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President Clinton's State of the Union address got a modest
"thumbs up" from retirement policy makers and lobbyists. The question is: will
the "retirement reform show" soon be playing at a theater near you?
Not likely, say policy makers.
In his speech on Jan. 27, Clinton proposed three
initiatives specifically targeting private retirement plans: creating a new Retirement
Savings Account (RSA), granting tax deductions to small businesses to encourage them to
offer plans to employees, and changing the earned income tax credit calculation to make it
easier for low-wage earners to contribute to plans like 401(k)s.
In contrast to his 1999 speech, which unveiled the
ambitious, government-run Universal Savings Accounts, this year's scaled-back programs
show Clinton seems to be listening to lobbyists and retirement experts on Capitol Hill who
have been urging him to work through the existing system. The new RSAs are designed to be
distributed through private-retirement- and employer-offered plans.
"I was pleased that the President recognized the need
to provide incentives for private retirement. It builds on the current plans out
there," said Rep. Benjamin Cardin, D-Md.
This could bode well for eventual congressional approval
and a presidential signature. But, and this is a big BUT, 2000 is an election year with
fewer legislative workdays than usual. And in the wake of the 1999 impeachment, Clinton
and Congress haven't been playing nicely with each other. For these reasons, lawmakers
aren't confident Clinton's proposals will become law.
Still, there's a chance they will. Here's a look at
Clinton's proposal and what it could mean to working Americans.
Retirement Savings Accounts
The cornerstone of Clinton's proposal is the Retirement
Savings Account. In many ways the program resembles the ill-fated Universal Savings
Accounts (USA) proposed in 1999. The key differences are that the RSA program would cost
less, would be distributed through the private retirement system, and would allow more
generous withdrawal terms.
Last year, Clinton proposed spending a whopping $250
billion over 10 years for his USA plan. "They were incredibly expensive," said
Michael Smart, a spokesman with Rep. Earl Pomeroy, D-ND, explaining the lack of
Congressional interest.
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"We are no longer talking about
government-run, 401(k)-type programs. (Clinton's) talking about working through the
existing employer systems."
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- James Delaplane,
vice president, retirement policy,
at the Association of Private Pension and Welfare Plans. |
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Comparatively, the RSA program is slated to cost a
relatively modest $54 billion over 10 years. By narrowing the plan, benefits would target
low-income families. Families with annual income of $25,000 or less would be eligible to
contribute a maximum of $2,000 a year. They may qualify for a government matching
contribution of up to $400 on the first $200 put in the account. Single tax filers would
be able to contribute a maximum of $1,000 a year to an RSA. The government would provide
matching contributions up to $200 on the first $100 in the account.
Further, for the next $1,800 contributed by families
earning less than $25,000 a year, the government would provide a one-to-one match. The
match would also phase down for families earning between $25,000 and $80,000 a year.
Single filers would qualify for the one-to-one match on the next $900 contribution. That
match would phase out for filers earning between $12,500 and $40,000 a year.
The government matching contribution would either come in
the form of tax credits or refunds directly to the RSA account.
In a move sure to please small government advocates,
Clinton proposes distributing the RSAs through private retirement channels. So, if your
employer offers a retirement plan you could sign up for a RSA through that plan. If you
save on your own, you should be able to go to almost any bank, brokerage firm or financial
institution to sign up for a RSA.
"We are no longer talking about government-run,
401(k)-type programs. (Clinton's) talking about working through the existing employer
systems. We feel that's substantial and important progress," said James Delaplane,
vice president retirement policy, at the Association of Private Pension and Welfare Plans.
Are RSAs Redundant?
Some observers say the RSAs are redundant because pending
legislation could solve some of the same problems.
Congressmen Earl Pomeroy, D-ND, and Jim Kolbe, R-Ariz.,
proposed offering something called a "first credit" in their Retirement Account
Portability Act. This law was ultimately folded into another pension law proposed by
Cardin and Rep. Rob Portman, R-Ohio. The two bills are expected to cost $15 billion. The
Portman-Cardin bill was attached to the 1999 tax bill, which Clinton vetoed last fall.
Capitol Hill observers expect Portman-Cardin to be reintroduced in 2000.
The "first credit" would be a non-refundable tax
credit equal to 50% of a worker's contribution to a qualified pension plan or IRA. The tax
credit would be offered only on the first $2,000 contributed to a qualified pension plan
or IRA. So, if you contributed $2,000 to an IRA or a 401(k), you would receive a $1,000
tax break -- the maximum that would be allowed.
Even with this tax credit, any money you contributed to a
qualified plan or IRA could also be deducted from your adjusted gross income.
This tax credit would be phased out for higher-income
workers. Individuals with adjusted gross income over $41,000 and households with income
over $61,000 wouldn't be eligible for this tax break.
"When we look at encouraging lower-paid employees to
save, it should be in the current structure and not place more administrative complexity
on employers" with programs such as RSAs, said David Wray, president of the Profit
Sharing/401(k) Council of America.
