Retirement: Help For Clueless Baby Boomers

Forgot you'll need money to retire? Congress has an answer

Every day, 10,000 baby boomers turn 50--and find retirement looming closer and closer. Even with a raging stock market, many feel twinges of regret about all those years when saving took a back seat to spending. But where there's voter angst, there are sure to be politicians waving a solution.

Republicans in Congress have an answer for boomers' fears: catch-up contributions to let laggard savers make up for years when they didn't put money into their employers' 401(k) or similar pension plans. In a pitch to parents, the GOP would give those returning from maternity or paternity leave three years to make up the tax-deferred contributions they missed.

A second, more ambitious idea would allow parents who didn't work or didn't participate in a 401(k) while raising kids to make double the tax-favored contribution now permitted by employers, up to $11,400 a year. With child-rearing behind them, parents could put extra savings into a pension for as long as 18 years.

AIMING FOR WOMEN. Republican leaders figure that their pension scheme--dubbed the Women's Investment & Savings Equity (WISE) Act--will appeal to elusive female voters. The GOP already championed higher limits on contributions to individual retirement accounts for nonworking spouses in this year's tax-cut law. "Women have really gotten the short end of the pension stick," says Senator Judd Gregg (R-N.H.), who wrote the WISE bill.

Business groups see the germ of a bigger idea: catch-up plans for all workers. Annual limits on 401(k)s "don't recognize the economic reality: There are times in your life when you have more ability to save," says James A. Klein, president of the Association of Private Pension & Welfare Plans. The benefits group advocates raising the limits for tax-favored saving for all workers over 50, even those who have saved steadily. Companies like to boost 401(k)s because the tax breaks are popular with managers and don't cost companies much.

Such an expansion could raise the nation's anemic savings rate. But the tax break could blow a big hole in the federal budget: Salary that's deposited into 401(k)s isn't taxed, and earnings grow tax-free until they're withdrawn.

The Republican plan holds down expenses by targeting parents. Congress' Joint Committee on Taxation estimates that catch-up contributions after family leave would cost less than $1 billion over five years. Although there's no official estimate for the 18-year catch-up, it's bound to cost more. Still, it isn't as generous as it might seem: If parents deposited even a token amount in a 401(k) during a year, they'd be barred from later making catch-up savings for that year.

In fact, most workers who qualify for 401(k) plans do contribute. Benefits consultant Watson Wyatt Worldwide finds that 77.5% of male workers in their 40s and 77.1% of females participate. But contributions tend to fall far short of current limits: Only 12% of fortysomething men, and 7.8% of women, put away the maximum $9,500. "What you need is a plan that lets people carry forward their unused contributions," says Sylvester J. Schieber, director of research at Watson Wyatt.

WHOSE BREAK? That could be hard to administer. Job-switching workers would have trouble keeping track of contributions. And opponents also argue that only upper-income families could take advantage of higher 401(k) limits. The Clinton Administration hasn't yet taken a stand on the catch-up idea, but officials say they'd frown on funneling bigger tax breaks to the better-off.

Advocates aren't deterred. While savings tax breaks cost the Treasury in the short run, pension investments more than repay the loss by spurring economic growth, argues Dallas L. Salisbury, president of Employee Benefit Research Institute. And pension earnings yield more revenue later because they're taxed as ordinary income, vs. the lower capital-gains rates other investments enjoy. Instead of fretting over near-term revenue losses, says Salisbury, Washington should aim for a flexible policy of "lifetime savings."

The first test of that grand concept will come next year, as Republicans push their catch-up plan for parents. The idea will face stiff opposition. But all of those 50-candle birthday cakes are sure to turn up the heat as politicians search for new ways to help baby boomers build their nest eggs.

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