FacebookTwitterGoogle+RedditEmail

Roth IRAs Pushing Up the Deficit

by GERALD E. SCORSE

Saving for retirement is good for individuals and good for the country—but Roth individual retirement accounts (IRAs) are costing America dearly. They’ll add to the deficit far into the future, and the amount they add is set to explode. Let’s discover why, and look at some ways to hold down the damage.

In contrast to other retirement accounts, contributions to Roth IRAs have already been taxed. That’s it for the Treasury from Roths. Instead of an upfront tax break, they get a permanent tax break: no more taxes, ever.  The tradeoff effectively guarantees untold billions in downstream losses.

The losses are unlimited. They occur because the untaxed capital gains in Roth accounts can easily reach several multiples of taxed Roth contributions. All other accounts ultimately pay taxes on both contributions and gains; Roths pay only on the usually far smaller contributions amount.

Congress has twice sharply increased America’s future losses from Roth IRAs. On New Year’s Day 2013, the fiscal cliff agreement opened the door to immediate Roth conversions by tens of thousands of 401(k)s, 403(b)s and 457s. (Conversions turn tax-deferred plans into tax-free Roths. Until now, only regular IRAs could convert before age 59 1/2.  Conversions raise Treasury receipts initially, since they require the payment of the taxes due on the base accounts.) Earlier, starting in 2010, a Bush Administration law removed the $100,000 adjusted gross income limit for Roth conversions.

Ending the income cap on conversions followed the Bush pattern of tax breaks for the wealthy. The bipartisan pattern of playing fiscal games also helped drive Congress’s action. In July 2010, with conversions booming, tax expert Howard Gleckman described the Roth game: “Congress adopted the tax change in part as a fiscal gimmick. That’s because, within the 10-year budget window (all that matters in Washington accounting), the conversions raise revenue. At the time the law passed, CBO [the Congressional Budget Office] figured it would generate about $6.5 billion from 2010-2015. But in the long run, turning billions of dollars from tax-deferred to tax-free savings will be a huge loser for Treasury. My colleagues at Tax Policy Center figure that, through mid-century, allowing unlimited Roth conversions will reduce federal revenues by $100 billion.” That figure, of course, doesn’t count the losses that began piling up when the accounts were launched in 1998.

There’s no stopping the red ink already flowing from Roth IRAs. With the nation struggling to balance the books, it’s time for Congressional damage control. Here are three deficit-reducing  Roth reforms:

Abolish conversions. The largest Treasury losses will come from the largest Roth accounts, i.e., conversions. Congress should override the fiscal cliff provision and abolish all future Roth conversions. At a minimum, it should restore the income ceiling.

End Roth Startups. Other retirement plans are genuine two-way bargains: savers enjoy tax advantages, but repay the country via taxable distributions. Roths eat away at America’s fiscal future, taking ever-bigger bites as more accounts come on-stream. The second reform, just as important as the first, is to stop opening new Roth IRAs.

Require distributions.  Minimum distribution requirements—standard on all other retirement plans—have never applied to Roths. Accounts created under the fiscal cliff agreement will require distributions, and Congress should extend the rule to all Roths. Tax-free Roth payouts would pump extra money into the economy, and give governments at all levels a chance to recoup some of their lost revenues.

Senate Majority Whip Dick Durbin (D-IL) sees tax reform as one way to help close the federal deficit. As he recently told CNN, “There are plenty of things within that tax code, these loopholes where people can park their money on some island offshore and not pay taxes.” Nobody has to go offshore. All anyone has to do is convert a retirement account to a Roth IRA, or build one from scratch.

Gerald E. Scorse helped pass the bill requiring basis reporting of capital gains. He writes articles on taxes.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

December 05, 2016
Bill Martin
Stalingrad at Standing Rock?
Mark A. Lause
Recounting a Presidential Election: the Backstory
Mel Goodman
Mad Dog Mattis and Trump’s “Seven Days in May”
Matthew Hannah
Standing Rock and the Ideology of Oppressors: Conversations with a Morton County Commissioner
Kevin Zeese - Margaret Flowers
#NoDAPL Scores Major Victory: No Final Permit For Pipeline
Fran Shor
The End of the Indispensable Nation
Michael Yates
Vietnam: the War That Won’t Go Away
Michael Uhl
Notes on a Trip to Cuba
Robert Hunziker
Huge Antarctica Glacier in Serious Trouble
John Steppling
Screen Life
David Macaray
Trump vs. America’s Labor Unions
Yoav Litvin
Break Free and Lead, or Resign: a Letter to Bernie Sanders
Norman Pollack
Taiwan: A Pustule on International Politics
Kevin Martin
Nuclear Weapons Modernization: a New Nuclear Arms Race? Who Voted for it? Who Will Benefit from It?
David Mattson
3% is not Enough: Towards Restoring Grizzly Bears
Howard Lisnoff
The Person Who Deciphered the Order to Shoot at Kent State
Dave Archambault II
Standing Rock Sioux Tribe Statement on Dakota Access Pipeline Decision
Nick Pemberton
Make America Late Again
Weekend Edition
December 02, 2016
Friday - Sunday
John Pilger
The Coming War on China
Jeffrey St. Clair
Roaming Charges: The CIA’s Plots to Kill Castro
Paul Street
The Iron Heel at Home: Force Matters
Pam Martens - Russ Martens
Timberg’s Tale: Washington Post Reporter Spreads Blacklist of Independent Journalist Sites
Andrew Levine
Must We Now Rethink the Hillary Question? Absolutely, Not
Joshua Frank
CounterPunch as Russian Propagandists: the Washington Post’s Shallow Smear
David Rosen
The Return of HUAC?
Rob Urie
Race and Class in Trump’s America
Patrick Cockburn
Why Everything You’ve Read About Syria and Iraq Could be Wrong
Caroline Hurley
Anatomy of a Nationalist
Ayesha Khan
A Muslim Woman’s Reflections on Trump’s Misogyny
Michael Hudson – Steve Keen
Rebel Economists on the Historical Path to a Global Recovery
Russell Mokhiber
Sanders Single Payer and Death by Democrat
Roger Harris
The Triumph of Trump and the Specter of Fascism
Steve Horn
Donald Trump’s Swamp: Meet Ten Potential Energy and Climate Cabinet Picks and the Pickers
Ralph Nader
Trump and His Betraying Makeover
Louis Proyect
Deepening Contradictions: Identity Politics and Steelworkers
Stephen Kimber
The Media’s Abysmal Coverage of Castro’s Death
Dan Bacher
WSPA: The West’s Most Powerful Corporate Lobbying Group
Nile Bowie
Will Trump backpedal on the Trans-Pacific Partnership?
Ron Ridenour
Fidel’s Death Brings Forth Great and Sad Memories
Missy Comley Beattie
By Invitation Only
Fred Gardner
Sword of Damocles: Pot Partisans Fear Trump’s DOJ
Renee Parsons
Obama and Propornot
Dean Baker
Cash and Carrier: Trump and Pence Put on a Show
Jack Rasmus
Taming Trump: From Faux Left to Faux Right Populism
Ron Jacobs
Selling Racism—A Lesson From Pretoria
FacebookTwitterGoogle+RedditEmail