[Congressional Record Volume 145, Number 42 (Wednesday, March 17, 1999)]
[Senate]
[Pages S2850-S2853]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ROTH (for himself and Mr. Baucus):
  S. 646. A bill to amend the Internal Revenue Code of 1986 to provide 
increased retirement savings opportunities, and for other purposes; to 
the Committee on Finance.


               retirement savings opportunity act of 1999

 Mr. ROTH. Mr. President, one question many Americans ask 
themselves is this: Will I have enough to live on when I retire. 
According to a study published by the Employee Benefit Research 
Institute, about one third of Americans are not confident that they 
will have enough to live on in their retirement years. Social Security 
is an important component of an individual's retirement income, but 
savings--whether through personal accounts or through employer-provided 
retirement plans--will help provide for a better life at retirement. 
Another troubling factor is that if you are employed by a small 
business you are far less likely to be eligible for a retirement plan. 
There must be ways to get more Americans interested in providing for 
their retirement years and to get small businesses interested in 
providing retirement benefits for their employees. This is a concern 
that spreads across party lines; everyone knows that there must be 
incentives for promoting retirement savings.
  Despite these concerns, we have a strong system of tax favored 
savings plans in place. For savings through the workplace, there are 
401(k) plans, 403(b) plans and 457 plans, each of which can be 
sponsored by different types of employers. For individual savings, 
there is either the traditional IRA or the Roth IRA. And all these 
different savings vehicles have different limits on how much 
individuals can save. However, our current system can do more and the 
limitations that we placed on retirement savings in times of budgetary 
restraints should be re-examined now. In addition, we should capitalize 
on some of the successful savings incentives and use them to broaden 
our savings base.

[[Page S2851]]

  Both Senator Baucus and I are pleased to introduce a new bill, the 
Retirement Savings Opportunity Act of 1999, which will build upon the 
strengths of our current system, yet provide new opportunities for 
people to save for retirement. In addition, this bill would also 
increase the incentives that would help small businesses start and 
maintain retirement plans for its employees. These are issues that 
Senator Baucus is very concerned about and I join him in providing 
these important incentives for small businesses. The provisions of this 
bill are as follows:
  Increase IRA dollar limit. The maximum contribution limit for IRAs 
(both traditional IRAs and Roth IRAs) is $2,000. This limit, which has 
been in place since 1982, has never been indexed for inflation. If the 
IRA limit were indexed for inflation it would be close to $5,000. In 
this bill, the limit for all IRAs (both traditional IRAs and Roth IRAs) 
will be increased to $5,000 per year. In addition, this limit will be 
adjusted annually for cost of living increases, in $100 increments, so 
that the amount that taxpayers can save with an IRA will never again be 
reduced due to the impact of cost of living increases.

