or profit-sharing plans. The effect of such plans is to defer for tax purposes to years after retirement a substantial part of the compensation currently earned. No such relief is now available to self-employed persons or to others whose employers have not established such plans. This substantial inequity should be mitigated by legislation that would permit self-employed persons and others not covered by existing pension plans to deduct from their taxable income limited amounts to be set aside each year in restricted retirement funds. Legislation along the several lines proposed in the ReedKeogh bills, introduced last year, and reintroduced this year as the JenkinsKeogh bills (H. R. 10 and H. R. 11) should be enacted. Sincerely yours, THOMAS JEFFERSON MILEY, STATEMENT OF THE NATIONAL ASSOCIATION OF LIFE UNDERWRITERS The National Association of Life Underwriters, which is a trade association having a membership of upward of 55,000 life-insurance agents, general agents, and managers, wishes to take this opportunity to express to your committee its views on H. R. 10 and 11 (83d Cong., 1st sess.), which are hereinafter collectively referred to as the "Jenkins-Keogh bill" and the "bill." As we understand this bill, it would permit a self-employed person or an employed person not covered or eligible for coverage under a qualified pension plan set up by his employer to exclude from gross income annually amounts paid by him into a bank-trusteed restricted retirement fund or toward the purchase of a restricted retirement annuity contract, to the extent that such amounts did not exceed the lesser of $7,500 or 10 percent of his earned net income, and subject to an overall lifetime limitation of $150,000 on such amounts. In addition, for any participant who happened to be between 55 and 75 years of age at the time of enactment of the bill, the above-mentioned regular annual exclusion would be increased by 1 percent of his earned net income, or $750, whichever might be the lesser, multiplied by the number of full years of his age in excess of 55. Upon reaching age 65 (or later retirement age), the participant would commence receiving distributions from the restricted retirement fund or payments under his restricted retirement annuity contract and would then report such distributions or payments as taxable income. Prior to a participant's reaching age 65, there could be no distributions from the restricted retirement fund or payments under his restricted retirement annuity contract to him or his beneficiaries, except in the event of his total and permanent disability or death. The Jenkins-Keogh bill is a revised version of the Reed-Keogh bill (H. R. 4373 and 4371, 82d Cong., 1st sess.), on which this committee held hearings on May 13, 1952. At that time, we filed with you a statement, dated May 9, 1952, which, while expressing our agreement with the general principle underlying the bill, also pointed out what we conceived to be serious defects and inequities in the specific provisions thereof. We still agree with the general principle of this proposed legislation but feel that the Jenkins-Keogh bill itself contains virtually as many defects and inequities as its predecessor. As we shall point out herein, it would (1) create a totally unwarranted and unjust discrimination against life insurance, (2) tend to produce widespread and unwise surrender and lapsation of existing policies, which would certainly not be in the public interest, and (3) by denying any sort of income exclusion to employed persons covered by pension plans, not only result in discrimination against such persons but also very likely have an unsettling effect on the thousands of pension plans now in existence, many of which are funded by life insurance. In the first place, while the Jenkins-Keogh bill, unlike the original ReedKeogh bill, would encourage an individual to provide for his retirement through the purchase of a restricted retirement annuity contract or contracts, as well as through participation in a restricted retirement fund, he apparently would not receive the benefit of the contemplated income exclusion for payments made on account of existing annuity contracts otherwise qualified as restricted. Even more important, the bill would absolutely preclude the use of life insurance or endowment contracts as permissible methods of funding his retirement program. As your committee is undoubtedly well aware, life insurance and endowment contracts are immensely popular and sound investments in that they provide not only a means whereby the breadwinners in millions of families can, through the cash values accumulated under such contracts, assure themselves and their dependents of adequate retirement incomes but also invaluable life-insurance protection in the event of their premature death. To exclude these types of contracts as permissible funding media under the Jenkins-Keogh bill would, we fear, lead many people, in their desire to obtain the current income-tax advantages resulting from their participation in a restricted fund or their purchase of restricted retirement annuity contracts, to lapse or surrender existing life insurance and endowment contracts, to the eventual detriment of themselves and their dependents. Accordingly, we propose that if the Jenkins-Keogh bill or similar legislation is to be enacted, it first be amended to include appropriate provisions permitting the use of both new and existing individual life-insurance and endowment policies, as well as annuity contracts, as one of the methods whereby a taxpayer may fund his retirement program under the bill. Briefly stated, we contemplate that such a plan would be applicable to any such policy (either new or existing), except a term-insurance policy. That portion of the premium which is applied to building up the policy reserve would be excludable