Pres. Bush's plan encourages savings - Investment

We've all heard the talk about how consumer spending will boost the economy. How about consumer savings? That's the route taken by Pres. Bush's proposed retirement plan. Consumer savings ultimately will lead to economic recovery in the U.S., contend experts at Evaluation Associates (EAI), a Norwalk, Connecticut-based, full-service consulting firm for the institutional investment community. "If you really encourage people--who have the ability to save--to save, it benefits everybody," indicates Phil Maisano, chairman and chief executive officer of EAI. "If people save more, that drives down the cost of capital because there is more capital available. As the cost of capital goes down, it makes growth more available and companies more willing to expand."

Consumer savings also brings down--and keeps down--interest rates. With the cost of corporate borrowing lowered, companies can expand and create jobs. Increasing the pool of capital also lowers the cost of government debt, which lessens government budget deficits and decreases the need for the Federal government to borrow money.

Maisano predicts that the Bush plan also could have far-reaching effects on Social Security. "You're going to lessen the dependence on Social Security in a way that might allow the government to distribute benefit payments based on need rather than automatic disbursements. If you give people the opportunity to save their own money, they may not be so dependent on a government check."

The Bush plan calls for the creation of three new retirement vehicles: Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employer Retirement Savings Accounts (ERSAs).

LSAs would enable individuals to save as much as $7,500 per year. The funds would grow tax-deferred and could be taken out tax-free at any time and for any purpose. The only catch is that contributions are not tax deductible. RSAs would replace individual retirement accounts including Roth IRAs, and traditional and nondeductible IRAs. Individuals could contribute $7,500 each year, and the funds would not be taxed if they were withdrawn after the age of 58. There is no tax deduction on contributions. Contribution limits for both LSAs and RSAs would be indexed for inflation. ERSAs would replace employee-sponsored retirement plans, such as 401(k), 457, and 403(b) plans, by rolling them all into one. The lone retirement vehicle that won't be affected is the nongovernmental 457 plan offered by nonprofit organizations. ERSAs would enable individuals to save up to $12,000 per year. That amount would rise to $15,000 by 2006, while people over age 50 could contribute $14,000 this year and $20,000 by 2006. Employers can set up the plans so that contributions come from pretaxed earnings.

Other changes revolve around the 401(k) program. Employers must give workers a 30-day notice before restricting their ability to change their 401(k) plans. Workers can move 401(k) investments out of company-owned stock after three years. In addition, employers must provide quarterly--not just annual--benefit statements.

Bush has said that the purpose of these changes is to simplify the retirement system, currently mired by myriad plans. Some critics argue, however, that the plan oversimplifies retirement. By fitting all employers and individuals into one mold, they sacrifice flexibility. Others claim that the proposed changes to employee-sponsored plans will discourage small business owners from offering them because the LSAs and RSAs decrease their need to save for their own retirement through a work-based plan. While Maisano agrees that there is that risk, he points out that other factors will encourage small employers to help their workers save for retirement. "Even in today's world, employers don't have to offer a plan. That argument is hollow for me. If you want the best employees, you're going to offer attractive benefits."

Perhaps one of the biggest criticisms of the Bush plan is that it will favor those with higher incomes. Maisano isn't buying that argument, either. "There are revenue implications that are going to be fairly dramatic over the longer term, and the rich-poor argument is going to be brought out here. But the reality is that it's equally effective for rich people and poor people as an incentive. Besides, this helps everyone to save according to his or her ability. Tomorrow's benefit is most likely to be enjoyed by the person with the [wherewithal] to save. This isn't just trickle-down economics. When you lower the cost of capital, you help everybody."

COPYRIGHT 2003 Society for the Advancement of Education
COPYRIGHT 2003 Gale Group