RETIREMENT SAVINGS by fxx80801

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									  UNIVERSAL RETIREMENT SAVINGS
ACCOUNTS: GIVING PEOPLE CONTROL
       OVER THEIR SAVINGS
Keeping Pace With Change

Although new impetus has been given to ensuring the security of people’s retirement
savings in the wake of the Enron collapse, the existing system of retirement savings has
needed a major overhaul for a long time. There are currently 16 types of retirement
savings accounts and plans that are available to people. The rules vary from company to
company, and when people change jobs, as they do more frequently now, they find that,
in many cases, they cannot take their savings with them but must leave balances in
accounts with former employers. Others receive a large lump sum that is frequently spent
rather than saved.

All of this helps to explain one reason that the savings rate in America is so low: people are
confused and deterred from saving by rules they cannot understand.

Although protecting people’s 401(k)s and other pensions from future Enrons has to be a
top priority in the immediate future, it is equally essential to address the long-term
economic security of the Baby Boomers in retirement and their children who are now
entering the workforce. Doing that means increasing personal savings, both in employer-
sponsored and personal retirement plans.

A key element of accomplishing this is to give people control over their own money by
creating a system that takes into account the changing nature of people’s lives, from job
mobility to the demands of family. For nearly seventy years the retirement system has had
three parts: Social Security, private pensions, such as employer-sponsored plans, and
personal saving. Social Security remains the foundation of Americans’ retirement security,
accounting for half of the income for two-thirds of senior citizens.

But we have to take into account the changes that have occurred in the other two
components of the system. Private pensions and IRAs account for 24 percent of the
retirement income for all households, about half the share of Social Security and about the
same share as income from all other types of personal saving. Although the data on
rollovers from employer-provided pensions into IRAs are difficult to interpret, several
analysts have concluded that most of the money in IRAs comes from rollovers as people
change jobs. Making these rollovers easier and ensuring that they are saved instead of
spent is crucial to people’s retirement security.

The private pension system has changed dramatically in the last twenty five years, giving
more choices and but also placing greater risk onto the shoulders of most workers. The
number of people with defined contribution plans as their only private pension has
increased dramatically as 401(k) plans and other types of defined contribution and deferred

U.S. House Democratic Policy Committee, February 14, 2002                            Page 1 o f 5
compensation plans have been adopted by employers while the number of people covered
by traditional defined benefit plans has remained stable. For example, while 57 percent
of families with a worker under the age of 65 participated in some type of pension plan in
both 1992 and 1998, 57.3 percent of those had only a defined contribution-type plan in
1998, an increase from 37.5 percent who had only a defined contribution plan in 1992.

This means that, for many workers, their employer-sponsored plan has taken on attributes
that are usually associated with personal saving, including bearing the risk of variations in
the value of the investments in the plan. However, many people – like employees and
retirees of Enron and a number of other large firms that have either filed for bankruptcy or
suffered major declines in the value of their stock – find that they have little control over
these investments.

However, many small employers still do not offer their workers a company-sponsored
pension plan. According to one recent survey, only 32 percent of employees between the
ages of 25 and 64 working in firms employing fewer than 100 people participate in a
pension plan. That compares with 72 percent participation of workers in larger firms.
While there are many reasons for this, the cost and complexity of setting up a pension plan
was cited as the primary reason by 26 percent of the firms that do not have a plan.
Despite a series of efforts since 1978 to provide low-cost, low-regulation options to small
firms, most workers in firms with fewer than 100 employees still do not have a pension
plan.

While Individual Retirement Accounts (IRAs) and Roth IRAs are considered to be
successful vehicles for middle-income families to build up tax-advantaged retirement
savings, in 1998 only 28.4 percent actually had such an account, and the median balance
in these accounts was only $20,000. That is hardly enough to provide an adequate
supplement to Social Security and private pension income during retirement. Further,
while nearly two-thirds of families with incomes over $100,000 had an IRA, only 14.7
percent of those with income between $100,000 and $25,000 had an account.

These facts point up the need to simplify the way that people can save, provide them with
a way to maintain their savings from previous employers, give them control over their
retirement savings whether from personal saving or from an employer-sponsored defined
contribution plan and encourage them to increase their saving through more effective use
of tax incentives.


The Universal Retirement Savings Account

The Universal Retirement Savings Account proposed by Democratic Leader Gephardt is
designed to put people in charge of their own retirement savings and provide the basis for
an economically secure retirement.

It simplifies and consolidates a number of the confusing options that people face now and
gives them more control over their retirement funds when they change jobs.

It is open to Americans at all income levels and gives people over a greater range of the

U.S. House Democratic Policy Committee, February 14, 2002                           Page 2 o f 5
income scale a tax incentive to add to their retirement savings.

Finally, it will provide seed money to all of America’s children that gives them a start to
saving, not only for their retirement, but for their education and buying their first home as
well.


Details About the Universal Retirement Savings Account

Basic Account Structure and Contributions

1.      Replaces the current structure of traditional IRA, Roth IRA, SEP, and SIMPLE IRA
        plans with a single tax-favored account. Current employer-sponsored defined
        benefit plans, cash balance and defined contribution plans (401(k), 457, money
        purchase, ESOP) will be retained.

