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Tax Bill Expands Limits on Retirement Savings
By: David Cay Johnston
The value of the increased savings limits is less than they
appear, however, because of inflation. Critics of the legislation also warn
that it will hurt some lower-income workers in small businesses by
discouraging their employers from offering plans and by encouraging some
others to cut future benefits. The leading sponsor of the changes in retirement plans,
Representative Rob Portman, Republican of Ohio, says such concerns are
overblown. The greatest effect of the bill is to raise the maximum that
can be contributed to an individual retirement account to $5,000 from the
$2,000 limit in effect since 1981. The maximum will rise to $3,000 beginning next year through
2004, to $4,000 in 2005 through 2007 and then to $5,000 in 2008, and
thereafter with increases for inflation in $500 increments. In real terms, however, these adjustments will only allow
retirement savers to catch up with inflation. The new $5,000 limit in 2008 would be worth only $2,014 in
1981 dollars, virtually the same as the current limit when it was adopted. The maximum contribution to 401(k), 403(b) and 457 plans, or
tax- deferred retirement savings plans offered by employers, would be
increased from the $10,500 limit this year to $11,000 next year, $12,000 in
2003, $13,000 in 2004, $14,000 in 2005 and $15,000 in 2006, with the maximum
indexed for inflation in later years. The bill would also allow those age 50 and over to make
extra contributions to both individual retirement accounts and to plans like
401(k)'s. Older savers could put an extra $500 in their I.R.A. next
year and $1,000 each year after that. For plans like the 401(k), those 50 and over could save an
extra $1,000 next year, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005 and
$5,000 in 2006 and subsequent years. Because of inflation, these increases
will be worth less than their surface value. Mr. Portman, Republican of Ohio, has promoted this benefit
for older people as a matter of fairness to women who were out of the work
force raising children. But both men and women could take advantage of the
increase, even if they worked continually, so long as they are age 50 or
older. Congress also raised the maximum amount of income that can
be counted for retirement benefits. Raising the maximum savings and the amount of income that
can be counted primarily benefits owners and highly paid workers, said Karen
Ferguson, director of the Pension Rights Center in Washington, a nonprofit
group representing the interests of workers. It helps only the relatively
small number of workers now saving the $10,500 maximum in 401(k) plans and
the maximums in a variety of other retirement savings plans, she said. She
noted that half of all 401(k) individual accounts contain less than $16,000. "What we need is money for those who are not now
benefiting, not more for those who are already saving the maximum," she
said. About 60 percent of people with I.R.A.'s contribute the
$2,000 maximum each year, said Dallas L.Salisbury, president of the Employee
Benefits Research Institute in Washington. He said a study of three large
companies found that about one in five workers was saving the maximum
allowed in their 401(k) plans. Mr. Portman and representatives of the retirement investment
industry say that higher savings limits are vital to persuading more small
employers to adopt retirement plans. He said Ms. Ferguson and other critics
miss this larger picture. "The percentage of workers covered by any retirement
plan is basically what it was in 1974," when the Employee Retirement
Income Security Act, which governs retirement plans, was adopted, Mr.
Portman said. Mr. Portman said that raising the limits on 401(k) savings
permits business owners to save more, encouraging them to provide such plans
for themselves and their workers. About 70 million people, roughly half the
nation's work force, are without retirement plans, he said. When a plan is offered, more than two-thirds of workers
typically participate, Mr. Salisbury said. Daniel Halperin, a Harvard University pension expert, said
that the higher savings limits for all retirement plans will mean nearly $50
billion less in tax revenues over the next decade. Most of the tax savings
will benefit owners and highly paid workers, he said. "We can spend that, but we ought to buy something for
it, and we're not buying anything in terms of expanded coverage for
workers," he said. When Congress raises the income levels that can be used for
calculating all kinds of retirement benefits, he said, some business owners
respond by lowering the percentage of workers' pay that the employers
contribute. Mr. Halperin said he doubted that many new 401(k) plans
would be created by small businesses. When I.R.A. contribution limits are
raised, he said, some employers may decide not to offer plans like the
401(k) because they can save enough for themselves through an I.R.A.. Ms. Ferguson said she thought many new plans would be created, but that the primary beneficiaries would be owners, not their employees.
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