A bullet point on Page 18 of President Barack Obama's 2014 budget sounds ominous: "Prohibit Individuals from Accumulating Over $3 Million in Tax-Preferred Retirement Accounts."
That it appears in a section titled "Strengthening the Middle Class" is odd since such a proposal would seem to undermine the goal.
Why, at a time when the government is looking to reform entitlement programs because it can't keep the promises it has made to future generations, does Obama want to reduce the incentive to save? It makes no sense.
Suddenly, the political agenda becomes obvious. Mitt Romney's $102 million individual retirement account became an issue during the 2012 presidential election. Instead of offering a solution to prevent wealthy individuals from putting deeply discounted stock in their IRAs and earning huge, tax-free profits, Obama is looking to score political points.
"He's taking a cheap shot at Mitt Romney rather than helping lower- and middle-income Americans save for their retirement," says Jason Fichtner, a senior research fellow at George Mason University's Mercatus Center in Arlington, Virginia. "He's going after a very small segment of the population that has in some way managed to save wealth in a tax-deferred vehicle."
A very small segment - for a very small return. Limiting an individual's total retirement balances to about $3 million, enough to finance "an annuity of not more than $205,000 per year in retirement," would raise $9 billion over 10 years, according to Obama's budget proposal.
Why, it makes it sound as if the danger is saving too much, not too little.
Fichtner has spent the last 15 years - at the Joint Economic Committee of Congress and Social Security Administration before going to Mercatus - looking for ways to help lower- and middle-income people save for retirement. And he has come up with some terrific solutions.
For starters, Fichtner would adopt a system of automatic enrollment. By forcing individuals to opt out rather than opt in, saving becomes a passive choice.
Think of it as the default setting. You do nothing, which is the path of least resistance, and you receive the benefit. Research by Harvard University's Raj Chetty has shown that nudging people to save in this manner is more effective than the existing tax break.
To his credit, Obama's budget includes automatic IRA enrollment and payroll deductions for those who lack employer-based 401(k) plans, considered to be the best way to induce people to save.
Next, Fichtner would address the current deductibility limits, which he says are "upside-down": The higher the marginal tax rate, the bigger the benefit from the deduction. The existing system gives incentives to those who don't need any.