Our Enormous Retirement Subsidies for the Rich

In the State of the Union address, Obama revealed that he will be implementing a myRA plan, which is basically an Individual Retirement Account administered by the government. Savers will put the money in after-tax (like a Roth IRA), the accounts will be small (capped at $15,000), and the returns will be modest but guaranteed.

Callahan had some preliminary coverage of the myRA idea and retirement security in general yesterday. The Economic Policy Institute also wrote on the plan, largely panning it as being very inadequate. Indeed, it is hard to see how such a small account is meant to accomplish much or what this is supposed to do for low-income people who simply do not have any real money to put aside.

But before people start rattling off alternative account proposals that are much better, it behooves us to collectively recall just how much money the federal government is already devoting to subsidizing private retirement accounts. Those in policy circles tend to be aware of this stuff, but it largely escapes the glare of everyone else.

Each year, the federal government puts tax expenditures towards a whole slew of retirement instruments including defined benefit plans, 401(k)s, Keogh plans, traditional IRAs, and Roth IRAs. The Joint Committee on Taxation projects that in the five years between 2013 and 2017, spending on these subsidies will total over $700 billion. If we double that to do the 10-year budget thing everyone does for some reason, we wind up with $1.4 trillion of tax expenditures on just these subsidies.

Who captures these subsidies? The rich of course. According to the CBO, the following is who soaked up the tax expenditures dedicated to net pension contributions and earnings in 2013.

The richest fifth pulled down 66 percent of them, while the poorest fifth pulled down just 2 percent of them. So the richest quintile receives 33x more federal money for their retirement accounts than the poorest quintile. Even the fourth quintile (incomes in the 60th to 80th percentiles) only received 18 percent of these tax expenditures. So all income groups other than the top fifth receive less than a proportional share of this money.

Needless to say, this system of retirement tax subsidies is totally ridiculous and is just another of the submerged ways that we funnel huge sums of money to the rich in this country. If we really want to pump up the retirement savings of the poor, one obvious way to start is to take the next decade's $1.4 trillion of retirement tax expenditures and distribute them in a different way than the manner detailed in the graph above.