With tax reform high on the administration's agenda for next year, the life insurance industry is pushing for preferential treatment for annuities.
President Obama's Task Force on Tax Reform, which is being headed by Paul Volcker, chairman of the President's Economic Recovery Advisory Board, is expected to issue a report Dec. 4 that will serve as a blueprint for tax reform in 2010.
One priority for the American Council of Life Insurers is legislation that would provide tax breaks for annuity payouts. Legislation introduced in the House in June by Reps. Earl Pomeroy, D-N.D., and Ginny Brown-Waite, R-Fla., would allow retirees to exclude from their taxable income half of any annuity payouts, up to $10,000 per year. Legislation introduced the same month in the Senate by Sens. Kent Conrad, D-N.D., and Pat Roberts, R-Kan., would allow an exclusion of up to $20,000 per year.
“Whenever there is tax legislation moving, you can have specific items included in it,” said Walter Welsh, executive vice president for taxes and retirement security at the ACLI. “If significant tax legislation moves through Congress, that might be considered as part of that.”
While tax simplification is a major goal for the task force, “there's definitely an interest in Congress and in the Obama administration in addressing the distribution phase,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council.
“There's been an interest in doing something to incentivize annuities,” she added.
Given that this year's federal-budget deficit is expected to reach $1.58 trillion, however, gaining congressional support for tax reform won't be easy.
PROPOSALS
Still, several plans have been proposed.
Under one plan, advocated by Mark Iwry, senior adviser to Treasury Secretary Timothy Geithner on pensions and benefits, and John Turner, director of the Pension Policy Center, a portion of 401(k) contributions could go toward the purchase of an annuity.
Furthermore, the purchase of the annuity could be made automatic — meaning workers would have to elect not to buy an annuity — or it could be offered as an investment option.
“The problem that we are ad-dressing is that when people are offered the opportunity to take an annuity from their 401(k) plan, most of them don't,” Mr. Turner said. “People have a reluctance to put that money down and have it gone forever.”
The administration has not set forth a position yet on the proposal.
TALE OF TWO PROPOSALS
Another proposal, from Mr. Iwry and David John, senior research fellow at The Heritage Foundation in Washington, would automatically enroll retiring workers in “trial annuities.” Under that plan, a portion of workers' retirement savings would automatically be annuitized upon retirement, unless they specified that that not be done.
Retirees would receive annuity checks for two years, after which the annuity would become permanent if they did not act.
“The goal is to get people past the initial shock,” Mr. John said. “It gets them used to the idea that their money would be in an income stream.”
Changes may have to be made under the Employee Retirement Income Security Act of 1974 to ensure that the option could be put into effect, Mr. John said.
The administration also is likely to provide a boost to annuities by issuing tax guidance that would give employers more protection from liability if they established such an annuity deduction plan.
E-mail Sara Hansard at [email protected].
