Bill rewards buyers of life annuities
H.J. Cummins
Minneapolis Star Tribune
July 29, 2004 PENSION0729
Americans will get a tax break for taking an extra step toward a secure retirement under a bill being considered in Congress. Retirees who buy something called a "life annuity" -- paying an insurance company a big chunk of money in exchange for a lifetime stream of income -- will get half that income tax-free, according to a bill introduced in the U.S. Congress last week by Nancy Johnson, R-Conn.
The goal is to encourage saving by Americans who have no company-sponsored retirement benefits, and by those who want to supplement their employer plans. The bill, which is already picking up co-sponsors, comes at a time when retirement savings rates are hitting historic lows and American anxieties about old age new highs. Headlines warn of shrinking Social Security and Medicare payments, and massive pension bailouts -- possibly $5 billion for United Airlines -- by the federal Pension Benefit Guaranty Corporation.
"My ... legislation will give Americans greater incentive to secure for themselves and their family a 'paycheck for life,' " Johnson said.
The concept is endorsed by more than a dozen business, professional and consumer organizations, including the U.S. Chamber of Commerce, Women's Institute for a Secure Retirement and the National Consumers League.
The biggest complaint is that the plan offers the tax advantages only to private annuities. It excludes retirement income from any employer program, including old-style pensions and the newer 401(k)-type plans. That will only discourage more employers from offering retirement plans, when 60 percent of Americans with household incomes below $50,000 already have none, critics say.
"This is a good step in the right direction, a great step in the right direction," said Harry Conaway, head of the Washington Resource Group at Mercer Human Resource Consulting in Washington, D.C. "The problem is it applies the incentive only to outside plans. We'd like to see the same tax incentive extended to qualified [employer] plans."
A better approach would be to spread the benefit, Conaway said, even if congressional budget limits necessitate shrinking the tax break to 10 percent or 15 percent.
The American Society of Pension Actuaries agrees. The revision is needed to "avoid tilting the competitive balance away from employer-sponsored plans, especially in the case of small business," executive director Brian Graff said in a statement to Congress.
Several pension-rights groups endorse the bill's specific focus on annuities, the so-called "paycheck for life." It's the same reason they worry about the growing numbers of retirees -- more than nine in 10 -- who opt for lump-sum pension payouts instead of annuities.
Some used a rough example to explain their position, describing an annuity as helping retirees "manage the risk of living a long life": A retiree could pay an insurer $100,000 after cashing out a mutual fund or tapping some home equity. That retiree may just live three more years, and collect only $30,000. But more typically Americans are underestimating their life expectancy, insurers and actuaries say. That's also why the experts worry about the growing numbers of retirees -- more than nine in 10 -- who opt for lump-sum pension payouts instead of annuities. "With a lump sum, you run the real risk of outliving your retirement money," Conaway said.
