How Bush May Accelerate 401(k) Trends ; Three-Pronged Proposals Extend Shift from Traditional Pensions, Social Security

Article excerpt

The Bush administration wants to push Americans into greater self- reliance in looking after their own needs for their retirement years.

Social Security would be altered, with a portion of the program looking like a 401(k), involving individual accounts.

Corporations would find it easier to modify traditional pensions into retirement plans that are, again, more like 401(k)s. Younger workers could benefit from enhanced account portability. Older ones may pay a price in lower benefits.

Individuals would be given new options for tax-sheltered saving.

To supporters, the president's proposals extend long-needed opportunities to workers in an era when people are used to keeping an eye on mutual funds from their desktop computers.

"Generally, the trend is away from a pension provided by the government or companies to one controlled by the individual," says Andrew Biggs, an analyst at the Cato Institute in Washington.

But to critics, Mr. Bush's plans may fail to encourage greater savings, while accelerating a trend that has already been undercutting key goals of traditional pensions: certainty and security.

Indeed, the prospects for passage in Congress are uncertain, and some news reports suggest the White House is not putting high priority on selling the plans.

For years, corporations have been shifting from so-called "defined-benefit" pensions to 401(k) plans where investments are chosen by workers and not guaranteed to provide an income stream in retirement.

The Bush proposals come as Americans are living longer than ever, and changing employers often - a trend that has limited the usefulness of traditional pensions, where benefits rise dramatically after long years of service at a single firm.

While perhaps least imminent of Bush's proposals, Social Security reform is the most controversial. In last month's State of the Union address, Bush renewed his call for partial privatization of the program. Perhaps 2 percent of an individual's pay (or about $1 in every $6 that is now taxed for Social Security) could be invested in a personal account, with stocks among the investment choices.

A second, and newer, Bush proposal would create two new types of savings and retirement accounts for individuals. Both "retirement savings accounts" and "lifetime savings accounts" - the latter designed to help people save for needs other than retirement - would allow contributions of up to $7,500 per year. Contributions would not be tax-deductible, but the money could grow and be tapped tax- free.

Critics worry that these savings vehicles will encourage small employers to drop pension plans for their employees. Workers would be left to try to save money themselves for retirement - a task especially difficult for low-income employees. Meanwhile, they say a manager with a spouse and two children could put aside as much as $45,000 a year into the Bush tax-advantaged plans.

Under present rules, an employer wishing to set aside substantial money for retirement, also has to provide a pension system for employees. …