Cato Policy Analysis No. 73 June 3, 1986

Policy Analysis

Deductible Ira's are Best For Workers

by Peter J. Ferrara

Peter J. Ferrara, a Washington attorney, is author of Social Security: The Inherent Contradiction and editor of Social Secu- rity: Prospects for Real Reform, both published by the Cato Institute.


Executive Summary

The tax-reform bill currently before the Senate is one of those rare pieces of legislation that are truly historic and revolutionary. It deserves the wide support it is receiving. But there is one major flaw in the bill that is so serious it must be corrected before passage by the full Senate. That is the provision sharply restricting the deduction for Individual Retirement Accounts (IRAs).

Unfortunately, the debate over IRAs has been marred by widely trumpeted but flawed and inaccurate analysis. These inaccuracies must be cleared up. The fact is that workers would receive much higher retirement benefits from their IRAs with the deductible IRA under current law than with the non- deductible IRA under the Senate Finance Committee bill. Restoring the full deductibility of IRAs under the Committee bill is necessary if workers are to receive about the same benefits in retirement from their IRAs as under current law.

Moreover, it should be recognized that the policy justifications for fully deductible IRAs are still applicable and compelling under the Committee's sweeping tax-reform proposal. Opinion polls also show that the public strongly supports restoring IRA deductibility. Doing so would only strengthen the appeal of tax-reform legislation.

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1986 The Cato Institute
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