larger) sum turns back into taxable income.

I think a simpler approach would be to eliminate 401k and similar programs, increase the IRA limit, and allow employers to contribute to an employee's IRA in the same way as a typical payroll deposit. That would make things _way_ simpler for everyone, and maybe people would feel confident enough in their understanding of retirement accounts to actually use them...

We don't need _more_ accounts, just simplify the ones we have and consolidate.

How is that simpler than just letting every existing savings or brokerage account act like an IRA with absolutely no contribution limit or penalty for early withdrawal? That doesn't create more accounts, it just gives the existing tax benefits (and then some!) to the accounts that everyone already has. You would probably end up just eliminating the 401(k) and IRA classifications and converting those accounts into normal brokerage accounts.

That would be quite the tax dodge. It lets you spread income over many years, whichever way has the lowest tax rate.

Right now we charge someone who earns their lifetime income in 20 years much more tax than someone else who earns the same total income over 40 years. A change like this would remove this unfairness, but to collect the same total amount (over say 60 years for both now) the brackets would surely be different.

If you get the same amount of money and then twenty years of leisure, surely you are meaningfully better off than someone that had to work forty years for it?

Fair point. How about a decade off raising kids?

I'm sure it isn't intended this way, but this feels a little like a trick question. Certainly there are benefits to society to people having children and raising them well. But I don't think anyone has children and takes a decade off to raise them because it benefits society. Rather they do so because it is something they want to do. Give that, if we take someone that made $x dollars over 40 years of work and someone else that made $x dollars over 30 years of work and took ten years off to raise kids, I would say the latter is better off. That said, maybe we want to adjust the tax system to favor the that second person anyway because of the spillover benefits, but that's a different question than who is better off.

Sorry not intended as snark, I do think you raise a good point, and may yet dim my enthusiasm for pure consumption taxes. But would be good to generate more examples to think through.

One unfairness is people who have spiky incomes, like a guy who repeatedly builds companies & sells them off, 4 years on ramen & 1 big payoff -- it does seem unfair to put him in the tax bracket of those with 5 times his average income. I have an idea many countries would let him smooth this out already, but don't know the details.

Sure, but I think this would actually help a lot of working or middle class folks more than it would help the rich. If you were rich, it wouldn't really matter how much you "spread income" because your typical standard of living would exceed the higher tax brackets anyway. So this would actually be a benefit to working-class or middle-class folks with inconsistent and bursty income, which is a good outcome.

If you were worried about say, frugal people with large amounts of generational wealth, you can also pair this with a big fat estate tax.

This would likely need to coincide with a flat federal sales or value added tax (VAT) to properly tax consumption activities.

Example: 12% tax on a Bentley or Toyota, Yacht or toy boat, wealth advisor service or lottery ticket

This would already be a federal tax on consumption activities.

That is how pensions work in the UK, with an upper annual limit on savings and a lifetime allowance.

So we live in an ecosystem: one lever cannot be pulled without substantially effecting that ecosystem

In this case, the last decade of monetary policy has been about pushing people to find passive savings unattractive. Their dreams of generational wealth from merely having a savings account totally wrecked because their life span cannot withstand the paultry compounding interest at a fraction of a percent.

Therefore creating incentives like you have imagined would further be at odds with the goal of keeping the money supply circulating, instead of parked in passive accounts.

The point is to keep everyone desperate for returns and using their entire mind share to find the best returns. Amongst the winners and failures you have individuals throwing their money across asset classes and the entire planet, which allows for easy accounting of the money supply and high velocity.

With fractional-reserve banking, this proposal keeps supply circulating.

> Ideas include allowing your savings to follow you wherever you go or however you work

IRAs (which should replace 401ks entirely)? Wage increases so workers can afford to save for retirement (and not need to raid their retirement accounts for emergencies)? Also seems like a submarine piece for annuities.

401ks are underwhelming as a product. Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process (just as you provide ACH routing and account number for your checking account rontour employer, you’d provide the same for your IRA). This ensures portability, low costs (lots of competition in the IRA space), and also prevents junk fees from 401k administrators since you’re not a captive audience.

