Moneynews – By: Gene J. Koprowski
One of the nation’s largest labor unions, the Service Employees International Union (SEIU), is promoting a plan that will centralize all retirement plans for American workers, including private 401(k) plans, under one new “retirement system” for the United States.
In effect, government pensions for everyone, not unlike the European system and regardless of personal choice.
The SEIU, which was integral to the election of Barack Obama as president, is working with the left-leaning Economic Policy Institute (EPI), and the National Committee to Preserve Social Security and Medicare, on SEIU’s plan, called “the Retirement USA Initiative.”
Claiming that the retirement system in place now has “failed most Americans,” EPI vice president Ross Eisenbrey, told a labor union publication that “account balances have fallen by a third since late 2007, leaving many older workers unable to retire just as our economy is shedding millions of jobs.”
“The failure is broad and deep. It’s not just a few people falling through the cracks: most of us already are in the ravine. Three in 10 have only a 401(k) or similar savings plan, and the rest of us are totally out of luck,” said Eisenbrey.
Eisenbrey said that the median 401(k) account balance was $25,000 in 2006, and the median for workers near retirement was $40,000.
“Half of those who had a 401(k) were nearing retirement with less than $40,000 in their account,” said Eisenbrey, who is trained as a lawyer and was a Clinton administration appointee from 1999 through 2001.
The proposed retirement system would be operated under the following parameters:
• Benefits that move with you, even if you change jobs
• Payouts only at retirement
• Shared responsibility among employers, the government and employees
• Pooled assets, controlled by professional investment managers
“The financial crisis and the economic recession have shone a spotlight on the inadequacies of today’s system,” said Stephen Albrecht, director of benefits for SEIU…
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Parts 2509, 2520 and 2550
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Request for Information Regarding Lifetime Income Options for Participants and Beneficiaries in Retirement Plans
AGENCIES: Employee Benefits Security Administration, Department of Labor; Internal Revenue Service, Department of the Treasury.
ACTION: Request for information.
SUMMARY: The Department of Labor and the Department of the Treasury (the “Agencies”) are currently reviewing the rules under the Employee Retirement Income Security Act (ERISA) and the plan qualification rules under the Internal Revenue Code (Code) to determine whether, and, if so, how, the Agencies could or should enhance, by regulation or otherwise, the retirement security of participants in employer-sponsored retirement plans and in individual retirement arrangements (IRAs) by facilitating access to, and use of, lifetime income or other arrangements designed to provide a lifetime stream of income after retirement.
The purpose of this request for information is to solicit views, suggestions and comments from plan participants, employers and other plan sponsors, plan service providers, and members of the financial community, as well as the general public, on this important issue.
DATES: Comments must be submitted on or before [INSERT DATE THAT IS 90 DAYS AFTER THE DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: You may submit written comments to any of the addresses specified below. Any comment that is submitted to either Agency will be shared with the other Agency. Please do not submit duplicates.
Department of Labor. Comments to the Department of Labor, identified by RIN 1210-AB33, by one of the following methods:
- Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
- E-mail: e-ORI@dol.gov. Include RIN 1210-AB33 in the subject line of the message.
- Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW, Washington, DC 20210, Attention: Lifetime Income RFI.
All submissions received must include the agency name and Regulation Identifier Number (RIN) for this rulemaking. Comments received will be posted without change to
http://www.regulations.gov and http://www.dol.gov/ebsa, and made available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, 200 Constitution Avenue, NW, Washington, DC 20210, including any personal information provided. Persons submitting comments electronically are encouraged not to submit paper copies.
Internal Revenue Service. Comments to the IRS, identified by REG-148681-09, by one of the following methods:
- Mail: CC:PA:LPD:PR (REG–148681-09), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
- Hand or courier delivery: Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–148681-09), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224.
- Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments (IRS REG–148681-09).
All submissions to the IRS will be open to public inspection and copying in room 1621, 1111 Constitution Avenue, NW, Washington, DC from 9 a.m. to 4 p.m.
FOR FURTHER INFORMATION CONTACT: Stephanie L. Ward or Luisa Grillo-Chope, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), (202) 693-8500 or Peter J. Marks, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), Internal Revenue Service, Department of the Treasury, at (202) 622-6090. These are not toll-free numbers.
The Agencies are issuing this request for information in furtherance of their efforts to
promote retirement security for American workers. The Secretary of Labor’s overarching vision for the work of the Department of Labor is to advance good jobs for everyone. Good jobs provide wages that support families, and rise with time and productivity. Good jobs also provide safe and healthy working conditions.
Finally, good jobs, no matter the type or income level, provide retirement security. Consistent with these objectives, the Department of the Treasury strives to promote economic growth, stability, and economic security, including retirement security, for American workers, and oversees the federal tax expenditures for retirement savings and security.
