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RETIREMENT INCOME generation to prepare for retirement and to increase savings and productivity, limitations on retirement savings withdrawals should be stricter, not more lenient. A significant asset of many retirees is their owner-occupied homes. Targeted programs to assist groups that might otherwise not be able to own a home could be considered as an element in any comprehensive strategy for increasing retirement savings. Initiatives in this area could increase savings and assist these diverse groups by adding to their retirement assets. Congress may want to at least consider increasing tax incentives to financial institutions and to organizations that help nontraditional homeowners purchase homes. Moreover, since home ownership is such a substantial part of many families’ assets, policy initiatives that contribute to making housing equity accessible to retirees are well worth exploring. Since 1987, taxpayers over 55 have had some taxfree access to the capital gains portion of their home equity. Those over age 55 were entitled to a one-time exclusion of up to $125,000 of capital gains on the sale of an owner-occupied house. The Taxpayer Relief Act of 1997 liberalized this provision. Under the revised law, homeowners of any age can exclude from taxable income up to $250,000 for a single individual and $500,000 for a married couple in capital gains from the sale of a principal residence. Moreover, unlike under the old rules, the capital gains exclusion is available not just once in a lifetime, but once every two years. A second way of gaining access to the savings invested in one’s home is through a home equity loan. Although these have become popular, they may not be a very suitable way for retirees to gain access to the portion of their savings invested in their home. Lenders often impose monthly payment-toincome ratios on these loans and may be reluctant to make these types of loans to retirees for other reasons as well. Moreover, retirees are not really seeking a loan. At their stage in life, they want to permanently withdraw the equity for other forms of consumption. Yet a third way to access home equity is through reverse mortgages. These mortgages pay a monthly sum or set up an open line of credit to the homeowner in return for the bank’s taking possession of the property when the owners die. Lenders in 43 states provide FHA-insured reverse mortgages.57 It is not clear how popular this type of loan will become. Lenders cannot as a rule enforce proper maintenance of the property, and the life expectancies of the borrowers may be difficult for a lender to predict. The government might want to consider ways to encourage reverse mortgages. Perhaps this could be done through insurance arrangements, since repayment is in the form of property whose date of possession for the lender/insurer is uncertain due to mortality risk. Encouraging reverse mortgages could add substantially to the cash income of many of the elderly, and might be especially helpful to widows. Finally, broader changes to the tax code that discourage current consumption could be considered. Congress has recently begun to review consumption, flat wage, and valueadded tax proposals that would tax consumption rather than savings. While such fundamental change may not be feasible or wise, portions of the proposals might be brought into play to encourage greater savings.

might be permitted to immediately contribute these sums to plans sponsored through their employers. Contribution limits could also be varied by age to accommodate the greater savings required at older ages to reach any given retirement income. Making it easier to contribute to plans may well lead to greater coverage, as workers in smaller firms press their employers to establish simplified contributory plans for them. Elected officials should also consider developing rules that would retain for retirement more of the dollars contributed to defined contribution plans in general, and 401(k)-type plans in particular. To do this, it is not necessary to raise tax penalties to confiscatory levels or to make withdrawals totally disallowed. For example, the tax penalty for withdrawals from defined contribution plans could be graduated, so that the more a worker withdraws, the higher the penalty. Alternatively, preretirement distributions could be limited to a specific dollar maximum, or to a maximum percentage of the account balance. These changes might also be combined with fewer restrictions on the amounts workers can contribute to their plans. Greater tax-deferred retirement savings will mean that income tax revenues will fall in the short run. It is important that Congress reconsider how it measures tax expenditures for pension programs. Over time, many of these incentives will pay for themselves through increased productivity, higher real wages, and higher pensions that generate higher tax revenue. It is important that policy makers not be short-sighted when estimating the budget impacts of long-term savings programs. Methodologies should be considered that would measure the value of future tax flows and other benefits to the economy when making decisions that affect short-term revenue. The American Academy of Actuaries Pension Practice Council has compiled a list of over 100 options for reducing complexity in the tax code and encouraging coverage.

Increasing Opportunities for Personal Savings Because Americans save only if there are convenient vehicles that are widely marketed and subsidized, Congress needs to explore options that fit this profile. The most obvious are increased IRA opportunities. Already, banks and other financial institutions are aggressively marketing the recently enacted Roth IRAs. However, the changes made as part of the Taxpayer Relief Act of 1997 are probably not nearly bold enough to add perceptibly to personal savings. There is no increase in the $2,000 limit on contributions, and pretax contributions remain strictly limited. It is clear from experience that IRAs are not likely to be used widely enough to increase savings unless they have higher contribution limits and can be used by all workers, regardless of other pension coverage. To be most effective, the rules must be simple and apply generally. To encourage greater savings among lower-middle-income workers, tax credits might be considered in lieu of pretax contributions. Also, greater restrictions could be placed on withdrawals for mortgages, college, unemployment, and major medical expenses. If the objective is to assist the baby boom 29


The Problem and Options for Change PublicPolicyMonograph 1998 No. 1 A MERICAN A CADEMY of A CTUARIES