The decision of the Bush administration to propose in its budget for the coming fiscal year a combination of retirement incentive savings plans that would include so-called Lifetime Savings Accounts is stirring concern within the insurance industry.
The industry also is concerned about another provision of President Bushs budget, one which would make permanent the repeal of the estate tax. Under current law, the estate tax is due to be eliminated entirely in 2010 but will reappear the following year.
Both the American Council of Life Insurers and the National Association of Insurance and Financial Advisors are against repeal and instead support estate tax “reform,” including creation of a threshold that is indexed for inflation and retention of the current “step up” in basis system.
But NAIFA and the ACLI do support certain retirement savings incentive provisions contained in the 2001 and 2003 tax cut laws enacted during the first Bush administration, officials say.
In general, however, the ACLI and NAIFA oppose creation of LSAs, with their concern being over the impact of LSAs on long-term family and retirement security as well as on the overall
long-term U.S. savings rate.
Their concern is greater this year because the new budget proposes combining all individual retirement savings accounts, replacing the various forms of IRAs with so-called Retirement Savings Accounts, or RSAs.
“This increases our concern, because when LSAs are potentially combined by small business owners with RSAs, up to $5,000 per year could be placed into an RSA,” a NAIFA official says. Earnings in this program would be tax-free and withdrawals would be taxed (with a
penalty tax) if they occurred prior to age 58, death or disability. There also would be no age or income restrictions on RSAs.
“Because there are no restrictions on the immediate use of money in LSAs, there is an incentive to use them simply as save and spend
accounts,” the NAIFA official says. “And thats not a problem unless, as experts fear, LSAs replace
annuities and life insurance as long-term savings and protection vehicles for individuals and families.” The staff official says that when compared to LSAs, both annuities and life insurance have far less favorable tax treatment on withdrawals.
“There is every reason to believe that many people will opt to save in LSAs instead of life insurance and annuities and later spend the money
set aside in LSAs for short-term desires,” the NAIFA official says. “Over time, many individuals
and families could face serious shortfalls in family security and retirement income needs.”
There also is concern, the NAIFA official says, that small business owners would be tempted to set up RSAs in combination with LSAs that benefit only the business owner and his/her family “and fail to establish retirement accounts for rank and file workers.
“A generation from now, the results could be disastrous for individuals, families and the U.S. economy,” the official says. “Life insurance, annuities and employer-sponsored retirement plans are bedrocks of family and retirement security. They are also major sources of long-term capital
formation in the U.S.,” he says.
While an ACLI staff official says the trade group has no objections to the RSA proposal and is working on suggested modifications to Employee Retirement Savings Accounts, “we oppose the LSA proposal as contrary to long-term savings.” The ACLI staff official notes “with particular interest” the revenue estimate for the LSA proposal. “The 2005 budget estimated that the accounts would raise $5.6 billion over 10 years while the 2006 budget estimate is only $1.5 billion,” the official says.
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 11, 2005. Copyright 2005 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.