Retirement security is provided to many workers through defined benefit pension plans sponsored by their employers. Employers that sponsor defined benefit pension plans are responsible for making contributions that are sufficient for funding the promised benefit, investing and managing plan assets (as fiduciaries), and bearing investment risks because the employer, as plan sponsor, is required to make enough contributions to the plan to fund benefit payments during retirement. In addition, when the defined benefit pension plan pays (or offers to pay) a lifetime annuity, it provides (or offers to provide) protection against the risk of outliving one’s assets in retirement (longevity risk).
Department of Labor data, however, show a trend away from sponsorship of defined benefit plans, toward sponsorship of defined contribution plans. The number of active participants in defined benefit plans fell from about 27 million in 1975 to approximately million in 2006, whereas the number of active participants in defined contribution plans increased from about 11 million in 1975 to 66 million in 2006.1
While defined contribution plans have some strengths relative to defined benefit plans, participants in defined contribution plans bear the investment risk because there is no promise by the employer as to the adequacy of the account balance that will be available or the income stream that can be provided after retirement.
Moreover, while defined benefit plans are generally required to make annuities available to participants at retirement, 401(k) and other defined contribution plans typically make only lump sums available. Furthermore, many traditional defined benefit plans have converted to lump sum-based hybrid plans, such as cash balance or pension equity plans, and many others have simply added lump sum options.
Accordingly, with the continuing trend away from traditional defined benefit plans to 401(k) defined contribution plans and hybrid plans, including the associated trend away from annuities toward lump sum distributions, employees are not only increasingly responsible for the adequacy of their savings at the time of retirement, but also for ensuring that their savings last throughout their retirement years and, in many cases, the remaining lifetimes of their spouses and dependents.
In recognition of the foregoing, the Agencies are considering whether it would be appropriate for them to take future steps to facilitate access to, and use of, lifetime income or other arrangements designed to provide a stream of income after retirement.
This includes a review of existing regulations and other guidance and consideration of whether any such steps would enhance the retirement security of participants in retirement plans, taking into account potential effects on and tradeoffs involving other policy objectives. To that end, this request for information (RFI) sets forth a number of questions that are generally organized into categories under which the Agencies may be able to provide additional guidance if appropriate.
This RFI also includes a number of questions pertaining to the economic impact of rulemaking, and to impediments beyond the statutory requirements, if any. Commenters are not limited to these questions and are invited to respond to all or any subset of the questions, but the Agencies request that commenters relate their responses to specific questions when possible.
Similar considerations arise when participants decide how to take retirement distributions from an IRA (including an IRA that holds rollover distributions from qualified retirement plans).
Further, participants often elect to take lump sum distributions where they are available from defined benefit plans, which may also be rolled over to an IRA. Commenters are encouraged to address these contexts as well, identifying the particular types of arrangements to which their comments relate.
All comments will be considered, and comments supported by references to empirical data will be particularly appreciated. In considering the questions set forth in this RFI, commenters are encouraged to take into account the following studies and commentary:
2009 GAO Report
In July 2009, the Government Accountability Office (GAO) published Report GAO-09-642 entitled, “Private Pensions: Alternative Approaches Could Address Retirement Risks Faced by Workers but Pose Trade-offs.” The GAO found that workers face a number of risks in both accumulating and preserving pension benefits. The GAO found, in relevant part, that:
Workers that receive lump-sum distributions, in particular, face several risks related to how they withdraw, or ‘draw down’ their benefits, including:
- Longevity risk — retirees may draw down benefits too quickly and outlive their assets. Conversely, retirees may draw down their benefits too slowly, unnecessarily reduce their consumption, and leave more wealth than intended when they die.
- Investment risk — assets in which pension savings are invested may decline in value.
- Inflation risk — inflation may diminish the purchasing power of a retiree’s pension benefits. Commenters are encouraged to consider this GAO report in reviewing the issues identified in this RFI. This report may be accessed at www.gao.gov/new.items/d09642.pdf.
2007 GAO Report
In November 2007, the GAO published Report GAO-08-8 entitled, “Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers.” The GAO concluded that only 36 percent of workers participated in a current defined contribution plan in 2004, with the total median account balance (for workers with a current or former DC plan, including rolled-over retirement funds) of only $22,800.
The median account balance was $50,000 for workers age 55 to 64 and $60,600 for those age 60 to 64. The report is relevant to this RFI because the need for lifetime income may be most acute among workers who have small but significant retirement savings balances.
Commenters are encouraged to consider this GAO report in reviewing the issues identified in this RFI. This report may be accessed at www.gao.gov/new.items/d088.pdf.
