The country’s long held system of tax-deferred retirement savings may be a potential casualty in the policy duel between austerity and the long term revenue generation in the upcoming budget battles of 2012 and beyond. Unfortunately, with inevitable focusing of the budget battle focusing on the big ticket items of Medicare and Social Security there may not be much discussion about proposed changes that could potentially destroy America’s private retirement system as we know it.

In my opinion, of the all budget proposals on the table, the one most likely to be used as a negotiating starting point would be the one produced by the co-chairmen of the National Commission on Fiscal Responsibility and Reform.* One of the tax “loopholes” the Simpson-Bowles plan proposes adjusting is the limits on amounts that can be contributed to qualified retirement plans.  Instead of the current limit of $49,000 (not taking to account this number is regularly adjusted upwards and can include additional amounts for plan participants older than 50), the Simpson-Bowles plan proposes limiting the contribution amount to the lesser of $20,000 or 20% of salary.

While this will clearly affect those who manage to max out their annual contributions to their retirement plans, a study conducted by the Employee Benefits Research Institute shows that even though the proposed Simpson-Bowles plan would affect the biggest earners in the country the most, the impact on the accruals of the lowest quartile of workers are the second most affected.

In addition to just applying the caps on projected retirement accruals, the contribution of employers to retirement plans will more than likely decrease under the Simpson-Bowles proposal. As many in the retirement community know, employers can contribute amounts to employees in their retirement plans (include themselves) and have those amounts grow in a tax deferred environment.  Many small employers will simply look at the amounts they can personally receive under the plan compared to what it would cost them to fund an amount to their employees that permit them to pass various testing that prohibits highly compensated employees from benefiting from the plan in a prohibited way. If the limits are lowered to, effectively, $20,000 small employers will no longer have the incentive to contribute to these plans, meaning employer matches and profit sharing contributions will simply disappear from employee’s retirement plans.

With American’s retirement savings already in a precarious place, the Simpson-Bowles proposal would be absolutely devastating to American’s needs and desires for a secure retirement.

For a quick chart describing the cuts proposed by a whole host of budget proposals, ASPPA has put together this handy chart.

* Many often refer to this report as the “Deficit Commission Report,” but the Commission itself did not actually produce a report.  The report failed to acquire the votes necessary to become the commission’s official report and thus was released by Erskine Bowles and Alan Simpson, the commission’s co-chairs. I blame sloppy reporting and many involved parties wanting to give the illusion of consensus for the inaccurate representation of the report.