[Congressional Record Volume 150, Number 138 (Tuesday, December 7, 2004)]
[Senate]
[Pages S11898-S11900]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SMITH (for himself and Mr. Conrad):
  S. 3029. A bill to amend the Internal Revenue Code of 1986 to 
encourage guaranteed lifetime income payments from annuities and 
similar payments of life insurance proceeds at dates later than death 
by excluding from income a portion of such payments; to the Committee 
on Finance.
  Mr. SMITH. Mr. President, with over 77 million baby boomers beginning 
to retire in 2008, a serious retirement challenge is looming in our 
country. Moreover, with Americans living longer and a growing numbers 
of retirees facing the challenge of managing their own retirement 
savings, we need to provide them with better retirement options. In 
response, I rise today to offer legislation aimed at assisting people 
to maintain their financial independence and their standard of living 
throughout their retirement by making it easier for them to secure a 
steady income for life.
  In recent years, the focus of the ``retirement security'' debate in 
Congress has almost entirely been on the need to accumulate a nest egg 
to fund retirement. Congress is doing much to encourage personal saving 
and employer-provided retirement plans. I am proud of both our 
successes and our continuing efforts in these areas. Encouraging 
greater savings is an important step; however, it is not enough.
  Unfortunately, there has been little attention paid to the retirement 
income or ``payout'' phase of the retirement security equation. The 
risk of outliving one's savings is one of the biggest problems facing 
retirees. I have heard it said that Americans perceive the retirement 
savings ``finish line'' to be the point of retirement. But retirement 
is just the beginning of a very different kind of race, one of unknown 
duration. If Americans are going to fully enjoy their retirement years, 
we need to ensure that as many Americans as possible will have a stream 
of income they cannot outlive. We have some control over when we 
retire. However, we have very little control over how long we will 
live.
  For most Americans, a ``secure retirement'' means maintaining their 
standard of living through retirement and the means to deal with life's 
challenges from the first day of retirement to the very last. For the 
majority of Americans, that requires a steady stream of income that, 
combined with Social Security or other retirement income, covers basic 
living expenses--from housing expenses to medical bills, taxes to 
transportation, food to clothing. Yet, Americans today are facing a 
serious and growing challenge to retirement security.
  At the same time Americans are living longer, the future of private 
and public retirement programs, as well as financial markets, is 
increasingly uncertain. Fewer Americans are covered by traditional 
pension plans, and Social Security currently replaces on average only 
about 42 percent of earnings. This means it's increasingly up to each 
individual to manage their retirement savings to last their lifetime. 
And exactly how long will that period in retirement be? It depends. Of 
course none of us know how long we will live; research shows most 
Americans vastly underestimate their longevity.
  According to the Society of Actuaries, a male age 65 has a 50 percent 
chance of living beyond age 85 and a 25 percent chance of living beyond 
age 92. Indeed, the biggest risk we face in retirement is the longevity 
risk--that is, living longer than our retirement savings lasts. In 
order to meet this challenge, Senator Conrad and I are introducing 
legislation to encourage the use of retirement vehicles that pay a 
guaranteed lifetime income.
  Under the Retirement Security for Life Act that Senator Conrad and I 
are introducing today, a tax incentive would be enacted that encourages 
retirees to provide themselves with a guaranteed lifetime income that 
they can't outlive. Specifically, the proposal would exclude from 
Federal taxes one-half of the income payments from an annuity purchased 
with after tax dollars (a so-called non-qualified annuity). 
Importantly, we have proposed a cap on the exclusion so that no more 
that $20,000 could be excluded in a year. For a typical American in the 
25 percent tax bracket, this would provide an annual maximum tax 
savings of up to $5,000. I believed that this modest tax incentive will 
enable some retirees to consider annuitizing a portion of their nest 
egg so that they have a guaranteed lifetime of income.
  This legislation has a wide range of support from organizations 
representing women, minorities, farmers and small businesses. Many in 
these groups do not have access to traditional employer provided 
pension. As we tackle the challenges of retirement policy, we need to 
ensure that all Americans have adequate financial security to meet 
their basic needs during retirement. Personal savings and 
responsibility are the keys to a balanced national retirement security 
policy. Please join me in supporting our proposal as a crucial step in 
providing a secure retirement for all Americans. I ask unanimous 
consent that the text of the legislation be printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 3029

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Retirement Security for Life 
     Act of 2004''.

     SEC. 2. EXCLUSION FOR LIFETIME ANNUITY PAYMENTS.

