WASHINGTON - With both ends of Pennsylvania Avenue pushing for reinstatement of fully tax-deductible individual retirement accounts, there's a good chance the next Congress will pass legislation and the president will sign it.
But pension policy experts and economists disagree on whether the president's proposal - unveiled Dec. 15 as part of his broader package of middle-class tax cuts - and a similar version proposed earlier by House Republicans will help Americans all that much. That's because both proposals would let Americans dip into the IRAs for big-ticket items - college tuition, home purchases or medical bills.
"Giving people early access to their retirement lunch could mean they go hungry when they actually get to retirement," said Sylvester J. Schieber, director of research at The Wyatt Co., Washington.
Also, letting Americans save more of their own money for retirement might lessen the pressure on employers to provide pension benefits, some say.
"IRAs would eliminate the double tax on saving and allow people to benefit from the same treatment for pensions which is only available now to employers," said Carolyn L. Weaver, an economist at the American Enterprise Institute, a Washington think-tank.
Laurence J. Kotlikoff, an economist at Boston University, says restoring fully deductible IRAs with penalty-free withdrawals for emergencies could cause more harm than good. Referring to the proposal as "another half-baked scheme," Mr. Kotlikoff said it allows people "to arbitrage the system and save on taxes but not really increase their savings, and actually you get a decline in national savings instead of an increase."
People could do that, he said, by using tax-deductible borrowings (such as home equity loans or mortgages) to make tax-deductible contributions to IRAs.
What's more, it is a misnomer to label the president's proposal and the Republican version as universal individual retirement accounts, said Washington lawyer Steven J. Sacher. Both proposals should be viewed as efforts to help Americans save through tax-deductible savings accounts, he says. Mr. Sacher, a partner at Kilpatrick & Cody, was counsel to the Senate Labor and Human Resources Committee in the late 1970s.
"If you view them as deductible savings accounts rather than IRAs, then the question becomes whether the revenue cost of the deduction will be made up for by the increased savings, which will be funneled into more productive uses," he pointed out.
Under the president's proposal, revenue lost because of increased tax deductions for IRAs would be made up by cutting government spending. The Republicans have not yet said how they intend to pay for their proposal, although the losses would not show up for at least five years because employees would use after-tax income for contributions, but no taxes would be imposed when the money is taken out.
Nonetheless, Democrats and Republicans agree that something must be done about the nation's paltry savings rate. It plummeted from an average of 12.3% of net national product in 1950 to 2.7% in 1993, according to Mr. Kotlikoff's data. Net national product is defined as gross national product minus depreciation.
Administration sources and Republicans both see universal IRAs as one way to tempt Americans into saving more. And many economists say that despite conventional wisdom, even IRAs with penalty-free withdrawals would still nudge up the nation's saving rate.
Several economists from both ends of the political spectrum say there's plenty of evidence to suggest that making IRAs freely available again could boost the nation's savings rate.
Saving money requires exercising self-control, said Richard H. Thaler, an economist at Cornell University, in congressional hearings earlier this month. In other words, the harder it is to get at money, the less likely it will be spent. Thus, it is less tempting to spend money specifically put away in IRAs than cash in one's wallet.
"Over time, the households who contribute to IRAs and 401(k)s accumulate assets in those accounts rapidly, rarely draw down on them before retirement, and show no signs of reducing assets in other accounts," he testified at hearings held by Sen. Bill Bradley, D-N.J., on increasing the nation's savings rate. But because inducements are important, Mr. Thaler contends IRAs with an upfront tax deduction will be more persuasive than IRAs set up with after-tax income and tax-free distribution.
Steven F. Venti, an economist at Dartmouth College who has done several studies on American savings, also agrees IRAs can make a difference.
IRA contributions rose from about $3.4 billion in 1980 to about $38 billion in both 1985 and 1986, before changes in tax laws limited contributions, Mr. Venti testified at the recent hearings. At the peak of the IRA program in 1986, about 16% of tax filers contributed to IRAs, and about 29% of all families with household heads younger than 65 had IRAs, he testified. And 75% of all IRA contributions were accounted for by families with annual incomes of less than $50,000.
Under the president's proposal, Americans earning less than a certain amount would once again be able to make tax-deductible contributions of up to $2,000 a year to IRAs. The $2,000 ceiling would be adjusted each year for inflation. The Republican proposal would not have an income cutoff. Non-working spouses also would be allowed to put in $2,000 a year.