May 5, 2003

by John Springer

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A new report from the Center on Budget and Policy Priorities, Examining the New Portman-Cardin Legislation, explores several problematic provisions of the pension bill introduced April 11 by Representatives Rob Portman and Ben Cardin.  The report’s author is Peter Orszag, a senior fellow at the Brookings Institution with expertise in pension and tax issues.

The Portman-Cardin bill includes some positive changes, such as expanding and making permanent the “saver’s credit” created by the 2001 tax legislation and modifying rules in the Supplemental Security Income program so a disabled worker is not forced to deplete modest pension savings before reaching retirement age.  Yet most of its costliest parts are tax breaks primarily for high-income individuals, who would likely save without them and who already tend to be much better prepared for retirement than individuals with less income and wealth.  The bill would:

Key Elements of the Bill

·          Accelerates to 2003 the scheduled increases in maximum 401(k) and IRA contributions contained in the 2001 tax legislation.

·          Makes the above increases permanent.

·          Raises the amount a household can earn and still contribute to a Roth IRA or traditional IRA.

·          Raises to 75 the age at which an individual who has not yet retired must begin withdrawing funds from a 401(k) or traditional IRA.

A preferable way to simplify the minimum distribution rules would be to exempt up to $50,000 of pension and retirement account assets.  If this were done, the rules would no longer apply to two-thirds or more of retirees.

As the Center’s paper concludes, the Portman-Cardin bill’s emphasis on expanding tax benefits for high-income households is unfortunate.  Pension reform should focus on expanding tax incentives for lower- and moderate-income earners.  Contributions to tax-preferred retirement accounts by such workers are more likely to represent new saving, rather than asset shifting, and are much more likely to reduce the risk of living in poverty during retirement.  Moreover, given the troubled fiscal outlook facing the nation, the bill’s costly and not-well-targeted tax breaks are not fiscally prudent.

End Note:

[1] Under the 2001 legislation, these provisions would expire by the end of 2010.