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

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?

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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.

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