A new brief from the Center for Retirement Research at Boston College makes the case for scrapping tax benefits on retirement plans like 401(k)s and IRAs, potentially adding billions of dollars in U.S. tax revenue each year.

Economists Alicia Munnell and Andrew Biggs argue how subsidies for these retirement plans, which they say fail to “significantly boost national saving,” could be diverted to fund Social Security instead — which is set to run short of cash by 2033.

Don't miss

• Commercial real estate has beaten the stock market for 25 years — but only the super rich could buy in. Here's how even ordinary investors can become the landlord of Walmart, Whole Foods or Kroger

• Inflation is still white-hot — use these 3 'real assets' to protect your wealth today, no matter what the US Fed does or says

• Anything can happen in 2024. Try these 5 easy money hacks to help you make and save thousands of dollars in the new year (they will only take seconds)

“It makes little sense to throw more and more taxpayer money at employer plans and IRAs,” the duo wrote in the brief. “In fact, the case is strong for eliminating the current tax expenditures on retirement plans and using the increase in tax revenue to address Social Security’s long-term financing shortfall.”

The price of deferred taxes

Americans saving up for their golden years get to defer taxes on contributions to retirement plans, like 401(k)s and IRAs, which they only pay on withdrawals in retirement. But deferring their taxes not only squeezes the future savings they get to enjoy in retirement, it also leaves potential tax revenue on the table.

The brief points to Treasury estimates that the tax preference for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185 billion in 2020 — equivalent to about 0.9% of gross domestic product.

What’s more, the tax expenditures for retirement savings plans are actually more likely to benefit higher earners. The Tax Policy Center estimates nearly 60% of those benefits went to taxpayers earning at least $167,000 annually, while more than 38% went to those making $245,000 or more in 2020.

Why? Higher earners are more likely to have access to employer-sponsored retirement plans, are more likely to participate in them and contribute more when they do participate, the brief states.

Read more: Rich young Americans have lost confidence in the stock market — and are betting on these 3 assets instead. Get in now for strong long-term tailwinds

The researchers also calculated, based on Federal Reserve data, that between 1989 and 2022, the share of workers aged 25 to 64 who participate in employer-sponsored retirement plans rose by a meager two percentage points, from 51% to 53%.

Meanwhile, Social Security benefits are a major source of income for low-income seniors, many of whom rely on these checks to cover the cost of essentials. Additional financing would allow the program to continue paying beneficiaries in full for an extended period of time.

Some retirement experts oppose nixing tax incentives

Not everyone is convinced by Munnell and Biggs’s proposal to reduce or eliminate tax preferences for retirement plans.

“Talk about robbing Peter to pay Paul,” Brian Graff, CEO of the American Retirement Association, told the National Association of Plan Advisors (NAPA). “It’s absurd to take away the incentives from a system that’s actually working to give money to a system that has fundamental challenges.”

Some experts challenge whether retirees indeed face major financial headwinds with Social Security checks in the future. However, The Center on Budget and Policy Priorities says that without their benefits, a stunning 38.7% of older adults would have incomes below the poverty line.

In fact, even with a 3.2% cost-of-living bump to Social Security benefits in 2024, a survey from The Senior Citizens League (TSCL) found over half of respondents worry their retirement income won’t cover the cost of essentials.

“The Social Security benefits are modest, only replacing about 30% of one's earnings during working years,” Mary Johnson, Social Security and Medicare policy analyst at TSCL, told Moneywise in an email.

What to read next

• Here's how you can invest in rental properties without the responsibility of being a landlord

• ‘The biggest crash in history': Robert Kiyosaki warns that millions of 401(k)s and IRAs will be 'toast' — here's what he likes for protection

• 'It's not taxed at all': Warren Buffett shares the 'best investment' you can make when battling inflation

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.