from the taxpayer's current income, while that portion of the premium representing the cost of the pure insurance protection under the policy would not be excludable. (This would simply parallel the tax treatment given to employees under qualified pension plans that are funded by insurance.) The policyholder would have the right to surrender his policy for cash or to obtain a loan thereon at any time. However, in the event of any such surrender or loan, he would be required to report as taxable income for the current year that portion of the entire cash surrender value as was attributable to the premiums that he had previously excluded from his income. Moreover, he would not be permitted to lessen the resulting tax liability by qualifying a number of small policies, instead of one large policy, for the Jenkins-Keogh tax treatment. In such case, if he surrendered or borrowed against any one of such policies, the cash surrender values of all (to the extent attributable to premiums theretofore excluded from income) would have to be reported as taxable income. Thus, while the policyholder could surrender or borrow against his policy or policies in the event of real economic need, we believe that the tax consequences outlined above would serve as a deterrent to taxpayers who might otherwise be more interested in juggling their tax liability from year to year than in setting up bona fide programs designed to take care of their retirement needs. Apropos of our suggestion that a taxpayer owning qualified life insurance policies be allowed to surrender or borrow against them at any time prior to age 65, we should like to explain, first of all, that this flexibility was found to be necessary to meet the requirements of State laws, which will not permit the issuance of life-insurance policies containing provisions tying up the cash values thereof. However, we wish to make it perfectly clear that we are not asking that this liberalized treatment be confined to life insurance and annuities under the Jenkins-Keogh bill, but suggest that consideration be given to extending similar treatment to restricted retirement funds and to any other form of savings that your committee may see fit to include in the bill. In this connection, we are extremely doubtful, in any case, of the social desirability of making it virtually impossible (as would the existing form of this bill) for a man to use his savings no matter how dire his needs and those of his family may be. In addition, we feel constrained to point out that because of the restrictive nature of the present bill, participation in the retirement programs and the resulting tax benefits provided thereunder would, in our opinion, be confined largely to older individuals in the higher income tax brackets, especially where such individuals already had a backlog of savings, accumulated in years past when taxes were much lower than at present, which they could funnel into a restricted retirement fund or a restricted retirement annuity contract. Before leaving the foregoing point, we should like to emphasize that we are not making a plea that life insurance be given special treatment that is more favorable than that accorded to any other form of savings program that may ultimately be provided by the Jenkins-Keogh bill. We simply are of the conviction that life insurance should be recognized as one of the permissible methods of funding the contemplated individual retirement programs just as it has long been recognized as such in the case of qualified pension plans. The second fundamental objection that we have to the present form of the Jenkins-Keogh bill is its complete denial of the tax benefits provided thereby to employed persons who are covered or eligible for coverage under qualified pension plans of their employers. Present statistics tend to show that the 10-percent exclusion provided by the bill for self-employed persons and for employees not covered or eligible for coverage under qualified pension plans is roughly twice as large as the amounts that employers, on the average, have been contributing to such plans. This is so because, among other reasons, under many pension plans employees have to serve long waiting periods before becoming eligible to participate, or, once having become participants, have no vested rights in the employers' contributions to the plans. Accordingly, while those employees who serve until retirement may thereafter receive very substantial pensions, there are many more who leave prior to that time and, therefore, receive nothing. Thus, while the proponents of this bill (who are primarily self-employed professional people) contend that one of the principal purposes thereof is to eliminate the discriminnation in income-tax treatment that now exists against them and in favor of employees covered by qualified pension plans, the fact seems to be that unless such employed persons are permitted a limited exclusion under the bill, the existing situation will merely be reversed by the creation of a new discrimination. We feel that such a discrimination would have a substantial, unsettling effect on the thousands of existing pension plans, many of which, we repeat, are funded by life insurance. In these circumstances we also recommend the inclusion of the following provisions in the bill: 1. A provision permitting employed persons who are covered or eligible for coverage under qualified pension plans to exclude from gross income up to 5 percent of earned net income if set aside for retirement purposes in a restricted retirement fund, in a life insurance, endowment, or annuity contract (as we have hereinabove suggested), or in any other form of qualified savings program that your committee may feel should be recognized under the bill. 2. An additional provision permitting employed individuals covered by qualified contributory pension