2003 GAO Report
In July 2003, the General Accounting Office (GAO) published Report GAO-03-810 entitled, “Private Pensions: Participants Need Information on Risks They Face in Managing Pension Assets at and During Retirement.” The GAO concluded that:
The decreasing number of employer-sponsored pension plans that offer only life annuities at retirement and the increasing percentage of retiring participants who choose benefit payouts other than annuities suggest that, in the future, fewer retirees may receive pension income guaranteed to last throughout retirement.
The growth in the number of DC plans, along with the increasing availability of lump sums from DB plans, means that retirees will face greater responsibility and choices for managing their pension and other assets at and throughout retirement. Depending on their choices, retirees could be at greater risk of outliving their pension and retirement savings plan assets or ultimately having insufficient income to maintain their standard of living through their retirement years.
Such risks underscore the need for providing enhanced information and education to participants about their available payout options, the issues they may face in managing retirement assets, and how different options may mitigate, or increase, these risks. As part of their responsibility, retirees will have to weigh certain pros and cons of different ways to manage and preserve pension assets.
Currently, the notices that plan sponsors must furnish to retiring participants are not sufficient to help them choose payout options that suit their individual circumstances, while assuring adequate levels of such income to the extent possible. Our expert panel suggested that providing several types of information, such as on risks that could affect retirement income security, could help retiring participants make more informed decisions regarding how they balance income and expenditures during retirement.
This report, which did not recommend executive branch action, nonetheless recommended that the Congress may wish to consider amending ERISA to require plan sponsors to provide participants with a notice on risks that individuals face in managing their income and expenditures at and during retirement. Commenters are encouraged to consider this GAO report in reviewing the issues identified in this RFI. This report may be accessed at www.gao.gov/new.items/d03810.pdf.
ERISA Advisory Council Reports
In 2007, the ERISA Advisory Council’s Working Group on Financial Literacy of Plan Participants and the Role of the Employer undertook a study of numerous issues relating to increasing the financial decision-making skills of plan participants. The Working Group issued a report containing, among others, the following recommendation: “The Working Group recommends that the Department of Labor expand the reach of [Interpretive Bulletin 96-1] by changing and updating it. As innovation continues in the financial marketplace, educational initiatives will need to address items heretofore not necessarily addressed in 96-1. 96-1 needs to address information, education, and advice in the de-accumulation stage as well as the accumulation phase. Further, as innovation continues in this area, 96-1 needs to be continually updated.” Commenters are encouraged to consider this report in reviewing the issues identified in this RFI. This report may be accessed at www.dol.gov/ebsa/publications/AC-1107a.html.
In 2008, the ERISA Advisory Council’s Working Group on the Spend Down of Defined Contribution Assets at Retirement undertook a study on the types of guidance that could help plan sponsors and plan participants make better informed decisions regarding plan investment and insurance vehicles that provide periodic or lifetime distributions. The Working Group issued a report containing, in relevant part, the following recommendations: (1) expand the reach of Interpretive Bulletin 96-1 by adapting it to the spend down phase; (2) clarify that products which are eligible qualified default investment alternatives while participants are actively participating in the plan will continue to so qualify; (3) encourage, authorize, endorse and facilitate plan communications that use retirement income replacement formulas based on final pay and other reasonable assumptions in employee benefit statements on an individual participant basis; and (4) enhance plan sponsor and participant education by publishing and regularly updating information about the distribution options available to participants in defined contribution plans.
Commenters are encouraged to consider this report in reviewing the issues identified in this RFI.
This report may be accessed at www.dol.gov/ebsa/publications/2008ACreport3.html.
B. Request for Information
The purpose of this notice is to solicit views, suggestions and comments from plan participants, plan sponsors, plan service providers and members of the financial community, as well as the general public, to assist the Agencies in evaluating what steps, if any, they could or should take, by regulation or otherwise, to enhance the retirement security of participants in employer-sponsored retirement plans and IRAs by facilitating access to, and use of, lifetime income or other arrangements designed to provide a stream of lifetime income after retirement.
1 The number of active participants in 1975 and 2006 are not directly comparable because of adjustments in the definition of a participant. Please see a detailed explanation of the adjustment in U.S. Department of Labor, Employee Benefits Security Administration, “Private Pension Plan Bulletin Historical Tables and Graphs,” February 2009, p. 1-9. See www.dol.gov/ebsa/pdf/1975-2006historicaltables.pdf.
General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals
Department of the Treasury
PROVIDE FOR AUTOMATIC ENROLLMENT IN IRAS AND DOUBLE THE TAX CREDIT FOR SMALL EMPLOYER PLAN STARTUP COSTS
A number of tax-preferred, employer-sponsored retirement savings programs exist under current law. These include section 401(k) cash or deferred arrangements, section 403(b) programs for public schools and charitable organizations, section 457 plans for governments and nonprofit organizations, and simplified employee pensions (SEPs) and SIMPLE plans for small employers.