       (a) Lifetime Annuity Payments Under Annuity Contracts.--
     Section 72(b) of the Internal Revenue Code of 1986 (relating 
     to exclusion ratio) is amended by adding at the end the 
     following new paragraph:
       ``(5) Exclusion for lifetime annuity payments.--
       ``(A) In general.--In the case of lifetime annuity payments 
     received under one or more annuity contracts in any taxable 
     year, gross income shall not include 50 percent of the 
     portion of lifetime annuity payments otherwise includible 
     (without regard to this paragraph) in gross income under this 
     section. For purposes of the preceding sentence, the amount 
     excludible from gross income in any taxable year shall not 
     exceed $20,000.
       ``(B) Cost-of-living adjustment.--In the case of taxable 
     years beginning after December 31, 2005, the $20,000 amount 
     in subparagraph (A) shall be increased by an amount equal 
     to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2004' 
     for `calendar year 1992' in subparagraph (B) thereof.

     If any amount as increased under the preceding sentence is 
     not a multiple of $500, such amount shall be rounded to the 
     next lower multiple of $500.
       ``(C) Application of paragraph.--Subparagraph (A) shall not 
     apply to--
       ``(i) any amount received under an eligible deferred 
     compensation plan (as defined in section 457(b)) or under a 
     qualified retirement plan (as defined in section 4974(c)),
       ``(ii) any amount paid under an annuity contract that is 
     received by the beneficiary under the contract--

       ``(I) after the death of the annuitant in the case of 
     payments described in subsection (c)(5)(A)(ii)(III), unless 
     the beneficiary is the surviving spouse of the annuitant, or
       ``(II) after the death of the annuitant and joint annuitant 
     in the case of payments described in subsection 
     (c)(5)(A)(ii)(IV), unless the beneficiary is the surviving 
     spouse of the last to die of the annuitant and the joint 
     annuitant, or

       ``(iii) any annuity contract that is a qualified funding 
     asset (as defined in section

[[Page S11899]]

     130(d)), but without regard to whether there is a qualified 
     assignment.
       ``(D) Investment in the contract.--For purposes of this 
     section, the investment in the contract shall be determined 
     without regard to this paragraph.''.
       (b) Definitions.--Subsection (c) of section 72 of the 
     Internal Revenue Code of 1986 is amended by adding at the end 
     the following new paragraph:
       ``(5) Lifetime annuity payment.--
       ``(A) In general.--For purposes of subsection (b)(5), the 
     term `lifetime annuity payment' means any amount received as 
     an annuity under any portion of an annuity contract, but only 
     if--
       ``(i) the only person (or persons in the case of payments 
     described in subclause (II) or (IV) of clause (ii)) legally 
     entitled (by operation of the contract, a trust, or other 
     legally enforceable means) to receive such amount during the 
     life of the annuitant or joint annuitant is such annuitant or 
     joint annuitant, and
       ``(ii) such amount is part of a series of substantially 
     equal periodic payments made not less frequently than 
     annually over--

       ``(I) the life of the annuitant,
       ``(II) the lives of the annuitant and a joint annuitant, 
     but only if the annuitant is the spouse of the joint 
     annuitant as of the annuity starting date or the difference 
     in age between the annuitant and joint annuitant is 15 years 
     or less,
       ``(III) the life of the annuitant with a minimum period of 
     payments or with a minimum amount that must be paid in any 
     event, or
       ``(IV) the lives of the annuitant and a joint annuitant 
     with a minimum period of payments or with a minimum amount 
     that must be paid in any event, but only if the annuitant is 
     the spouse of the joint annuitant as of the annuity starting 
     date or the difference in age between the annuitant and joint 
     annuitant is 15 years or less.

       ``(iii) Exceptions.--For purposes of clause (ii), annuity 
     payments shall not fail to be treated as part of a series of 
     substantially equal periodic payments--

       ``(I) because the amount of the periodic payments may vary 
     in accordance with investment experience, reallocations among 
     investment options, actuarial gains or losses, cost of living 
     indices, a constant percentage applied not less frequently 
     than annually, or similar fluctuating criteria,
       ``(II) due to the existence of, or modification of the 
     duration of, a provision in the contract permitting a lump 
     sum withdrawal after the annuity starting date, or
       ``(III) because the period between each such payment is 
     lengthened or shortened, but only if at all times such period 
     is no longer than one calendar year.

