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205 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0202 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. June 20, 2006 Advisory No. 205 PENSION CONFERENCE SHOULD EXTEND SAVING PROVISIONS IN THE 2001 TAX ACT A Senate-House conference is meeting to reconcile differing versions of pension reform legislation. The House version, H.R. 2830, the Pension Protection Act of 2005, contains language that would make permanent the pension and retirement saving provisions in Title VI of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Senate version, S. 1783, the Pension Security and Transparency Act of 2005, does not include the permanent extension of the 2001 provisions. The EGTTRA pension provisions will expire in 2011 if the Congress does not act. It would be good policy to include the House provision to make the changes permanent. These provisions encourage greater saving by millions of workers, and reduce the cost and administrative burdens of employer-sponsored plans, making it easier for employers to offer the plans to their workers. The sooner these provisions are extended, the better. Employers and employees alike would benefit from the certainty that early renewal would bring. Waiting until the last minute is not a good option, because it is costly for plan sponsors to have to rewrite the rules, and it takes time to prepare materials for the open seasons attached to these programs. Some of the key pension provisions of EGTRRA are: An expansion of amounts that may be contributed to pensions and IRAs; Catch-up amounts for workers over age 50; Greater portability among plans; and The low income saver's credit. The U.S. private pension systems are the largest and best in the world. They have encouraged personal saving, and result in reduced dependency on government tax-transfer retirement programs that are under demographic pressure and financial threat. Unfortunately, under old law, many savers had maxed out on their allowable contributions, and were exposed to ordinary income tax treatment on additional saving, which discourages saving. By expanding the contribution limits on such programs, the 2001 Act gives more savers an incentive at the margin to add to their retirement plans. These higher contribution limits should be retained. The Act also gives matching funds to encourage saving by low income workers, exposing them to the advantages of setting money aside for retirement. The pension and IRA provisions in the tax law partially offset a basic bias against saving inherent in an income tax. The ordinary income tax treats income used for saving more harshly than income used for consumption. Income is generally taxed when earned. If the after-tax income is spent on consumption, there is usually no further federal tax (except for a few selective federal excise taxes). One can buy a meal and enjoy the nutrition, or buy a television and watch a stream of programming, without owing the IRS anything more. However, if the after-tax income is put in a bank account, or used to buy a bond, the stream of interest (what one is g~.I S I g6~ 8 ~6I

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