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Retirement Savings Plans Gain Steam

March 16, 1999

WASHINGTON (AP) _ To help Americans improve their anemic savings for retirement, several bipartisan proposals are circulating in Congress to increase limits on contributions to 401(k) plans and individual retirement accounts.

There also is growing support to remove obstacles to creation of workplace pension plans for small businesses.

``We face a major retirement challenge in this country,″ said Rep. Rob Portman, R-Ohio, co-sponsor of one major proposal. ``While we need Social Security reform, we need to go well beyond that.″

Congress and President Clinton have pledged to reserve 62 percent of projected budget surpluses to keep Social Security solvent into the next century. But that program provides only about 40 percent of a typical retiree’s income.

Aging baby boomers, who figure to live longer than their forebears, have a low savings rate.

``As a generation, they have not saved adequately for their retirement,″ said Matthew Fink, president of the Investment Company Institute, which represents nearly 8,000 investment firms.

Last June, the amount of money Americans were saving as a percentage of their personal disposal income dipped into the negative range for the first time since 1933, according to the Commerce Department. Although the rate has since crept up, analysts estimate that about half of all American have less than $10,000 in savings.

In addition, half of all workers have no pension plan, and only 20 percent of businesses with 25 or fewer employees offer one.

One popular answer has been the 401(k) plan created in 1978, in which 25 million Americans _ often with an employer match _ have $1 trillion in tax-deferred contributions invested in mutual funds and elsewhere. And millions of people have IRAs, which also grow through investments.

But limits on how much people can contribute hamper the growth of these retirement nest eggs, particularly for older Americans who need to save more money quickly and women who missed workplace pension years while at home raising children.

For example, there is a $2,000 annual limit on tax-deductible IRA contributions, $10,000 for a 401(k).

Several pieces of legislation introduced in Congress would raise these limits. The bill sponsored by Portman and Rep. Ben Cardin, D-Md., would boost the 401(k) limit to $15,000 and the IRA ceiling to $5,000, for example.

In addition, the measures propose ``catch-up″ provisions for older people and women, allowing them to contribute more. A bill sponsored by Senate Finance Committee Chairman William Roth, R-Del., would allow those ages 50 and up to contribute $7,500 a year to an IRA.

The bills also would create a new Roth 401(k), similar to the popular Roth IRA in which contributions are made after taxes are paid but withdrawals for retirement are tax-free.

They would also make it easier for employers to offer pension plans by eliminating complexity in tax rules and Internal Revenue Service user fees.

``Start-up and maintenance costs are the primary reason small employers do not offer their employees a pension plan,″ said Dan Danner, vice president of federal public policy at the National Federation of Independent Business.

There is a cost to such efforts, but it is far less than the tens of billions of dollars needed to rescue Social Security. The Portman-Cardin bill, for example, would cost up to $7 billion over five years.

On the political side, sponsors argue that improving the private pension system complements the fix of Social Security. But even Republicans acknowledge that these changes won’t necessarily help people of modest incomes, who often can’t afford to contribute to an IRA.

``If everybody had one of these plans, you could″ focus on them, said Rep. E. Clay Shaw, R-Fla, a senior member of the tax-writing Ways and Means Committee. ``But your lower-income people don’t.″

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