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Retirement Planning > Social Security

Senate Rejects Personal Social Security Accounts

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The Senate’s decision to reject emphatically the creation of personal accounts in Social Security is being greeted with a discreet sigh of relief by the life insurance industry.

However, a securities analyst who covers the industry cautions that while tax proposals that would undermine the attractiveness of life insurance products keep getting defeated, they also continue to crop up.

The American Council of Life Insurers and the National Association of Insurance and Financial Advisors declined to comment directly on the Senate decision, which occurred March 16 as the Senate wrestled with the fiscal 2007 budget resolution, which is a blueprint for spending limits on next year’s budget.

The vote was 46-53, with eight Republicans, either moderate or facing challenging re-election campaigns, supporting 45 united Democrats. It also marked the first time the issue had come up on the Senate floor.

Jack Dolan, a staff official at the ACLI, said the industry had a “neutral position” on the Social Security reform issue. In general, however, he said the industry supports “long-term, meaningful reform.

“Our position is that if there is to be private accounts, workers should have the option to receive a lifetime income stream from an annuity at retirement from assets accumulated in a private account,” he said.

The insurance industry’s concern is that private accounts are a “double-edged” sword for insurance companies and agents. As security analysts and industry officials in private briefings over the past year or so have explained, while private accounts would encourage people to manage their own accounts, they also have the potential of undermining the employer-based retirement system. Specifically, such accounts would serve as a disincentive, in the view of industry officials, for people to invest in 401(k)s, insurance policies, IRAs, annuities and long term care products, for example.

Saul Martinez, who covers the industry for Bear Stearns, reacted to the vote by saying it is a “positive that seemingly a lot of the tax laws that could hurt the industry are not gaining as much traction in Congress as the proponents would hope for, and that is a good thing for the industry.”

Besides the private accounts issue, he cited strong Bush administration support for Lifetime Savings Accounts, which offer consumers an opportunity to build up after-tax savings and take them out at any time tax-free, and myriad proposals advanced by the President’s Advisory Panel on tax reform. Among other proposals, this panel suggested a substantive limit on inside buildup, a critical issue for the industry.

All of these proposals “eat into the tax advantages given to life insurance products,” Martinez said. “What worries me a little bit is that LSAs have been defeated year and year out, yet these proposals continue to crop up.

“There is seemingly a base that very much supports tax policies that would reduce the tax advantages offered by life insurance products,” Martinez said. “I am not so sure these issues aren’t going to crop up again in the future.”

Work on the budget resolution will continue when Congress comes back on March 28, but the Social Security issue, which has been a loser for the Bush administration and Republicans in Congress, is unlikely to come up again this year.

The nonbinding resolution by Sen. Jim DeMint, R-S.C., would have directed thecreation of a reserve fund for Social Security but only after the Senate dealt with the larger issue of allowing younger workers to divert a portion of their SocialSecurity taxes into personal investment accounts or allowing other types of accounts providing legal ownership of a person’s Social Security contributions.


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