Insight: "Cliff" deal's retirement plan revenue boost questioned

Thu Jan 3, 2013 1:40pm EST
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By Lauren Young and Nanette Byrnes

NEW YORK (Reuters) - One modest way that U.S. lawmakers were able to offset the impact of delaying spending cuts in the deal to avert the "fiscal cliff" was through a retirement plan provision that is supposed to raise $12.2 billion over 10 years.

The only problem is that some retirement and fiscal policy experts doubt whether enough people will take advantage of the provision, which allows workers to move their money from one kind of plan to another, for the government to be able to raise that much money.

And if it does, they argue it will only be robbing from future taxation revenue - which might even reduce the government's tax take over the long run.

"It's worse than fake," said Robert Greenstein, the founder and president of the left-leaning Washington think tank, the Center on Budget and Policy Priorities, in a blog post. "Every dollar of that $12 billion is revenue that the federal Treasury would have collected in subsequent decades. And, the resulting revenue loss in later decades will be substantially greater than $12 billion — probably several times that amount."

Alicia Munnell, director of the Center for Retirement Research at Boston College amplified that sentiment, saying, "It was simply a last-minute ploy to close a funding gap."

The change concerns the conversion of more traditional 401(k) retirement plans into the so-called Roth 401(k) plans, which were named after William Roth, a Republican senator, who was a relentless campaigner for lower taxes. He died in 2003.

Unlike mainstream 401(k) contributions, which are tax deferred until money is withdrawn, Roth contributions are taxed up front.

The estimate of an additional $12.2 billion in revenue hinges on the idea that there would be enough people willing to convert and pay taxes on the money they were moving over immediately (as well as on future contributions), rather than paying taxes on income from a traditional plan in retirement.   Continued...

A pair of elderly couples view the ocean and waves along the beach in La Jolla, California March 8, 2012. REUTERS/Mike Blake