The Congressman who will be most influential in fixing Social Security and tax reform is now on a crusade to remedy all of the nation’s retirement-related challenges. At press time, industry observers in Washington and across the nation were awaiting a proposal from Rep. Bill Thomas (R-California), chairman of the House Ways and Means Committee, that’s expected to include Social Security reform and enhanced retirement savings incentives.
Thomas’s proposal “will be a starting point” as to the direction Congress should take in reforming Social Security and addressing the retirement savings issue, says Bill DeReuter, assistant director of government relations at the Financial Planning Association. Among Thomas’s retirement savings enhancements will likely be increased contribution limits in IRAs and 401(k)s, DeReuter says, which is Thomas’s way of “softening the impact” of benefit cuts that higher-income folks would likely face under Social Security reform using private accounts. Thomas’s bill will also likely include a provision calling for automatic enrollment in companies’ 401(k) plans, unless an employeechooses to opt out.
“Some form” of private accounts will likely be proposed in Thomas’s bill, DeReuter says, despite the fact that Democrats remain unwilling to negotiate any Social Security fix that includes private accounts. It’s unclear if Thomas’s bill will provide a method to fix Social Security’s solvency problem, like the suggestion put forth by Robert Pozen, chairman of MFS Investment Management, which calls for using private accounts along with “progressive indexing” of benefits. Under Pozen’s proposal–which President George Bush has cited in at least one recent speech–high wage earners’ benefits will be based on the consumer price index (CPI), middle-income workers will have a “blended rate” between wages and CPI, and lower-income workers will continue to have their benefits tied to changes in wage rates. “I think you’ll see a bill in the House on Social Security that may well pass on a party-line vote this year,” DeReuter says.
GROW Accounts and LTC
Such a bill may include the Growing Real Ownership for Workers (GROW) Accounts that were introduced in June by Rep. Jim McCrery (R-Louisiana), chairman of the House Ways and Means Subcommittee on Social Security. Under the proposal the Social Security surplus would be devoted to GROW Accounts, which would be invested in guaranteed, marketable Treasury securities. Upon retirement, the money in the GROW accounts will be used to help pay workers’ Social Security benefits.
Ann Cammack, an attorney with Sutherland, Asbill & Brennan in Washington, told attendees at a recent regulatory affairs conference held by the National Association for Variable Annuities (NAVA), that Thomas is interested in taking a look at the “whole spectrum of retirement issues,” including long-term care policy. She said he’s asked the insurance industry to consider developing innovative products that help meet investors’ retirement planning needs. “Thomas wants companies to think outside of the box,” Cammack said. President Bush’s proposed retirement planning accounts–Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employee Retirement Savings Accounts (ERSAs)–are unpopular in the insurance and annuity industries because, for one thing, LSAs would compete with deferred annuities, Cammack told attendees. Senator Craig Thomas (R-Wyoming) and Rep. Sam Johnson (R-Texas) introduced legislation in April called the “SAVE Initiative,” which called for the adoption of all three of Bush’s savings accounts.
Other members of Congress have recently introduced legislation that promotes annuities as long-term retirement vehicles. In February, Rep. Nancy Johnson (R-Connecticut) introduced the Retirement Security for Life Act of 2005 (H.R. 819), which proposes that investors would not have to pay taxes on the first $20,000 that they receive through annuity payments. DeReuter of FPA says he expects Thomas’s bill to include favorable tax treatment “toward annuities or annuitized payments,” as well as maybe even scheduled payments from a 401(k) plan.
On June 9, Rep. John Boehner (R-Ohio), chairman of the House Education & the Workforce Committee, introduced his much-anticipated Pension Protection Act of 2005 (H.R. 2830), which updates outmoded pension laws and seeks to shore up the Pension Benefit Guarantee Corp’s deficit. Boehner is drafting separate legislation to address cash balance pension plans. Another bill introduced by Boehner on June 9, the Pension Preservation and Portability Act of 2005 (H.R. 2831), would allow, among other things, investment advisors to provide advice to participants in defined contribution plans. DeReuter expects Boehner’s Pension Protection Act to be attached to the legislative package that Thomas’s Ways and Means Committee introduces to address Social Security and retirement issues.
The Pension Protection Act replaces the corporate bond interest rate that’s due to expire at the end of the year, and establishes a modified yield curve that provides a permanent interest rate for employers to use to calculate their pension contributions. Boehner’s bill also increases the contributions that employers must make to their pension plans to $30 from $19 per employee. In addition, Boehner’s proposal would “soften” the Administration’s proposal in that it gives pension funds seven years to “get back into balance” if the fund is 80% underfunded, DeReuter says. Senator Mike Enzi (R-Wyoming), chairman of the Committee on Health, Education, Labor, and Pensions, is expected to release soon a similar pension reform proposal to Boehner’s.
Washington Bureau Chief Melanie Waddell can be reached at [email protected]