Small employers (those with no more than one hundred employees) that adopt a new qualified retirement, SEP or SIMPLE plan are entitled to a temporary business tax credit equal to 50 percent of the employer’s plan “startup costs,” which are the expenses of establishing or administering the plan, including expenses of retirement-related employee education with respect to the plan. The credit is limited to a maximum of $500 per year for three years.
Individuals who do not have access to an employer-sponsored retirement savings arrangement may be eligible to make smaller tax-favored contributions to individual retirement accounts or individual retirement annuities (IRAs).
IRA contributions are limited to $5,000 a year (plus $1,000 for those age fifty or older). Section 401(k) plans permit contributions (employee plus employer contributions) of up to $49,000 a year (of which $16,500 can be pre-tax employee contributions) plus $5,500 of additional pre-tax employee contributions for those age fifty or older.
Reasons for Change
For many years, until the recent economic downturn, the personal saving rate in the United States has been exceedingly low, and tens of millions of U.S. households have not placed themselves on a path to become financially prepared for retirement. In addition, the proportion of U.S. workers participating in employer-sponsored plans has remained stagnant for decades at no more than about half the total work force, notwithstanding repeated private- and public-sector efforts to expand coverage.
Among employees eligible to participate in an employer-sponsored retirement savings plan such as a 401(k) plan, participation rates typically have ranged from two-thirds to three-quarters of eligible employees, but making saving easier by making it automatic has been shown to be remarkably effective at boosting participation.
Beginning in 1998, Treasury and the IRS issued a series of rulings and other guidance (most recently in September 2009) defining, permitting, and encouraging automatic enrollment in 401(k) and other plans (enrolling employees by default unless they opt out). Automatic enrollment was further facilitated by the Pension Protection Act of 2006.
In 401(k) plans, automatic enrollment has tended to increase participation rates to more than nine out of ten eligible employees. In contrast, for workers who lack access to a retirement plan at their workplace and are eligible to engage in tax-favored retirement saving by taking the initiative and making the decisions required to establish and contribute to an IRA, the IRA participation rate tends to be less than one out of ten.
Numerous employers, especially those with smaller or lower-wage work forces, have been reluctant to adopt a retirement plan for their employees, in part out of concern about their ability to afford the cost of making employer contributions or the per-capita cost of complying with tax-qualification and ERISA (Employee Retirement Income Security Act) requirements.
These employers could help their employees save — without employer contributions or plan qualification or ERISA compliance — simply by making their payroll systems available as a conduit for regularly transmitting employee contributions to an employee’s IRA. Such “payroll deduction IRAs” could build on the success of workplace-based payroll-deduction saving by using the excess capacity to promote saving that is inherent in employer payroll systems, and the effort to help employees save would be especially effective if automatic enrollment were used.
However, despite efforts more than a decade ago by the Department of the Treasury, the IRS, and the Department of Labor to approve and promote the option of payroll deduction IRAs, few employers have adopted them or even are aware that this option exists.
Accordingly, requiring employers that do not sponsor any retirement plan (and that are above a certain size) to make their payroll systems available to employees and automatically enroll them in IRAs could achieve a major breakthrough in retirement savings coverage.
In addition, such a requirement may lead many employers to take the next step and adopt an employer plan (permitting much greater tax-favored employee contributions than an IRA, plus the option of employer contributions). The potential for the use of automatic IRAs to lead to the adoption of 401(k)s, SIMPLEs, and other employer plans would be enhanced by raising the existing small employer tax credit for the startup costs of adopting a new retirement plan to an amount significantly higher than both its current level and the level of the proposed new automatic IRA tax credit for employers.
In addition, the process of saving and choosing investments in automatic IRAs could be simplified for employees, and costs minimized, through a standard default investment as well as electronic information and fund transfers. Workplace retirement savings arrangements made accessible to most workers also could be used as a platform to provide and promote retirement distributions over the worker’s lifetime.
Employers in business for at least two years that have more than ten employees would be required to offer an automatic IRA option to employees, under which regular contributions would be made to an IRA on a payroll-deduction basis. If the employer sponsored a qualified retirement plan, SEP, or SIMPLE for its employees, it would not be required to provide an automatic IRA option for its employees.
Thus, for example, a qualified plan sponsor would not have to offer automatic IRAs to employees it excludes from qualified plan eligibility because they are covered by a collective bargaining agreement, under age eighteen, nonresident aliens, or have not completed the plan’s eligibility waiting period. However, if the qualified plan excluded from eligibility a portion of the employer’s work force or a class of employees such as all employees of a subsidiary or division, the employer would be required to offer the automatic IRA option to those excluded employees.
