Unveiling a new set of initiatives during his Saturday radio address, President Barack Obama made a sweeping promise to workers. "We cannot continue on this course," he said. "If you work hard and meet your responsibilities, this country is going to honor our collective responsibility to you: to ensure that you can save and secure your retirement."
[For more, see 3 Ways Obama's Saving Initiatives Will Affect Your Retirement.]
Obama's proposal, which includes a provision that would help small businesses automatically enroll employees in savings plans, comes as workers struggle to recoup losses on their recession-ravaged retirement investments. Although Obama does not need congressional approval to enact his plan, which is administrative in nature, his remarks follow on the heels of a recently renewed—although lesser-known—push on the Hill to tackle retirement savings.
Earlier this summer, GOP Rep. Paul Ryan of Wisconsin and GOP Sen. Mike Crapo of Idaho reintroduced the Generate Retirement Ownership Through Long-Term Holding (GROWTH) Act, which looks to defer capital-gains payments for investors in taxable mutual funds. Supporters hail the bill, which has been caught in legislative limbo since 2000, as an opportunity to encourage workers to invest in their future.
Currently, when a mutual fund sells a holding at a profit, investors are required to pay taxes—usually at a rate of 15 percent—even if they put the money back into the fund. Some have called this taxation unfair, arguing that individual investors have no control over when a fund sells an asset.
With stocks, for example, individual investors choose when to sell. And when they do unload an asset at a profit, they have cash on hand, as opposed to merely more shares in a fund. The bill would allow share owners in mutual funds to defer payments until they actually withdraw their profits.
Advocates say that the move would have downstream effects on savings since mutual funds are an attractive option for workers looking to invest for retirement. "Mutual funds offer the best way for middle-class and working-class people to get diversification and professional management and strong custody of their assets in an affordable package," says Mike McNamee, a spokesperson for the Investment Company Institute, a group that lobbies on behalf of funds and investors.
But the proposal, which has long been caught at an awkward crossroads between obscurity and a divisive debate over taxation, faces a number of obstacles. For starters, it's still homeless. Its only real hope for passage is to be included as part of a larger tax overhaul, but it has historically failed to make it into such bills. Then there's the issue of costs. While the initiative would defer rather than eliminate taxes, it would deprive the federal coffers of short-term profits at a time when legislators are instead pushing for increased revenues.
To discuss these challenges, U.S. News spoke with Representative Ryan, a member of the House Ways and Means Committee and a perennial sponsor of the bill.
Congress has been considering this change since 2000. Why do you think the legislation hasn't been approved yet?
I have yet to run into very effective or forceful arguments against doing this. It's mostly been a cost issue or simply an issue of finding the right bill to get it done in. It's bipartisan; it's always been bipartisan. The way I see it, mutual funds have democratized capitalism for workers, and they've put sophisticated investing within reach of every American. And the whole notion of capital-gains taxes is you get taxed when you realize the gain, and that notion ought to be replicated within mutual funds. So I find very little resistance to it in Congress. It's just finding the right legislative vehicle and finding the physical space to get this done.
What would this legislative vehicle look like?
It will probably be a tax bill that I don't like because it will do other bad things while we try to do this good thing . . . . The other thing is it's going to cost revenue. When the Democrats are looking to raise revenues, they're less likely and less inclined to want to support bills that theoretically cost revenue. Now this really doesn't cost revenue in the long run, but in the budget window it does. Because—I don't agree with the score —but the scorekeepers will say you're pushing money outside the five- and 10-year window because those tax collections won't occur until the person sells the mutual fund and realizes a gain.
How do you justify the short-term costs?
I believe what will happen is this will make mutual funds more attractive, more efficient—and you'll have more investment, and therefore the volume will make up for it and you'll have more realizations and therefore more tax revenues.
But is now the right time for the bill given that Congress is struggling to bring in money?
Absolutely. I don't think Washington should be on the hunt for increasing taxes and raising revenues. We should be focused on cutting spending and doing what we can to help people build back their savings portfolios that have been savaged with the economic downturn. This of all times is when we should do a bill like this because so many people have lost about 40 percent of their wealth for their retirement nest eggs. This would be one of the critical, easy things we could do to help people replenish their lost wealth as they near retirement. And so to me, this would just be a good economic policy. I think it would eventually more than pay for itself. And again, the goal here should not be raising taxes but cutting spending.
What other benefits do you see coming from this bill?
I think it will help get some investment into the economy. I think it will take a lot of money that's sitting on the sidelines and get it back into the marketplace and help create jobs. This puts capital to work. It not only helps retirement, but it puts money back into the market that's going to be invested. So this is going to help supply seed capital to businesses that are desperately needing it. And the way I see it is right now in this credit crunch we have, and in a moment where the common investor and mutual fund investors are hunkering down with a very conservative strategy, I think it will help unlock capital for business start-ups, and it will help the economy in that way.
How has this bill been affected by other investment-related issues, such as regulation following Bernie Madoff's Ponzi scheme, that are before Congress?
I think the public trusts mutual funds a lot more these days . . . . So mutual funds can be a refuge for the investor who just wants to rebuild his retirement savings.