Greased by lobbying and campaign cash, tax breaks for retirement savings are one thing Congress agrees on. But they also blow out the deficit and add to income inequality.
Five months before Congress faced a near-catastrophic standoff over the debt ceiling, with Republicans demanding restrictions to food and Medicaid programs to rein in spending, a bill that raised the cost of private retirement savings accounts to $282 billion per year was quietly signed into law.
In this era of deeply divided politics, the 2022 bill known as Secure 2.0 was hailed as a bipartisan success — a victory for average Americans. It had sailed through the House by a whopping 414-5 vote. It followed four other major bills passed between 1996 and 2019 that dramatically expanded taxpayer savings – all equally lauded as bipartisan victories.
But that rare issue that brought a divided Washington together also increased wealth disparities and the federal deficit. And the victory was most strongly applauded by the burgeoning financial services industry, for whom tax-advantaged retirement savings has transformed a $7 trillion retirement market in 1995 to a $38.4 trillion behemoth in 2023.
That doesn’t sound like enough to retire on.
Fine, then think of it as free money to supplement your income with when you’re 60+.
You would be wrong. Compounding is an absolute beast. It’s nearly a Million. Let’s say you are 25 and just starting out. You manage to put in $1000 a year and get the $1000 credit. Let’s say you do this exact same thing until you are 65. You invest it in the S&P500 Index which historically returns ~10% annually…
Balance at 65: $929,444
Total contributions: $80,000
Employee contributions: $80,000
Employer match: $0
Investment returns: $849,444
I’d be willing to bet that medical bills at the generally accepted “retirement age” will eat through most of that inside of 5-10 years. A retirement home even faster.
“Millionaire” doesn’t mean what it used to.
If only I had an extra $1000 a year.
Gotta give up the avocado toast.
/s in case it isn’t obv.