Lifeboats for first class passengers

"Boost Those 401(k) Contributions" advises Albert B. Crenshaw in a Washington Post article that my paper will be running on Sunday:

Millions of workers around the nation can sock away bigger nest eggs in their 401(k) and similar retirement savings plans in 2004, thanks to tax-law changes of recent years. And workers 50 and older can put away even more.

The 2001 tax cut loosened the restrictions on 401(k) plans, allowing many workers to boost contributions sharply, and easing the rules on employers so that better-paid workers are less likely to run afoul of antidiscrimination requirements.

For 2004, workers can dump as much as $13,000 into their plans, and those 50 and older can toss in another $3,000, for a total this year of $16,000.

Do you hear this, you millions of workers out there? You can now "sock away" $13,000 a year in your retirement savings. You now have permission to do this. So what are you waiting for? Take that extra $13,000 that you millions of workers have just lying around in need of tax-sheltering and sock it away!

Crenshaw does eventually get around to the following admission in his ninth paragraph:

The effect for most middle-income families is that tax-preferred saving for retirement and a variety of other purposes will be limited more by their ability to spare the cash than by ceilings in the law.

Ah, yes, that other limit on most workers' ability to "sock away" thousands of dollars for retirement. You know, reality. The vast majority of the millions of workers in this country won't be taking advantage of this new $13,000 ceiling because they are not wealthy enough to do so.

So who exactly is this change supposed to benefit?

Consider that the federal government is on pace to post another largest-ever deficit this year, which means these tax cuts and increased shelters will be funded by money intended to ensure the future solvency of Social Security. With that in mind, the increased 401(k) contribution limits look suspiciously like a lifeboat for the first class passengers to escape in while the rest of us -- those millions of workers who don't have an extra $13,000 to spare -- go down with the ship.

Crenshaw's offensive and inaccurate use of the word "can" in his opening sentence is echoed in the reporting I've seen on other dubious new benefits, such as the "Health Savings Accounts." HSAs seem designed to subsidize high-deductible health insurance and the customers who can afford to rely on them by allowing taxpayers to put $2,500 to $4,500 a year into a tax-free HSA. Millions of workers can take advantage of this for considerable savings (both on taxes and on the cheaper-to-begin-with, and now subsidized high-deductible insurance) -- all they need is few thousand dollars to spare.

In The Christian Science Monitor, David Callahan writes of The myth of the populist stock market":

At the height of the boom, however, the bottom three-quarters of American households owned less than 15 percent of all stock. Barely a third of households hold more than $5,000 in stock. Most Americans have more debt on their credit cards than money in their mutual funds.

Consider that last sentence again:

Most Americans have more debt on their credit cards than money in their mutual funds.

Crenshaw's article -- like the majority of "business" and "personal finance" journalism -- seems utterly irrelevant for a nation in which this is true.

Most Americans have more debt on their credit cards than money in their mutual funds.

A tax-cut plan that increases 401(k) contribution limits beyond the means or dreams of the majority of workers is irrelevant and regressively redistributive in a nation in which this is true.

Most Americans have more debt on their credit cards than money in their mutual funds.

Write that on postcards and send it to your representatives and your local paper. Scream it back at the television. Spraypaint it on a wall.

Comments

[praktike]

dear lord. great post.

[537 votes]

I am here from an Atrios link, and, yes, a great post, but I have to quibble--

Sure, the HSAs and 401(k) limits reduce tax exposure, but not for Social Security. SS contributions cap out around $80K (?), so after you hit the cap, you aren't contributing to SS anyway. People maxing out on their 401(k)s probably hit the SS cap, say, mid-September? Earlier?

Proving, of course, that payroll taxes, along with sales taxes, are the most regressive taxes going.

[Fire Ant]

Great post....maybe one day when the Religious Right folks post the Ten Commandments up everywhere, people will immediately tear up their credit cards, since, after all, we're not supposed to covet!!

[oh]

How about a few words about the regressive home mortgage interest deduction? Surely no one who believes in the expansion of government services takes advantage of either of these deductions. Right?

[Get HR2239 Passed Now]

Great post - I hope people have it in mind when, during the SOTU, BushCo trots out his Workers-as-Pioneers ideas that are supposed to give all us Pioneers tools like these tax shelters to help pay for healthcare, moving expenses in case our region is jobless and other things we'll need to survive in this brave new world.

Also, this kind of talk is what has me worried about Clark's healthcare plan when he talks about tax incentives to make healthcare more affordable.

I've heard that Dean is going to come out with a tax plan that addresses payroll taxes. That will be nice to see.

[JA3]

The CSM quote is a devastating one. But this:

...tax-preferred saving for retirement and a variety of other purposes will be limited more by their ability to spare the cash than by ceilings in the law.

Isn't this how it should be? In my family's case, we'll never be able to hit the absolute limits, but lifting the old percentage contribution limits has been a big help. My wife makes more than I do but I have the better retirement plan. It's a boon that I'm able to set aside 20%+ of my salary, because the limits on her plan are so low.

I'm sure we're unusual in choosing to set aside so much of our income, but I have yet to meet anyone my age who didn't give up on SS a long time ago and decide that retirement was their own responsibility...

Even though higher limits might not mean much to most of us, one positive development has been retirement savings tax credits for low-income people, also mentioned in the article (we were able to take advantage of that credit last year). It's sad that credit hasn't been better-publicized; there's no better way to get people into the habit of saving than to give them money.

[Get HR2239 Passed Now]

All the things you mention, JA3 are great - I wish I had known about the retirement savings tax credit. The problem with BushCo's plan is that they plan to use all these ideas to replace social security, medicare, medicaid - basically all your safety net programs. The Norquistas want all gov't service except for defense and local police to be privatized and that's where we're heading.

I just realized that I use "all" a lot in that comment. I'm sure that's a problem, but I stand by the gist of it - The Norquistas want to destroy the middle class and these phony baloney tax shelters that they are dangling as pro-middle class plans are a sham.

"With that in mind, the increased 401(k) contribution limits look suspiciously like a lifeboat for the first class passengers ..." ummm. Don't mistake this criticism for a defense of deficit spending or anything else Congress may do, but being able to contribue 13K per year does not come close to being a "first class passenger." I'm a long damn way from first class and it will help me personally. FTR, my salary is a shade above 60K/yr, but my company has a very generous 401(K) plan. Most Americans have more credit card debt than equity assets because most Americans lack the discipline to save instead of spend. Speaking as someone who can recall being in that sad state but is no longer. Credit cards are to personal finance what Cheetohs are to a healthy diet.

[Ab_Normal]

401(K)? What's that? I haven't worked for a company which matched 401(K) contributions since 1997. But I haven't been able to afford them either, so that means nothing. (And, no, it's not because of credit card payments.)

[Jeff S.]

Most Americans have more credit card debt than equity assets because most Americans lack the discipline to save instead of spend.

Exactly. And most Americans are in this situation because they want to live at a higher standard of living than they can afford.

[muckdog]

I've found the best way to get started in a 401k, for folks without the $13,000 laying around on the shelf, is to ease in.

Start with $100 a month (or as much as you can afford). Then, every time you get a promotion or a cost of living adjustment, put 50% of that amount in the 401k.

You'll be maxing out sooner than you think. And you won't miss the money, since you'll be taking it out of future raises.

Easy, huh?

[Ab_Normal]

that's how we started out, but then a whole lotta *stuff* happened. sigh.

[Ab_Normal]

oh, and i haven't had a raise or COLA since 2001.