Republicans Could Affect Americans' Retirement By Targeting 401(k) Plans

Republicans in Congress are talking behind closed doors about a plan that would affect millions of Americans who are saving for retirement — and not in a good way according to many critics. The idea is to drastically lower the amount of money that Americans can set aside before taxes in their 401(k) accounts.

ROBERT SIEGEL, HOST:

Republicans in Congress are batting around ideas for changing the way Americans save for retirement. And one idea is to lower the amount of money we could set aside before taxes in retirement accounts like 401(k)s. Largely the ideas have been discussed behind closed doors. But NPR's Chris Arnold has been digging into this, and he joins us now. Hello, Chris.

CHRIS ARNOLD, BYLINE: Hey, Robert.

SIEGEL: What's being proposed here?

ARNOLD: Well, there's no formal proposal yet. As you say, this is sort of in the formulation stage behind closed doors. But what we're hearing is that the idea is to really sharply lower the amount of money that you can contribute pre-tax to a 401(k). Currently you can put in $18,000. They'd bring that down to $2,500 - so a very big drop. So if you're not allowed to contribute as much there, though, one way they could deal with that is to say, well, OK, you could put more money into what's called a Roth IRA. You just have to pay the taxes upfront on that. And then later, when you retire, you don't have to pay the taxes when you start using the money.

SIEGEL: The effect of that would be to bring in some tax revenue right now in exchange for later on. What's the point of doing that?

ARNOLD: Yeah, exactly. So it would put cash into the government's pockets today. And this has everything to do with that big $1.5 trillion tax cut that Republicans are proposing. And this could help to pay for that. Now, critics say, look; I mean, this is basically just an accounting gimmick. You're getting money now instead of getting it later. So, you know, is this really a way to pay for the tax cut?

SIEGEL: What would it mean for middle-income Americans?

ARNOLD: Well, this is the way that just a huge number of Americans save for retirement. Fifty-four million American workers are actively involved in 401(k) plans. And as we know, people need to be saving more for retirement, not less. And this plan, if it became a reality, it would be really disruptive, and it would probably mean that people would be saving less money for retirement.

SIEGEL: What's the thinking there? Why would it lead to people saving less?

ARNOLD: Well, in the current system - if you think about this way, there's this big upfront incentive, right? I mean, I put money into my 401(k) account - or it's actually a 403(b) because I'm - work for a nonprofit - but I stash money in there and I think, you know, yay for me. I don't have to pay as much in taxes this year. And that's just a huge incentive. You take that away, behavioral economists will tell you that people will just not save as much.

And I spoke to a senior vice president at Fidelity Investments today, too. He said he's very concerned about this deterring people from saving. And finally, there's just a lot of good things that have been happening with 401(k)s over the past decade. Many more Americans are taking part and saving more. Companies are automatically signing up workers so they start saving. And a lot of people feel like, look; why do you want to upset this apple cart?

SIEGEL: So while Republicans in Congress have been talking about possibly upsetting this apple cart, President Trump tweeted this morning there will be no change to your 401(k). How seriously should we take all this talk?

ARNOLD: Right. He wants to save the apples. But, you know, I mean, absolutely there is strong opposition. The financial industry is against this. The AARP is against it. Democrats are opposed. Some Republicans in Congress say that they don't like it. So the odds of this moving forward, especially after the president's tweet - at least today this is what he's saying - the odds seem slim. The fact, though, that it's being considered at all might be an indication of just how hard it's going to be to find the money to pay for this big tax cut.

SIEGEL: That's NPR's Chris Arnold. Chris, thanks.

ARNOLD: You're welcome, Robert.

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