EDITORIAL: DON’T BE FOOLED BY SMOKE AND MIRRORS

If President Clinton were an army general, he’d rival Dwight Eisenhower.

If we were a magician, he’d rival Harry Houdini. Gen. Eisenhower confused Hitler about where the Allied invasion of Europe would occur by feinting at several different parts of the French coast. Houdini, like all magicians, distracted the audience’s attention while carrying out his real objective. The president has used a similar tactic in his budget proposal to distract the insurance industry — and to divide and conquer it.

Mr. Clinton is attacking on three fronts. First, he has proposed taxing the inside build-up of variable annuities by charging a federal penalty on virtually every change in an annuity. Second, he’s going after corporate-owned life insurance by reducing the tax deductions available to companies. Third, he wants to increase taxes on the insurance company reserves that back annuities.

The president knows he’s not going to win all three battles, so which is his real target? Where should the insurance industry concentrate its defenses?

It’s not the tax on variable annuities; that would raise only $900 million in the next five fiscal years. And eliminating the corporate-owned life insurance tax credits would bring the government $2.2 billion. No, the administration’s top target is the insurance company annuity reserves: Its proposal would raise the most revenue — $4.6 billion by fiscal 2003 — and it’s likely to be the most heavily defended.

Like most good generals, Mr. Clinton will take what the enemy gives him. If the insurance and financial planning industries do not mount strong defenses of variable annuities — if they concentrate their efforts on protecting the annuity reserves and life insurance tax credits — the administration will gratefully snap up the $900 million.

Fortunately, variable annuities are probably the easiest target to defend because they have attracted strong following from financial planners and insurance agents and — boosted by a roaring bull market — hundreds of thousands
of retirees and individuals saving for retirement.

Yes, there are problems with such annuities. Costs are too high. Anti-consumer churning practices that merely generate sales commissions must be corrected. But annuities seem to fill a void for many investors who want higher returns and insurance features that protect their principal. The financial planning industry can rally those investors so that every member of Congress hears loud and clear that variable annuities are not an easy target of opportunity for a revenue-hungry administration.