"The evidence of the past suggests that people do not behave like grasshoppers. They are much more like ants." Norman Ture, undersecretary of the Treasury for tax and economic affairs.
In Aesop's fable, the witless grasshopper sang all summer while the wily ant stored up food for the winter ahead. When the hungry grasshopper later begged for a morsel, the ant told him to go dance.
The moral of Reaganomics -- which some people believe is also a fable--is that free enterprise, left alone by government, will make this nation prosperous again, and that other countries should depend on their own resources and ingenuity rather than expect handouts. What's true for the administration's economic policy also holds true for its pension policy.
When President Reagan announced in September that minimum Social Security benefits would be restored for people with low incomes, he added this caveat: "There is, however, a sizable percentage of recipients who are adequately provided for by pensions or other income and should not be adding to the financial burden of Social Security."
This statement has caused needless shudders among some retirees and workers on the threshold of retirement for fear they will not collect what they feel is their due. While this apparently is not true, the president's words do indicate the administration's thinking on the future of the retirement system.
In a recent interview with Nation's Business, Ture discussed the need for changes in Social Security.
"Part of the problem is that we have assigned too much responsibility to Social Security," he said. "It is time to examine the prospects in the next 50 years or so of setting up a system in which people are able and willing to provide more on their own for retirement.
"Suppose, a long time down the road, the major source of retirement income is private, supplemented by Social Security. Would we expect to see a lot of people falling out of the system altogether, opting out of Social Security and yet not opting into private provision? To expect that would be to say that people are dumb . . . People are smart. They'll take care of themselves if given the chance."
Thus the opportunity--and the responsibility--of providing for one's future is at hand. The Economic Recovery Tax Act of 1981, which offers a host of incentives to stimulate personal savings, plus the changes and proposed changes to chip away at Social Security benefits, leave little doubt that the retirement system, like many other institutions in this land, is undergoing a fundamental overhaul.
The changes are not all magnanimous. Underneath the principle of letting the American people play a greater role in determining their financial futures by increasing savings and relieving some of the pension burden for the next generation lies the cold economic reality that public and private pension funds are the largest non-government source of capital in the United States.
Pension funds are frequently being tapped to provide below-market financing for the distressed housing industry. A bill now before Congress would allow small businesses to invest up to 50 percent of their pension plan assets in the company.
As the administration sees it, these long-term funds are needed for investment to increase productivity. This in turn will help to assure a higher standard of living, which will generate a better retirement for the American worker.
But will it work? Just as there are doubts about Reaganomics, there are doubts about the practicability of a retirement system based increasingly on voluntarism.
Ture observed: "For most of our history, we didn't have Social Security. People did not simply reach the age of 65 and die. They had provision made, by themselves, by their families, by charities."
Karen Ferguson, director of the Pension Rights Center, which lobbies on behalf of retirees, countered: "It's unrealistic. People can't afford to save early enough to get enough money to retire. The reality is that we already had 'voluntarism' for people not covered by pension plans, and it didn't work.
"All that the new law has done is add on a tax break for the people who are covered by pension plans. This doesn't change anything for the average worker who doesn't have enough to save, and it isn't necessary for the high-income worker who would save without a tax break."
Starting in 1982, workers already covered by corporate pension plans will be able to establish tax-deferred Individual Retirement Accounts as well. This measure has been described as a boon for the middle class. While conceding that this provision will do nothing to help the poor, the business community is obviously delighted not only by the prospect of up to a $25 billion windfall in new IRA funds, but also by the flexibility it affords.
Less than a year ago the pension industry was reeling from the shock of a recommendation by the President's Commission on Pension Policy that private pensions be made mandatory because private coverage was not expected to grow otherwise. Some critics allege that corporations will use the excuse of expanded IRAs as well as inflation to cut down such controversial provisions as automatic cost-of-living adjustments.
Yet Dallas Salisbury, executive director of the Employee Benefit Research Institute, a business-oriented organization, believes that companies won't back off from their plans because employes have made known their concerns about securing adequate retirement income.
Moreover, he notes that a number of companies are gearing up to help employes invest their IRA funds, a few through contributions to existing plans, but the majority as conduits for outside vehicles. Others question whether the administrative difficulties and costs of separate accounting will not discourage corporations from taking on the additional burden of investing their employes' funds.
Even if they should, there certainly will be no dearth of financial institutions and consultants ready to advise Americans how and where to invest their retirement funds. More than ever, the public will be told, it is wise to seek professional counsel not only on IRAs but also on the entire gamut of tax changes that go into effect this year, next year and beyond.
Tax consultants are expecting a bonanza from the estimated half million corporate pension plans that will have to be altered to take advantage of the tax breaks. Lawyers may be deluged with requests for new wills because of the change in estate taxes. The number of members in the Washington chapter of the International Association of Financial Planners has grown by a third in the past year, according to its president, David S. Dondero.