plans to count their own contributions to such plans in computing their permitted 5 percent income exclusion. In conclusion, we should like to say that our association, working in conjunction with the American Life Convention and the Life Insurance Association of America (which represent a combined membership of 240 life-insurance companies in the United States and Canada having more than 98 percent of the legal reserve life insurance in force in this country), have developed specific amendatory language which we feel would accomplish the results recommended in this statement. Representatives of this association will be pleased to discuss those suggested amendments in detail with your committee or its staff at any time or to help in any other way in devising a satisfactory and equitable solution to the troublesome problem at hand. Respectfully submitted. Gerard S. Brown, GERARD S. BROWN, C. L. U., Chairman, Committee on Federal Law and Legislation. Dated: August 12, 1953, 11 West 42d Street, New York 36, N. Y. Counsel. STATEMENT ON INDIVIDUAL RETIREMENT LEGISLATION BY THE AMERICAN LIFE CONVENTION AND THE LIFE INSURANCE ASSOCIATION OF AMERICA, WASHINGTON 5, D. C., RE INDIVIDUAL RETIREMENT LEGISLATION-ITEM 36 OF THE AGENDA OF THE WAYS AND MEANS COMMITTEE This statement is submitted in behalf of the American Life Convention and the Life Insurance Association of America, two associations which represent approximately 98 percent of the life-insurance business of the country. It is filed with the Ways and Means Committee in connection with the hearings announced by the committee on the subject of individual retirement legislation— item 36 of the committee's agenda. The life-insurance companies are in accord with the underlying philosophy that all persons should be encouraged by tax incentives or otherwise to save for their old age. They realize also that individuals who are not employees of corporations having retirement plans may be at a disadvantage under the present tax laws and are finding it increasingly difficult to provide for their retirement. The basic problem is to develop a sound plan that will remove this discrimination. A basic principle that should be carefully considered in a study of individual retirement legislation is whether such legislation should limit the channels through which taxpayers may save for retirement. In one important type of legislation now being considered (H. R. 10, H. R. 11, H. R. 2692, and H. R. 6114, the so-called Jenkins-Keogh bills) retirement savings may be invested only in bank trusts or restricted annuities. Many taxpayers have long established their individual retirement savings plans which involve other forms of investment which would not qualify under such restrictions. For example, under such legislation, a taxpayer who purchases an endowment policy or continues to put his savings in policies already in force, could not qualify for the proposed tax deferment. It would seem that any individual retirement legislation should be so drafted that taxpayers as far as practicable will not be discouraged from continuing established savings programs. In developing individual retirement legislation designed to cure tax inequities between employed and self-employed persons, it should be recognized that the retirement problem of the self-employed is not on all fours with that of employees. There are some basic points of similarity but there are fundamental differences. These basic differences are: 1. The retirement of an employed person usually involves considerations quite different from those pertaining to the retirement of a self-employed person. Unlike employed individuals the self-employed person has a large measure of control over the time and circumstances of his retirement. He can continue to work if he elects to do so. He will frequently continue to derive income from his business or profession. The tendency on the part of the self-employed individual is not to retire. 2. The self-employed individual under the concept of Jenkins-Keogh bills would have vested rights from the outset in his retirement savings. In event of death before age 65 or disability, his savings are distributed to beneficiary (ies) designated by him. At age 65 or prior disability he can elect to have his retirement savings payable to him in a lump sum. In contrast, under many employee-pension plans, the employee's interest in the employer payments does not vest in him unless he continues in employment until retirement, and then only as pension or annuity payments. Other plans provide for vesting only after completion of specified service age requirements and then only in the form of annuity or pension payments commencing at normal retirement date. Another important question is whether it is socially desirable to enact legislation which would require taxpayers to put their savings in a retirement fund from which no withdrawals could be made until age 65, except in the case of total and permanent disability. During periods of personal financial need, some provision should be made to permit the taxpayer to utilize these savings. Without this privilege, many individuals might refrain from participating in a savings program of such a restricted type unless they were in very comfortable econome circumstances. When the Committee on Ways and Means of the 82d Congress held hearings on legislation for postponement of income tax on income set aside for retirement, the life-insurance-company associations filed a statement analyzing H. R. 4371 and H. R. 4373. Several questionable features of these bills were discussed in our statement and your committee was advised that the amendment of these bills to remedy these questionable features would require carful study. Since then, these bills have been reintroduced as H. R. 10, H. R. 11, H. R. 2692, and H. R. 6114. The life-insurance companies have studied these new bills and believe that additional amendments are necessary and desirable. If the individual retirement problem is to be solved along the lines of H. R. 10, H. R. 11, H. R. 2692, and H. R. 6114, the life-insurance companies strongly recommend that these bills be amended to include 1. A provision permitting individuals to accumulate their retirement savings in both new and existing life insurance policies without the intervention of a trust. Only the savings feature of the policy would qualify for tax deferment. The cost of the insurance protection as distinguished from the savings feature of the policy would not qualify. This tax treatment would parallel the use of life insurance policies under section 165 pension plans. 