>401ks are underwhelming as a product...

Agreed. It wasn't too long ago that The Crash[0] wiped-out a large portion of people's life-savings.

>Congress should provide IRAs the same creditor protection, allow employer contributions, and incentivize a streamlined onboarding process...

Couldn't agree more but what you're - essentially - describing is no different than the pensions as exists in Europe [1,2,3,4].

This isn't meant to be an affront but, for some reason, Americans have grown adverse to the idea of pensions; even though previous generations of Americans enjoyed the fruits of that very same labour.

[0] - https://www.cbsnews.com/news/retirement-dreams-disappear-wit...

[1] - https://www.revenue.ie/en/jobs-and-pensions/pensions/tax-rel...

[2] - https://www.deutsche-rentenversicherung.de/Allgemein/en/Inha...

[3] - https://www.island.is/en/senior_years/pensions_and_benefits/...

[4] - https://www.pensionsmyndigheten.se/content/dam/pensionsmyndi...

I'm sorry I'm not sure I understand. How is a retirement account that you control, and whose investments you direct, the same thing as a pension?

I always thought that a pension was defined as:

"Contribute $A/month for X years, and we'll pay you $B/month for Y years after you retire - and don't worry about how it happens, you're guaranteed this money if you qualify."

Is that not how pensions in Europe work?

Not in the UK, not anymore and those that do still exist are remnants that don't accept new members.

Work place pensions now are like investment accounts, except you have some degree of matching from the company and the government tops you up an extra 20% of what you contribute (it gets more complicated when you get into higher tax brackets, like getting 40% top up on portions, but getting it back by raising your untaxed income level instead of directly into the account. And very high earners it gets more complicated)

As an individual you can also open a SIPP which is a personal pension investment account, get all the government benefits but no company match of course.

What 401k were “wiped out”? The selling price for the assets in the 401k was only down for a few years, and then they were reinflated and tripled within 10 years.

And defined benefit pensions and 401k are invested into the same assets, the government doesn’t have a secret stash of risk free 8% return investments. What they do have is the ability to fudge the numbers by setting inappropriate assumptions and buying government employee votes with crazy promises 30 years into the future, backed by the power to tax everyone into oblivion.

> Workers would still be free to opt out of saving entirely

This is never going to work. With so much people living check to check, who has the money to save? This approach supposes that we are hommo economicus able to take the best long-term decisions. We are not.

For me, the easy solution is tax people now to pay the retirement of older people. Then, do that forever. It works in Europe.

But, will this work with a diminish population? Is not this a pyramidal scheme?

The reality is that productivity has gone up way faster than population is going down. The main problem is how to distribute that enormous wealth, not if there is enough for everybody.

We call that social security in the US and that’s roughly how it works, other than the trust fund con.

And the regressive income cap.

> For me, the easy solution is tax people now to pay the retirement of older people. Then, do that forever. It works in Europe.

This isn't actually true for at least some parts of Europe. In fact, there are huge problems with current retirements systems and doubts of its future tenability precisely because of this scheme.

Why should I have to pay for someone elese’s retirement?

> Why should I have to pay for someone elese’s retirement?

To have a functional society. Everybody has the mandatory duty to take care of the society they live in.

You have right, as you should. But is as fair to have duties. A society where everybody is entitled to rights but nobody wants to perform their duties is a sick society.

This benefits you in the end if a selfish reward is what you look for, by creating a better society your odds to have a good life are increased.

In many tribes, the implicit contract is that if you are unable to have children, raise a family, suffer a loss of family, or become disabled yourself, then the tribe is still there for you.

Tribes that have an every man for himself ethos don’t really work out in the long run. Turns out, working together and spreading risk over the tribe (or country) is more sustainable and productive, hence they thrive and have a competitive advantage.

