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Making tax reform hurt retirement savers is 'politically dumb,' says Cato Institute's Chris Edwards

Key Points
  • 401(k)s are essential, and using tax reform to lower tax deductibles would be "politically dumb," says Chris Edwards, Cato Institute director of tax studies.
  • A lower tax pre-tax contribution limit would result in people saving less, yet Americans need to be saving way more, says Seth Harris, former acting Labor secretary under President Barack Obama.
We need to increase the tax protection for retirement savings: Former Acting Labor Secretary

Retirement savings plans known as 401(k)s are essential, and using tax reform to alter their tax benefits would be "politically dumb," Chris Edwards, Cato Institute director of tax policy studies, said on CNBC Monday.

Right now, taxpayers can set aside a certain amount of pre-tax dollars in 401(k) plans each year. For 2017, the limit is $18,000; in 2018, it will be $18,500. Workers age 50 and older can make so-called catch-up contributions up to an additional $6,000.

Lawmakers have discussed lowering that tax-preferred amount to as low as $2,400 in order to boost revenue to support tax reform, according to published reports.

That kind of change would affect a lot of taxpayers. Three-quarters of Americans contribute more than $2,400 per year, Seth Harris, former acting secretary of Labor under President Barack Obama, told CNBC Monday.

Edwards said on CNBC's "Power Lunch" that 401(k)s are "an essential part of financial security for tens of millions of Americans."

"[The government is] signaling here to Americans that tax reform could be a danger to them, which is really politically dumb," he said. "There's no economic advantage to reducing 401(k) – putting these limits on."

Harris said a lower pre-tax contribution limit would result in people saving less, at a time when Americans need to be saving substantially more.

"Fewer than a quarter of the people in the Baby Boomer generation, which is the generation that's retiring right now, feel that they're going to have enough money to support them for the rest of their lives," he said. "We need to increase savings and increase the tax protection of savings so that those folks can stay in the middle-class once they're in retirement."

Instead of reducing the tax break on 401(k)s, Edwards suggests a different move.

"I think instead, we ought to take Roth IRAs and expand them and supercharge them into things called universal savings accounts," he said. "This is what Britain and Canada have done. ... They would expand savings opportunity, rather than cutting back."

Earlier Monday, President Donald Trump tweeted there will be no change to 401(k) limits under the new GOP tax bill.

"There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!" Trump said in a tweet.

— CNBC's Evelyn Cheng and Sarah O'Brien contributed to this report.