Robert Neville Ginsburgh, head of Neville Associates, Inc., writes in the October issue of The Financial Planner: "While the Reagan law brings mainly good news for the financial planning process, there are some negative aspects."
He cites the period of uncertainties prior to the issuance of regulations by the Internal Revenue Service and coincidental with the indexing of taxes scheduled for 1985. "On the other hand," he continues, "the very fact that taxes are being reduced should make it easier to make plans to achieve financial objectives."
The Washington Post's Financial Planning section is concerned with achieving those objectives. Staff reporters have carefully analyzed the Economic Recovery Act of 1981 from the individual taxpayer's viewpoint. The reader will find information about the effect of tax changes on savings accounts, shelters and estate planning, and about current trends in corporate pensions. There also is an article about how an individual can take the first steps toward financial independence.
A study earlier this year by the Bureau of Labor Statistics shows that the Washington metropolitan area is one of the most expensive urban communities in the continental United States for a retired couple. It is second only to Seattle-Everett, Wash., in the amount of money it takes to maintain a low-budget couple--$7,281 a year. It is in the top four for intermediate- and high-budget couples. For the intermediate, it takes $10,269, and for the high budget, $15,109.
The median household income for this area was $24,167 in 1979. According to the management consulting firm of Towers, Perrin, Forster & Crosby, a couple with an income of $10,000 needs to go into retirement with 69 percent of that income to maintain the same standard of living enjoyed before retirement. At $20,000 the figure is 61 percent, and at $50,000, 51 percent.
Surveys indicate that very few people reach their goals. The pension commission found that the average private pension for a couple in 1978 totaled $3,689 annually. Average Social Security benefits in that year were $5,066, for a total of $8,755. (The Civil Service pension plan benefits for a couple were $8,951.)
Social Security typically provides some 70 percent of total retirement income for those at the lower end of the pay scale. With a model showing just 60 percent of the income from Social Security and 40 percent from a private pension, Towers, Perrin calculates that the purchasing power of a $10,000 retirement income declines to 96 percent of its original during the first 10 years of retirement (although it goes up thereafter). The model assumes no increase in the private pension but an 11 percent annual rise in the Consumer Price Index, even though the retiree's real cost of living rises at just 8 percent annually. At $30,000, the purchasing power would decline by a fourth in 10 years; a third in 20 years.
BLS has announced changes in the CPI, effective in 1983 and 1985, which will reduce that purchasing power even more. That leaves private pensions and savings. When corporations do grant cost-of-living adjustments, they are usually on an ad hoc basis in the 3 to 4 percent range, the Employee Benefit Research Intitute reports. (The number of workers covered by private retirement pension plans varies between 50 percent and 60 percent of the workforce, depending on the method of counting.)
That leaves savings. Reagan has set a goal of $16 billion in additional savings in the next year, $80 billion in the next three years. The hope is to raise the U.S. level of savings, currently about 5 percent of income, to those of countries like France and Britain, about 16 percent and 14 percent, respectively. Economist Michael Evans predicts the rate will jump to 8 percent by late 1983.
Or, as Samuel H. Murray of Arthur Andersen & Co. observed: "Never before in the nation's history have so many inducements been offered to encourage people to save and invest." These include the All Savers certificates, IRAs and Keogh plans, the cut in the top capital gains rate, indexation in 1985, child care credit and deductions for charities for those who don't itemize.
All of these provisions and more offer challenges for the investor-taxpayer. The usual year-end scramble to get into tax shelters will be intensified by the need, on the one hand, to defer income until 1982 or later, and, on the other, to avoid investing in questionable deals a more vigilant IRS may not allow. Commodity straddles are out. Oil and equipment leasing shelters still appear attractive, according to financial planner Ginsburgh.
Collectibles like antiques are no longer allowable as tax deferred investment vehicles. Real estate has become a gamble: the new depreciation schedule, especially for old residential buildings, weighs in its favor, whereas high interest rates, the falling housing market and the talk of mortgage interest deduction curbs may weigh against it. The same might be said of the stock market: The cut in the top capital gains rate is offset by the uncertainty caused by current economic policy.
Employe stock options become more interesting because they are not taxed until sold and then as capital gains. The curb on student loan programs may require a complete rethink on how families can finance their children's college education, although the increase in the amount of money wealthy parents and grandparents can give children without tax consequences--up from $3,000 to $10,000--may help. Moreover, tuition is excluded from gift taxation.
Finally, for all the changes made in the American way of economic life, none is so dramatic as that affecting the American way of death.
A schedule to phase out estate taxes over the next six years will mean that 99.6 percent of all estates eventually will have no liabilities. The exempt amount will rise from $175,625 this year to $600,000 in 1987. This provision will obviate the need for many of the family trusts in use today. Spouses will find it more advantageous not to own property jointly but for the surviving spouse to inherit it. To benefit from the exemption limits as they rise--as indeed from many of the changes in the tax code--will take careful financial planning.