Bill Raising Contributions on IRAs, 401(k)s Gains Momentum

After two years of Republicans passing tax cuts and President Clinton vetoing them, the one tax measure with broad appeal to middle-class voters that could still become law this year would raise contribution limits for IRA and 401(k) retirement plans.

Earlier this summer, the House passed its version of the legislation with 401 votes in favor. Last week, the Senate Finance Committee unanimously approved a somewhat different package.

“It’s getting a bit of steam, and well it should,” said Sen. Max Baucus, D-Mont.

White House Wants a Compromise

Last year, Clinton vetoed a 10-year, $792 billion GOP tax cut — it included similar retirement provisions but was vetoed for other reasons — and has vetoed bills this year that would have eliminated inheritance taxes and reduced the tax marriage penalty on two-income couples.

The Clinton administration has expressed concern that the retirement package wouldn’t do enough to help lower-income people save, but those reservations may not withstand an election-year Congress eager to pass the measure by veto-proof majorities.

“There should be no reason for any further resistance by the Clinton administration to ultimately signing these provisions into law,” said James Klein, president of the Association of Private Pension and Welfare Plans.

A White House spokesman said Monday that the administration is working toward compromise.

“We’re very hopeful we can reach agreement with Congress on a package of pension reforms this year which is consistent with our commitment to fiscal discipline,” said Patrick Dorton, spokesman for economic adviser Gene Sperling.

By any measure, Americans are abysmal savers. In 1999, savings as a percentage of personal disposable income fell into negative range for the first time since 1933. Some analysts estimate that half of all Americans have less than $10,000 in savings.

Social Security Faces Insolvency

At the same time, Social Security faces possible insolvency after the baby boom generation retires. Only about half of today’s workers have employer-provided pension plans, including just 20 percent of those who work for small businesses of 25 employees or less.

“Right now, Americans are not saving enough for their retirements,” said Sen. William Roth, R-Del., chairman of the Senate Finance Committee. “They are prevented from doing so by several factors, including a tax code that discourages savings.”

For example, the annual $2,000 contribution limit for traditional individual retirement accounts hasn’t changed since 1981.

The legislation approved by the House and pending in the Senate would raise the annual IRA contribution limit to $5,000. For 401(k)s, in which an estimated 36 million people now participate, the annual contribution cap would rise from $10,500 to $15,000.

Both bills also contain special IRA “catch-up” cap of $7,500 in annual contributions for people over 50, particularly women whose retirement savings lags behind because they left the work force temporarily to raise children.

Other provisions include creation of a Roth 401(k), similar to a Roth IRA, in which contributions are made with after-tax dollars and the withdrawals are tax-free. There is a tax credit to encourage businesses to offer pensions, accelerated pension vesting for employees and rules making it easier for workers to carry assets from job to job.

Senate Bill’s Controversial Provision

Critics say the bill mainly helps people who already can save. The Center on Budget and Policy Priorities, a nonprofit research organization, estimated that three-quarters of the House bill’s benefits would flow to people with incomes above $67,000 a year.

“We have been concerned that any approach to increasing savings focus on the 75 million Americans who don’t have access to pensions or 401(k)s or tax-favored savings,” said Treasury Secretary Lawrence Summers.

To address that concern, single people earning up to $25,000 and married couples earning up to $50,000 would benefit from a Senate bill proposal by Baucus creating tax credits of 5 percent to 50 percent for up to $2,000 in contributions to a qualified retirement plan.

One controversial element in the Senate bill would set up new disclosure rules for workers when employers convert to “cash balance” pension plans that can erode benefits expected by older employees. Opponents say this could legitimize a questionable practice and jeopardize pending court cases.

“It would allow companies to get away with age discrimination in their pension plans,” said Rep. Bernie Sanders, I-Vt.

Those concerns aside, the bill will be brought to the Senate floor later this month under budget “reconciliation” rules that limit debate and amendments.

If it passes as expected, the House and Senate would work out differences before a final product is sent to Clinton. The bill could still become a vehicle for unrelated tax legislation as the congressional session winds down, but supporters were optimistic the pension provisions would not fall victim to other divisive issues.

“It’s important that we have a bipartisan consensus if we want to have something enacted this year,” said Sen. James Jeffords, R-Vt.