  It is important to remember who makes IRA contributions. An estimated 
26 percent of American households how own a traditional IRA, according 
to a 1998 survey by the Investment Company Institute. In 1993 (the most 
recent year for which comprehensive aggregate data is available) 52 
percent of all IRA owners earned less than $50,000. This same group 
made about 65 percent of all IRA contributions in 1985.
  We know that people at all income levels are limited by the $2,000 
cap on contributions. For example, IRS statistics show that the average 
contribution level in 1993 for people with less than $20,000 in income 
was $1,500. Clearly this means that there were lower income people who 
wanted to make contributions of more than the $2,000 limit.
  In addition, IRAs are the only tax-favored savings vehicle for many 
taxpayers. According to the Bureau of Labor Statistics, only 48 percent 
of individuals who work in small business establishments were eligible 
for any retirement plan in 1994. This is a problem that both Senator 
Baucus and I try to address elsewhere in this bill by providing greater 
incentives to business for establishing employer-sponsored retirement 
savings plans. However, regardless of the incentives that we may 
provide, not all employers will establish retirement plans for their 
employees. Furthermore, not all employees will stay with one employer 
long enough to receive a benefit. Under current law, the maximum amount 
that an individual can save is too low to provide adequate savings for 
retirement. In order to spur an increase in savings, we believe that an 
increase in the IRA limit is warranted.
  Increase IRA income caps. There are different and confusing caps on 
contributions to traditional and Roth IRAs. They are as follows:
  Tax deductible contributions to traditional IRAs. If an individual is 
an active participant in an employer provided pension plan, the amount 
of a deductible contribution that an individual can make is confusing. 
First of all the $2,000 contribution amount is reduced if the adjusted 
gross income of the taxpayer is over $51,000, if the taxpayer is filing 
a joint return. If the taxpayer is a single or head of household filer, 
the $2,000 contribution amount is reduced if adjusted gross income 
exceeds $31,000. These income limits are scheduled to increase annually 
until the year 2007 when the joint filer limit will be $80,000 and the 
single and head of household filer limit will be $50,000. Married 
taxpayers who file separately are precluded from making deductible 
contributions if their adjusted gross income is above $10,000, unless 
the couple has not lived together for the entire year. Finally, if an 
individual is not an active participant in an employer's plan and the 
individual's spouse is, an individual is not able to make a deductible 
contribution to an IRA if the couple's income is $150,000 or above. 
These are too many restrictions.
  The bill will eliminate these conflicting and confusing income limits 
for deductible IRAs. What this will mean is that all individuals who 
have earned income can make full deductible contributions to a 
traditional IRA. In addition, a homemaker without earnings will be able 
to make IRA contributions.
  Contributions to Roth IRAs. A full $2,000 contribution can only be 
made to a Roth IRA if a single taxpayer's adjusted gross income is less 
than $95,000 and married taxpayer's adjusted gross income is less than 
$150,000. If a taxpayer is married and files separately from his or her 
spouse, the taxpayer cannot make a Roth IRA contribution if his or her 
adjusted gross income exceeds $10,000, unless they live apart for the 
entire year. The bill will eliminate these income limits for Roth IRA 
contributions, so that all taxpayers can make a contribution to a Roth 
IRA. Remember, however, that a taxpayer cannot make a full contribution 
to a Roth IRA and also make a full contribution to a traditional IRA; 
amounts contributed to one type of IRA reduce the amounts that can be 
contributed to the other type of IRA.
  Conversion to Roth IRAs. In order to convert to a Roth IRA, an 
individual's adjusted gross income must not exceed $100,000 regardless 
of whether the individual is married filing jointly or single. Married 
individuals who are filing separately cannot convert to a Roth IRA, 
unless they live apart for the entire year. The bill will raise the 
income cap for conversions to $1 million.
  The current income limitations relating to IRAs are needlessly 
complex and are confusing to taxpayers. As we heard at the recent 
Senate Finance Committee hearing on retirement savings, these limits 
are confusing to taxpayers with the result that taxpayers do not fully 
utilize these products. By eliminating these income limitations, which 
affect only a small percentage of taxpayers, we can increase the use of 
IRAs. When Congress restricted the deductibility of IRA contributions 
in 1986, the IRS reported that the level of IRA contributions fell from 
$38 billion to $14 billion in 1987.
  Will taxpayers increase the amount of their savings to IRAs if the 
savings opportunities were increased? According to a 1997 survey 
conducted on behalf of the Savings Coalition, increasing the IRA limits 
would result in more savings for retirement. Sixty-four percent said 
that they would increase the rate of their personal savings with IRAs.
  Economic studies also have shown that increasing the tax incentives 
for savings should result in substantial increases in savings due to 
increases in the net return. See, for example, Lawrence H. Summers, 
``Capital Taxation and Accumulation in a Life Cycle Growth Model,'' 
American Economic Review, 71, September 1981. The staff of the Joint 
Committee on Taxation noted in its description of Present Law and 
Background Relating to Tax Incentives for Savings prepared for the 
Finance Committee hearing (JCX-7-99), there are many reasons for this 
increase in savings due to increased limits, including the 
psychological incentives to save and the increased advertising by banks 
and other financial institutions of tax-benefitted savings vehicles may 
influence people's savings decisions.
  Increase other dollar-based benefit limitations. Currently, the 
maximum pre-tax contribution to a 401(k) plan or a 403(b) annuity is 
$10,000. In addition, the maximum contribution to a 457(b) plan (a 
salary deferral plan for employees of government and tax exempt 
organizations) is $8,000. Finally, the maximum contribution to a SIMPLE 
plan (a simplified defined contribution plan available only to small 
employers) is $6,000. These limits are indexed for cost of living 
increases. There has traditionally been a differential in contribution 
limits among the various types of plans: IRAs (which are individual 
plans) having the lowest limits; SIMPLE plans having a greater limit--
but not as much as a 401(k) plan; and 401(k) and 403(b) plans having 
the highest limits, but the greatest number of regulations. Since the 
IRA limit will be raised to $5,000, the bill will increase limits for 
401(k) and 403(b) plans to $15,000 and for SIMPLE plans to $10,000; 
thereby continuing the differential. The limit for 457(b) plans for 
government employees will increase to $12,000.
  As stated before, there is a clear need to increase the IRA limit 
above the current $2,000 contribution level. But increasing that level 
without increasing the savings opportunity levels for

