Robert M. Gardiner, president of the investment firm of Dean Witter Reynolds, received an unusual telephone call several weeks ago. He was asked if some Roman Catholic priests could stop by to see him.
The Wall Street executive's curiosity obviously was aroused and he readily agreed. When the meeting took place in his Manhattan office, Gardiner got a good lesson in Reaganomics.
Because of a substantial enhancement of individual savings plans for retirement, included in the Economic Recovery Tax Act of 1981, the churchmen wanted Gardiner's advice on whether to set up their own brokerage business to handle what they anticipated would be a massive amount of such investments by members of their order after Jan. 1.
In effect, why shouldn't the priests get even more advantage from the changes in tax law by handling the retirement accounts' investment pool, they wanted to know? Gardiner recalled in a recent interview that he spelled out the pros and cons but doesn't know what the priests have decided to do.
But, like every other leader in the increasingly mixed-up financial services industry -- including banks, savings institutions, insurance firms, mutual funds and securities firms -- Gardiner would be happy to see the new retirement savings end up at an office of Dean Witter (soon to become a subsidiary of retail giant Sears, Roebuck & Co.).
"This will be a tremendous business, as explosive as we've ever seen, with a pool of investment capital so enormous we can't measure it today," Gardiner said. In general, investment and banking executives agree with Gardiner in predicting that the new tax law's relaxation of Keogh and Individual Retirement Act (IRA) restrictions will dwarf the much-ballyhooed All Savers certificates created by the same law in terms of impact on savings by American individuals and on the economy as a whole.
Specifically, beginning in 1982, you can contribute to an IRA even if you are a participant in an employer-provided retirement plan. If you have self-employment income, such as consulting or free-lance writing fees, you can establish a so-called Keogh plan even though you are covered by an employer's pension plan. And more funds can be allocated to these retirement savings plans.
Details about the changes and how individuals can take advantage of the new law are spelled out in two articles inside this section: John M. Berry's questions and answers report on page G2 and financial counselor E. M. Abramson's assessment on page G12.
Still to unfold, however, is the big battle for your new retirement savings dollars. Until recently, financial institutions have been concentrating on All Savers certificates in seeking customer deposits. That focus is beginning to shift to retirement accounts. The reason is that under existing laws, more than 55 million Americans have been eligible for IRAs and many of them have low incomes. By 1978, the latest figures available, just 2.5 million IRAs had been opened, mostly by persons in higher income levels.
No one knows for certain how big a pot of new retirement money is out there with changes in the law. But the guess is that many more persons of all income levels will sign up. An estimated 110 million Americans will be eligible for IRAs after Jan. 1 and life insurance industry experts have forecast that 60 percent of these persons will elect a retirement plan of their own. Merrill Lynch, Pierce, Fenner & Smith, the securities firm, projects the IRA participation rate will be much less, at 20 percent.
Whatever the number, it will be big. Indeed, there are real concerns among economists that individuals will set aside so much money for retirement plans and other forms of savings that consumer spending will be curtailed severely -- adding still more woes to the depressed housing, automobile and lumber industries.
In the Washington region alone, an estimated 2 million persons will become eligible for retirement savings accounts for the first time after Jan. 1, according to research by National Permanent Federal Savings and Loan Association. According to Bob Bailey, marketing manager of the District-based S&L, this new pool of potential customers adds up to some $4 billion in possible new deposits if all individuals decided to take advantage of the new laws.
Nationwide, financial industry experts expect at least $25 billion of retirement savings to be set aside by consumers as a result of the new law, and that's only a small portion of the potential new market. One analyst predicts an annual volume of $10 billion in IRAs.
In terms of impact on federal revenues, congressional staff members who worked on the tax act forecast that the Treasury would suffer a loss of $9 billion in fiscal years 1981 through 1986 that would have been paid in taxes by individuals but for the more liberalized retirement savings provisions.
If retirement savings becomes the bonanza that banks and brokerage firms are expecting, the revenue shortfall could be greater.
In contrast, the government has forecast a loss of less than $4 billion to the Treasury because of interest exemption on the All Savers certificates for fiscal years 1981 through 1983. The All Savers plan is set to end at that time but the retirement savings plans will continue unless that law is changed.
Returns are beginning to come in on the activity in All Savers certificates, which are available from last Oct. 1 through Dec. 31, 1982, and which permit tax-free interest income up to $1,000 for an individual and $2,000 for a joint return. An estimated $3 billion to $4 billion of new funds flowed into the nation's savings institutions during the first three weeks of October for All Savers deposits and some industry experts see total All Savers deposits of more than $200 billion over the next year.
As the one-year certificates mature, however, the funds will go wherever there is the best potential interest return. The All Savers certificates are costing some S&Ls dearly because many lower-paying passbook accounts have been upgraded to All Savers rates and the value of the certificates as a method of rescuing the industry has been questioned. One industry official last week described the tax law that allowed the certificates as the "all-failures act."
Partly because of fears that All Savers certificates may not work out as planned, some leaders of the savings and loan industry now are calling for an interest rate ceiling on investments under the new IRA plans. Without a ceiling, they argue, bitter competition between banks, S&Ls, brokerage firms and others will foster another costly rate war that the savings institutions cannot afford.
"From our point of view, that means you would have dangerously high rates at a time when a good many institutions can't afford it," said William B. O'Connell, executive vice president of the U.S. League of Savings Associations. The bankers want federal regulators to dismiss the S&L fears and stick with a Depository Institutions Deregulation Committee plan to allow IRA and Keogh accounts with a maturity of 1 1/2 years or longer and with no limit of interest. The bankers argue that if they and S&Ls are limited in what they can offer, millions of dollars in new IRA and Keogh investments will flow to insurance and brokerage firms.
Meanwhile, some S&L leaders are willing to let the battle begin. A variety of promotions and savings programs have been designed and consumers will hear and see a lot of information about competing plans in the next few weeks. National Permanent, to cite one local example, will offer an "IRA plus" plan starting Nov. 16. Under this program, the S&L will pay 20 percent interest on savings deposited in advance of next January, at which time the savings will be converted automatically to a 1982 retirement account. The pre-1982 deposit is not a savings deposit, as such.
There will be many more such offerings, adding still more of a burden to the individual who must sift through all sorts of programs in deciding how best to serve short-term and long-range financial planning.