Deductible individual retirement accounts. Nondeductible IRAs. Spousal IRAs, Roth IRAs, education IRAs, 401(k)s, 403(b)s, SEPs, SIMPLEs, Keoghs, annuities, and medical savingsaccounts.What a mess.
Congress has littered the tax code with a dozen such plans, each with its own arcane rules about who may invest, how much they can save, and how much and how soon they can withdraw. And it is looking to create more. One recent candidate: tax breaks for folks who save for their kids' private schooling. "You've got gratuitous complexity," grumps Tulane University law professor Daniel Q. Posin.
Enough already. Instead of handing out new savings plans like candy for taxpayers, Congress ought to repeal the $100 billion in annual tax breaks now on the books and lower tax rates instead. Why? Because these plans, which started blooming in 1981, have never achieved their goal of boosting the savings rate. Indeed, since then the savings rate has plummeted, from more than 9% to 4%. Sure, investors are earning great returns in the stock market--pushing up the overall value of savings--but they are putting away less of their paychecks.
If they can't stomach repeal, lawmakers should at least think about creating a single plan that works for everyone--simply. The backbone of such an approach could be an employer-based program, similar to a 401(k) but with a single set of rules. For the self-employed or those without a job-based plan, the account could simply be administered by the individual.
Into this account, workers could put away each year a chunk of their income tax-free--say, up to $10,000, or whatever the budget will bear. And employers could still match a portion. When individuals withdraw money, for any reason, they would be taxed at their regular income rate. On May 19, the National Commission on Retirement Policy, a bipartisan panel of lawmakers, academics, and executives recommended such an idea--merging all employer-based savings plans into one that might be simple enough to make people save again. Their hope: Strong private savings would take the pressure off the troubled Social Security system.
Up till now, Congress has had little incentive to consolidate. The biggest beneficiaries of these savings incentives--brokers, insurance companies, and banks, which use each new scheme to sell a hot investment product--are also among the most generous campaign contributors. Moreover, individual tax breaks such as these provide Congress the opportunity to address specific problems, such as the rising costs of health care or education, without wasting political capital on sometimes controversial spending plans.
IRS BASHING. Yet even Wall Street is becoming disenchanted--because investors are so unsure which products to choose. "They put off decisions because they are confused," says PaineWebber Group Inc. Chairman Donald B. Marron. In the end, the multitude of highly publicized breaks, such as the new Roth IRA, seems only to be encouraging savers to shuffle funds from one tax-advantaged plan to another.
Now, the politics may be changing as Congress considers privatizing a portion of Social Security--a move that could further complicate an already complex savings system. Creating a single tax-deferred account could provide a convenient vehicle for individuals to use if Congress approves privatization.
Yet despite all the talk about "simplifying" the tax code, this Congress has done little more than bash the Internal Revenue Service. Lawmakers would be doing voters a bigger favor if they began in earnest to streamline the tax code--starting with savings incentives.