The employer offering automatic IRAs would give employees a standard notice and election form informing them of the automatic IRA option and allowing them to elect to participate or opt out. Any employee who did not provide a written participation election would be enrolled at a default rate of three percent of the employee’s compensation in an IRA. Employees could opt out or opt for a lower or higher contribution rate up to the IRA dollar limits. Employees could choose either a traditional IRA or a Roth IRA (with Roth being the default). For most employees, the payroll deductions would be made by direct deposit similar to the direct deposit of employees’ paychecks to their accounts at financial institutions.
Payroll-deduction contributions from all participating employees could be transferred, at the employer’s option, to a single private-sector IRA trustee or custodian designated by the employer. Alternatively, the employer, if it preferred, could allow each participating employee to designate the IRA provider for that employee’s contributions or could designate that all contributions would be forwarded to a savings vehicle specified by statute or regulation.
Employers making payroll deduction IRAs available would not have to choose or arrange default investments. Instead, a low-cost, standard type of default investment and a handful of standard, low-cost investment alternatives would be prescribed by statute or regulation. In addition, this approach would involve no employer contributions, no employer compliance with qualified plan requirements, and no employer liability or responsibility for determining employee eligibility to make tax-favored IRA contributions or for opening IRAs for employees.
A national web site would provide information and basic educational material regarding saving and investing for retirement, including IRA eligibility, but, as under current law, individuals (not employers) would bear ultimate responsibility for determining their IRA eligibility.
Contributions by employees to automatic IRAs would qualify for the saver’s credit (to the extent the contributor and the contributions otherwise qualified), and the proposed expanded saver’s credit could be deposited to the IRA to which the eligible individual contributed.
Employers could claim a temporary tax credit for making automatic payroll-deposit IRAs available to employees. The amount of the credit for a year would be $25 per enrolled employee up to $250, and the credit would be available for two years. The credit would be available both to employers required to offer automatic IRAs and employers not required to do so (for example, because they have not more than ten employees).
In conjunction with the automatic IRA proposal, to encourage employers not currently sponsoring a qualified retirement plan, SEP, or SIMPLE to do so, the “startup costs” tax credit for a small employer that adopts a new qualified retirement, SEP, or SIMPLE plan would be doubled from the current maximum of $500 per year for three years to a maximum of $1,000 per year for three years. This expanded “startup costs” credit for small employers, like the current “startup costs” credit, would not apply to automatic or other payroll deduction IRAs. The expanded credit would be designed to encourage small employers that would otherwise adopt an automatic IRA to adopt instead a new 401(k), SIMPLE, or other employer plan instead, while also encouraging other small employers to adopt a new employer plan.
The proposal would become effective January 1, 2012.
EXPAND SAVER’S CREDIT
A nonrefundable tax credit is available for eligible individuals who make voluntary contributions to 401(k) plans and other retirement plans, including IRAs. The maximum annual contribution eligible for the credit is $2,000 for single taxpayers or married individuals filing separately. In the case of a married couple filing jointly, the maximum annual contribution eligible for the credit is $2,000 for each spouse (for a total of up to $4,000). The resulting maximum credits are $1,000 and $2,000, respectively. The credit rate is 10 percent, 20 percent or 50 percent, depending on the taxpayer’s adjusted gross income (AGI). The AGI thresholds for the credit are subject to adjustment each calendar year based on increases in the cost-of-living. In 2010, “eligible individuals” who may claim the credit are
Married couples filing jointly with incomes up to $55,500, Heads of households with incomes up to $41,625, and Married individuals filing separately and single taxpayers with incomes up to $27,750, who are eighteen or older, other than individuals who are full-time students or claimed as a dependent on another taxpayer’s return.
The credit is available with respect to an eligible individual’s “qualified retirement savings contributions.” These include: (i) elective deferrals to a section 401(k) plan, section 403(b) plan, section 457 plan, SIMPLE, or simplified employee pension (SEP); (ii) contributions to a traditional or Roth IRA; and (iii) other voluntary employee contributions to a qualified retirement plan, including voluntary after-tax contributions and voluntary contributions to a defined benefit pension plan. The eligible individual may direct that the amount of any refund attributable to the credit be directly deposited by the IRS into an IRA or certain other accounts.
The credit is nonrefundable and, therefore, only offsets regular tax liability or alternative minimum tax liability. The credit is in addition to any deduction or exclusion that would otherwise apply with respect to the contribution.
