Retirement Savings as a Political Cudgel in the Debate over FTTs

Richard Shea and Jack Lund

Richard Shea and Jack Lund are employee benefits attorneys with the international law firm of Covington & Burling LLP.

A financial transaction tax (FTT) is exactly what it sounds like: a tax imposed on the exchange of all or certain types of financial instruments. A well-known example of such a tax is the British stamp tax—a modern version of the tax that contributed to the American independence movement. Recently, several prominent presidential candidates, including Bernie Sanders, Elizabeth Warren, and Kamala Harris, have called for such a tax. Generally, these proposals would impose a 10 to 50 basis point tax on the sale of stocks and a somewhat smaller tax on the sale of bonds and derivatives.

Proponents say this will raise enormous amounts of revenue, be progressive, and discourage bad behavior in the market, like speculation and high-frequency trading. Skeptics say FTT proposals will not raise anywhere near as much revenue as some predict and will damage the market by reducing liquidity, interfering with price discovery, and generally distorting the securities markets. Some have also argued that much of the so-called bad behavior like high-frequency trading that would be discouraged by an FTT actually isn’t bad.

What does this have to do with retirement savings? Opponents say an FTT is a tax on retirement savers because it will make it more expensive to save (including in 401(k) plans) and will be very costly for defined benefit pension plans which commonly employ sophisticated trading strategies. Proponents say an FTT will actually encourage a responsible level of trading in retirement funds.

But the debate about the impact of an FTT on retirement savings is mostly a re-litigation of the underlying debates about the merits of the tax itself. If an FTT damages the economy and raises the cost of investing and saving generally, it will be harmful for retirement savings. If not, then it is unlikely to harm retirement savings. There are, however, several senses in which an FTT might affect retirement savings differently than the economy writ large:

  • Retirement is already seriously underfunded. So anything that could make it even a little more expensive to save, should be considered carefully.
  • Some opponents of an FTT have claimed that by imposing a new cost on large public defined benefits plans, the tax would be taking money directly out of the pockets of teachers, police officers, and other public sector workers. But taxing the investment behavior of defined benefit pension plans usually won’t adversely affect the benefits to which current plan participants are entitled. This is because benefits in a defined benefit plan are usually delinked from the performance of the underlying investments used to fund those benefits. This is particularly true in the case of state and local government plans which frequently are prohibited by law from reducing participant benefits retroactively and, in many cases, even prospectively. As a result, if it costs more to pay for the benefits that a plan sponsor has promised, it is generally the plan sponsor—and taxpayers—who are on the hook to make up the difference, not the plan participants. Of course, if it becomes more costly for a state or local government to provide pension benefits, it could choose to reduce the retirement benefits that it offers to new hires. So, depending on the economic impact of an FTT, there could be a mild to major incentive for public plan sponsors to reduce pension promises on a go-forward basis. If the economic impact of the FTT were bad enough, it might even push tenuously-funded public plans over the brink, into insolvency.
  • Claims that an FTT will encourage responsible levels of trading in retirement accounts are somewhat misleading. The claim appears to be based on the notion that there is currently overtrading in retirement accounts because of a principal-agent problem. According to the theory, brokers and others servicing retirement plans may have an interest in increasing the frequency of trades in order to generate commissions and other forms of compensation. Yet such self-interested behavior is largely prohibited under current law and, in any event, it is hard to imagine that the imposition of an additional tax on the principal (who, after all, is the victim of such behavior) would have any impact on the illicit behavior of the principal’s agent.

In sum, the debate over FTTs is less about retirement savings and more about broader economic and political controversies.


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