       ``(B) Annuity contract.--For purposes of subparagraph (A) 
     and subsections (b)(5) and (w), the term `annuity contract' 
     means a commercial annuity (as defined by section 
     3405(e)(6)), other than an endowment or life insurance 
     contract.
       ``(C) Minimum period of payments.--For purposes of 
     subparagraph (A), the term `minimum period of payments' means 
     a guaranteed term of payments that does not exceed the 
     greater of 10 years or--
       ``(i) the life expectancy of the annuitant as of the 
     annuity starting date, in the case of lifetime annuity 
     payments described in subparagraph (A)(ii)(III), or
       ``(ii) the life expectancy of the annuitant and joint 
     annuitant as of the annuity starting date, in the case of 
     lifetime annuity payments described in subparagraph 
     (A)(ii)(IV).

     For purposes of this subparagraph, life expectancy shall be 
     computed with reference to the tables prescribed by the 
     Secretary under paragraph (3). For purposes of subsection 
     (w)(1)(C)(ii), the permissible minimum period of payments 
     shall be determined as of the annuity starting date and 
     reduced by one for each subsequent year.
       ``(D) Minimum amount that must be paid in any event.--For 
     purposes of subparagraph (A), the term `minimum amount that 
     must be paid in any event' means an amount payable to the 
     designated beneficiary under an annuity contract that is in 
     the nature of a refund and does not exceed the greater of the 
     amount applied to produce the lifetime annuity payments under 
     the contract or the amount, if any, available for withdrawal 
     under the contract on the date of death.''.
       (c) Recapture Tax for Lifetime Annuity Payments.--Section 
     72 of the Internal Revenue Code of 1986 is amended by 
     redesignating subsection (w) as subsection (x) and by 
     inserting after subsection (v) the following new subsection:
       ``(w) Recapture Tax for Modifications to or Reductions in 
     Lifetime Annuity Payments.--
       ``(1) In general.--If any amount received under an annuity 
     contract is excluded from income by reason of subsection 
     (b)(5) (relating to lifetime annuity payments), and--
       ``(A) the series of payments under such contract is 
     subsequently modified so any future payments are not lifetime 
     annuity payments,
       ``(B) after the date of receipt of the first lifetime 
     annuity payment under the contract an annuitant receives a 
     lump sum and thereafter is to receive annuity payments in a 
     reduced amount under the contract, or
       ``(C) after the date of receipt of the first lifetime 
     annuity payment under the contract the dollar amount of any 
     subsequent annuity payment is reduced and a lump sum is not 
     paid in connection with the reduction, unless such reduction 
     is--
       ``(i) due to an event described in subsection 
     (c)(5)(A)(iii), or
       ``(ii) due to the addition of, or increase in, a minimum 
     period of payments within the meaning of subsection (c)(5)(C) 
     or a minimum amount that must be paid in any event (within 
     the meaning of subsection (c)(5)(D)),

     then gross income for the first taxable year in which such 
     modification or reduction occurs shall be increased by the 
     recapture amount.
       ``(2) Recapture amount.--
       ``(A) In general.--For purposes of this subsection, the 
     recapture amount shall be the amount, determined under rules 
     prescribed by the Secretary, equal to the amount that (but 
     for subsection (b)(5)) would have been includible in the 
     taxpayer's gross income if the modification or reduction 
     described in paragraph (1) had been in effect at all times, 
     plus interest for the deferral period at the underpayment 
     rate established by section 6621.
       ``(B) Deferral period.--For purposes of this subsection, 
     the term `deferral period' means the period beginning with 
     the taxable year in which (without regard to subsection 
     (b)(5)) the payment would have been includible in gross 
     income and ending with the taxable year in which the 
     modification described in paragraph (1) occurs.
       ``(3) Exceptions to recapture tax.--Paragraph (1) shall not 
     apply in the case of any modification or reduction that 
     occurs because an annuitant--
       ``(A) dies or becomes disabled (within the meaning of 
     subsection (m)(7)),
       ``(B) becomes a chronically ill individual within the 
     meaning of section 7702B(c)(2), or
       ``(C) encounters hardship.''.
       (d) Lifetime Distributions of Life Insurance Death 
     Benefits.--
       (1) In general.--Section 101(d) of the Internal Revenue 
     Code of 1986 (relating to payment of life insurance proceeds 
     at a date later than death) is amended by adding at the end 
     the following new paragraph:
       ``(4) Exclusion for lifetime annuity payments.--
       ``(A) In general.--In the case of amounts to which this 
     subsection applies, gross income shall not include the lesser 
     of--
       ``(i) 50 percent of the portion of lifetime annuity 
     payments otherwise includible in gross income under this 
     section (determined without regard to this paragraph), or
       ``(ii) the amount in effect under section 72(b)(5).
       ``(B) Rules of section 72(b)(5) to apply.--For purposes of 
     this paragraph, rules similar to the rules of section 
     72(b)(5) and section 72(w) shall apply, substituting the term 
     `beneficiary of the life insurance contract' for the term 
     `annuitant' wherever it appears, and substituting the term 
     `life insurance contract' for the term `annuity contract' 
     wherever it appears.''.
       (2) Conforming amendment.--Section 101(d)(1) of such Code 
     is amended by inserting ``or paragraph (4)'' after ``to the 
     extent not excluded by the preceding sentence''.
       (e) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to amounts received in calendar years beginning after 
     the date of the enactment of this Act.
       (2) Special rule for existing contracts.--In the case of a 
     contract in force on the date of the enactment of this Act 
     that does not satisfy the requirements of section 72(c)(5)(A) 
     of the Internal Revenue Code of 1986 (as added by this 
     section), or requirements similar to such section 72(c)(5)(A) 
     in the case of a life insurance contract), any modification 
     to such contract (including a change in ownership) or to the 
     payments thereunder that is made to satisfy the requirements 
     of such section (or similar requirements) shall not result in 
     the recognition of any gain or loss, any amount being 
     included in gross income, or any addition to tax that 
     otherwise might result from such modification, but only if 
     the modification is completed prior to the date that is 2 
     years after the date of the enactment of this Act.

