Retirement Reservations

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By Jonathan Weisman
Washington Post Staff Writer
Sunday, July 24, 2005

Congressional leaders of the drive to overhaul Social Security will limp into their August recess next week, divided and hoping against hope that political magic will resurrect the centerpiece of President Bush's domestic agenda this fall.

Out of the Social Security stalemate, however, a separate, bipartisan push is emerging to address an issue that is arguably more pressing: the nation's abysmal savings rate, which most economists see as a broader threat to retirement security.

A final House Ways and Means Committee bill on Social Security remains far off, but potential provisions aimed at bolstering the nation's anemic savings rate are coming into focus. Many of those initiatives will have bipartisan appeal. House Democrats plan to unveil their own proposals this week to boost national savings, said Rep. Sander M. Levin (Mich.), the ranking Democrat on the Social Security subcommittee.

"Perhaps out of the Social Security debate, we will come out with a consensus on creating retirement security out of the other legs of the retirement savings stool," said Rep. Benjamin L. Cardin (Md.), one of the few Ways and Means Committee Democrats who still consults closely with Republicans. "We may bear fruit this Congress." The traditional retirement security "stool" includes Social Security, traditional pensions and personal savings.

A savings package, which could move on its own or be wrapped into a bill next year to overhaul the tax code, could have significant economic consequences. Personal savings as a percentage of disposable income was a meager 0.6 percent in May, compared with a personal savings rate of 4.6 percent just 10 years ago. National savings helps to keep interest rates low and to finance business investments that maintain economic growth. For now, the U.S. economy has relied on foreign investors to bankroll economic growth, but as Europe and Japan hit old-age crunches, those regions will begin drawing down their savings, not sending it here.

"Right now, our economic growth and capital formation is highly dependent on foreign capital," said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute. "If those in-flows dry up, we're going to either have to stop growing or finance that growth ourselves. With that in mind, policies to stimulate savings are perfectly sensible."

The 2001 tax cut created a "saver's credit" that provided a federal match equal to as much as 100 percent of a low-income worker's annual savings. But restrictions, complexity and a lack of publicity has kept participation low. Out of 54 million potential qualifiers, only 5.4 million Americans have actually received the saver's credit.

The centerpiece policy of a new savings package, crafted by Republican tax lobbyist Richard Grafmeyer, is an enhanced tax credit to spur savings among low- and moderate-income workers.

Grafmeyer's plan -- under serious consideration by the Ways and Means Committee -- would expand that participation greatly. Workers earning $50,000 or less would open a savings plan with their employer, a financial institution or even a tax preparer such as H&R Block. Those institutions would then match the deposits -- 50 cents on the dollar up to a maximum annual contribution of $2,000 -- and would receive a federal tax credit to cover the cost.

By checking a box on their tax returns, these workers could direct their earned income tax credits or income tax refunds into the new accounts as well, under a plan under committee consideration, said Rep. Jim McCrery (R-La.), chairman of the House Ways and Means subcommittee on Social Security.

McCrery said such policies could then be coupled with a significant boost to the maximum annual deposit limits in 401(k) plans and individual retirement accounts. That move is not likely to help those who are not saving, primarily struggling families who cannot reach the existing annual limits. But it could boost overall national savings, he said.

Moreover, by promoting the new saver's credit, employers could expand the savings options of their well-paid executives without running afoul of rules that limit the tax-favored savings of "highly compensated employees." Such rules apply the brakes on executives if their savings are too disproportionate to the savings of lower-paid workers.

Another likely piece of the larger retirement security package being drafted by House Ways and Means Chairman Bill Thomas (R-Calif.) would help employers make enrollment in 401(k) plans automatic unless workers choose to opt out. About 10 percent of companies with 401(k) plans already enroll new hires automatically, and the effect has been dramatic. A 2001 study by the University of Pennsylvania's Brigitte C. Madrian and United Health Group's Dennis F. Shea found that in one large corporation, retirement plan participation among new hires jumped to 85.9 percent from 37.4 percent when enrollment became the default option. For minorities and low-income workers, the change was even more striking.

Virtually every one of these measures is mirrored by a similar Democratic proposal, said Rep. Rahm Emanuel (D-Ill.), a Ways and Means Committee member who has been pushing savings provisions for months. If Republicans are willing to break them out of a private accounts package, there is little doubt they would be approved overwhelmingly.

"You could make progress on this in a New York minute," Emanuel said. "We're getting very close here."

Proponents of Social Security overhaul have not lost hope.

"We're operating on the assumption that we will be pulling together something in September for a vote some time this fall," McCrery said. But, he hastened to add, "there is no consensus."


© 2005 The Washington Post Company

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