As recently as 30 years ago, the overwhelming majority of employee retirement plans were defined benefit plans. A defined benefit plan typically guaranteed a fixed monthly payment for the life of the retired worker. Currently, defined benefit plans are becoming rare outside the public sector. Most non-public employers instead offer a defined contribution plan. These plans make no guarantees about lifetime income. Instead, the employer simply makes (or allows employees to make) contributions.
This shift has received lots of media attention and policy-maker concern. One of those concerns is the impact on women, who tend to have fewer years in the workplace before retirement age and live longer afterwards, when compared to men. Working less years at typically lower wages reduces not only retirement savings opportunities with the employer, but also Social Security retirement benefits, which are based upon wages earned.
Oregon Senator Gordon Smith, along with bi-partisan co-sponsors, introduced a bill in the Senate that addresses one aspect of this problem. Among other retirement incentives, the bill provides special treatment for assets received as annuities (a guaranteed payment for life) from both qualified retirement plans, such as 401(k) or profit sharing plans, and non-qualified plans. Annuity payments from qualified plans are 10% income tax-free up to a limit of $2,000 annually. Annuity payments from non-qualified plans are 50% tax-free up to $20,000.
The bill also allows the tax-free purchase of longevity insurance, a special type of insurance policy that begins making life annuity payments when a person attains their life expectancy. Many retirees budget their retirement savings over their life expectancy. The insurance would guarantee an income stream for those individuals who live longer than their expected life span.
It's too soon to know whether this bill will become law, and what impact it will have if it does. But it's good news that policy makers continue to seek solutions for Americans' chronic inability to save for retirement.
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