Industry Concerned That Treasury Is Still Pushing Life Savings Accounts

By

Washington

The Treasury Department is continuing to promote tax-free Lifetime Savings Accounts that some in the life insurance industry believe could discourage consumers from purchasing annuities.

Pamela Olson, Assistant Treasury Secretary for Tax Policy, says President Bushs budget proposals to create a simplified personal retirement savings system would encourage Americans to save for their own retirements.

Olson spoke at a Retirement Savings Conference jointly sponsored by the Investment Company Institute and the Securities Industry Association.

Olson says the current tax code discourages saving.

“Nowhere is this problem more evident than in the numerous savings vehicles we have in the code,” she says.

“Instead of simplifying to increase savings, we keep adding complexity–more rules, more limitations, more terms, more conditions, more qualifiers, more provisos, more exceptions,” Olson says.

“As a result,” she says, “Americans are decreasingly inclined to save, rather than trying to figure out the complex rules.”

She notes that the administration advocates replacing the current system with three simplified retirement savings accounts.

One account, the Lifetime Savings Account, would allow an individual to save up to $7,500 annually, earn interest tax-free and withdraw money at any time and for any purpose with no penalty.

In addition, the administration is proposing Retirement Savings Accounts to replace Individual Retirement Accounts.

These would also allow individuals to save up to $7,500 tax-free, so long as the earnings are not distributed before the owner reaches age 58 or becomes disabled.

Finally, 401(k) and other plans would be consolidated into Employer Retirement Savings Accounts.

Olson says the two individual accounts will make saving for everyday life and retirement security easier and more attractive.

“Make no mistake about it; the real winners here are average Americans,” she says.

“In a matter of less than a decade, the accounts would permit all lower and moderate income Americans to enjoy the benefits of tax-free compounding and freedom from the complexity of Schedule B and Schedule D for all of their savings,” Olson says.

She adds that confusion and frustration are far too common among individuals trying to save.

In 1982, she says, the IRS publication explaining IRAs was 12 pages long. Now, Olson says, it is 104 pages long.

“People should not have to worry about the confusing alphabet soup of six different savings accounts and the endless maze of confusing rules,” she says.

Jack Dolan, a spokesman for the American Council of Life Insurers, Washington, says ACLI has said repeatedly that Americans need to save more.

However, he says, when talking about retirement security, it is important to consider the bigger picture.

In any examination of retirement security, Dolan says, it is necessary to consider both halves of the equation.

The first half, he says, is accumulation, while the second half is asset management.

It is important to encourage savings but also important to encourage asset management, he says.

Congress, Dolan says, should look to annuities as the only vehicle that both encourages savings and guarantees lifetime income.

The fear of some in the life insurance industry is that allowing individuals to establish a tax-free account that offers immediate access will discourage the purchase of annuities, in which access is restricted.

In other tax news, the House Ways and Means Committee is expected to consider an international tax bill that could include provisions on nonqualified deferred compensation.

Sources tell National Underwriter the provisions are likely to protect rabbi trusts at the statutory level.

Currently, sources note, rabbi trusts exist under IRS letter rulings.

Specifically, the provision would say that rabbi trusts are protected from employer use except in cases of insolvency and bankruptcy.

Thus, there would be a substantial risk of forfeiture necessary to stave off constructive receipt.

Moreover, the legislation would tighten rules on distributions. Distributions could occur only upon certain events, which are separation from service, disability, death, a specified time, change in control or financial hardship.

ACLIs Dolan praises Ways and Means Committee Chairman Bill Thomas, R-Calif., for taking the right approach to address Enron-like abuses while preserving deferred compensaton.

ACLI, Dolan says, is especially pleased by the preservation of rabbi trusts.

Bob Plybon, president of the Association for Advanced Life Underwriting, says his understanding is that Thomas will address nonqualified deferred compensation in the international tax bill, which appears to have a significant chance of passing due to political pressure from the European Union.

Plybon did not want to speculate on specifics in the bill but says he feels the industry will have an opportunity to discuss with Thomas and other committee members a variety of issues surrounding nonqualified deferred compensation.

He notes there has been a lot of discussion about offshore trusts, curtailing the use of triggers and other issues that affect access.

Plybon says he would not be surprised to see some of the provisions noted above in the legislation.


Reproduced from National Underwriter Edition, June 9, 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.