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Proposal Would Eliminate 401(k) Tax Deduction

The U.S. Senate Finance Committee will hear a proposal today (Thursday) that would eliminate the 401(k) tax deduction in favor of a tax credit.

The presentation by the Brookings Institution will be one of several at a hearing intended to explore ways to encourage workers to save more money for retirement.

Getting people to save more on their own is a goal that's taken on greater importance as Congress has considers reforms to the Social Security program, which is projected to run out of money in 2036.

Most of the possible changes Congress makes to Social Security to keep the program solvent will reduce benefits to future retirees, which means workers will need to start saving more now.

It's clear that U.S. workers are not saving enough - Boston College's Center for Retirement Research has estimated the gap between what Americans have squirrelled away for their golden years and what they'll need at $6.6 trillion.

"Consideration of reforms to strengthen the private retirement system would be appropriate and constructive, especially since any plausible long-term fiscal plan will involve some reductions in Social Security and Medicare benefits," William Gale, a senior fellow at the Brookings Institution, said a briefing last week.

The Brookings proposal eliminates the 401(k) tax deduction, which it says favors high-wage workers, and replaces it with a tax credit that would put money directly into workers' retirement accounts.

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