Will Washington Re-Declare War
on Annuity Buildups?
by Michael Finley
Exclusive to Magazine
Copyright © 1993 by Michael Finley. All rights reserved.
As the Clinton administration comes to grips with its task of reducing the $3 trillion budget deficit, numerous insiders have made the familiar statement that "everything is on the table." That statement has sent every special interest everywhere scurrying for higher ground. In particular, it reminds planners and people in the insurance industry of last year's fight over the removal of tax deferment benefits from annuity buildups. Is it likely that annuities may again be targeted as a source of revenue for a goivernment that doesn't know where else to turn? Financial Planning News looks at the government's case, and the industry's likely response.
The Case. The U.S. government is broke. Over a decade of high deficit spending helped bring down the Iron Curtain, but it has nearly bankrputed us at home as well. While the Clinton administration hopes to achieve real spending reductions with Congress, promised new health care and other programs force it to take a hard look at the revenue side as well. Taxpayers are not only hostile to the idea of a general tax hike -- many in the middle class are expecting tax cuts. Annuities enjoy a tax-deferred status that the nation can ill afford. While often used for retirement savings, they are also used as tax-defered savings accounts by people in comfortable circumstances for college, vacation homes, and non-essentials. Combined with a balance of other sacrifices, going after the government's fair share of this money is an equitable way to begin bringing down the deficit numbers.
The Rebuttal. First of all, says Jack Dolan, spokesman for the Council of Life Insurers, any attack on annuity buildups is a replay of what happened a year ago at this time, when the Bush administration tried it. "The proposal came down on January 29th last year, and within a week the administration admitted it was a bad idea. I do not believe there was a single member of Congress who was emphatically in favor of it. If it comes up again, I don't see why things should be any different."
But politics was only one reason the initiative failed. It meant striking the tax benefits from $290 billion dollars, 17.3 million individual accounts, in order to capture a meager $1.7 billion in new taxes -- chump change next to the hundreds of billions needed to make a dent in the $3 trillion-plus deficit.
And at what cost to the nation's savers? Planner Amy Leavitt, of Quechee, VT, doesn't envy the government's task. "The 1986 Reform Act eliminated most investments that prevented government from getting anything. There's not much left out there to go after, especially with lower tax rates.
"But tax-deferred growth offers a balance. Annuities don't offer current deductions, like IRAs, which cost the government money upfront. They invest after-tax money. You've already paid tax on the principal. By keeping it invested you're deferring the tax. The goverment will get its money eventually. But you have given people an incentive to keep the money long-term."
Don Haas, of Haas Financial Services, Southfield, MI, puts it bluntly. "Retirement funding is a three-legged stool -- employer contributions, Social Security, and individual savings. But the stool is wobbling badly. Over the past 30 years defined benefit pension plans have largely disappeared. They're complicated, they're expensive, so they're going by the wayside, replaced by 401(k) profit sharing-type plans.
"Social Security? It's a very unclear situation. If many in the baby boom generation live to be 100 -- and I tell my clients they probably will -- they will be paid astronomical amounts of money in their final years. Indexing for inflation is the reason. It seems obvious that at some pont we will have to raise taxes or reduce the benefits -- maybe both.
"That leaves the individual. We keep telling him, you're going to have to do a lot of this yourself. But what happens if we remove the tax benefits of saving, as this proposal would do? You wind up with a three-legged stool with no legs, and that's bad news."
Bad news for the retiree -- and what would it do to providers of annuities? Bill Chapman here
Talking about moving to more consumptive taxes -- gasoline, energy that sort of thing. But if we want to r4eward savings,w hich will help the economy, tax-deferred vehicles are the way to do it.
Jim McIntyre, Washington counsel to IAFP, doesn't know of any imminent assault on annuity buildups. "But clearly, there will be tough decisions ahead. Clinton knows the deficit must be capped. Gram-Rudman never worked, it never once made its targets. They say that with one party in both the White House and Congress, that cooperation on spending reductions might come easier. But at the same time, the Democrats have 12 years of pent-up demand to deal with."
There is division even within the administration. Treasury Secretary Lloyd Bentsen is an historic advocate of tax-deferred plans, and has said he would like to expand their benefits to encourage savings. Incoming budget director Leon Panetta, on the other hand, has said that deficit reduction must come first.
The fairest approach, everyone agrees, is one in which all parties chip in a little, and the burden isn't saddled unequally on one sector or program. Most in financial services would prefer to see new taxes come in the form of consumption taxes, such as on gasoline and energy. But in the season of the axe, no spending is guaranteed, and no revenue source is safe.
You can't distract them , you can only point up the merits.
Ed Tessmer, insurance company sales manager. Nationwide National Sales manager, Columbus OH 614-249-8128,
Lynn Burcher, insurance company sales manager. Kemper, Chicago, 312-499-1292, Bill Chapman
American Council of Life Insurers ... 202-624-2000 ...
Michael Finley is a St. Paul-based writer specializing in issues of management, technology, and quality.