Roth Asks Colleagues to Support Retirement Savings Accounts for Working Americans

Plans to Introduce Legislation on January 19th

WASHINGTON -- In a letter to his Senate colleagues, Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) today urged them to co-sponsor a bill that would dedicate a portion of the budget surplus to the creation of personal retirement accounts (PRAs) for all working Americans.

"Today there is a growing bipartisan consensus that PRAs should be a key feature of Social Security reform. My legislation would jump start these accounts while Congress makes decisions to preserve and protect Social Security for the long term," Roth stated in the letter.

Roth will introduce the bill on January 19, and the Senate Finance Committee will hold hearings on the concept this spring. Roth introduced a nearly identical bill last July.

"I am hopeful that this idea can be the basis for a bipartisan consensus solution to building a secure retirement for all Americans," Roth stated.

A copy of the letter and a summary of the bill are attached.

# # #

January 12, 1999

Dear Colleague:

I am writing to invite you to co-sponsor the "Personal Retirement Accounts Act of 1998," which I plan to introduce next week. In brief, my bill would create a 5-year program of personal retirement accounts (PRAs) for working Americans funded with a portion of the budget surplus. Today there is a growing bipartisan consensus that PRAs should be a key feature of Social Security reform. My legislation would jump start these accounts while Congress makes decisions to preserve and protect Social Security for the long term.

My bill works as follows. Each year, every working American earning a threshold amount would receive a deposit in his or her PRA. Each account would receive a minimum of $250 per year, plus an additional amount based on payroll tax payments. Account holders would have several prudent investment choices -- following the proven model of the Federal Thrift Savings Plan -- and several payout options at retirement. An average wage earner -- today earning $28,840 -- would receive about $2,589 for his or her account -- equal to a 22-percent rebate of payroll taxes. With 7.5 percent annual earnings, this amount would grow to $2,986 by 2004 and to $37,537 by 2039. Allocations to these accounts and the earnings on them are not taxed until the individual receives distributions in retirement. Those distributions will be fully taxable at the time they are received.

PRAs have many other attractive features. Such accounts would give the majority of Americans who do not own any investment assets a new stake in America's economic growth. Creating these accounts may encourage Americans to save more, and better prepare for retirement generally. Such accounts -- if later made a part of Social Security -- might help restore the confidence of the American people in this important program.

A summary of the legislation is attached. Please call Alexander Vachon of the Finance Committee staff (4-8220) for more information or to become a co-sponsor.

Sincerely,

William V. Roth, Jr.

January 12, 1999

SUMMARY OF "PERSONAL RETIREMENT ACCOUNTS ACT OF 1999"

• The "Personal Retirement Accounts Act of 1999," sponsored by Senator Bill Roth (R-DE), would create a new "Personal Retirement Program" -- a 5-year program of personal retirement accounts for working Americans funded by a portion of the budget surplus. In general, the program is modeled after the Federal Thrift Savings Plan (Federal TSP) -- a retirement savings and investment plan for Federal employees.
• Today, there is a growing bipartisan consensus that personal retirement accounts should be a key feature of Social Security reform. The Roth plan would jump start these accounts -- get them up and running, proven and tested -- while Congress makes decisions on long-term Social Security reform. The Roth plan would also ensure that the surplus is not spent, but instead goes to work for every working American.

Key features of this bill include:

• Each working American who had earned the minimum for four quarters of Social Security coverage ($3,000 in 2000, indexed annually) would be eligible for a deposit in his or her personal retirement account. About 128 million Americans would receive a deposit in 2000, rising to about 132 million in 2004, the last year of the program.
• The first deposits would be made to personal retirement accounts on October 1, 2000. The bill would distribute half the budget surplus each year 1999 through 2004, as projected by the Congressional Budget Office.

• The formula for distributing the budget surplus is progressive. Each eligible individual would receive a minimum amount of $250 per year in his or her account, plus an additional amount based on their share of payroll taxes.
• As the table below shows, over the 5-year life of the program a minimum wage earner (earning $12,980 in 1999) would receive $1,853 in his or her account -- equal to a 35 percent rebate of payroll taxes. An average wage earner (earning about $28,840 in 1999) would receive $2,589 -- equal to a 22 percent payroll tax rebate. And an individual who pays the maximum Social Security tax (earning at least $72,600 in 1999) would receive $4,561, a 16-percent rebate. (These figures do not include investment income to accounts -- or deductions for the costs of running the program.)

• Account holders would be provided with three prudent investment choices: a "stock index fund" -- a mutual fund that would represent the overall performance of stock market; a fund that invests in corporate bonds and other "fixed income" investments; and a fund that invests in U.S. Treasury bonds. Legislation also provides for a study of other investment options.
• At the time an individual signs up for Social Security benefits (minimum age 62), he or she could elect one of two kinds of: (1) an annuity; or (2) annual payments based on life expectancy.
• Future value of the accounts is shown in the table below (assumes 7.5 percent annual interest rate).

• Allocations to these accounts and the earnings on them are not taxed until the individual receives distributions in retirement. Those distributions will be fully taxable at the time they are received.

• The bill provides a number of features to ensure the program is properly run:

1. The program would be supervised by a new, independent Personal Retirement Board, with members appointed by the President and Congressional leaders and subject to Senate confirmation. Board officials would be fiduciaries, and required by law to act only in the best financial interests of beneficiaries.

2. The program would be neither "on" budget nor "off" budget -- instead, the program would be outside the Federal budget. The money in the program could be used for no other purpose than retirement benefits and the program's operating expenses.

3. The stock funds would be managed by private sector investment managers. To insulate companies represented in the stock funds from politics, no Board official or other government employee would be eligible to vote company proxies -- only the investment managers.

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