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There’s no debate that Social Security’s funds — which are projected to become insolvent in the next decade — need fixing.
But a new research proposal published by the Center for Retirement Research at Boston College by experts at the opposite ends of the political spectrum has sparked considerable opposition.
The research comes from an unlikely pair — conservative economist Andrew Biggs, a senior fellow at the American Enterprise Institute, and left-leaning economist Alicia Munnell, director of the Center for Retirement Research. (The brief is based on a paper Biggs and Munnell co-wrote with Michael Wicklein, a research assistant at the Federal Reserve Bank of Boston.)
Together, they call for limiting current tax preferences for retirement savings plans, and instead redirecting those funds to help shore up Social Security.
How retirement plan tax incentives work
In 2024, the limit for total employee and employer contributions to a defined contribution plan such as a 401(k) is $69,000. Individuals who are 50 and over can put away an extra $7,500.
However, the limit for employee contributions is $23,000, or $30,500 for those who are 50 and up. Those contributions are typically eligible for tax deferrals, whereby the money saved now is not taxed until retirement.
Only high-income individuals tend to meet those thresholds.
Individual retirement accounts also enable workers to put away up to $7,000 in pretax contributions, or $8,000 for those 50 and up.
The maximum contribution thresholds are adjusted each year.
In 2020, those tax preferences reduced federal income taxes by about $185 billion to $189 billion, the research found. That is equal to about 0.9% of gross domestic product, defined as the final goods and services produced in the U.S.
The tax incentives have “virtually no impact on retirement saving,” the CRR research concludes.
Meanwhile, Social Security’s combined trust funds are projected to run out in the early to…
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