Reasons for Change
The saver’s credit should be amended to more effectively encourage moderate- and lower-income individuals to save for retirement. Because it is currently nonrefundable, the saver’s credit only offsets a taxpayer’s income tax liability and therefore offers no saving incentive to tens of millions of households without income tax liability. In addition, to provide a stronger incentive, the credit rate should be increased for most eligible households, the current three-tier credit rate structure should be simplified, and the number of eligible households should be increased by raising the income thresholds. Finally, making the saver’s credit more like a matching contribution would enhance the likelihood that the credit would be saved and would increase the salience of the incentive by framing it as a match similar to the familiar employer matching contributions to 401(k) plans.
The proposal would offer a more meaningful saving incentive to tens of millions of additional households by making the saver’s credit fully refundable and raising the eligibility income threshold to cover millions of additional moderate-income taxpayers. The proposal also would raise the credit rate and simplify the current three-tier credit structure by prescribing a uniform 50 percent credit rate, and would allow the credit to be deposited automatically in the qualified retirement plan account or IRA to which the eligible individual contributed.
In place of the current 10-percent/20-percent/50-percent credit for up to $2,000 of qualified retirement savings contributions per individual, the proposal would provide a 50-percent refundable credit that effectively matches 50 percent of the first $500 of such contributions per individual (allowing a married couple filing a joint return to make up to $1,000 of such contributions) per year, indexed annually for inflation beginning in taxable year 2012). Accordingly, the maximum credit would be $250 for a single filer and $500 for a married couple filing a joint return.
The eligibility income threshold would be increased to $65,000 for married couples filing jointly, $48,750 for heads of households, and $32,500 for single taxpayers and married individuals filing separately, with the amount of contributions eligible for the credit phased out at a 5-percent rate for AGI exceeding those levels (so that some amount of credit would be available to joint filers with AGI between $65,000 and $85,000).
The proposal would be effective for taxable years beginning after December 31, 2010.
Source: General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals Department of the Treasury February 2010 (pdf)(153 pages)
PR Newswire: Rules enhance retirement advice and transparency for workers
WASHINGTON, Feb. 26 /PRNewswire-USNewswire/ — Today, at a White House forum hosted by Vice President Joe Biden, the U.S. Department of Labor announced two new rules designed to enhance retirement security and transparency for the millions of workers covered by 401(k), pension and other retirement arrangements. The announcement was part of the White House Middle Class Task Force’s year-end report, which the vice president released at this morning’s event.
During the past year, the Middle Class Task Force has focused on solutions to the challenges facing America’s middle class — including retirement security and the need for high-quality jobs for middle class workers. The report details the year’s work of the task force, and it includes a proposed rule on investment advice. The department also is announcing the publication of a final rule on multiemployer plan transparency.
“A secure retirement is essential to workers and the nation’s economy. Along with Social Security and personal savings, secure retirement allows Americans to remain in the middle class when their working days are done. And, the money in the retirement system brings tremendous pools of investment capital, creating jobs and expanding our economy,” said U.S. Deputy Secretary of Labor Seth Harris. “These rules will strengthen America’s private retirement system by ensuring workers get good, objective information. When that happens, workers make the kind of decisions that are good for their families and the nation as the whole.”
The first of the two rules would ensure workers receive unbiased advice about how to invest in their individual retirement accounts or 401(k) plans. If the rule is adopted, it would put in place safeguards preventing investment advisors from slanting their advice for their own financial benefit. Investment advisors also would be required to disclose their fees, and computer models used to offer advice would have to be certified as objective and unbiased. The department estimates that 2 million workers and 13 million IRA holders would benefit from this rule to the tune of $6 billion…
The Middle Class Task Force recently announced a number of initiatives that are designed to strengthen the retirement system and help provide a more secure retirement to millions of American workers. These initiatives are part of President Obama’s FY 2011 budget, and this Administration will be working hard with Congress to get these proposals passed into law this year.
You don’t need us to tell you how important it is to strengthen the retirement system, but in the wake of the financial crisis and the market collapse, it’s become clearer than ever that we need to do more to help American workers save for a secure retirement. Many workers have seen their 401(k)s and IRAs decline by thirty or forty percent, and many more have seen the value of their home – the single most important asset for many middle-class families – fall just as far. So families across the country are acutely feeling the need for us to do more to help provide a secure retirement for hardworking Americans.
But there are also some longer-term problems with the retirement system, and we think it’s important to address those as well. Far too many workers don’t have access to a retirement plan through their employer, and even among Americans who have been saving since they got their first job, too many are seeing the returns on their savings eaten away by high fees, leaving them with less than they’d hoped for when they retire.
That’s why we’ve proposed this package of retirement initiatives – we want to make sure that Americans have access to good options to save for retirement.
