Retirement, tax laws may be redrawn by Congress

Changes proposed on pensions, Social Security, student loans

Your Money

September 11, 2005|By Tami Luhby | Tami Luhby,NEWSDAY

Thought you knew how to handle your tax and retirement planning? You may have to rethink things soon.

This fall, Congress may consider major overhauls of tax and retirement policies, as well as the student loan program. Here's what to watch for:

The tax system

National sales tax? A flat income tax? No more alternative minimum tax on income?

These are among the changes being considered by a presidential panel, which is to report its recommendations soon.

So far, the bipartisan panel has agreed that the alternative minimum tax should be repealed. Meant to make sure the wealthy paid their fair share, the tax increasingly is affecting middle-class Americans because the exemption amount wasn't indexed to inflation. It will hit more people if Congress does not extend an increase in the exemption level beyond this year.

Repealing the AMT would cost the government about $1.2 trillion in revenue during the next decade. And because the tax panel cannot make any suggestions that reduce revenues, it must find a way to make up the funds, possibly through eliminating some deductions.

Panel officials said they are still looking at alternatives, but deductions for state and local income taxes or employer health-insurance premiums could be ended.

Where the panel is headed should become clearer after public hearings are held. The group, led by former Sens. Connie Mack of Florida, a Republican, and John B. Breaux of Louisiana, a Democrat, will recommend several options. Turning the panel's recommendations into legislation, however, could take months or years.

Social Security

Congressional leaders promise to return eventually to the issue of Social Security, though it likely will take a very different shape than the plan that President Bush has proposed.

It appears that House Republicans are likely to back funneling surplus Social Security revenue into individual accounts, experts close to the debate said.

Such a bill would not make the system solvent and does not have Democratic backing. Bush would like to allow workers to contribute part of their payroll taxes to private accounts. Also, to address the system's solvency problems, he would cut retiree benefits.


Congress also is looking at changing other retirement-savings vehicles.

With a growing number of corporate pensions on shaky financial ground, and several high-profile defaults, both houses of Congress are seeking to tighten pension funding and disclosure rules.

Bills passed by the Senate Finance Committee and the House Committee on Education and the Workforce would increase to $30 from $19 per covered worker the premiums that companies must pay each year to the Pension Benefit Guaranty Corp. The PBGC pays pensions if companies terminate plans.

The bills also would require companies to put more money into their pension funds and give workers more information about their plans' fiscal health.

On the 401(k) front, the House bill would make it easier for employers to provide workers with investment advice. And it would require advisers to disclose their fees and any potential conflicts, such as recommending mutual funds that the adviser manages. The Senate would require employers to allow workers to diversify out of company stock in the employer-match portion.

Student loans

College students would be able to take out loans for higher amounts if a bill working its way through the House becomes law.

With a fixed amount of federal government money available for higher education, lawmakers want to make sure students get their fair share. In recent years, many graduates have consolidated their student loans to lock in record low interest rates.

The House education panel introduced a bill that would change the rules for consolidated loans as part of the Higher Education Act reauthorization. Borrowers would have to choose between a variable-rate loan and a fixed-rate loan, which would carry a higher interest rate. At the same time, first-year students would be able to borrow $3,500, up from $2,625. Sophomores could borrow $4,500, up from $3,500. Total undergraduate debt, however, remains at $23,000.

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