Bipartisan Annuities Bill Introduced in Senate
December 13, 2004
Legislation giving favorable tax treatment to annuities was introduced in the U.S. Senate shortly before Congress adjourned for the year by senators who warned that the first members of the baby-boomer generation would hit retirement age in about three years -- making it important for lawmakers to revamp the country's retirement and tax policies now rather than later.
Sens. Kent Conrad, D-N.D., and Gordon Smith, R-Ore., introduced the Retirement Security for Life Act of 2004, a measure that would allow retirees to keep a greater share of their annuity payments. The bill excludes from income taxes half of the income from an annuity purchased with after-tax dollars, a so-called "nonqualified" annuity. To discourage tax-sheltering schemes, the bill establishes a $20,000 annual cap on the exclusion. For a typical person in the 25% tax bracket, the bill would provide a tax savings of $5,000 a year.
That, Conrad said from the Senate floor Dec. 7, would encourage people to purchase annuities, thereby "helping people avoid the risk of outliving their assets."
The bill applies only to life-contingent, nonqualified annuities. A life-contingent annuity converted to a fixed-term payout would be subject to a recapture tax, Conrad said. A companion bill was introduced in the House of Representatives in July but hasn't moved since being referred to the Ways and Means Committee.
Smith, speaking from the Senate floor Dec. 7, said that when Congress addresses retirement issues, it tends to focus on helping people save money for a "nest egg" to fund their retirement. While encouraging savings is worthwhile, Smith said, "there has been little attention paid to the retirement income or 'payout' phase of the retirement security equation."
"If Americans are going to fully enjoy their retirement years, we need to ensure that as many Americans as possible will have a stream of income they cannot outlive," Smith said. "We have some control over when we retire. However, we have very little control over how long we will live."
Ironically, improved life expectancy is the biggest threat to retirees' income. Conrad, citing actuarial data, said that about one in six 65-year-old men and one in three 65 year-old-women now can expect to live into their 90s. That means that people will have to live longer on their retirement savings, and the first wave of the country's 77 million baby boomers will hit retirement age in 2008. Many of them, Conrad said, can't count on the same monthly pension checks that previous generations took for granted.
Traditional defined-benefit pension plans, Conrad said, have given way to defined-contribution plans, "which have shifted the retirement income security risk from the employer to the individual." Still others, Conrad said -- those outside the traditional work force, the widowed, those in rural and farming communities -- have an even greater need for secure lifetime retirement income and would benefit from the tax break.
