Many Americans won't have enough for retirement, but Congress may make it easier to stash money away

Monday, July 17th 2000, 12:00 am

By: News On 6

Congress, concerned that many Americans will be poverty-stricken in their "golden years," is considering changes to the nation's pension laws that would make it easier for workers to save for retirement.

Better late than never is John Howton's response to the news. Take, for example, the proposal to raise the annual contribution limit for individual retirement accounts from $2,000 to $5,000.

"It sounds like a very good idea," said Mr. Howton, 53, who owns a jewelry store in Arlington. "Two thousand dollars a year is kind of puny for somebody who's self-employed."

In fact, Mr. Howton said if lawmakers had raised the contribution limits when he was younger, he would have opened an IRA.

"It [the proposed legislation] is not going to be a great benefit for me," he said, "but someone who's in their 30s and 40s, I would think it would be very much an incentive. It makes people more personally responsible to take care of their own retirement."

Retirement and personal finance experts certainly hope the proposed legislation has that effect on the millions of Americans who are way behind the eight ball in saving for retirement.

"Many baby boomers who are now approaching retirement age have not saved adequately for their retirement," the bill's authors say in a summary of the legislation.

"In particular, this catch-up provision will benefit women who have returned to the workforce after taking time away to raise families."The Comprehensive Retirement Security and Pension Reform Act, sponsored by U.S. Reps. Rob Portman, R-Ohio, and Benjamin Cardin, D-Md., proposes the following changes in the nation's retirement laws:

Gradually raise the current $2,000 annual contribution limit for traditional and Roth IRAs to $5,000 by 2003. The limit would thereafter rise each year based on inflation. A catch-up provision would allow taxpayers age 50 and older to begin contributing the full $5,000 in 2001.

The intent of the catch-up provision is to enable those workers to make up for the years when they weren't working, didn't contribute to their retirement plan or otherwise weren't able to save.

Just half of male workers have pension or retirement plan coverage, while only 45 percent of female workers are covered, said the American Council of Life Insurers.

More than 50 million American workers don't have any coverage at all.

By 2005, increase the limit on contributions to employer 401(k) retirement savings plans from the current $10,500 to $15,000 and index that amount for inflation after 2005. Limits on employer matches to employee contributions would also be increased. People age 50 and older would get an extra $5,000 limit, or $20,000 total.

Create a new 401(k) plan similar to the popular Roth IRA, which differs from a traditional IRA in that withdrawals, rather than contributions, are tax-free if certain conditions are met.

Shorten employer-offered pension vesting from five years to three years. Vesting is the process by which employees acquire the right, depending on how long they've worked at a company, to receive employer-contributed benefits, such as a pension plan.

Additionally, the legislation would make 401(k) plans more portable so that workers could more easily roll over and consolidate retirement savings into a new plan when they change jobs.

"This bill would make it seamless," said Brian Besanceney, a spokesman for Mr. Portman.

Streamline and simplify pension laws to encourage small businesses to offer retirement plans to their workers.

The House Ways and Means Committee approved the legislation last week and sent it to the full House, which is expected to vote on it this week.

Long-overdue changes

"These are needed changes that will give people the chance to save more for retirement in an IRA, 401(k)-type plan or a traditional pension," Mr. Portman said.

"Our bipartisan plan strikes the right balance, it's fair, and it will make a real difference in the lives of millions of Americans."

The bill has wide support, and he's optimistic about its chances of it becoming law, he said.

"This is something we can get done this year," Mr. Portman said.

Retirement experts said the changes are long overdue.

"Just putting in that extra $3,000 a year would really help people boost their savings quickly," said Ed Slott, a certified public accountant in Rockville Centre, N.Y., and publisher of Ed Slott's IRA Advisor.

"Most people are unprepared for retirement."

Baby boomers should have saved $80,000 to $100,000 by age 45 for retirement, said Mike Esser, a principal and manager of government relations at the Edward Jones brokerage firm in St. Louis.

"The current level is under $20,000 on average," he said.

"The challenge is to provide an incentive for the baby boom generation to start saving, and this bill makes a dramatic step in that direction."

The Roth 401(k) will be especially helpful, said Russell Morgan, senior retirement consultant at Watson Wyatt Worldwide in Dallas, a management consulting firm.

"I could see more people taking advantage of the Roth 401(k) to get the tax savings feature," he said.

"This law will help tremendously."

That's encouraging, considering that a company retirement plan and Social Security benefits typically provide only about 58 percent of retirement income, Edward Jones retirement experts said.

"That means 42 cents of every dollar of income has to come from another source like investments or wages," Edward Jones said.

"If your retirement savings plan falls short, the options aren't very attractive: Drastically reduce your standard of living, continue to work later in life or rely on the generosity of others."

Pension benefits or retirement plan income can determine whether a retiree lives in poverty or relative comfort, the life insurers council said.

"The average Social Security benefit in 1998 was $9,200, only slightly above the official poverty level of about $7,700," the organization said, citing U.S. Census Bureau figures.

"Add the average pension benefit of $10,000, and a retiree's income rises to $19,200, comfortably above poverty."

Experts said a key aspect of the legislation is that it offers hope that more small businesses will offer retirement plans to their workers.

That's where the greatest need is, they said.

"There's a very real problem," said John Emling, manager of legislative affairs at the National Federation of Independent Business in Washington, D.C., which represents small businesses.

Small businesses needing help

Eighty-seven percent of workers employed by small businesses with fewer than 20 employees don't have a retirement plan, he said.

"The smaller the business, the higher that number goes up," Mr. Emling said.

By contrast, in companies with more than 500 employees, 72 percent of workers have some form of retirement plan coverage, he said.

"It is a function of the size of the business, to a large degree," Mr. Emling said.

The cost and complexity of current pension rules are a deterrent to small-business owners to establish retirement plans, he said.

"They don't have the means to do this or hire bookkeepers to administer the plans," Mr. Emling said.

"A bill that helps small-business owners, that simplifies some of the current rules, is certainly a step in the right direction."

But the concerns of small-business owners go beyond the complexities of pension law.

For themselves, the $2,000 contribution limit is just not enough to save for retirement.

"If you're working for a big corporation and they match your contribution, it's OK," said Mr. Howton. "But when you're self-employed, you need something a little bit more aggressive. That's why I don't have an IRA."

Not everyone agrees that the retirement legislation will help the little guy.

"For the people who have 401(k)s, it will help a small group of people," said Ted Benna, president of the 401(k) Association in Bellefonte, Pa., and the man often credited with inventing the 401(k).

"The group it's going to help are employees who already have plans who would put more in than $10,500. Generally, those are individuals who are paid pretty well."

Unfortunately, for the service industry worker who toils for $7 or $8 an hour, who doesn't have a retirement plan, "I don't think it's going to help those employees," said Mr. Benna.

Pamela Yip covers personal finance for The Dallas Morning News. If you have a story idea, e-mail her at pyip@dallasnews.com.