Another worry policy wonks have with RSAs is the ease with
which workers can withdraw their money. Clinton proposed letting families withdraw money
after five years for expenses such as college, medical care or home purchase.
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"(Clinton is) moving away from
saving for retirement only to a minor account representing savings for any number of
purposes."
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- Dallas Salisbury,
president of the Employee Benefit Research Institute |
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With looser withdrawal rules, "(Clinton is) moving
away from saving for retirement only to a minor account representing savings for any
number of purposes … that might include retirement," said Dallas Salisbury,
president of the Employee Benefit Research Institute.
Cardin agrees that home ownership is a laudable goal and
the government should do what it can to make housing affordable. "But (Americans)
shouldn't have to use retirement funds for that," he said.
Tax Credits For Small Business Retirement
Plans
Many workers at small businesses (100 employees or fewer)
may have a tough time saving for retirement simply because their employers don't offer
retirement plans.
Only 31% of people working for small businesses have some
sort of employer- or union-provided pension plan, according to EBRI's 1999 Small Employer
Retirement Survey. In comparison, in 1998, 78.3% of companies with 500 or more employees
offered 401(k) plans, the Profit Sharing/401(k) Council of America said in its 401(k) Plan
Sponsorship Survey from 1994 to 1998.
Three leading reasons given by small employers who don't
offer plans are that retirement plans are costly, the paperwork is too arduous and
employees aren't interested (preferring wages or other benefits), the EBRI study says.
Clinton, borrowing from an idea originally authored by Sen.
Spencer Bachus, R-Ala., proposed offering businesses with 100 or fewer employees a tax
credit to pay for 50% of the qualified contributions made to a retirement plan for
non-highly compensated employees. The hope is that offering a credit on employer
contributions would spur greater worker interest in saving for retirement. This tax credit
is expected to cost $17 billion over 10 years.
Many lawmakers and lobbyists simultaneously hail and
criticize Clinton's proposal. They acknowledge the credit may help defray the costs of
retirement plans but say the paperwork and qualifying rules are still too much of a
burden.
"My boss is sensitive to the criticism of the current
regulations, especially with small business," said Smart, Pomeroy's spokesperson.
Pomeroy favors "relaxing" some rules while sticking with the spirit of
regulations that require the plans to be fair to all employees.
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"(Tax credits) add more
complexity to the (tax) code. ... (Rep. Bill) Archer favors deductions."
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- Trent Duffy,
spokesman for the House Ways and Means Committee |
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That's one reason why House Ways and Means Committee
Chairman Bill Archer, R-Texas, is lukewarm toward the tax credit, says committee spokesman
Trent Duffy. "(Tax credits) add more complexity to the (tax) code. … Archer
favors deductions. Conceptually, the chairman is in agreement that the tax code shouldn't
penalize businesses that want to offer pension plans," Duffy said.
Winning Archer's support will be key for Clinton because
retirement reform laws come from the Ways and Means Committee.
Recalculating The Earned Income Tax
Credit
In the early 1980s, President Ronald Reagan created the
earned income tax credit. It was designed to encourage unemployed workers to return to the
work force. One oversight in the program was that 401(k) plan contributions are counted
against the credit. This means that folks who really need to save for retirement the most
are penalized by a program designed to help them.
Clinton proposed recalculating the EITC and excluding
nontaxable earned income from it. Lawmakers, both Democrats and Republicans, admit the
EITC needs to be changed to correct this oversight. But, some Republican reviews of
Clinton's proposals aren't overwhelmingly positive, for two reasons. The first is that the
EITC has high rates of fraud. The second, offered by Archer, is that tax credits are too
complicated for taxpayers to use.
Forgotten Social Security?
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"I think Clinton acknowledged
it's highly unlikely that a major Social Security bill will pass in this Congress."
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| - Rep. Benjamin
Cardin, D-Md. |
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In 1999, with the economy chugging along and the government
generating a surplus, saving Social Security was the issue over which Clinton and the
Republicans clashed. Each was trying to prove they had the one solution to the problem.
After a bloody year of fighting to a stalemate, Social
Security reform was the casualty in this year's State of the Union speech. Clinton barely
devoted a sentence to the subject.
The meaning of this brief mention: Social Security reform
isn't expected to pass this year.
"I think Clinton acknowledged it's highly unlikely
that a major Social Security bill will pass in this Congress," Cardin lamented.
The Congressional Agenda
Currently, private-pension reforms are contained within
the bankruptcy bill before the Senate that was passed in early February.
In the House, the Portman-Cardin private pension reforms
are likely to be attached to the minimum wage bill.
Because the retirement reforms might be attached to
different bills, it could take several months before Congress can sort them out and send
them to the President, observers say.
Even then, the chances of passage and ultimately a
Presidential signature to make them law are slim.
"This is the last year of (Clinton's) presidency and
an election year. Generally the ability of a president, who has the opposition in charge
of Congress, to get anything significant through … is pretty low," EBRI's
Salisbury said.
In the meantime, Clinton's proposals were delivered to
Congress on Feb. 7, when his budget was officially released.
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