Right, sure. For truly unpredictable events like suffering a loss or becoming disabled, the argument for a government funded safety net makes a bit more sense. At what point should personal responsibility come into play? IMO it should for something as predictable as “one day you will need to retire.”

Retirement is not very predictable at all. How long will you live? What medical treatments will you need and how much will they cost? Are your skills going to pay what you think they will for 20 to 40 years in the future?

We can’t even predict 2 years into the future, what chance do we have decades in the future. Only certainty I can see is if one decides to kill themself once they are no longer self sufficient. Even then, planning about doing it and doing it are very different things.

because by killing pensions and forcing people to gamble with stock are essentially also "paying for someone else's retirement" only that its Buffet's and the likes instead of people that needs it for a sane functioning society.

there's no way out of paying for someone's else retirement. it just change if you do it consciously and right, or be mislead.

No idea what the article says because I don't have a WSJ subscription. It would help if op could at least post a brief summary of what the author is for or against.

As a matter of social spending policy the tax expenditures for retirement savings don’t strike me as terribly efficient. The benefit to society is that it encourages people to save during their working years so they won’t have to be supported by society during retirement. Fine, that’s decent reasoning. But in the system as designed most of the forgone taxes go to relatively well off people that would save and not end up on welfare regardless.

I really liked Canada's approach to this, the "Tax Free Savings Account".

You get contribution room for every year that you are 18+ and a tax resident. Money goes in post-tax; withdrawals of principle and growth are tax-free. Withdrawals can happen at any time with no penalty; you get the contribution room back in the following year.

Right now Canadians get $6000/year of contribution room; anyone who's been in Canada since they were introduced in '09 has something like $63k of contribution room accumulated. $6000 is a tangible number for a teenager with a part-time or summer job, and the lack of withdrawal penalties means that the account doubles as an emergency fund (which is what you should be doing with your first dollars if you go by r/personalfinance's chart).

Then again, the Canadians also don't have the whole "savings accounts are limited to six withdrawals" nonsense.

The USA already has something very similar, called a Roth Individual Retirement Account (Roth IRA). The contribution limit is even the same, at $6k USD/year

The main difference is that, before retirement age, Roth IRAs only allow the principal (not the growth) to be withdrawn without penalties. Also, people who earn more than around $150k are not allow to contribute to Roth IRAs (the exact threshold is based on a tax calculation called MAGI)

In my opinion, the Roth IRA would be much more successful if it was for everyone, and not just "the poor".

- Roth IRA is an investment account. Usually holds ETFs. TFSA can come both as a savings account and an investment account. People with lower MAGI are less likely to be able to weather the ups and downs of the market for their emergency fund.

- $150k MAGI is literally "any job at Google/Facebook"; and also roughly the poverty line for family-with-two-kids in SF Bay Area due to the housing prices here. Who actually has funds to put in a Roth IRA through the front door?

- Contribution room mechanism means that you have to know your MAGI before you can put money in it. In Canada, the banks display your contribution room on the online banking portal, because the calculation is the same for everyone.

- Any mechanism for a withdrawal penalty makes it regressive. Rich people rely on accountants or TurboTax to track basis; with the TFSA you can just look at your balance to see if it's safe to withdraw money, making it accessible to young people and immigrants.

- Rich people can contribute to the Roth IRA through a Traditional IRA, and in doing so, contribute more per year than folks contributing through the front door.

In the US, a Roth IRA is somewhat similar, except it differs from what you described: early withdrawals have a penalty, and the contribution "room" is different. With the IRA, you can only contribute up to the $6000 annually. You don't accumulate "room", just principal. If you miss it, you miss it.

Get rid of the Roth IRA income cap and raise the max annual contribution limit 4x. Not that hard.

Get rid of the 401k entirely and let everyone use IRA/Roth IRA with the increased contribution limits. Make contribution limit a percentage of income rather than a fixed amount (e.g. Canadian RRSP allows 18% of last year's income). Allow a minimum dollar amount contribution even if it exceeds that percentage. E.g. $50k-earning worker wants to save $10k/year by living with parents, not eating out etc even though contributions are limited to 15% of income.

