When Gene Harte lists his assets available for retirement, he can tick off real estate, stocks, bonds, his graphic-design company and savings--worth more than $1 million in all. But every year before April 15, he makes sure to put $2,250 into his individual retirement account.
"When you're in my tax bracket, you just can't let it go by," the 60-year-old Los Angeles executive said of the convenient IRA tax deduction.
Jeff Chop, on the other hand, really needs an IRA, given that he has no pension and little in savings or investments. But, on an income of $700 a month from two part-time jobs handling photo exhibits and selling fossils, he has nothing left to save. "I need all my money just to get by," the 37-year-old Los Angeles resident said.
Touted as the "people's loophole" and the "little guy's tax shelter," IRAs were made widely available in 1981 as a way to supplement Americans' retirement savings. Since then, they have become one of the most popular investment vehicles in history, with millions of investors seeking not only to save for old age, but to enjoy an extraordinary tax break.
Funds in the accounts have doubled in the last two years. Taxpayers are plowing in as much as $25 billion in the month leading up to April 15, the deadline for 1985 IRA tax deductions.
But the cases of Harte and Chop illustrate a controversial aspect of the program that critics say is cause for reform: IRAs are most used by people who need them the least. Those headed toward an insecure retirement--individuals with little or nothing in pensions, savings or other assets--are much less likely to have them.
There also is sharp disagreement over whether IRAs are achieving their other major social objective, which is to boost the nation's savings rate to promote economic growth and investment. Indeed, the rate of personal savings actually has diminished in the last few years.
Such disputes over the role of IRAs have become a major element of the tax reform debate in Congress. Pending legislation would indirectly limit IRA contributions for many workers. At issue: whether the retirement accounts serve a social purpose that compensates for the lost tax revenues, totaling an estimated $12 billion in 1985 alone.
Used Most by the Wealthy
"Everybody knows they're popular, but are they really great tax policy? A lot of evidence suggests they're not," said an aide to Rep. Pete Stark (D-Oakland), a member of the House Ways and Means Committee, which helped formulate the House tax reform bill.
Data from the Internal Revenue Service clearly shows that "the people's loophole" is most frequently exploited by people who have a lot of money. In 1983 (the latest year for which figures have been tabulated), only one of every 10 households with income between $10,000 and $20,000 bought IRAs. By contrast, almost two of every three earning between $50,000 and $100,000 invested in the accounts.
"I'm really gambling with Uncle Sam's money," said Joan Benson, a 57-year-old Glendale computer programmer who admits that she really does not need an IRA, as she expects to retire with the security of two homes, a generous pension and nearly $100,000 in savings and annuities.
Policy Shift Urged
It may seem only natural that the well-off take greater advantage of such investment opportunities. But some argue that federal policy should be tilted more in favor of those who are least prepared financially for old age.
"IRAs just aren't doing the job. What they are is tax shelters for people who would save anyway," complained Karen Ferguson, director of the Pension Rights Center, a Washington-based nonprofit organization representing workers and retirees.
"The reality is that most people at moderate- or low-income levels can't even begin to think of retirement savings till they're in their 50s--and then it's too little too late," she said.
Despite the criticisms, IRAs have widespread political support. In fact, some congressmen and others recommend expanding the approach to promote savings for health-care expenses, college education and even housing. "IRAs are here to stay," said Alan Fox, legislative representative for banking issues at the Consumer Federation of America.
But IRAs were not always a household word. They were widely overlooked in 1974 when Congress introduced the accounts in an attempt to stimulate retirement savings for workers not covered by pension plans.
IRA Program Takes Off
A key problem was that the many workers who did not stay with one employer long enough to qualify for a pension benefit were left out of the new program. But in 1981, Congress broadened IRA participation to include virtually all workers and to reduce pressure on Social Security. IRA fever was on.
The total amount in such accounts is expected to reach about $250 billion this year and may reach $500 billion by 1990. As many as 45 million individuals own IRAs, with an average balance of about $4,500, said W. Wesley Howard III, publisher of the IRA Reporter, a Cleveland-based newsletter.