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Social Security: Beyond accounts
Accounts are still highly divisive. But some retirement ideas may be gaining bipartisan support.
May 25, 2005: 2:26 PM EDT
By Jeanne Sahadi, CNN/Money senior writer
SPECIAL REPORT
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NEW YORK (CNN/Money) – Both the House and Senate committees charged with drafting Social Security reform legislation are holding hearings this week. There likely will continue to be sharp partisan bickering over individual investment accounts.

But there are other retirement-related proposals that have generated bipartisan discussion – and, in some cases, agreement.

Even though the proposals are not related to Social Security per se, they may be included either in legislation on Social Security reform or in other retirement-related bills, say Washington observers who hail from both sides of the account debate.

The proposals focus primarily on providing more tax-based savings incentives and on making it easier for employers and workers to set up retirement savings plans.

Here are several options that have been bandied about:

Automatic enrollment in 401(k)s: Such a provision would call for those companies with 401(k) plans to automatically enroll employees as soon as they become eligible. Individual employees would have to actively opt-out of the plan if they wished.

Research has shown that automatic enrollment boosts participation in 401(k) plans – particularly among low-income workers and employees who have been with an employer fewer than five years.

In company plans that already have automatic enrollment, participation rates are up over 90 percent, said Bo Harmon, a spokesman for the Retirement Security Project at the Brookings Institution. That's up from an average of about 75 percent among all 401(k)-eligible workers.

The director of the Brookings retirement project, Peter Orzsag, has promoted the idea of automatic 401(k) enrollment and has coauthored a Social Security reform plan that does not include accounts.

One point of resistance on the issue may be concerns that such a step makes greater the likelihood that at some point companies will be required to offer 401(k)s, said Derrick Max, executive director of the Alliance for Worker Retirement Security, a pro-business lobby that supports individual accounts as part of Social Security.

A related provision may also include an automatic increase in the employee's contribution rate, said David Wray, president of the Profit-Sharing/401(k) Council of America. An employee who is automatically enrolled in a 401(k) may have 3 percent of his salary slated for contribution, but the employer might up that allocation by a percentage point every year unless the employee dictates otherwise.

Modified SIMPLE IRAs: Companies -- typically, small businesses -- that find 401(k)s too costly to provide for employees may give workers the option of having money deducted from their paychecks and deposited into what's known as a SIMPLE IRA at an institution of their choosing or at an institution selected by the employer.

Currently, the employer is obligated to make sure a worker's contribution is deposited into the IRA in a timely fashion. And the employer is required to make a dollar-for-dollar matching contribution of up to 3 percent of an employee's pay or, instead, to contribute a flat 2 percent of an eligible employee's pay, whether or not the employee is making contributions to the plan.

But there are many companies that offer no retirement plan option to employees. So lawmakers might create incentives for those employers to provide SIMPLE IRAs, without necessarily requiring that the company provide any matching funds.

Enhanced saver's credit for low-income workers: Currently, low-income taxpayers are entitled to a tax credit on retirement savings contributions up to $2,000. The credit can be worth up to half of those contributions.

So a low-income worker who contributes $2,000 a year to a retirement savings plan would be entitled to a tax credit of up to $1,000, which would reduce his tax liability for that year by $1,000.

Lawmakers might enhance that credit by:

Making the credit refundable: If a taxpayer's credit is worth more than his tax liability, he could get the rest as a refund. Say a taxpayer is entitled to a $1,000 credit but only owes $500 in taxes. The government would refund him the other $500.

Turning the credit into an IRA contribution: Rather than reducing a taxpayer's liability by the amount of the credit, the government would instead treat it like a match, contributing the amount of the credit to the person's IRA.

Help ensure a worker doesn't run out of money in retirement: With life expectancy increasing, there is concern that workers may underestimate the number of years they will be living off their retirement savings.

One idea that has been mentioned is to automatically convert a worker's 401(k) balance into an annuity upon retirement. This likely would be a default option unless the worker chooses to do something else with the money, such as roll it into an IRA. When you purchase an annuity, you pay an insurer a large lump sum in exchange for which you receive regular monthly payments as long as you live.

Make annuities more tax-friendly: Payments of annuities, just like withdrawals from 401(k)s and pension payouts, are taxed as income. There is some discussion about making annuity payments tax-advantaged -- for instance, excluding some portion of the annuity payments from income tax.

It's not clear yet whether that tax advantage would apply only to non-qualified money used to purchase an annuity, said Ron Gebhardtsbauer, a senior fellow at the American Academy of Actuaries. Non-qualified money would include any savings that don't come from qualified plans such as a 401(k) or a company pension.

When the tax rates on long-term capital gains and dividends were lowered to 15 percent, that made annuities less attractive, since for most people the income tax imposed on annuity payments would be higher than what they'd pay on their own investments.

Split refund option: If you're entitled to a tax refund, you're allowed to have that refund deposited directly into one account, such as your checking account. The administration has backed the idea of allowing taxpayers to split their refund and deposit it into more than one account. So, for example, you could choose to put some portion of it in checking, some in savings and some in an IRA.

The change doesn't require Congressional action, Harmon said. But Congressional guidance may be sought as the Treasury decides how many accounts a taxpayer may choose to deposit portions of his refund.  Top of page

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