WASHINGTON - An expanded individual retirement account program is one of the banking industry's top priorities, but two key Senators said it makes more sense to focus on 401(k) plans.
Sen. Robert Packwood, R-Ore., chairman of the Senate Finance Committee, said he favors expanding the 401(k) deduction because the employer contribution helps promote use.
"There is tremendous room for the expansion of the 401(k)s," he said.
"People making $20,000 are not going to buy an IRA. They can't afford IRAs. They don't have the money. And the deduction-from-their-income savings plans are as good an incentive as you can get for people making under $25,000," he added.
Bankers, however, say the 401(k) option is less attractive than the expanded IRA, which they strongly favor.
"Anything that opens the door to bringing in longer-term money is very important," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America. "We have a very strong interest in more flexible IRA rules."
The IRA, he said, "is much more attractive" than an expanded 401(k).
Of a four-member panel testifying before the Senate Finance Committee last week, only John Skinner, University of Virginia economics professor, and David Wise, Harvard University economics professor, said they favor increasing IRA and 401(k) deductions.
When Sen. Packwood asked which plan would have more impact on the savings rate, however, all four economists said they would rather increase the 401(k) deduction.
"Any plan where people make the decision to save once and stick to it is better," said Lawrence Kotlikoff, a Boston University economics professor. "I favor the 401(k) because it will get people to save automatically."
Sen. John D. Rockefeller, D-W.Va., another member of the Finance Committee, agreed with the economists' choice.
"All of you came down on the side of the 401(k), which is where I would come down," he said.
But Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., defended IRA deductions and said Congress should not have limited the IRA tax deduction in 1986.
"I think we made a tremendous mistake," Sen. D'Amato said. "We took lots of families that did not have an incentive to save and made it even harder. I think an effective IRA deduction would substantially affect the rate of savings."
Committee Member Carol Moseley-Braun, D-Ill., said she also favors expanding the IRA deduction, but she does not believe it will increase the savings rate.
In a study released last month, Mr. Skinner wrote that in the long term, 401(k) plans increase net national saving by $16 for each $1 reduction in tax revenue while expanding IRAs would increase net national savings by $4 for each $1 reduction in revenue.
While the study recommended including both IRAs and 401(k) plans as parts of long-term savings strategies, it also concluded that 401(k) plans are more effective at reaching lower-income workers.
A number of proposals are pending which would expand IRAs. Bills introduced by Sens. William V. Roth, R-Del., and John Breaux, D-La., would allow penalty-free withdrawals in certain circumstances, such as the purchase of a first home.
Ms. Oppenheim writes for the Medill News Service.