  Mr. CONRAD. Mr. President, I am pleased to join my friend and 
colleague, Senator Gordon Smith from Oregon, in introducing legislation 
that can help seniors enjoy a more secure retirement. The good news is 
that Americans are living longer but it also means that people have to 
plan for a longer period of retirement. A successful retirement income 
plan is a challenge even for the savvy investor. How much more 
difficult is this task for the millions of Americans with limited 
investment experience?
  For years Congress has encouraged people to save for their 
retirement. Through the tax code, we encourage asset building through 
home ownership. We provide significant tax incentives for employer-
based pension plans and for dedicated retirement savings programs by 
individuals, such as IRAs and 401(k) plans.
  One of the biggest threats to retirement income security for baby 
boomers is their own longevity. It will not be easy to manage their 
accumulated assets so that they will last a lifetime. Unprecedented 
numbers of Americans are now living into their 90s and even past 100. 
Today, actuaries tell us that

[[Page S11900]]

about one in six 65-year-old men and one out of three 65-year-old women 
can expect to live into their 90s.
  Consequently, people are going to spend more time in retirement than 
previous generations. Over the course of the 20th century, the 
percentage of men in the workforce aged 65 years or older dropped from 
about 66 percent to less than 20 percent. Now our society confronts the 
impending retirement of 77 million baby boomers. Many of them will not 
have the guaranteed monthly retirement checks that many of their 
parents enjoyed as a result of employer-based pension plans. 
Traditional defined-benefit pension plans have given way to defined 
contribution plans, which have shifted the retirement income security 
risk from the employer to the individual.
  Of course, there are still many Americans who have no access at all 
to employer-provided pension plans. Some have never been in the 
traditional workforce; others work in seasonal jobs or part time. In my 
state of North Dakota, as well as in rural and farming communities 
across America, there is an acute need for retirement vehicles that 
will provide a secure lifetime payout. Others who could face difficulty 
in securing retirement income are widowed individuals--both men and 
women--who suddenly find themselves having to make a life insurance 
benefit or proceeds from the sale of a business or family home last a 
lifetime.
  The proposal we are introducing today will provide a valuable tool 
for helping people avoid the risk of outliving their assets. 
Specifically, we are proposing a tax incentive to encourage Americans 
to available a portion of their assets annuitize for retirement. If 
they annuitize--in other words, elect to receive their money from an 
annuity in a series of payments for the rest of their lives, no matter 
how long that may be--they would be able to exclude from income a 
portion of the annuity benefit that represents the accumulation in the 
annuity above and beyond the original investment. The tax benefit is 
capped to ensure that tax sheltering activity is not encouraged and 
that the incentive will be effective for people who would benefit most 
from securing a lifetime income stream.
  This proposal we offer today would apply only to life-contingent, 
nonqualified annuities. A life-contingent annuity that is subsequently 
modified to a fixed-term payout would be subject to a recapture tax.
  Baby boomers represent an unprecedented challenge to our retirement 
security policies. They should have a wide range of options available 
for responsible retirement planning. Our proposal focuses on non-
qualified annuities because it is important to have this option 
considered as part of the larger retirement income security debate that 
Congress should have before baby boomers begin retiring in large 
numbers. Options for making qualified plans more secure should be part 
of that debate as well.
  I hope that the 109th Congress will tackle this matter promptly 
because time is short. That first wave of baby boomer retirees begins 
in 2008--just over 36 months from today.
                                 ______