As traditional pensions, or defined benefit (DB) plans, are replaced by defined contribution plans (DC), workers in New York City and in the nation have less retirement security. Coverage rates for employer plans are falling. Most DC retirement accounts are in the form of 401(k)-type plans - voluntary, individual, self-directed financial accounts that enjoy tax-favored status under federal, state, and city tax rules. Because contributions and investment earnings accumulate tax-free under these plans, the increasing use of DC retirement accounts represents a significant loss of tax revenue for federal, state, and local government budgets. At the federal level, public data reveal that these tax breaks will cost taxpayers a staggering $540.6 billion from 2012 – 2016. Because most state and local tax codes allow the same deductions as federal tax law, cash-strapped state and local government budgets suffer a substantial revenue loss from these tax expenditures. Surprisingly, states and municipal tax authorities – including New York - do not publish tax expenditures for 401(k) plans, making it difficult to determine the exact amount of their considerable fiscal impact. We estimate the cost of New York City and State tax expenditures for all individual retirement savings plans, including 401(k) plans, Individual Retirement Accounts (IRAs), and Keogh accounts (for the self-employed), to be approximately $1.79 billion annually. The cost includes over $390 million for the city and $1.39 billion for the state. To put these numbers in perspective, $390 million is more than the $290 million the city spent on its parks. In New York State, $1.39 billion would cover approximately 90.5% of proposed funding cuts to school aid or 93% of the cuts to both Medicaid and funding for human services in the 2011-2012 fiscal year. Unfortunately, these tax expenditures fall far short of fulfilling the intended goal of increasing retirement security for most working families. Because this subsidy is in the form of a tax deduction rather than a credit, these expenditures are highly regressive. Taxpayers in the highest tax brackets, who are likely to save without government incentives, receive the largest tax break. Taxpayers with the lowest incomes receive relatively miniscule assistance. In New York City, low-income earners receive an estimated $16 per year, while those in the top brackets receive 28 times more, or over $448 per year. Rearranging these tax subsidies from a tax deduction to a flat tax credit would provide workers with annual accumulations (indexed for inflation) to supplement Social Security and provide an adequate standard of living in retirement In New York City, this switch would provide each worker with $110 to invest in a retirement account at no extra cost. Switching to a state credit would give each worker an extra $158, and a new federal credit would provide $600. These accumulations could then be invested in a “Guaranteed Retirement Account,” a vehicle that allows workers and employers to contribute to a safely and efficiently administered pension account. This change would be revenue neutral for the city, while increasing retirement security for workers at small- and medium-sized businesses without imposing additional cost on their employers.
