The foundation says the inadequate savings are prompted in part by a tax code that encourages consumption and discourages saving.
Personal saving, the setting aside of resources today to get benefits in the future, is taxed in a variety of ways in the United States, the think tank says.
For example, ordinary income tax treatment taxes income when first earned, and, if saved, taxes the returns on the saving as well (in other words, taxes the reward one “buys” by saving).
This is very different from the way the code treats consumption, the paper says, adding that “income used for immediate consumption is taxed only once by the income tax; the income tax does not fall again on what one buys with the after-tax income. This second layer of tax on the rewards for saving favors immediate consumption over delayed consumption.” These multiple layers of taxation are part of the bias against savings, the paper says.
“In addition to personal income taxes on the principal and the return, corporate income taxes on business profits and estate and gift taxes mean that saving, in some instance, can face up to four layers of taxation. These layers of taxes discourage saving and investment.”
What should be done to combat the bias against saving that has generated this retirement savings deficit?
Several advisors say financial professionals should illustrate the problem in dramatic ways.
“I take out a chart [that shows] how one’s retirement savings will run down and how you may be out of savings by age 72 and then what?” says Raymond Mignone, a CFP in Little Neck, N.Y.
These people usually understand the problem when it is explained to them, advisors say, but unfortunately many people don’t have advisors.
“My clients seem to understand it,” says Jeff Feldman, a CFP in Pittsford, N.Y., “but many people who don’t have advisors have never properly considered the problem. No one has explained to them that if they just put 10 percent aside, they will hardly miss it. And if they do it over 30 years, then their retirement isn’t going to be hard. You’ll [retire] with a million or so.”