That means making sure more workers have workplace retirement plans by requiring employers who don’t offer a retirement plan at the workplace to automatically enroll their workers in a direct-deposit IRA, to give workers an easy and effective way to save. Workers will be able to opt out if they choose, and the smallest employers will be exempt, but this proposal will provide an important new way to save for many of the seventy eight million Americans – about half the workforce – who currently do not have a retirement plan at work.
It also means matching the savings of many families to help them save more. We’re proposing to simplify and expand the Saver’s Credit to provide a fifty percent match on the first $1,000 of retirement savings for families making up to $65,000, and to provide a partial credit for families making up to $85,000. So if you save $1,000, you get a tax credit for an additional $500 to help you build up your retirement savings. And we’re proposing to make the credit fully refundable, helping families who are just starting to save a nest egg and helping lower-income families to rise into the middle class.
Finally, it means updating and strengthening regulations to make sure there are good savings options available to American workers. Too many workers are seeing high fees erode the returns on their retirement savings year after year, so we’re proposing new regulations that would make sure American workers have all the information they need to make the best choices with their retirement savings.
We’re already getting good reactions on these proposals from retirement experts across the ideological spectrum. For example, Nancy LeaMond, Executive Vice President of AARP, said in a statement,
“Millions of hard-working Americans don’t have access to a traditional pension or a 401(k), making it difficult for them to save for retirement. Studies have shown that when workers have the ability to enroll in an automatic workplace retirement savings plan, they are more likely to save. AARP firmly believes that the an automatic workplace savings account or “Auto IRA” is a low-cost, high-impact way to help millions of Americans save for their retirement – experts estimate such a proposal could help 50 million Americans. The Auto IRA proposal has earned bipartisan support among leaders in Congress as well as among employers. More importantly, according to a recent AARP survey, eighty percent of Americans support for the proposal as a way to improve individuals’ retirement security.”
Robert Greenstein, Executive Director of the Center on Budget and Policy Priorities, said of our package of retirement initiatives,
“Taken together, these proposals should induce significant increases in retirement saving. Such an increase in saving would both help families in old age and strengthen U.S. long-term economic growth by increasing the pool of national savings that can be tapped for private investment in new plant and equipment.”
The Corporation for Enterprise Development also praised our efforts to help American workers save more, writing in a statement,
“We commend the Obama Administration for prioritizing asset building as part of their solution to financial distress for America’s middle class families. The President and his team are right to seek solutions to rising levels of asset poverty.”
Meanwhile, David John at the Heritage Foundation describes our Automatic IRA proposal as a “common-sense idea that could help to increase Americans’ retirement security.” He writes:
“This simple, easy-to-understand way for workers to save some of their own money each payday is important, because almost 78 million American workers–about half of all workers–are employed by companies that do not offer any sort of pension plan or 401(k)-type retirement saving plan. … The Automatic IRA has wide bipartisan support from the left and right and was endorsed in 2008 by both the McCain and Obama campaigns. It is a simple, cross-ideological, and practical solution to a serious problem.”
Of course, we don’t think these proposals will solve the problem of retirement insecurity overnight; especially in the aftermath of the market crash, it will take time and hard work for Americans to build up their retirement savings. But we believe these initiatives are an important step toward making sure that American workers have good choices to save for the secure retirement they deserve.
Tobin Marcus is the Assistant to the Chief Economist for the Vice President
Democratic leaders in the U.S. House discuss confiscating 401(k)s, IRAs
Carolina Journal Exclusives By Karen McMahan November 04, 2008
RALEIGH — Democrats in the U.S. House have been conducting hearings on proposals to confiscate workers’ personal retirement accounts — including 401(k)s and IRAs — and convert them to accounts managed by the Social Security Administration.
Triggered by the financial crisis the past two months, the hearings reportedly were meant to stem losses incurred by many workers and retirees whose 401(k) and IRA balances have been shrinking rapidly.
The testimony of Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York, in hearings Oct. 7 drew the most attention and criticism. Testifying for the House Committee on Education and Labor, Ghilarducci proposed that the government eliminate tax breaks for 401(k) and similar retirement accounts, such as IRAs, and confiscate workers’ retirement plan accounts and convert them to universal Guaranteed Retirement Accounts (GRAs) managed by the Social Security Administration.
Rep. George Miller, D-Calif., chairman of the House Committee on Education and Labor, in prepared remarks for the hearing on “The Impact of the Financial Crisis on Workers’ Retirement Security,” blamed Wall Street for the financial crisis and said his committee will “strengthen and protect Americans’ 401(k)s, pensions, and other retirement plans” and the “Democratic Congress will continue to conduct this much-needed oversight on behalf of the American people.”
