Bill Raising Contributions on IRAs, 401(k)s Gains Momentum
W A S H I N G T O N, Sept. 12, 2000 -- After two years of Republicans passing taxcuts and President Clinton vetoing them, the one tax measure withbroad appeal to middle-class voters that could still become lawthis year would raise contribution limits for IRA and 401(k)retirement plans.
Earlier this summer, the House passed its version of thelegislation with 401 votes in favor. Last week, the Senate FinanceCommittee 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 otherreasons — and has vetoed bills this year that would have eliminatedinheritance taxes and reduced the tax marriage penalty ontwo-income couples.
The Clinton administration has expressed concern that theretirement package wouldn’t do enough to help lower-income peoplesave, but those reservations may not withstand an election-yearCongress eager to pass the measure by veto-proof majorities.
“There should be no reason for any further resistance by theClinton administration to ultimately signing these provisions intolaw,” said James Klein, president of the Association of PrivatePension and Welfare Plans.
A White House spokesman said Monday that the administration isworking toward compromise.
“We’re very hopeful we can reach agreement with Congress on apackage of pension reforms this year which is consistent with ourcommitment to fiscal discipline,” said Patrick Dorton, spokesmanfor economic adviser Gene Sperling.
By any measure, Americans are abysmal savers. In 1999, savingsas a percentage of personal disposable income fell into negativerange for the first time since 1933. Some analysts estimate thathalf of all Americans have less than $10,000 in savings.
Social Security Faces Insolvency
At the same time, Social Security faces possible insolvencyafter the baby boom generation retires. Only about half of today’sworkers have employer-provided pension plans, including just 20percent of those who work for small businesses of 25 employees orless.
“Right now, Americans are not saving enough for theirretirements,” said Sen. William Roth, R-Del., chairman of theSenate Finance Committee. “They are prevented from doing so byseveral factors, including a tax code that discourages savings.”
For example, the annual $2,000 contribution limit fortraditional individual retirement accounts hasn’t changed since1981.
The legislation approved by the House and pending in the Senatewould raise the annual IRA contribution limit to $5,000. For401(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 $7,500in annual contributions for people over 50, particularly womenwhose retirement savings lags behind because they left the workforce temporarily to raise children.
Other provisions include creation of a Roth 401(k), similar to aRoth IRA, in which contributions are made with after-tax dollarsand the withdrawals are tax-free. There is a tax credit toencourage businesses to offer pensions, accelerated pension vestingfor employees and rules making it easier for workers to carryassets 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 researchorganization, estimated that three-quarters of the House bill’sbenefits would flow to people with incomes above $67,000 a year.
“We have been concerned that any approach to increasing savingsfocus on the 75 million Americans who don’t have access to pensionsor 401(k)s or tax-favored savings,” said Treasury SecretaryLawrence Summers.
To address that concern, single people earning up to $25,000 andmarried couples earning up to $50,000 would benefit from a Senatebill proposal by Baucus creating tax credits of 5 percent to 50percent for up to $2,000 in contributions to a qualified retirementplan.
One controversial element in the Senate bill would set up newdisclosure rules for workers when employers convert to “cash balance” pension plans that can erode benefits expected byolder employees. Opponents say this could legitimize a questionablepractice and jeopardize pending court cases.
“It would allow companies to get away with age discriminationin their pension plans,” said Rep. Bernie Sanders, I-Vt.
Those concerns aside, the bill will be brought to the Senatefloor later this month under budget “reconciliation” rules thatlimit debate and amendments.
If it passes as expected, the House and Senate would work outdifferences before a final product is sent to Clinton. The billcould still become a vehicle for unrelated tax legislation as thecongressional session winds down, but supporters were optimisticthe pension provisions would not fall victim to other divisiveissues.
“It’s important that we have a bipartisan consensus if we wantto have something enacted this year,” said Sen. James Jeffords,R-Vt.