2.      The account would be set up and administered through financial institutions and
        other financial service providers (like IRAs and Roth IRAs). Individuals would
        choose the institutions, investments and manage their own plans.

3.       Individuals make tax-deductible contributions to plans, subject to limits:

        <        people not covered by employer-sponsored plan:

                 $10,000 per year, rising in $2,000 increments until it reaches $20,000 in
                 2008, indexed for inflation in $500 increments.

        <        people currently covered by an employer-sponsored plan:

                 $3,000 in 2002 - 2004, $4,000 in 2005 - 2007, $5,000 in 2008, indexed for
                 inflation in $500 increments after 2008 (same as limits established for
                 traditional IRAs in sec. 601 of EGTRRA of 2001)

        <        Limits on tax-deductible contributions begin to phase down at $60,000 AGI
                 for singles, $100,000 for couples, until they are fully phased out at
                 $110,000/$160,000.

        <        People with higher incomes could still make non-deductible contributions to
                 their accounts. Earnings and capital gains on these contributions would be
                 tax-deferred.

4.      Accounts would be established with a $500 refundable tax credit when parents
        apply for a Social Security number for a child.

5.      Existing balances in current accounts that are being superceded (IRAs, Roth IRAs,
        etc.) would be rolled into the Universal Account without penalty.

6.      Contributions could be made either directly or through payroll deduction.

U.S. House Democratic Policy Committee, February 14, 2002                             Page 3 o f 5
7.      Employer contributions could be made directly to the account if there is no
        employer-sponsored plan, combined contributions (employer and employee) could
        be made up to the otherwise applicable limit.

8.      Small businesses would have the option of making contributions directly into their
        employees Universal Retirement Savings Accounts instead of establishing 401(k)
        plans.


Tax Benefits

1.      Employee contributions would be treated comparably with 401(k) and traditional IRA
        contributions: tax deferred and deductible from Adjusted Gross Income (AGI).

2.      Tax would be deferred on earnings and capital gains in the account until a
        distribution is made.

3.      The tax credit for contributions to retirement accounts enacted in sec. 618 of the
        Economic Growth and Tax Reduction Reconciliation Act of 2001 would apply to
        contributions to the Universal Account. This credit (sec 25B of the Internal Revenue
        Code of 1986) would be made permanent and refundable.

4.      The tax credit for contributions to retirement plans (sec 25B of tax code) would be
        extended to cover contributions made for individuals under the age of 18.

        <        Account would be established when parents apply for a Social Security
                 number for a child under 18 with a refundable tax credit of $500 made
                 directly to the Universal Account

        <        Additional contributions to the Universal Account for children under 18 by
                 parents would be matched with a 50% refundable tax credit for contributions
                 up to $200 per year. Same income limits as sec 25B credit apply


Integration with Existing Pension Plans

1.      Optional roll-over of all vested balances in existing plans into the Universal Account
        when changing jobs without penalty. Rollover is not mandatory.

2.      Existing fiduciary rules for plans would apply


Distributions from the Universal Accounts

1.      Distributions must begin no earlier than age 59½ and no later than 70½, except for
        qualified exceptions.



U.S. House Democratic Policy Committee, February 14, 2002                            Page 4 o f 5
2.      Distributions must be taken as annuities (not lump sums), except for qualified
        exceptions. Non-qualified distributions are subject to a 10% penalty tax.

3.      Qualified exceptions include:

        <        Distributions for the downpayment of a first home purchase, up to $10,000

        <        Distributions for allowable post-secondary education expenses of the
                 individual up to a total of $10,000. Qualified expenses include tuition, fees,
                 and other expenses eligible for the HOPE scholarship credit under sec.
                 25A(f) of the tax code.


Co-ordination With Other Pension Reforms

1.      The vesting and other changes made to existing 401(k) and other defined
        contribution plans by H. R. 3657 are included.

        <        All contributions would be vested after one year, not three years as in current
                 law.

        <        Employees would be given unrestricted choice over the investment of their
                 contributions immediately and over the investment of employer contributions
                 after the one year vesting period. Prohibits employers from levying financial
                 or other penalties against workers who sell company stock held in their plan
                 accounts.

        <        Requires employers to give employees a 30-day advance notice of
                 ‘lockdown’ periods when employees cannot access their accounts and limits
                 such lockdowns to no more than 10 days. Prohibits lockdowns when
                 company stock cannot be sold for any reason other than administrative
                 changes to the plan.

        <        Requires employees to be appointed as trustees for plans, requires
                 employers to provide fiduciary insurance for plans and gives employees the
                 right to recover money lost as a result of breach of fiduciary responsibilities..

        <        Requires employers to provide accurate information in annual benefit
                 statements, without material omissions, with appropriate information on the
                 composition of the portfolio including the amount of employer stock in each
                 account.




U.S. House Democratic Policy Committee, February 14, 2002                                Page 5 o f 5

								
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