Currently, 401(k) plans allow Americans to invest pretax money and their employers match up to a defined percentage, which not only increases workers’ retirement savings but also reduces their annual income tax. The balances are fully inheritable, subject to income tax, meaning workers pass on their wealth to their heirs, unlike Social Security. Even when they leave an employer and go to one that doesn’t offer a 401(k) or pension, workers can transfer their balances to a qualified IRA.
Ghilarducci’s plan first appeared in a paper for the Economic Policy Institute: Agenda for Shared Prosperity on Nov. 20, 2007, in which she said GRAs will rescue the flawed American retirement income system (www.sharedprosperity.org/bp204/bp204.pdf).
The current retirement system, Ghilarducci said, “exacerbates income and wealth inequalities” because tax breaks for voluntary retirement accounts are “skewed to the wealthy because it is easier for them to save, and because they receive bigger tax breaks when they do.”
Lauding GRAs as a way to effectively increase retirement savings, Ghilarducci wrote that savings incentives are unequal for rich and poor families because tax deferrals “provide a much larger ‘carrot’ to wealthy families than to middle-class families — and none whatsoever for families too poor to owe taxes.”
GRAs would guarantee a fixed 3 percent annual rate of return, although later in her article Ghilarducci explained that participants would not “earn a 3% real return in perpetuity.” In place of tax breaks workers now receive for contributions and thus a lower tax rate, workers would receive $600 annually from the government, inflation-adjusted. For low-income workers whose annual contributions are less than $600, the government would deposit whatever amount it would take to equal the minimum $600 for all participants.
In a radio interview with Kirby Wilbur in Seattle on Oct. 27, 2008, Ghilarducci explained that her proposal doesn’t eliminate the tax breaks, rather, “I’m just rearranging the tax breaks that are available now for 401(k)s and spreading — spreading the wealth.”
All workers would have 5 percent of their annual pay deducted from their paychecks and deposited to the GRA. They would still be paying Social Security and Medicare taxes, as would the employers. The GRA contribution would be shared equally by the worker and the employee. Employers no longer would be able to write off their contributions. Any capital gains would be taxable year-on-year.
Analysts point to another disturbing part of the plan. With a GRA, workers could bequeath only half of their account balances to their heirs, unlike full balances from existing 401(k) and IRA accounts. For workers who die after retiring, they could bequeath just their own contributions plus the interest but minus any benefits received and minus the employer contributions…
Powerline Blog – By John
Beginning around 40 years ago, the federal government implemented one of the wisest domestic policy initiatives of modern times. In an effort to equalize the tax treatment of employees and self-employed individuals, a series of statutes permitted self-employed persons to save pre-tax money for retirement and to accumulate funds in retirement accounts that are not taxed until money is withdrawn post-retirement. Those programs have been broadened over the years to include employees, as well as the self-employed, in 401K accounts. Over the last four decades, Americans have saved hundreds of billions of dollars in such retirement accounts. I haven’t seen figures lately, but the total of such savings is most likely in the trillions.
Now we have an improvident federal government that has spent itself into a state of near-bankruptcy. It can survive only by selling Treasury bills to Americans and foreigners, but as the government’s debts accumulate, international demand for T-bills slackens. So the Democrats are looking for money. They can’t help noticing that Americans have saved many billions of dollars–private property, theoretically, but under contemporary constitutional jurisprudence, subject to pretty much any whim that may come out of Washington.
Now, the Democrats may be poised to imitate Argentina’s theft. Investor’s Business Daily reports:
You did the responsible thing. You saved in your IRA or 401(k) to support your retirement, when you could have spent that money on another vacation, or an upscale car, or fancier clothes and jewelry. But now Washington is developing plans for your retirement savings.
BusinessWeek reports that the Treasury and Labor departments are asking for public comment on “the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams.”
In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years.
They will tell you that you are “investing” your money in U.S. Treasury bonds. But they will use your money immediately to pay for their unprecedented trillion-dollar budget deficits, leaving nothing to back up their political promises, just as they have raided the Social Security trust funds.
In other words, the government will allow you the “opportunity” to give Washington your savings, in return for which the government will give you unmarketable T-bills or other unreliable promises to pay some minimal rate of return. The program likely will be “voluntary” to begin with, but that makes no sense–you can buy T-bills in your retirement account any time you want. So the only possible point is to make the exchange mandatory. The government steals your savings in exchange for an IOU…
Related Previous Posts:
Chicago Sun-Times: Pension cuts a giant first step. Keep going
Dick Morris And Eileen McGann: RESPONDING TO OBAMACARE: RESTORE, DEFEAT, DEFUND, REPEAL
Market Ticker: And Here It Comes: State Pension Systems
updates: added “We The People” video – end