Bush’s pension proposals dead; new bill in works

WASHINGTON — Key Republican and Democratic congressmen have rejected the centerpiece of President Bush's savings proposals in the federal fiscal 2005 budget.

Instead, they are drafting their own retirement legislation, which focuses on a new universal retirement account that is intended to expand coverage to middle- and low-income workers.

Reps. Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., have publicly dismissed the lifetime savings account proposed by the president. They are working out the details of a new universal account, which hinges on the government depositing an annual match of up to $1,000 directly in the bank accounts of those who contribute to a retirement plan.

Both men are members of the powerful House Ways and Means Committee and are chief proponents of pension legislation in the House,

Their proposal differs from the SAVER credit, which is available only as a non-refundable tax credit, expires in 2006 and is available to individuals earning up to $25,000 and couples making up to $50,000. The universal account would make the government match available to all Americans with earnings below a set amount, including those who don't pay any income taxes.

The proposal could cost less than $50 billion over 10 years, according to a source who did not wish to be identified. It is expected to be part of a broader pension bill on which Messrs. Portman and Cardin are working.

A spokesman for Mr. Portman declined to provide any details, saying only: "They're working on a bill and details will be forthcoming."

"The two things they care about are increasing savings among the young and the low income, and certainly employer-sponsored plans," said a spokeswoman for Mr. Cardin, adding the bill is still in the "discussion stage."

The proposal has broad-based appeal among Democrats, who have argued strenuously for years in favor of incentives for low- and middle-income Americans to save for their retirement. Only 25% of households in the bottom 20% of the income ladder have any defined contribution plans or individual retirement accounts, according to a new study by Peter Orzag, a senior fellow at the Brookings Institution, Washington. (The study did not include defined benefit plans.)

"It is significant that Mr. Portman and Mr. Cardin would rally around a proposal like this. Until recently, refundable credits have been anathema for many Republicans," said James M. Delaplane Jr., partner in the Washington law firm of Davis and Harman and special counsel to the American Benefits Council, Washington.

The proposal also differs from President Bush's idea for lifetime savings accounts, which would permit all Americans, regardless of age or income, to make after-tax contributions of $5,000 a year, and pay no taxes on the investment income and withdrawals. Individuals would have no restrictions on withdrawals.

"While lifetime savings accounts promote short-term savings, I believe there is a greater need to promote long-term savings," Mr. Portman said at hearings on the Bush budget proposals last week.

Rep. Earl Pomeroy, D-N.D., and another member of the House tax-writing committee involved in pension legislation,lambasted Mr. Bush's proposals.

"The core of the deal under ERISA (the Employee Retirement Income Security Act) is that we allow significant retirement savings opportunities for employers, provided they make a plan available for their workers. The thrust of the package advanced by the administration is to allow significant savings opportunities by those with affluent income levels, without regard to whether they do anything to sponsor retirement plans for workers."

Mr. Bush's proposals also included a retirement savings account, or streamlined individual retirement account, that would consolidate deductible, non-deductible and Roth IRAs into a single tax-sheltered account into which workers could contribute $5,000 a year in after-tax savings. As with IRAs now, RSAs would be subject to the same restrictions on withdrawals, but unlike current law, there would be no income limits.

Although the RSA has also received a mixed review, sources say a trimmed version could be part of the package Messrs. Portman and Cardin are crafting.

The third element of Mr. Bush's proposals is the employer retirement savings account, which would consolidate the alphabet soup of 401(k), 403(b), 457 and SIMPLE plans into a single plan.

The ERSA is considered a non-controversial simplification and also is likely to be included in some form.

"The LSAs and RSAs will not be effective. If you're not saving $3,000 today (the maximum for IRAs) or if you don't have a tax liability, it doesn't take a rocket scientist to figure out that it won't change behavior," said Ed Ferrigno, a lobbyist for the Profit Sharing/401(k) Council of America. "If you want to expand savings, the only way to get lower income workers to save is to put a plan in front of them"

Moreover, while Mr. Bush's package reinstates cross-testing of retirement plans for non-discrimination purposes, allowing employers to give proportionately higher matches or contributions for older workers than for younger, the administration's failure to repeal the "top-heavy" rules does not sit well with some representatives of small businesses.

Sources say the Portman-Cardin package also will include many provisions of H.R. 1776, the Pension Preservation and Savings Expansion Act, which they introduced last April. The bill stalled after clearing the House Ways and Means Committee last July.

That legislation would have made permanent the higher contribution and benefit limits enacted as part of a 2001 law. It also speeded up vesting of matching employer contributions to 401(k)-type plans and simplified the administration of defined benefit pension plans, and intended to prevent abuses of the kind that became clear in the collapse of Enron Corp. Among the changes, the legislation would enable participants to diversify out of employer stock holdings and impose penalties on corporations for making huge payouts to top executives before filing for bankruptcies.

More uncertain is the fate of the legislative proposal included in Mr. Bush's budget package that would solidify the status of cash balance pension plans.

"Congress will take a very careful look at it," said David Koshgarian, a senior manager at the Washington Council Ernst & Young and previously chief of staff to Mr. Cardin.

Still, Mr. Koshgarian noted that the short legislative calendar and election-year politics will make it hard for any retirement legislation to pass this year. "Sixty-two legislative days. It's hard to see how you go through this stuff and bring it to a conclusion," he said.