Roth Introduces Personal Retirement Account Bill

Would Dedicate Portion of Surplus to Creation of Retirement Accounts for Every Working American

WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. (R-DE) today introduced legislation that would help Americans of every income level build a nest egg for retirement. His statement from the Congressional Record follows:

"Mr. President, I rise today to introduce the "Personal Retirement Accounts Act of 1999." This legislation has a simple but powerful purpose -- to establish personal retirement accounts for working Americans. In my view, these accounts promise to give working Americans not only a more secure retirement future but a new stake in the nation's economic growth. And, as I will describe, these accounts may provide the model for future Social Security reform.

"Just a few years ago personal retirement accounts were an exotic and even controversial concept. But no longer! Today, personal retirement accounts are a bipartisan, even mainstream, idea.

"In 1997, a majority of a Clinton Administration task force on Social Security endorsed the concept.

"In the last Congress, two comprehensive Social Security reform proposals, one introduced by Senator Moynihan, the ranking Democrat on the Finance Committee; the other by Senators Gregg and Breaux, had as a central element personal retirement accounts.

"Mr. President, let me explain why retirement accounts find so much support -- not only in Congress but among the American people. With even conservative investment, such accounts have the potential to provide Americans with a substantial retirement nest egg. And an estate that can be left to children and grandchildren.

"Creating these accounts would also give the majority of Americans who do not own any investment assets a new stake in America's economic growth -- because that growth will be returned directly to their benefit. More Americans will be the owners of capital -- not just workers.

"Creating these accounts may encourage Americans to save more. Today, Americans save less than people in almost every other industrial country. But personal retirement accounts will demonstrate to all Americans the magic of compound interest as even small savings grow significantly over time.

"Lastly, creating these accounts will help Americans to better prepare for retirement. According to the Congressional Research Service, 60 percent of Americans are not actively participating in a retirement program other than Social Security. A recent survey found that only about 45 percent of working Americans have tried to calculate how much they will need for retirement. It is my belief that retirement accounts will prompt Americans -- particularly Baby Boomers -- to think more about retirement planning.

"Mr. President, let me describe a few of the features of my bill. First, the program would run for 5 years, from 2000 to 2004, utilizing half the budget surplus projected by the Congressional Budget Office.

"Each year, working Americans who earned a minimum of four quarters of Social Security coverage -- $3,000 in 2000 -- would receive a deposit in his or her account. About 128 million Americans would receive a deposit in 2000.

"The formula for sharing the surplus among the accounts is progressive. Each eligible individual would receive a minimum amount of $250 per year, plus an additional amount based on how much they paid in payroll taxes.

"Over the life of the program, a minimum wage earner -- someone earning $12,400 this year -- would receive about $1,850. That amount is equal to a 35-percent rebate of his or her payroll taxes.

"An average wage earner -- earning $27,600 -- would receive about $2,590 -- equal to a 22-percent rebate of payroll taxes. And an individual who paid the maximum Social Security tax would get $4,560, a 16-percent rebate of payroll taxes. These figures do not include any investment income -- or deductions for the costs of running the program.

"Account holders would have three investment choices -- prudent choices that balance risk and return. The three choices are a "stock index fund" -- a mutual fund that reflects the overall performance of the stock market; a fund that invests in corporate bonds and other "fixed income" securities; and a fund that invests in U.S. Treasury bonds.

"However, my legislation also provides for a study of additional investment options - of other types of investment funds and investment managers.

"An account holder would become eligible for benefits when he or she signs up for Social Security. An individual could choose between an annuity or annual payments based on life expectancy.

"The bill also provides a number of features to ensure the program is properly run. First, 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.

"Second, 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.

"Lastly, 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.

"Mr. President, the design of this personal retirement accounts plan follows a proven model -- the Federal Thrift Savings Plan. Back in 1983, when I was Chairman of the Governmental Affairs Committee, the retirement program for Federal employees needed to be revamped. One of the new elements we added was the Federal Thrift Savings Plan -- a defined contribution employee benefit plan -- that has been a great success.

"Many Americans will undoubtedly ask, "What nest egg might grow in my personal account?" According to an analysis done by Social Security's actuaries, someone earning the minimum wage would have an account worth about $2,145 in 2004, assuming a 7.5 percent interest rate. For the average wage earner, the account would be worth about $2,990, and for the individual paying the maximum Social Security tax, about $5,250.

"Of course, over the long-term, accounts can grow significantly. For the minimum wage earner after 40 years -- in 2039, his or her account would be worth about $27,000. The average wage earner would have $38,000; and the person paying the maximum payroll tax, $66,000.

"Mr. President, some might ask, "Why start with personal retirement accounts, rather than comprehensive Social Security reform?" Indeed, my bill will not affect the current Social Security program. Personal retirement accounts are an exciting concept, but still a big job, requiring careful work by the Finance Committee.

"Personal retirement accounts also enjoy broad support, unlike many other Social Security reform proposals. So let's get these accounts up and running, proven and tested, while Congress considers carefully protecting and preserving Social Security for the long term.

"Mr. President, in closing, let me add that personal retirement accounts have another big promise. Such accounts -- if later made a part of Social Security or even as a permanent supplemental program -- may help restore the confidence of the American people in this important national program. Polls show that Social Security is among the most popular government programs, deservedly so. But many Americans -- particularly young Americans -- seem to have lost confidence in Social Security. They believe that there will be no benefits for them when they retire. Personal retirement accounts will provide the accountability and assurances that Americans are asking for.

"I encourage my colleagues to take a careful look at my bill, and I invite members to co-sponsor it.

"Mr. President, I ask for unanimous consent that a copy of this bill be entered into the Record."

A summary of the bill is attached.

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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