Could limiting tax breaks for 401(k)s rescue Social Security?

investmentnews.com:

It’s indisputable that something needs to be done to fix the Social Security system’s underfunding problem, and a pair of ideologically opposed academics suggest eliminating the tax preferences for 401(k)s and individual retirement accounts as solution.

That would not mean shifting the traditional 401(k) system from its deferred taxes on contributions and appreciation to a Roth design, in which taxes are paid upfront. Instead, it would eliminate some or all of the tax benefits of both designs, including the payroll tax perks for employers.

Doing so could free up revenue equal to an estimated 1.3 percent of gross domestic product, which could offset most of Social Security’s long-term funding gap, which is pegged at 1.3 percent to 1.7 percent of GDP, authors Alicia Munnell and Andrew Biggs wrote in a recent paper. The Social Security trust funds are projected to run dry by 2034, at which point benefit payments would have to be reduced, unless emergency measures are taken to fund the system.

“Tax expenditures for employer-sponsored retirement plans are expensive – costing about $185 billion in 2020. And, strikingly, they appear to be a very bad deal for taxpayers,” they wrote. “The current tax preferences primarily benefit high earners, and the tax expenditure has failed at its broader policy goals of increasing national saving or expanding plan coverage. Therefore, the case is strong for curtailing these tax breaks.”

To highlight that, they point to virtually unchanged participation rates in employer-sponsored retirement plans among workers ages 25 to 64 between 1989 (51 percent) and 2022 (53 percent).

Munnell, director of the Center for Retirement Research at Boston College, noted in a recent MarketWatch column that she