Could Tax Reform Kill 401(k) Plans?

Alicia H. Munnell

IB#38

Introduction

Employer plans are a critical component of the U.S. retirement income system. The existence of these plans, especially the increasingly dominant 401(k)s, seems highly dependent on their favorable tax treatment. It is less clear, however, whether the employee contributions that fund these plans are a response to the favorable tax provisions or to the ‘Christmas Club’ nature of pensions that make saving automatic. This issue has become increasingly important, because the reduction in the taxation of equities to date, and the near elimination of equity taxation recommended by the President’s Advisory Panel on Federal Tax Reform, dramatically reduce the tax advantages of employer plans…