Retirement : Pension Experts See Many Losers, Few Winners in Legislation
Retirement and pension specialists see very few winners but “plenty of losers” in the aftermath of legislation agreed upon by congressional tax negotiators over the weekend.
Among the winners: employees, notably women, who tend to change jobs frequently and, therefore, have greater difficulty qualifying for company pension benefits that require long-term employment tenure. Rules requiring earlier vesting are expected to qualify millions of workers for pension coverage.
Among the losers: older working families that had delayed making major retirement contributions until children were raised and had planned to catch up with substantial contributions to 401(k) company savings plans. Annual limits on an employee’s 401(k) contributions would be slashed from a maximum of $30,000 to $7,000 under the bill.
Also losing are those who used the 401(k) program as a forced savings device to accumulate large lump sums for such future needs as college educations, down payments on homes or to invest in a business after retirement. New rules would place much tighter controls and costly tax penalties on early withdrawal of those savings and reduce limits on the amounts that can be accumulated.
Loss of IRA Deduction
At the same time, millions of middle-income wage earners no longer would be able to deduct up to $2,000 ($2,250 for one-earner married couples) in annual contributions to individual retirement accounts if they--or their spouses (if filing jointly)--are covered by an employer’s pension plan.
“The tax plan is taking away a lot of individual options for saving for retirement. We’re going in the wrong direction at a time when we’ve already got a very low national savings rate,” said Beverly Orth, Los Angeles-based staff counsel for Mercer-Meidinger benefits consulting firm.
Other consultants warn that less prominent changes made in the tax package--particularly new limits on maximum corporate pension funding--could pose a long-term threat to the general health of industry retirement plans.
“They’re reducing the protection of pension programs,” said Mark Ugoretz, executive director of a Washington-based industry association that monitors pension-related legislation. “It could be years before we understand the extent of the damage.”
New Controls
The concern arises from new federal rules that control how much money is set aside by corporations in anticipation of future pension payments to retirees, amounts determined by complex actuarial formulas. Retirement specialists say that the new rules require funding to be based on anticipated retirements at age 65, without considering the likelihood of payment demands in the event of early retirement.
While the analysts agreed that pension programs run by financially healthy companies would not be in any jeopardy, Richard Raskin, a consultant with the Wyatt Co. in New York, said that “there will be more funds failing in the future” when employees’ companies get in financial trouble.
Consumer groups, however, have applauded provisions of the legislation that would make employees eligible for full value of their accrued retirement benefits after only five years (seven in some cases). Most pension plans require up to 10 years of continuous service with an employer before the worker is fully vested.
Rules Changes
Also popular with consumer advocates are rules changes that would require companies to include more employees in retirement plans to retain the program’s tax-favored status and imposing limits on the amount of Social Security benefits a company can apply to offset pension payments to a retiree.
Congressional debate over the treatment of individual retirement accounts received most of the public attention in debate over tax reform. Currently, all workers can deduct taxes on $2,000 a year set aside in IRA accounts that accumulate interest tax free until withdrawn at retirement, presumably at a lower tax rate.
However, under terms of the Senate-House tax bill compromise, people not covered by another pension plan could continue to take the $2,000 deduction. But a person covered by an employer’s pension plan would be able to take the full deduction only if he earned less than $25,000 ($40,000 for married couples) and partial deductions only up to earnings of $35,000 ($50,000 for married couples).
Non-Deductible
Couples earning more than $50,000 would not be able to make deductible IRA contributions if either spouse (in a joint return) is covered by a pension program. They can, however, make a non-deductible contribution and their IRA interest will continue to accumulate tax free.
Analysts were not sure about the effect of restrictions imposed on the 401(k) retirement programs. In addition to reducing the $30,000 contribution limit to $7,000, congressional negotiators agreed to make it more difficult to assert emergency justification for withdrawing accumulated savings without a 10% penalty.
“I think it’s intended to kill off the 401(k) program,” Raskin said. “They’ve imposed such a tremendous disincentive to use the program unless a person knows that he can absolutely afford to tie up his money until retirement.”
“I don’t know what kind of incentive a 30- or 40-year-old has to save when you take away his IRA deduction, you make it so his 401(k) money is stuck for 30 years and he can’t get at it even to, say, help meet his parents’ medical expenses,” Ugoretz said.
‘Used Every Penny’
He said that those especially hurt by the contribution limits, however, would be “middle-class people with little savings because they’ve used every penny for their mortgage and college tuition.
“This shows a real lack of understanding of the way ordinary people look at and plan for retirement,” Ugoretz said.
Nonetheless, Harold Dankner, a partner in the New York accounting firm of Coopers & Lybrand, predicted that 401(k) plans “will remain strong overall” because of pressure on employers to provide matching contributions for middle-income employees’ accounts.
The financial analysts expressed concern about the future effects of the lingering federal budget deficit. The deficit, they predicted, could lead to tax rate increases in the years ahead. In that case, when funds set aside today for retirement are withdrawn in the future, the tax rate may be higher than it was when the tax-deferred funds were deposited.
“People have got to be leery about tying up their money today so they can pay higher taxes on it when they retire,” Ugoretz said.