[[Page S2852]]

employer provided plans will result in some business owners eliminating 
their employer provided plans and saving only for themselves in an IRA. 
By increasing the employer provided plan limits, business owners will 
still have the incentive to maintain a plan for employees if only to 
avail themselves of the higher plan limits for employer provided plans.
  This does not mean that business executives can automatically take 
advantage of these higher contribution limits. First, it is important 
to remember that contributions can only be made on the first $160,000 
of compensation. In addition, in order for a business owner or other 
highly compensated employee to take advantage of these limits, a number 
of non-highly compensated employees must also benefit under the plan. 
An example should show how these non-discrimination rules work. In a 
company, there is one person--let's say the owner of the business--who 
makes over $160,000 and that person wants to contribute the full 
$15,000 to the company 401(k) plan. He could only contribute the full 
$15,000 if (i) low paid employees as a group contribute 8% of their 
compensation to the 401(k) plan, (ii) all low paid employees receive a 
fully vested contribution from the employer equal to 3% of their 
compensation or (iii) all low paid employees would be eligible to 
receive matching contributions of 100% of their contribution to the 
401(k) plan of their first 3% contribution and 50% of their next 2% of 
compensation contribution. Clearly, business owners and high paid 
employees cannot benefit with this new higher contribution limits 
unless the amount of savings that low paid people make--either on their 
own or with the help of the employer--increases.
  Roth 401(k) or 403(b) plan. We have heard testimony before the 
Finance Committee that the results of the first year of the Roth IRA 
has been successful. And we have all seen the television and print ads 
touting the benefits of the Roth IRA. The opportunity for tax-free 
investment returns has clearly caught the fancy of the American people. 
In less than five months after the Roth IRA became available, the 
Investment Company Institute estimated that approximately 3 percent of 
American households owned a Roth IRA. In addition, the survey found 
that the typical Roth IRA owner was 37 years old, significantly younger 
than the traditional IRA owner who is about 50 years old, and that 30 
percent of Roth IRA owners indicated that the Roth IRA was the first 
IRA they had ever owned. This bill will harness the power of the Roth 
IRA and give it to participants in 401(k) plans and 403(b) plans.
  Companies will have the opportunity to give participants in 401(k) 
plans and 403(b) plans the ability to contribute to these plans on an 
after-tax basis, with the earnings on such contributions being tax-free 
when distributed, like the Roth IRA. More than the maximum Roth IRA 
contribution amount can be contributed under this option; employees 
would be limited to the maximum 401(k) or 403(b) contribution amount. 
The regular non-discrimination rules that apply to 401(k) and 403(b) 
plans will also apply to these after-tax contributions. Consequently, 
in order for business owners and highly compensated employees to take 
full advantage of these new savings opportunities, low paid employees 
must also benefit.
  The regular distribution rules (rather than the Roth IRA distribution 
rules) would apply to these types of plans. However, these after-tax 
accounts could be rolled into a Roth IRA when the individual retires. 
And unlike Roth IRAs, there would not be an opportunity for 401(k) or 
403(b) plan participant to convert their current 401(k) and 403(b) 
account balances into the new non-taxable balances.
  Catch-up contributions. This provision will provide an additional 
savings opportunity to those individuals who are close to retirement. 
According to a study by the Employee Benefit Research Institute, older 
workers tend to have their contributions constrained by maximum limits 
which are either plan limits on how much can be contributed or legal 
limits on how much can be contributed. EBRI believes that this is 
probably due to the fact that they are more focused on retirement and 
are thus more likely to contribute at a higher level. We all know that 
there can be other pressing financial needs earlier in life--school 
loans, home loans, taking time off to raise the kids--which limit the 
amount that we may have available to save for retirement. The closer 
that we get to retirement, the more we want to put away for those years 
when we are not working. However, the current law limitations on how 
much may be contributed to tax qualified savings vehicles may restrict 
people's ability to save at this time in their lives.

