Highlights of bills to increase boomers' retirement nest eggs

Staying Ahead

May 10, 1999|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

WHATEVER the issue, the baby boomers rule. You can chart the country's main social concerns by the boomers' age.

Today, the first boomers are looking retirement in the eye and know they should put more money away. But, instead of doing it on their own, they want to be rewarded with extra tax deductions. Congress is awash in proposals to help.

The question is, what will these bills achieve? Will they give retirement tax breaks primarily to higher-income people, who would have saved money anyway? Or will they also be useful to people with moderate incomes?

The chief bill in the House is sponsored by Rob Portman, an Ohio Republican, and Benjamin L. Cardin, a Maryland Democrat. In the Senate, one of the leading bills comes from William V. Roth Jr., a Delaware Republican. I've culled the highlights from each bill. One or the other would:

Raise the limits on how much tax-deductible money you can contribute to an employee-retirement plan.

Allow companies to make traditional pension plans more lucrative.

Allow extra, pre-retirement employee plans. Workers 50 and older could add $5,000 or $7,500 a year, on top of their usual contributions.

Require faster vesting. To "vest" in a plan means that you can take the company's contribution with you when you leave the job. Today, it might be five years before you're fully vested (or seven years, if vesting is gradually phased in). Congress might lower that to three years (or five years, where vesting is phased in). So you'd have your money earlier.

Create new retirement plans. For example, there might be a new type of SIMPLE plan for small businesses, to which only employees contribute. (Today, employers have to contribute, too.)

Raise the maximum, tax-deductible IRA contribution to $5,000 a year, from $2,000 today.

If these bills passed, who would the winners be?

Higher-income people should definitely come out ahead. They have the extra income to contribute to retirement plans. People with moderate incomes might not be able to afford to put more money away. About 21 percent of workers reportedly don't contribute to available 401(k) plans.

Portman argues that middle-income people would be helped, thanks to the way most employee plans work.

By law, higher-income people cannot contribute the maximum to their 401(k)s (or similar plans) unless a certain percentage of middle- and lower-income workers contribute, too. So the bosses have an incentive to encourage the rank and file to save. Typically, they do it by matching the money their workers contribute to the retirement plan.

If the bosses want to contribute more money for themselves, as the proposed laws would allow, they'll have to get the average worker to save more. How would that happen? Companies will offer to match more of the money that workers save, Portman believes. Workers will take them up on the offer, leading to higher savings for everyone.

Maybe that would work. Then again, maybe it wouldn't. It depends on the company. One skeptic is the Treasury's assistant secretary for tax policy, Donald Lubick. He used to be in private practice, where he learned how to work the pension laws to get the most for the bosses and the least for the workers.

Under the changes proposed, he says, some bosses could raise their contributions to their retirement plans without giving the workers more. Or they might leave their contributions unchanged and reduce what they put in for the rank and file. That's a particular risk in closely held businesses, he says.

Lubick worries especially about raising the ceiling for IRA contributions to $5,000. Today, if the owner of a small business wants a tax-deductible retirement plan, the plan has to cover the workers, too. That's the law.

But what if the owner doesn't have a lot of money to set aside? If it's possible to put $5,000 into an IRA, plus another $5,000 into an IRA for a spouse, that might be enough. The owner might decide to do without an employee plan. More people would be left out.

Says Portman, "The Treasury lives in an unreal world."

Says Lubick, "I remain open-minded but as yet unpersuaded."

Pub Date: 5/10/99

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