The Future of Retirement Savings

Author: Internal Revenue Service Tax Exempt and Government Entities Division

Published: December 19, 2003

(Editor?s Note: On September 11, 2003, William F. Sweetnam, Jr., Benefits Tax Counsel in the Office of Tax Policy of the Department of the Treasury and J. Mark Iwry, Nonresident Senior Fellow at the Brookings Institution and Mr. Sweetnam?s predecessor as Benefits Tax Counsel, spoke at John Marshall Law School regarding The Future of Retirement Savings.)

Mr. Sweetnam and Mr. Iwry started off their presentation with an insider?s guide to how public policy issues are developed in our political system. The informal discussion focused on advising the White House, Cabinet secretaries and Congress on pension-related issues. Mr. Sweetnam described the complexity involved in trying to get support from many different groups with competing interests in a particular piece of legislation and how institutional gridlock can be overcome. ?The key?, he said, ?is to determine what each group needs and to craft that into a ?buy in? so that the legislation could move forward.? Mr. Iwry spoke to the process of reforming the pension system while maintaining stability for plan sponsors, describing how changing events and shifting political priorities shape the opportunities for change and demand flexibility.

The discussion turned to the future of retirement savings, with each presenting different views of the administration?s proposal for Lifetime Savings Accounts. Mr. Sweetnam addressed the concern that there are so many types of savings, such as Medical Savings Accounts, Educational Savings Accounts, IRA?s, etc., that a very complex system is now in place to keep track of all of the branches. Instead, he said, ?The Administration has proposed a way to encourage savings by everyone and the proposal would also consolidate and simplify current savings programs.? Mr. Iwry said that any such proposal had to be appraised in terms of fairness, fiscal responsibility and effect on national saving, including employer-based pensions. He critiqued the proposal on those three grounds, expressing concern that Roth IRA-style individual accounts allowing large contributions without income limits and with easy withdrawals would reduce retirement security for average workers, increase the budget deficit and undermine small employers? incentives to sponsor plans for employees.

Finally, they addressed the cash balance conversion issue and the impact of recent court decisions on issuance of determination letters. Mr. Sweetnam said that Treasury would be looking closely at the impact of those court decisions. Although unable to comment directly on the court decisions, he said, ?Employee benefits issues might need to be addressed politically.? Mr. Iwry said, ?There are ways to encourage employer sponsored plans, like cash balance, while mitigating the adverse effects of conversions on older workers.? He suggested Treasury join in supporting a ?win-win? legislative solution that approve hybrid plans, preserving flexibility for employers while requiring reasonable transition protection for older workers in a conversion.