How large are the tax expenditures for retirement saving?
The expenditures are very large, indeed. They topped $158 billion in 2015 and will likely exceed $1 trillion over the 2015–19 period.
Tax expenditures are revenue losses attributable to special exclusions, exemptions, deductions, credits, and other provisions in the tax code. Congress’s Joint Committee on Taxation (JCT) calculates the tax expenditure for retirement savings as the sum of the revenue loss due to the tax-exclusion for current-year contributions and earnings on account balances, minus the revenue from taxation of current-year pension and IRA distributions (table 1).
The White House Office of Management and Budget (OMB) publishes tax expenditure estimates calculated in a similar fashion by the Treasury’s Office of Tax Analysis (OTA). OMB also publishes alternative estimates that take into account the deferral of tax payments on pension and IRA contributions and earnings. That calculation is the sum of the immediate revenue loss due to retirement savings contributions, plus the “present value” of revenue loss that occurs as a result of the tax exemption for accrued earnings on that contribution in future years, minus the present value of the revenue due upon future withdrawals (table 2).
Joint Committee on Taxation. 2015. “Estimates of Federal Tax Expenditures for Fiscal Years 2015–2019.” Washington, DC: Joint Committee on Taxation.
Office of Management and Budget. 2016. Budget of the United States Government, Fiscal Year 2017. “Analytical Perspectives, Tax Expenditures.” Washington, DC: Office of Management and Budget.