  The bill will give those who are near retirement--age 50--the 
opportunity to contribute an additional amount in excess of the annual 
limits equal to an additional 50% of the annual limit. Catch-up 
contributions will be allowed in 401(k) plans, 403(b) plans, 457(b) 
plans and IRAs. For IRAs, this will mean that someone age 50 could 
contribute $7,500 each year rather than $5,000.
  For employer provided plans, the catch contribution will be available 
to anyone who is age 50 or above and who is limited in the amount that 
he or she can contribute to the plan by a plan limit, the maximum 
contribution limit or the nondiscrimination rules that apply to highly 
paid employees. This additional catch-up contributions to employer 
provided plan will not be subject to the normal non-discrimination 
rules for other contributions. Consequently, if a highly paid employee 
is limited by the nondiscrimination rules to only contributing $9,000 
to a 401(k) plan, the employee will be able to contribute an additional 
$7,500 annually in the years after he attains age 50. This way, an 
employee is able to make contributions to provide for his or her 
retirement security when he or she is best able to afford to make these 
contributions and not be limited because other younger employees do not 
make contributions.
  Small business incentives. According to the most recent Bureau of 
Labor Statistics figures, only 48 percent of employees in a small 
business are likely to be covered by any retirement plan, while 78 
percent of employees of large or medium size businesses are likely to 
be covered. Since employees of small businesses are less likely to be 
covered by a retirement plan, we needed to find incentives for small 
businesses to want to establish plans. This is an issue that Senator 
Baucus is particularly interested in and these small business 
incentives represent some of his ideas on how to expand the small 
business market for retirement plans. The bill will assist small 
businesses in establishing retirement plans in the following ways:
  Tax credit for start-up costs. A non-refundable tax credit of up to 
$500 would be available to small businesses with up to 100 employees to 
defray the administrative costs of establishing a new retirement plan. 
This credit would only be available for the first three years of 
operation of the plan. This credit could be carried back for one year 
or forward for 20 years (the general business credit carryover rules).

  Tax credit for contributions. A non-refundable tax credit equal to 
50% of employer contributions made on behalf of non-highly compensated 
employees would be available to small businesses with 50 or less 
employees during the first 5 years of a plan's operation. Only 
contributions of not more than 3% of compensation are eligible for the 
credit. This credit could be carried back for one year or forward for 
20 years.
  Small business defined benefit plan. This plan will provide employees 
of small businesses with a secure, fully portable, defined retirement 
benefit without imposing the complex rules and regulations of normal 
defined benefit plans. This plan, called the Savings Are For Everyone 
(SAFE) plan, will provide a fully vested benefit that is fully funded, 
using conservative actuarial assumptions. The benefit will be based on 
an employee's salary and years of service and could be structured so 
that years of service prior to the establishment of the plan can be 
used in determining the benefit--which helps older, long service 
employees. The SAFE plan is meant to complement the successful SIMPLE 
defined contribution plan that is available for small businesses.
  Elimination of 25 percent of compensation limitation. Currently, the 
maximum amount that can be contributed to a defined contribution plan 
on behalf of an individual participant is the lesser of $30,000 or 25 
percent of

[[Page S2853]]