2. A provision permitting an employed individual eligible under an employer pension plan to accumulate savings up to 5 percent of the individual's earned net income on a tax deferment basis, if he sets aside these savings for retirement purposes as provided by the bill, either under his employer's pension plan or under an individual retirement plan. Such a provision would be desirable because it would encourage the creation and expansion of contributory employee-pension plans. The plan to permit the use of life-insurance policies as a qualified investment would work as follows: The taxpayer would purchase the policy direct from the insurance company or would utilize an existing policy. The arrangement would be applicable to any life-insurance policy, except term insurance. Only that part of the premium going into the savings feature of the policy would qualify for tax postponement. The policyholder would have the right to surrender his policy for cash, should he be forced to do so. In such event, he would have to include the entire cash surrender value in his income-tax return for the current year. This flexibility is necessary to meet the requirements of State law. Apart from these legal requirements, the life companies believe it would be undesirable to restrict retirement savings, whether in a life-insurance policy or in other forms of investment, so that they could not be withdrawn by the taxpayer in the event of personal financial emergency. The amendments that we propose recognize the need for establishing equitable tax treatment for both employed and self-employed persons. In planning the elimination of existing inequities in the tax laws, every effort should be made to avoid creating new inequities. The proposed legislation in its present form would discriminate against many employees of corporations. Available data indicate that the 10 percent exclusion provided under the pending bills is substantially greater than employers on the average have been contributing_to employee-pension plans established under section 165 (a) of the code. The pending bills do not make provision whereby such employees could supplement their employee benefits by making additional contributions to an individual retirement plan, or to the retirement plan provided by their employers. The life insurance companies again respectfully suggest that this entire subject warrants further study by the Ways and Means Committee, in the light of the foregoing comments and suggestions. We offer our cooperation in lending technical assistance in respect to those matters which involve the services furnished by the life insurance companies. STATEMENT OF JOHN WESTBROOK FAGER, A LAWYER OF NEW YORK CITY, ON RETIREMENT FUNDS FOR THE SELF-EMPLOYED AND OTHERS (ITEM 36) I oppose the Jenkins-Keogh bills (H. R. 10 and 11) in their present form. I agree with my fellow witnesses that the self-employed (like the employed) should be able, through tax-qualified retirement programs, to look forward to retirement at age 65 or 70 on a substantial percentage (one-third to one-half) of their annual earnings prior to retirement. In my opinion, however, the proposed remedy is not the proper solution, since it is not patterned after retirement benefit programs set up under section 165 of the Internal Revenue Code and since it represents an unnecessarily high loss of tax revenue to the Federal Government. I believe the self-employed should be covered by a 2-step retirement program: (1) Federal old-age and survivors' insurance on the first $3,600 of annual earned net income; plus (2) a supplementary program covering annual earned net income above $3,600. Social security produces a 40-percent-plus retirement benefit on the first $3,600 (including the benefit to spouse). Accordingly, the Jenkins-Keogh bills should be amended to exclude from their coverage the first $3,600 of earned net income per annum. And such bills should also be amended so as to include self-employed professional men and women (now specifically barred) in the Federal old-age and survivors' insurance program on a compulsory basis; President Eisenhower has recommended such extension of social security.' These revisions would combine two cardinal advantages: (1) The potential loss of revenue would be reduced by hundreds of millions of dollars per year; and (2) the self-employed would be offered a two-step retirement program patterned after that presently covering the employed. Inclusion of the estimated 500,000 self-employed professional men and women in social security would increase Federal intake by over $40 million under present tax rates (24 percent on first $3,600, or $81 per person). For every million persons participating in the Jenkins-Keogh program, the limiting of the exclu 1 Retirement Programs for Attorneys and Accountants, John Westbrook Fager, proceedings of 11th Annual Institute on Federal Taxation. N. Y. U., pp. 1121-1145 (1953); OneMan Pension Funds. John Allison, Fortune magazine, May 1953, p. 111. 2 Special message to Congress dated August 1, 1953; also State of Union Message of February 2, 1953. |