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Saving for retirement - the Bush way. For the third year in a row, the Administration wants to change how Americans save. 401k plans, and 401k-like plans offered by tax exempt and government employers, would become ERSAs, Employer Retirement Savings Accounts. Today's IRAs would become RSAs, Retirement Savings Accounts, and LSAs, Lifetime Savings Accounts would be created for all-purpose saving. Low-income people could save in an IDA, an Individual Development Account, and get a federal matching contribution passed through financial service companies.
Why the change? Although pitched as ways to make saving easier, RSAs and LSAs are really intended to reduce, even further, taxes on investment income. High-income taxpayers could transfer $5,000 each year to an RSA and an LSAs for themselves and anyone they choose, free from all tax thereafter.
How would ERSAs change 401k plans? ERSAs would let high-income workers contribute more - twice as much as low-income workers. They could contribute as much as they like, up to the annual limit, if low-income workers contribute, on average, 6% of pay or get a 3% match up to 6% of pay. Other rules which let employers slant benefits toward high-paid workers would stay in place.
What are IDAs? IDAs have been promoted as a means to help low-income people accumulate financial assets. They have been tested on a small scale. They show low-income people do have the ability to save but the programs themselves are expensive. They cost about $3 for every $1 saved. Can they work on a large scale? No one knows but it won't be easy.
What does this all mean? Not much that's good. The private pension system fails to provide benefits to 50% of workers at any given time, and most reform efforts try to expand its coverage to more low and middle-income workers. RSAs and LSAs do the reverse and could be the trojan horses of the private pension system. ERSAs just give high-paid workers more special benefits without achieving any fundamental reform to make the rules more fair. IDAs make the Administration's proposal seem more fair but their ability to encourage savings among low-income workers is probably an illusion.
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http://zfacts.com/p/760.html | 01/18/12 07:23 GMT
Modified: Mon, 17 Apr 2006 05:43:56 GMT
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