compensation. This includes both employee contribution and any matching 
contributions or profit sharing contributions made by the plan sponsor. 
This bill will eliminate the 25 percent of compensation limit, so that 
the maximum contribution that is made on behalf of any individual is 
$30,000. With the additional savings opportunities provided for all 
employees under this bill, it would be much more likely for employees--
especially low paid employees--to exceed this 25 percent of 
compensation limitation. This change will make sure that those 
employees will not be limited in fully providing for their retirement 
security, especially, if the employer also contributes toward the 
employee's retirement plan.
  Tax deduction for employee deferrals. Under current law, an employee 
pre-tax deferral is treated as employer contribution and is subject to 
the limits on how much an employer can take as a tax deduction on 
qualified plan contributions. With the increased amount of pre-tax 
savings that we anticipate employees will make after enactment of this 
bill, there is a concern that the maximum limit on deductible 
contributions will be reached. This bill will permit employer to fully 
deduct any employee pre-tax deferrals, without regard to the maximum 
limit on deductions. Other employer contributions to a plan, however, 
will continue to be subject to this deduction limitation.
  IRA contributions to an employer plan. The bill gives employers the 
opportunity to accept traditional IRA contributions as part of their 
regular employer plan. In addition, it gives employees the ability to 
have IRA contributions made directly to the employer-sponsored IRA as a 
payroll deduction. One advantage of using an employer plan as an IRA 
account is that the administrative costs in an employer plan are 
usually much less than the costs in a privately maintained plan. 
Another advantage is that contributions to the IRA will be made on a 
payroll deduction basis, which makes it more likely that the 
contributions will be made.
  Full funding limit increase. Defined benefit pension plans are also 
an important source of retirement income. Currently, amounts that can 
be deducted as contributions to a pension plan is limited to the lesser 
of the actuarial funding requirement amount or 150 percent of the 
current liability amount of the plan. The current liability amount does 
not take into account projected pension benefits. This 150 percent of 
current liability limitation is eliminated in this bill. This will 
result in better funded pension plans, since the articial limitation of 
150 percent of current liability no longer applies.
  Both Senator Baucus and I hope that other Senators will join us in 
this effort to increase savings opportunities for all working 
Americans.
 Mr. BAUCUS. Mr. President, I rise to join my colleague, 
Senator Roth, Chairman of the Senate Finance Committee and fellow 
Montanan, in introducing this important bill. Mr. President, I have 
agreed to join Chairman Roth in introducing this bill for one reason--I 
believe we must increase the level of personal savings in our country.
  Personal savings have been on a precipitous decline during the last 2 
decades. Net personal savings have dropped from 9.3% of Gross Domestic 
Product in the 1970's to one-half of one percent in 1999. This is the 
lowest rate of personal savings since 1933. If we are to reverse this 
decline, and help Americans plan for their retirement years, we must 
create a culture of savings in our country.
  The Retirement Savings Opportunity Act is one piece of a much broader 
effort to reverse this trend. Another important part of this puzzle is 
represented by the package of regulatory reforms I have been working on 
with Senators Graham and Grassley, in a bill that will be introduced 
shortly. Yet another approach is represented by the President's 
proposal to create Universal Savings Accounts for all working 
Americans. I support the President's commitment to dedicate a portion 
of our projected budget surpluses to helping Americans save for their 
retirement, though I am modifying his proposal to take advantage of our 
existing pension system and enhance it. All of these proposals, when 
taken together in a comprehensive package, will help Americans of all 
income levels save for the future.
  My particular concern is in pension coverage for small businesses and 
their employees. Less than one in every five Americans working for 
small businesses have access to pension plans through their workplace. 
This represents 40 million working Americans who do not have pension 
coverage. And since virtually all of the net new jobs being created in 
this country are being created by small businesses, their retirement 
security must not be neglected. We simply must make it easier for small 
businesses to start pension plans, and to provide pension coverage to 
their employees.
  I am particularly pleased with the small business incentives included 
in the Retirement Savings Opportunity Act. This bill contains a tax 
credit to help defray the administrative costs small businesses incur 
when they start up new pension plans. It also includes an additional 
tax credit as an incentive for small business owners who contribute 
money on behalf of their employees into new plans. Finally, the bill 
includes a new, simplified defined benefit plan for small businesses. 
These are not by any means the only ways we can help small businesses 
provide pensions for their workers, but they are a good start down that 
road. The increased limits that are included in the bill will also help 
this process by making it easier for employers to save, thus making it 
more likely they will also provide benefits to their lower paid 
workers.
  I am very excited that we are finally engaging in a public policy 
debate about retirement security. Only by elevating this debate to the 
highest levels will we be able to make the changes necessary to truly 
make the American dream a reality for everyone. We must help Americans 
make their Golden Years truly golden, so they can look forward to a 
secure financial future. This bill, as part of a comprehensive solution 
that includes other proposals directed toward lower-income workers, 
will help make retirement security a reality for all Americans.
                                 ______