Reform bill uncertainties
Will it make it this time? At the beginning of May, the US House approved the Portman-Cardin bill, whose formal title is the Comprehensive Retirement Security and Pension Reform Act, sponsored by Republicans Rob Portman, R-Ohio and Ben Cardin, D-Md. and carrying the number H.R. 10. The first aim of the bill is to encourage retirement savings by increasing limits on contributions to retirement plans and reducing red tape and administrative costs, especially for small businesses.
That’s why this bill has received truly bipartisan favour in the house and the support not only of business organisations, but also of labour unions. So the House approved it by 407 votes to 24, which means that the bill has been sent to the Senate. And here is the problem: will the bill go on by itself, separately, or will it be included in the larger tax cut bill proposed by the new president George W Bush?
The $1.35trn tax cuts just approved in fact do not include the Portman-Cardin bill, which was reintroduced before the House on March 14, after being approved by the same House twice last year and once in 1999. But for a variety of reasons the initiative never became law: the last time it stalled after it was linked to unrelated health provisions that former president Bill Clinton opposed.
This time it will face competition from other popular tax breaks, if included in the general package sought by Bush. The president agrees on the principles behind the H.R. 10 bill, but he’s currently focused on setting up his bipartisan Social Security Commission, which has to discuss how to reform the system by creating private retirement accounts.
The legislation passed by the House concerns 401(k) plans and Individual Retirement Accounts (IRAs); it’s projected to cost the US Treasury $52bn over 10 years. It includes these provisions:
1) the allowable amount that employees can contribute to all types of company-sponsored retirement plans will gradually increase. For example, the current limit of $10,500 on 401(k) contributions would rise to $15,000 by 2005. The limit on IRAs would be raised from $2,000 to $5,000 by 2003 and thereafter allowable contribution amounts would be indexed to inflation;
2) 50 year old plus Americans can make catch-up contributions. They could immediately contribute up to $5,000 annually to an IRA and contribute $5,000 more each year to company-sponsored pensions than younger employees;
3) vesting requirements for employer pension matching contributions would be reduced from five to three years;
4) it would be easier for employees to roll over retirement assets when they change jobs and combine differing retirement plans, especially if they move from public-sector jobs to private-sector jobs;
5) regulations will be simplified to encourage more businesses to offer pension plans and reduce costs for new plans for businesses with 100 or fewer employees;
6) the deduction limit for stock bonus and profit sharing plans will be increased from 15% to 20%;
7) a new type of company retirement plan that works like a Roth IRA would be created. In Roth IRAs, there is no tax deduction for the contribution but earnings can later be withdrawn tax-free. In the new retirement plan, employees would not get tax deductions for contributions, but the money would be tax-free when received at retirement .
All these provisions should boost Americans’ participation to pension plans, which is currently quite low. Some 70m Americans, about half the work force, do not have a 401(k) plan or any kind of pension plan. The problem is worse among small businesses: less than 20% of small businesses with 25 or fewer employees offer any kind of pension coverage today, according to Portman, one of the authors of the Pension Reform Act.
But critics – like the Pension Rights Center – claim the bill constitutes a wish list of provisions sought by the financial services industry and major employers while largely ignoring the problems of lower-paid employees.
Actually an analysis by the nonpartisan Congressional Joint Committee on Taxation points out that 50% of the proposed new IRA benefits would go to taxpayers earning $100,000 or more by 2006, while only 22% of the benefits would go to those earning less than $50,000. The remaining 28% would go to those earning between $50,000 and $100,000.
Quick enactment of the bills is being urged by many business organizations: the Profit Sharing/401(k) Council of America, the Erisa Industry Committee and the American Society of Pension Actuaries, not to mention insurance agents and companies.