[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.
______