Calculate SS tax after these deductions, not before.

EDIT: Please let me know why these might be bad ideas. I think it's unfair that currently only people with employer-sponsored 401k plans can save $18k and everyone else has only an IRA with $5.5k limit. Or some people can do a self-employed 401k which is a thing I don't know a lot about. It's crazy there are so many options for what should be a simple thing "I want to put aside some money now, some of it tax free, for when I retire."

I'm disqualified from contributing to a Roth IRA. My uninformed speculation on why Roth IRA income caps and max annual contribution limits exist is that it's the sake of tax revenue.

In practical terms, you’re not. Contribute to a traditional IRA. Roll it over immediately into a Roth IRA. You can do this regardless of how large your income is.

Note: unless you have existing savings in a traditional IRA.

Yeah, this is an important caveat. If you have existing IRA funds, roll them into a 401(k) first.

Wait before rolling it over, probably at least 30 days. If you do it immediately it is considered a single transaction and illegal. If audited they’ll make you reclassify it and pay penalties.

Any reference or citation for that? I have never heard that advice and a quick googling doesn't turn anything up either. I've generally heard the opposite advice (convert the next day to minimize exposure to [undesired] gains/losses while a traditional IRA).

The google term you want is “structured transaction.” Any sequence of legal transactions clearly designed to do an illegal thing when done directly is to be treated the same as if it had been done as a single step.

The point of waiting e.g. 30 days is EXACTLY that it exposes you to gains/losses and you can rightly say the two actions are no longer connected.

You are confused as to the definition of a “structured transaction”. There is no issue with performing an immediate rollover. Rolling over IRA contributions into a Roth is not only legal, it is explicitly endorsed by the IRS.

Interesting, I've always been informed that waiting one day is sufficient. But, didn't the backdoor roth get closed in the recent tax change?

It didn’t, and doing an immediate rollover is not considered structuring since rolling over IRA contributions into a Roth is explicitly legal.

You can do a "backdoor Roth" to get around the income cap https://www.bogleheads.org/wiki/Backdoor_Roth

I know it’s possible, but get rid of all the hoop jumping. The more important thing is just raising annual contribution limits. 6000 is ridiculous.

"Tax breaks for the rich"?

I think this an important thing to note - Pensions are great when they're good - but most were not that good. I do like the idea of a savings where I can contribute money to, where some of it ends up being for retirement, and some of it ends up not being. My biggest issue with the 401k, is the money is locked in there, so if I honestly needed it, I'd be kinda screwed from a tax point of view.

Why is your money locked?

I think people make wayyy too much of the withdrawal penalty. Or assume that you can’t even touch it until you’re retired. It could be way higher. If you need the money 10% is not that bad...especially if you have an employer contribution.

It's 10% penalty, and then you have to pay tax on it because it's income (at least from a 401k). This is where it gets painful.

So what? It’s pre-tax dollars so yes you pay income tax. You will have to do that when you withdraw in retirement too.

If it’s for a emergency..like you lost your job then presumably you’d be in a lower income bracket for that year.

The penalty is unreasonable - that's my primary objection.

10% is unreasonable? Are you saying there should be no penalty? I’m arguing it’s low.

Every Californian (or anyone living in a state with high income tax) pays a 10% penalty just to live in that state.

Put another way, withdrawing from a 401k in a state with no income tax would probably amount to the same amount of tax any Californian pays on their normal income.

There's nothing like gambling with your retirement in the stock market.

Might I suggest you read up on some state run pensions, and see how much worse they are doing. CA, IL, NJ, NY, MA are all having serious funding problems after years of sweet deals and overly optimistic returns (which have done far worse than the stock market) that the unfunded liabilities are eating other parts of the state budget (and all these states are already way overtaxed)

Get rid of 401ks entirely, they’re just a giant tax benefit to the wealthy. Remove the cap on social security contributions and guarantee everyone a livable retirement with social security.

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