Bills aim to boost retirement savings

Author: Pamela Yip

Published: August 8, 2005

President Bush was in town last week trying to goose momentum for his domestic agenda, including Social Security overhaul.

"My first question to Congress," Mr. Bush told the American Legislative Exchange Council at the Gaylord Texan resort in Grapevine, "is how can you go back to your districts when you look at the facts and stand up in front of young workers and look them in the eye and say, 'Man, the future is bright for you,' knowing full well somebody is going to be paying payroll taxes into the system that's going broke?"

But the issue is bogged down in bipartisan debate and has made little headway.

Amid all the political wrangling, some congressional lawmakers are forging ahead with legislation to improve retirement security.

Rep. Connie Mack, R-Fla., has introduced the Lifetime Prosperity Act of 2005, which would allow children under the age of 18 to own a Roth IRA.

I've always been a fan of the Roth IRA.

With the traditional IRA, you invest with pretax dollars, and you're taxed on the money when you withdraw it. With the Roth, you invest with after-tax dollars. You don't pay any taxes on the investment gains, or on withdrawals in retirement if you meet certain conditions.

If $1,000 is invested in a Roth IRA for a person born this year and $1,000 is invested each year thereafter until retirement, he or she would accumulate $2.3 million, assuming an 8 percent annual return, Mr. Mack said.

"At a time when Congress and the American people are searching for ways to ensure our children and grandchildren achieve a more prosperous and secure future, extending this investment option is a common sense way to help them," he said.

Details of the bill

Mr. Mack's bill also would:

*Allow anyone to receive the Retirement Savings Contributions Tax Credit for contributing to the Roth IRA of a person under age 25. That's specifically aimed at allowing parents, grandparents and others to contribute to a Roth IRA to give young people a head start on saving and investing for retirement.

*Make the saver's credit permanent. The saver's credit is aimed at boosting retirement savings on the part of low-income workers. But it is scheduled to expire at the end of 2006.

"My hope is, regardless of this piece of legislation, that it will stay," Mr. Mack said.

Democrats' version

Not to be outdone, congressional Democrats unveiled "AmeriSave," their version of a retirement security plan that would:

*Match dollar for dollar the first $1,000 contributed to an IRA, 401(k) or similar plan. Workers would receive the match after they filed their income tax return, at which time the funds would be placed in their 401(k) or other plan.

*Give a tax credit to employers who encourage access to independent financial advisers for employees eligible for the AmeriSave match.

*Encourage employers to automatically enroll employees in 401(k) plans and make the employee opt out rather than opt in. Some companies are already doing this.

*Trigger the employer match for 401(k) accounts sooner.

*Give small businesses a tax credit for offering 401(k), IRAs and other similar plans for employees. The credit is aimed at helping to cover the administrative costs of offering such plans.

*Enable Americans to directly deposit part of their tax refund into an IRA or other retirement savings plan.

"Our plan will expand and improve existing investment accounts, such as 401(k)s and IRAs, so that American families can benefit from compound interest, while retaining Social Security's guaranteed benefit, creating a comprehensive retirement strategy," said House Minority Leader Nancy Pelosi of California.

Some retirement experts say that while Mr. Mack's and the Democrats' plans are good in concept, Congress needs to do much more.

Saver's credit

For one thing, the saver's credit should be refundable so that more low-income taxpayers can benefit from it, said William Gale, senior fellow at the Brookings Institution think tank.

A nonrefundable tax credit can't exceed a person's tax liability, so if he or she doesn't owe any taxes, there's no tax liability against which to apply the saver's credit.

"The vast majority of those in the affected income category don't have enough tax liability to benefit very much at all," Mr. Gale said. "It doesn't create any real incentive for a lot of people."

Harder to access

Congress also needs to make it harder for people to get at their retirement money for purposes other than retirement, said Dallas Salisbury, chief executive of the Employee Benefit Research Institute.

"If you really want to achieve the objective of systematic retirement savings, then there are areas that would need to be tightened," he said.