One of the head-scratching details buried in President Obama’s new budget proposal that was unveiled in April is a proposed cap on the amount of money that any one person can save in IRAs, 401(k)s and other similarly structured retirement accounts.
There is some minor haggling over what that cap would be (the administration says that it would be around $3 million, while other experts have concluded that it might be closer to $3.4 million). Once that savings cap is reached, the saver wouldn’t be able to make any additional contributions, unless the total account value fell below the cap or the cap was increased. That figure was reached by calculating what would be required to “finance an annuity of not more than $205,000 per year.”
At the moment, a $3 million+ cap would impact only a small sliver of retirement savers, around 0.1% of people 60 and older. While this leads to obvious concerns about whether changing financial circumstances would make this cap overly restrictive in the future, it is unlikely that tit would be a huge problem for quite some time. In 2006, for example, it would have only cost around $2.2 million to generate an annuity paying around the same annually. In other words, if interest rates increase (which they will almost certainly will), then the overall cap for IRA balances would be much smaller. The bigger issue, to my mind, is not the mechanics of the proposal, but the morality of it. It seems misguided to me to presume to tell people how much is “enough” for them, and I’m certain that limiting or eliminating some savings options (when we should be encouraging saving!) is simply bad policy.
Together with another proposed change in the Obama budget—restricting the payout from inherited IRAs to a 5-year window instead of a lifetime (a move that has obvious and ominous tax ramifications)—it seems like the pattern is clear: more government mandates, fewer options and less flexibility. This is definitely something that warrants close attention going forward.