Boost in retirement-savings allowance should fly

Save more for retirement; save on taxes.

That's the deal Congress is expected to offer Americans later this year.

Legislation for that purpose died under threat of a presidential veto in the closing days of Congress as lawyers fought over the ballots in Florida.

The Clinton administration held that the bill ignored the fact that 75 million Americans are not covered by any employer-sponsored retirement plan. "Indeed, it contains provisions that may lead to reduced retirement security for rank-and-file workers," charged the White House.

But now, as congressional aide Brian Besanceney puts it, "There's a new sheriff in town."

George W. Bush is not expected to veto legislation expanding the tax breaks for Individual Retirement Accounts (IRAs), 401(k) plans, and other retirement-savings vehicles.

Mr. Besanceney's boss, Rep. Rob Portman (R) of Ohio, plans to reintroduce the legislation "early in the legislative session." And both opponents and proponents expect it to pass in Congress easily later this year.

The expanded tax breaks zipped through the House last year with a bipartisan 401-vote majority. "Remarkable in an election year," says Besanceney.

It has not yet been decided whether the bill will make the tax breaks retroactive to the start of this year. Since President-elect Bush has other ambitious tax-cutting plans and the budget surplus is limited, the White House will likely want to voice an opinion.

Among the key provisions of the bill:

*The current contribution limit per year of $2,000 (or $4,000 for a couple) for both traditional and Roth IRAs would be increased to $3,000 in 2001 (if the bill is made retroactive) and $5,000 (or $10,000 for a couple) in 2005. With traditional IRAs, savers can deduct the amount set aside in an IRA from their taxable income. Taxes are paid when the money and its earnings are withdrawn. Under Roth IRAs, taxes are paid on money put into the plan, but no taxes are due when withdrawn.

*The amount that workers could contribute tax-free to 401(k) plans and similar pension plans would be increased from $10,500 to $11,000 in 2001 and $15,000 in 2005.

*In both IRAs and employer-sponsored 401(k) plans, taxpayers age 50 or above would be permitted to contribute an additional "catch-up" sum each year. It would be $1,500 for IRAs and $5,000 for 401(k)s.

*Pensions would be made more portable so workers can easily roll over retirement-plan assets when changing jobs. Workers would become vested and eligible for employer matching contributions in three years, rather than the current-law five.

*Pension laws would be modernized and streamlined to encourage small businesses to offer pension plans.

Critics of the bill say little of the tax savings of more than $50 billion over 10 years would benefit ordinary workers. An analysis by the Institute for Taxation and Economic Policy found that 77 percent of the tax reductions would accrue to the 20 percent of Americans with the highest incomes.

To deal with this charge, one Senate-backed provision would let businesses starting a new pension plan earn a tax credit for up to half of contributions made on behalf of low-paid employees.

Another feature, designed to encourage low-income people to save for retirement, would qualify couples making $50,000 or less and singles earning $25,000 or less for a tax credit of up to $2,000 for contributions to IRAs and 401(k)s.

But this measure would help only about one quarter of 20 million low-wage workers.

"That's better than nothing," says Peter Orszag, an economist with Sebago Associates, a public policy firm in Belmont, Calif.

But the remaining three quarters don't pay income taxes - only Social Security taxes. So a tax credit would be of no value.

Mr. Orszag sees a progressive system of tax credits as a promising way of spreading retirement savings to low-income workers. Such a system, though, would be improved if the credits were refundable - paid by Uncle Sam to a worker's retirement plan if income is so low he or she doesn't pay income tax.

Some members of Congress are frustrated that only 50 percent of US workers are eligible for private pensions, Orszag says.

Other complex provisions of the bill attract fire from the Coalition for Retirement Security, a grass roots umbrella group representing the pension interests of 1.3 million employees and retirees from major companies, such as IBM.

Paul Edwards, the group's president, calls the measure "dangerous." Among his objections, it would permit company owners and executives to up their own pensions while reducing those of ordinary workers. Nor are "disclosure provisions" adequate when pension plans are altered.

But the bill will save taxes for millions. And Congress will likely want to please them by passing it.

(c) Copyright 2001. The Christian Science Publishing Society