In 2017 a Republican-controlled Congress passed a tax cut hugely tilted to corporations and the wealthy. In the waning days of 2019, the Democratic-controlled House did a kind of me-too. It pushed through a retirement bill with a provision that gives billions to those in the upper tiers.
The House’s gift to the well-off was part of a deal finalizing federal spending for fiscal 2020. In a tweet summing up the agreement, tax expert Len Burman called it “the Zombie Extenders [aka tax breaks] and Fiscal Irresponsibility Act of 2019.”
In the case of retirement policy, nothing was as fiscally irresponsible as moving back the age for required minimum distributions (RMDs) from 70 1/2 to 72. An estimate from the Joint Committee on Taxation put the price tag for that change at $8.9 billion over the next decade.
And the number will only keep growing, with all those billions going to people who don’t need a dime.
(By comparison, the Taxation committee estimated the next-highest cost in the retirement bill at $3.4 billion. That money though will go to a good cause: shoring up the pensions of over 10 million workers in underfunded multiemployer plans.)
Getting back to RMDs, they provide the payback that seniors owe America for decades of tax breaks. Contributions to all retirement plans except Roths are tax-deductible; capital gains in all plans, Roths included, accrue tax-free. On the back end, through voluntary withdrawals and RMDs, the Treasury finally recovers long-forgiven taxes.
Withdrawals from retirement accounts are taxed at ordinary income rates. They can begin at age 59 1/2, and for those who need the money they often do. Those who don’t need it have long enjoyed a huge tax break. They could hold off making any withdrawals and paying any taxes for another 11 years (while balances kept growing and compounding all that extra time).
Their late-starting RMDs have cost the Treasury in the tens of billions. Now, thanks to the longer wait time passed by Democrats, they’ll cost billions more. The rationale is that life expectancies have risen, so the RMD starting age should rise as well.
That may sound like a good reason, but there’s a better reason to do just the opposite. It would make far more sense (and cost the Treasury far less) to begin RMDs earlier rather than later. There’s actually a strong case for starting at age 65.
The first year of Medicare eligibility could also be the year when retirees begin paying back for those extended tax breaks. The revenue inflow could be earmarked to bolster both Medicare and Social Security, the two most important safety net programs for the elderly.
There never was a good argument for putting off RMDs. The Treasury loses out. Those who count on retirement accounts to help them get along don’t gain anything; they’re drawing down early and often. The only real beneficiaries are those affluent enough to avoid withdrawing until it’s mandatory.
The current withdrawal rates also help out the haves. The formula that usually applies calls for a starting RMD of less than 3.7 percent. Twenty-five years later, at age 95, it’s only 11.6 percent.
At these rates account growth can easily outstrip RMDs. Balances can keep getting larger well after mandatory distributions begin.
And those low rates are likely to go even lower. The Internal Revenue Service has proposed updating the life expectancy tables that determine RMD withdrawals. If the money has to last longer, the withdrawal percentages have to be lower.
It wouldn’t hurt anybody if required distributions began sooner rather than later. And no, that wouldn’t wipe out balances; it’s not RMDs that drain retirement accounts, it’s withdrawals well beyond the minimums.
Here’s one last reason why it’s wrongheaded to further delay minimum distributions. Since 1979, incomes for the middle class (the middle 60% of households) haven’t grown anywhere near as fast as incomes for the top 20%. Those in the Top Twenty hardly need another tax break. It fails the fairness test, and the aroma test as well.
Summing up, the 2017 tax cuts ran true to form. They demonstrated once again the GOP’s laser focus on making the rich richer.
This time around, though, it was the left side of the aisle doling out the billions.
• This article first appeared at www.nydailynews.com
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