Poll: Should the 401(k) Contribution Limit be Reduced in 2010?

Not long ago we heard that for the first time in years Social Security beneficiaries won’t be receiving their annual cost of living adjustment. This means those who draw a monthly Social Security check won’t see an increase in 2010. A lot of people are understandably upset about this. While the cost of living adjustment is based on inflation, we have a situation right now where there is no inflation. So, in theory it makes sense to eliminate the increase since the actual cost of living should be staying the same or going down.

The problem is that inflation is measured on very broad terms. While a gallon of milk or a pair of jeans might not be going up in price, many item that seniors do spend their money on are still increasing–namely health care. So, the government says that there’s no inflation to base the cost of living adjustment to, therefore there is just no adjustment. While it’s a big story, as members of Generation X we aren’t too concerned. That doesn’t mean we’re out of the woods.

There has been some discussion about the 401(k) contribution limit in 2010. As you probably know, right now the annual limit is $16,500 a year, or $22,000 if you’re over 50 years old. In the past this limit has slowly increased over time to keep up with inflation. But guess what? We have the same problem as with Social Security. The government reports that there is no inflation or possibly even deflation, so they are considering actually reducing the 401(k) contribution limit. Right now it is proposed to drop it by $500 and make the 2010 limit an even $16,000.

Is This Good or Bad?

Personally, I think it sends the wrong message to savers. Without pensions and dwindling Social Security the message has always been that we need to save as much as we can on our own so that we can have enough money in retirement. Now the government wants to say that we should save less just because we’ve had a year where inflation wasn’t that bad. The government is stingy enough and has very few incentives to get people to save, so cutting the contribution limit won’t help that. Instead, they should be finding more ways to encourage people to save even more.

Although, the main argument is that very few people actually max out their 401(k)s as it is so very few people would even be affected. That’s true, but I have to argue that this same argument also backs up the idea of leaving the limit the same or actually increasing it. If the government doesn’t want to lose additional tax revenue by people saving a little more and think they can curb that by decreasing the limit, I’d argue that since very few people do reach the max anyway they would see very few changes to tax revenue loss while still promoting the message of saving.

What Do You Think?

I’m curious to see what others think about this idea. I know a lot of people might not personally be affected since they might not be maxing out anyway, but it will be interesting to see where people stand on this. I’m not even allowed to max out my 401(k) because my employer has a limit set at 25% of my pay, which also stinks. I should be entitled to whatever the IRS allows, but that is another discussion for a different day. So for now, what do you think about the proposed 401(k) contribution drop?

[poll=66]

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

7 comments
True Religion
True Religion

I agree that reducing the max is a bad idea. no one want to send the message that we should stop saving…Anyway, I like the idea of encouraging more investment in Roth accounts....many thanks

Goran Web | Net Age
Goran Web | Net Age

The days of the welfare state are numbered, and the government officials responsible for managing things for the people are more interested in benefitting and enriching themselves than actually making sure the public gets sorted out.

The Biz of Life
The Biz of Life

I don't think anyone under 40 should count on Social Security when they retire (it may be there, but it might not), so I'm all for increasing the 401k limits each year, regardless of the rate of inflation. America benefits most when Americans do the responsible thing and save for their future. We don't need any more disincentives to save.

Miranda
Miranda

I agree that reducing the max is a bad idea. We don't want to send the message that we should stop saving...Anyway, I like the idea of encouraging more investment in Roth accounts. This way, the government still gets its tax revenue (at least for now, in the short term), we are still encouraged to save.

Robert
Robert

Or maybe encourage savings and personal responsibility and remove the silly caps and allow people to invest whatever they can afford into their Roth or 401k.

newretirement.com
newretirement.com

It is disappointing that Social Security beneficiaries will not get a cost of living increase. Just because gas hasn't gone up does not mean that people are not spending more money on other items, like as you say Healthcare. One reason Healthcare is getting so expensive too is because doctors are prescribing expensive treatments to ensure they don't get sued. We need to get our Healthcare act together.

Erick
Erick

An other option is to eliminate the 401k and expand Roth and/or traditional IRAs with larger maximums. This takes employeers out of the loop and encourages more savings and more choice by individuals (easier to move investments, not limited to employeer's plan). In general we will be better off as citizens, employees and employers when benefits (retirement and health insurance) are de-coupled from employment. These benefits have become entitlements that employeers are all but required to provide. Encourage employeers focus on their business and not on providing additional benefits to their workforce.