Is This Any Way to Treat a Saver? : Yes, if the new Bentsen IRA bill is passed
Americans have long been penalized--not rewarded--for saving money. Wages are taxed once when they are earned. Sock those hard-earned net dollars away, then comes another tax hit, this time on the interest. Is this any way to treat a saver? It’s time to nurture some thrifty ways. Let’s restore fully tax-deductible contributions to Individual Retirements Accounts.
THREE-TRACK BILL: Sens. Lloyd Bentsen’s (D-Tex.) and William Y. Roth Jr. (R-Del.) introduced a bill last week to do just that. Their bill would restore and improve the traditional IRAs for all Americans regardless of their incomes or whether they have pension plans. Besides allowing for a flat tax-deductible contribution of up to $2,000 a year--the way the IRA law used to be--the new bill would give savers the option of foregoing an upfront tax deduction and taking instead tax-exempt interest if the funds are held in an IRA for five years. A third choice would allow splitting the $2,000 between the two types of IRAs. The bill, backed by more than 70% of the Senate, would allow penalty-free withdrawals if the money is used for a down payment on a first home, catastrophic medical expenses or education.
Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, says he likes the idea of restoring IRAs, but is concerned about how much IRA contributions might reduce tax revenues and worsen the budget. Bentsen has asked Congress’ Joint Committee on Taxation to calculate the cost of his IRA plan. He promised the bill that emerges from his Senate Finance Committee “will be paid for and it will be budget neutral,” as required by last year’s budget law.
The Bush Administration has indicated little enthusiasm for such expanded IRAs on the grounds that they do not result in new savings. There has been a long debate on whether IRA contributions represent money that would have been saved anyway or result in new savings. Various studies have shown that IRAs result in increased savings. When IRAs were first introduced in 1981, annual contributions skyrocketed 700%. In 1987, after eligibility rules were sharply curbed in the Tax Reform Act of 1986, contributions plunged 70%.
MULTIFACETED PROBLEM: IRAs would provide welcome relief from the dismal U.S. savings rate of 4%, the lowest among industrialized nations. Shoring up the nation’s savings would be a way to raise the much needed capital for new investment. In the 1980s, the United States relied heavily on loans from abroad. A tighter world economy and lower interest rates here are making that less likely in the 1990s. Savings would help make up the shortfall.
U.S. demographic shifts are likely to feed nicely into a savings pattern in the 1990s. Baby boomers in their 30s or 40s are in their peak family-formation years. That means redirecting their expenditures from the good life ways of the 1980s into homes and savings for their children’s education and their own retirement. Bentsen’s bill would help achieve such individual and national goals.
