Bushs Sweeping Retirement Proposals Causing Some Industry Apprehension
The scope of President Bushs proposals to revamp the nations retirement system is raising eyebrows in the insurance industry and causing some to question the impact on annuities.
“I was surprised by the sweeping recommendation to change the whole retirement system in the United States,” says Albert J. “Bud” Schiff, president of NYLEX Benefits, Stamford, Conn., and president of the Association for Advanced Life Underwriting.
“It was very dramatic. It took us by surprise,” he says.
The proposal, Schiff says, raises a lot of questions. Most important, he says, is the question of whether it will actually encourage people to save for the long term or discourage it. At first blush, Schiff says, he wonders whether the proposal might discourage small and medium-sized employers from maintaining qualified plans.
Second, he says, since the proposal does away with traditional individual retirement accounts, which are funded with pretax dollars, the proposal might actually discourage some individuals from retirement savings. Brian H. Graff, executive director of the American Society of Pension Actuaries, Arlington, Va., believes the plan would particularly harm employees of small businesses. He says the substantial expansion of tax-favored savings opportunities on an individual basis would eliminate the incentive for many small business owners to incur the cost and administrative burdens of establishing a retirement plan. “It is an understatement to suggest that the impact of these proposals on small business retirement plan coverage will be anything less than devastating,” Graff says. He says that for the average small business employee, the proposal changes the “three-legged stool” of retirement savings (pensions, individual savings and Social Security), into a “pogo stick.” Specifically, the administration wants to change the existing panoply of retirement savings vehicles with three products.
One is a Lifetime Savings Account in which all Americans, regardless of income, could contribute up to $7,500 per year, earn tax-free interest and withdraw their money at any time for any reason without any tax consequences. The $7,500 limit would be indexed for inflation.
The second vehicle is a Retirement Savings Account. All Americans, regardless of income, could contribute up to $7,500 a year, also indexed for inflation, to an RSA. All earnings would be tax-free, but RSA owners could not make tax-free withdrawals until age 58. Individuals could own an LSA and an RSA at the same time.
Finally, employer-based defined contribution plans such as 401(k)s would be replaced by Employer Retirement Savings Accounts. Contribution limits would be $12,000 annually through 2005 and $15,000 thereafter. In addition, employees aged 50 and older could make additional “catch up” contributions of $2,000 through 2005 and $5,000 thereafter. The Bush proposal would eliminate or reduce many of the administrative burdens faced by employer-based plans, such as top-heavy rules and nondiscrimination tests.
One industry expert, who asked not to be identified, says the new retirement regime could significantly harm the annuities market. Indeed, he notes, some insurance stock analysts have already said that. “Let me put it this way,” he says. “Suppose you could invest tax-free in an instrument where you could make immediate withdrawals or in one where you couldnt. Which would you choose?”
While not directly addressing this issue, the American Council of Life Insurers, Washington, says it is important to focus greater attention on financial planning for retirement, specifically, the management and distribution of savings in retirement.
It is vital, says ACLI spokesman Jack Dolan, that Congress and the administration address the risks and burdens of ensuring savings that last a lifetime. “As a result, ACLI is calling on Congress and the administration to embrace additional tax incentives for Americans to purchase annuities,” he says. Schiff says the Bush proposal is interesting, but that the implications will shake out over the next several months. Hopefully, he says, some good retirement policy will come out of this process, but he does not think it will be this proposal. Also in the presidents budget is a proposal to repeal Section 132 of the Revenue Act of 1978, which places a moratorium on the issuance of rules or guidance on many aspects of nonqualified deferred compensation arrangements. According to the Treasury Department, the current moratorium restricts its ability to respond effectively to the use of these arrangements to unfairly avoid current income.
Schiff says the moratorium was imposed in 1978 due to fears that Treasury was looking at broad changes in these arrangements. The feeling now, he says, is that any new rule by Treasury would be narrowly focused on perceived abuses. If that is true and if AALU can work with Treasury, Schiff says, he believes something can be developed that the industry can live with.
Finally, the budget calls for repeal of Section 809 of the tax code, but not Section 815. Section 809 imposes a tax on mutual life insurers by reference to the earnings of stock companies. Section 815 imposes a tax on policyholder surplus accounts held by stock companies. ACLI supports repeal of both 809 and 815, but the issues have always been linked. At press time, ACLI had not commented on the proposal to repeal only 809.
Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.