Rethinking the best-laid plans

Congress considers overhauling tax, retirement, student loan and other programs

Author: Tami Luhby

Published: September 4, 2005

Thought you knew how to handle your tax and retirement planning? You may have to rethink things soon.

Congress is considering major overhauls this fall of tax and retirement policies, as well as of the student loan program. Each overhaul, if enacted into law, has the potential to change personal finance plans.

Here's what to watch for in coming months.

Repeal of estate taxes

The Senate is likely to jump into the estate tax debate this week. Senate Majority Leader Bill Frist (R-Tenn.) plans to push hard for repealing what he and the levy's opponents call "the death tax."

The House approved the tax's repeal in April, and President George W. Bush supports its elimination. The Republicans need 60 votes in the Senate.

"We have never been in a better position than we are right now," said Dick Patten, executive director of the American Family Business Institute, which supports the tax's repeal.

Estate taxes are levied on legacies of more than $1.5 million left by those who die in 2005. The exemption amount will rise until 2010, when the tax will be eliminated. But under Bush's 2001 tax cut act, the levy will return in 2011 with a $1million exemption. Republicans are hoping to make it disappear permanently, though Democrats are more likely to support a partial repeal, officials said.

A possible compromise being floated by Sen. Jon Kyl (R-Ariz.) is taxing estates at the same rate as long-term capital gains: currently 15 percent. Other tinkering could include increasing the exemption amount or changing the tax rate, which now ranges up to 47 percent.

Small businesses and family farms have fought for years to eliminate the estate tax, though few actually wind up paying it. Taxes were levied on less than 1.5 percent of estates in 2003, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. In 2004, the tax is expected to hit 19,000 estates, bringing in $17.6 billion in revenue. Making the repeal permanent could cause the government to lose $270 billion in the next 10 years.

Overhauling the tax system

National sales tax? A flat income tax? No more alternative minimum tax on income?

These are the among the changes being considered by a presidential panel, which is scheduled to report its recommendations by Sept. 30.

So far, the bipartisan panel has agreed the alternative minimum tax should be repealed. Originally meant to make sure the wealthy paid their fair share of taxes, the AMT is increasingly affecting middle-class Americans because the exemption amount has not been indexed to inflation. And it will hit even more people if Congress does not extend an increase in the exemption level beyond this year.

But repealing the AMT will cost the federal government about $1.2 trillion in revenue during the next decade. And because the Tax Reform Panel cannot make any suggestions that reduce tax revenues, it must find a way to make up the funds - possibly through the elimination of certain deductions.

Panel officials say they are still looking at the options, but deductions for state and local income taxes or employer health insurance premiums could wind up on the chopping block. The former deduction is near and dear to many area New Yorkers, who generally pay among the highest property and income levies in the country.

Where the panel is headed should become clearer after several public hearings are held this month. The group, led by former Sens. Connie Mack (R-Fla.) and John Breaux (D-La.), will recommend several reform options.

"You could do some fairly fundamental and dramatic things even within the existing code," said Jeffrey Kupfer, the panel's executive director. "We could have options outside our current system as well."

Turning the panel's recommendations into legislation, however, could take months or even years. The issue of Social Security change didn't take shape until this year, though a presidential panel offered proposals at the end of 2001.

Social Security reform

Congressional leaders promise to return this fall to the issue of Social Security, though it will likely take a very different shape than the plan that Bush has proposed.

It now appears that House Republicans, in the face of Democratic opposition, are likely to back funneling surplus Social Security revenues into individual accounts, said experts with two think tanks close to the debate. The committee is charged with crafting reform legislation.

But such a bill would not make the system solvent and does not have Democratic backing. Bush would like to allow workers to contribute part of their payroll taxes to private accounts. Also, to address the system's solvency problems, he would cut benefits for future retirees.

Pension changes

Congress also is looking at changing other retirement savings vehicles.

With a growing number of corporate pensions on shaky financial ground and several high-profile defaults, including by United Airlines, both houses of Congress are seeking to tighten pension funding and disclosure rules. The Bush administration outlined its views, which included many of the same provisions, earlier this year.

Bills passed by the Senate Finance Committee and the House Committee on Education and the Workforce would increase to $30, up from $19, per covered worker the premiums that companies must pay to the Pension Benefit Guaranty Corp. The PBGC pays workers and retirees their pensions if their companies terminate the plans.

The bills also would require companies to put more money into their pensions and give workers more information about their plans' fiscal health.

"The bill not only gets the PBGC on sounder financial footing, but aims to get to the root causes of the problems of the pension plans," a committee said of the House bill.

On the 401(k) front, the House's bill would make it easier for employers to provide workers with investment advice. And it would require advisers to disclose their fees and any potential conflicts of interest, such as recommending mutual funds that the adviser manages.

The Senate, meanwhile, also would require employers to allow workers to diversify out of company stock in the employer match portion.

In the House, the bill will go to the House Ways and Means Committee, where it may be included in committee chairman Bill Thomas' (R-Calif.) broader retirement security legislation.

Student loan reform

College students would be able to take out loans for higher amounts if a bill working its way through the House becomes law. But that legislation also could cost graduates more when they pay back their loans.

With a fixed amount of federal government money available for higher education, lawmakers want to make sure students get their fair share. In recent years, many graduates have consolidated their student loans to lock in the record low interest rate - costing the government money.

So the House education committee has introduced a bill that would change the rules for consolidated loans as part of the Higher Education Act reauthorization. Borrowers would have to choose between a variable-rate loan and a fixed-rate loan, which would carry a higher interest rate.

At the same time, first-year students would be able to borrow $3,500, up from $2,625. Sophomores could borrow $4,500, up from $3,500. Total undergraduate debt, however, remains at $23,000.

"We're trying to find the right balance of ensuring college graduates have good interest rates so they can pay back their loans while also giving high school [graduates] and those in college additional aid," a committee spokesman said.

The House is expected to vote on the bill before the end of October, the spokesman said. The Senate has not yet introduced legislation on the issue. The bill is likely to encounter Democratic opposition, as it did in the House committee.