Congress needs to help retire workers with modest incomes


Is the average American going to be helped, if Congress lets them contribute more money to a retirement plan?

Naturally, Congress says yes. In July, the House overwhelmingly passed a retirement-savings bill, sponsored by Reps. Rob Portman, an Ohio Republican, and Benjamin L. Cardin, a Maryland Democrat. The vote was 401 to 25.

This month, the Senate Finance Committee unanimously approved a similar bill from its chairman, Republican Sen. William V. Roth Jr. of Delaware.

Among other things, these bills would raise the maximum IRA contribution to $5,000 per person and $10,000 per couple (compared with $2,000 and $4,000 today).

The maximum you could invest in a 401(k) each year would rise to $15,000, from $10,500 today. Traditional pension plans could be financed with enough to pay pensions of up to $160,000 a year (from $130,000 today).

For anyone in these brackets, it's a fabulous change. You'd be able to tax-deduct more of your savings than you can today.

But these deductions won't be spread equitably over the work force. The bills primarily help the people who can afford to put more than the current maximum into their plans.

In 1997, there were IRA deductions on about 4 percent of individual tax returns. Half showed the maximum investment, according to a U.S. Treasury estimate - so the other half invested less.

Of the workers with 401(k)s, no more than 6 percent are contributing the maximum.

As the nation ages, it seems reasonable that maximum retirement contributions should be increased - even though most of the tax-savings go to higher-income people.

The question is whether Congress cares to develop a savings-incentive program for people with modest incomes, too.

Backers of Portman-Cardin and Roth say their bills do indeed address this issue, by encouraging smaller businesses to start retirement plans.

Employer contributions are supposed to be one of three legs our retirement system stands on (the other two being personal savings and Social Security).

Yet only 17 percent of workers in smaller businesses (under 25 employees) are covered by a retirement plan.

In many of those plans, employers don't make contributions to their workers' accounts.

Congress believes that more small companies will offer plans, if the business owners themselves are allowed to put more deductible money away.

Will that work? The ERISA Industry Committee, which represents company plans, says it will. But doubters see several risks. Among them:

There's a cost to maintaining a plan. If a small-business couple can put up to $10,000 into their own IRAs, they may see no reason to start (or continue) a plan for their employees.

Under a complex provision in the bills, business owners could reduce the amount they're adding to workers' accounts, while making no change in contributions for themselves.

Similarly, they could put more into their own accounts without increasing what their employees get, says Norman Stein, professor of law at the University of Alabama in Tuscaloosa.

Some small employers won't behave this way, but others will.

As an example of what could happen, let me take you back to the early 1980s. High-earning professionals and small-business owners were setting up pension plans that paid them a lot, while providing little or nothing for their employees.

Congress rightly toughened the rules, so that the bosses couldn't get tax breaks without including their workers, too.

But instead of creating fairer pensions, thousands of business owners simply dropped the plans and made other arrangements for themselves.

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