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Reducing The Maximum 401k Contribution Limit To Help The Economy

Okay, yes this title isn’t a preferred route for the government to take, but there is a good chance a small decrease in 401(k) limits would help both the government and the economy.

Currently in 2012, the cap for the 401(k) contributions is set to $17,000.  But what if we reduce the contribution limit down to $15,500?

Such a decrease in the contribution limit would mean that those (like me) that were contributing that extra $1,500 would be a direct impact on tax collection for the government and there is a good chance it would help business too.  With respect to business, it would help because when people get that little extra money per pay period they most likely would spend that money.  After all it’s only about $30 if you are paid weekly ($60 if you are paid biweekly).  It might not seem like a lot, but it would give business a big boost really.  Actually the $30 and $60 figures would need to have taxes taken out of the amount received, so it would be less that those figures, but for simplicity I’m going to keep it as I state above.

And the government would be the biggest boost of all.  Most of the people who are contributing that extra $1,500 are in the 25% or 28% tax bracket.  Most of us will be millionaires some day (or so I hope).  So if we go with the lower percentage bracket (25%), that would mean that the government would get an injection of $375 extra per year per person.  So if there were just a mere million that were in the $1,500 camp, that would mean that the government would receive an extra 375 million injected into the economy.

Now that just a mere $1,500 decrease in the contributions limit.  If the reduction was more, the impact would be greater…  The problem is that the government would also increase their spending too.  They wouldn’t keep their spending in check, and this would mean that in about 5 to 10 years, we would be back in the same condition that we are currently in.

So even though it seems like a good solution to fix some of our problems from a mathematical sense, we would be in the same position in a few short years.  Change need to be in the way that government runs, not in the amount of taxes that they receive.

What are your thoughts on the matter and the idea of reducing the 401(k) contribution limit?  I know personally I’m not in favor of it, even if it would help.  I would rather the government cut out some of their more wasteful programs, but this is an option that should be considered.


18 Responses to Reducing The Maximum 401k Contribution Limit To Help The Economy

  1. Whereas I don’t want the government to reduce the limit, it is an interesting thought. I would also wonder what would happen if the government removed the income limits on the Roth IRA so that everyone could contribute. Would it hurt the economy?

    • I’ve been thinking about Roths alot lately. I don’t think it would hurt the government directly much (especially at first), but it would hurt business which in turn would hurt the economy, then eventually the government indirectly.

      That said, the income limits on Roths bite. The contribution limit cutoffs are set fairly high, so I don’t see what purpose they really serve in setting them… After all, if you earn above the contributions limit, is that 5,000 or 6,000 really going to make that big of a difference?

      Another for of discrimination against those working hard to get ahead in my opinion…

  2. I feel it would be a mistake. Most people don’t max 401(k) contributions anyway so I doubt there would be that much impact. The government needs to look at and control spending.

    • I agree, government needs to manage our money better too. Afterall, we don’t pay taxes for fun…

      I’m just saying that it’s an option to consider. 401(k)s and Traditional IRAs are a direct cut in tax revenue. I think in some ways it’s funny, they want to raise taxes, where 401K contributions is a direct way to reduce taxes. It’s a huge loophole.

      That said, I hope they don’t reduce it either… it directly affects me.

      And who is to say they can’t cap the contribution limit to something lower… maybe $10,000 per year…

      Of course it would be political suicide to do so, but still I thought it was worth bringing up 🙂

  3. I’m also against this proposal to reduce 401(k) contribution limits. Collectively we need to be saving more for retirement. The idealogy of promoting consumer spending to increase economic activity has been done to death. It’s time to spend less and save more and reduce everything to more sustainable levels.

    • It’s catch-22, without spending, unemployment will not increase, and yet without retirement money being saved, we lose out in our later years.

      Of course this is just me thinking outloud about cutting the upper limits of 401(k) contributions. I just thought it would be worth considering as a governmental tool during sharp recessions & depressions (if we ever get one).

      Perhaps it could be racketed down, then back up…

      Politically, I don’t think it will ever happen…

      • I don’t think it will help politically or economy wise. Not everyone contributes to the limit. People should decide for themselves what they can/want to save up, not government.

        • It was created by the government, so I think since they made it possible, they have a lot of say in how it operates.

          It would help the economy and the amount of taxes, but it would be political suicide for whichever party tries to change it.

  4. The government should reduce that 401k max contribution AND not tax the extra $1,500. That would give the economy a nice little boost. I think one year of this is enough for a short term boost. Good idea. 😉
    I hope they don’t reduce either. I want to keep my tax break.

    • Agreed, me neither. But I sometimes wonder what toll such a policy is having on the economy. It is a gaping loophole that the middle class (me) has in the tax system.

  5. Do you think there is an incentive to save the money?

    Inflation is at 5%, interest on deposits around 1% and the stock market is under-performing. You are subjecting your money to substantial risk of loosing them for very little benefit.

    It is OK for the government to have deficit budget, why should we be different?

    • Do the chinese or those in Asia have an incentive to save money? Yet they do. Why does the government have to hold our hand in convincing us to save? I’ve never been influenced by the government in my savings plans… That said I take advantage of the 401k and Roth exceptions. But I would have saved that money anyway.

      That said, I think our government isn’t running it’s financial system very prudently! We need to get those Walt Disney characters out of the government system.

  6. Just kicking the can down the road mentality…I think one could argue that $1,500 each year for 20 or 30 years at 5 or 7% annual could help the government save money down the line since that person may not need gov’t services.

    • Hmmm, interesting take on that, and very clever spin!

      Of course I was thinking temporary decreases just to help balance the tax stream…

      Interesting and very clever arguement!!!

  7. Like Barb says, the government already does enough to disincentivize saving (with tax breaks for housing, etc), we don’t need another thing to add to the mix. After all, the lack of savings is one of the reasons that we got into this foreclosure/bankruptcy mess in the first place. People were spending all they had and then some.

    • Since this directly affect me, I wouldn’t want something like this to happen either, but it is a constant drain on the governmental tax system… That said, I would hate if they did such a thing 🙂