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At first the proposal seems benign: Let's allow taxpayers to place more money in tax-deferred retirement accounts. What could possibly be wrong with that?

Well, actually, a bunch of things.

Under the Pension Reform bill, lucky citizens will be able to increase Roth IRA deposits to $5,000 per year by 2004, up from $2,000 now. Contributions to 401(k) plans will max out at $15,000 in 2006. Today the limit is $10,500.

Why "lucky" citizens?

Three reasons: First, retirement plan contributions are not a sure thing. Second, new and higher limits, if enacted, will impact only a small financial aristocracy. Third, the money is going in the wrong place.

The assumption is usually made that money in retirement plans will always grow. That's not always the case. For instance, according to the National Defined Contribution Council, assets in all types of retirement accounts declined 3 percent last year. And let's not forget that in the past year alone, stock values have plunged some $5 trillion.

In fact, the real retirement account loss is actually greater because of inflation. Let's say you have $100 and lose $3. You now have $97 in cash. But let's also say that during the year inflation reached a modest 2 percent. Now the spending power of your $97 has declined to $95.06.

New and higher limits for retirement plan contributions assume that people can actually make larger annual contributions. But in most cases, either they can't or they don't.

"Thanks in part to their credit cards, some 45 percent of American families now spend more than they earn," David M. Strauss, executive director of the federal Pension Benefit Guaranty Corporation, told industry executives in 1999.

"Many low income workers have no savings at all. The same holds true for many better-paid workers who, because of more immediate needs like housing and education, do not begin to save for retirement early enough in their working careers. Most older workers haven't saved very much. Half of America's households headed by people between the ages of 55 and 64 have wealth of less than $92,000 -- the bulk of that is equity in their homes," he continued.

"Even workers with 401(k) plans aren't saving enough. An Employee Benefits Research Institute (EBRI) study of almost seven million 401(k) participants shows that the average 401(k) account balance is only $37,000. The median 401(k) account balance is less than $12,000. In other words, half of all 401(k) accounts have less than $12,000. One-fourth of families eligible to participate in 401(k)s fail to do so.

"While the conventional wisdom is that the bull market will take care of everyone's retirement needs, in fact, significant stock market gains are not going to help most Americans," said Strauss.

We are, of course, no longer in a bull market.

Lastly there is the matter of where all that pension money goes. It's invested in stocks, bonds, and mutual funds. For the most part, the money is not available for real estate.

There is a provision which allows IRA depositors to withdraw as much as $10,000 penalty-free for the purchase of a first principal residence. However, general income taxes still apply to the money withdrawn and IRA funds must be used within 120 days after withdrawal for the purchase of a first home. For details, see a tax professional.

As an alternative, here's an idea: Why not allow retirement money to be invested in a place where there's a guaranteed benefit: pre-paying mortgages.

Imagine that you borrow $100,000 at 7 percent. You pay $665.30 per month for principal and interest. The government, in a fit of wisdom, says you can pre-pay your mortgage with a tax-free outlay up to $100 a month. You gleefully accept. Here's what happens.

Your taxable income declines by $1,200. This is a lot less than write-offs of $2,000, $5,000, $10,000, or $15,000 -- thus the government loses less tax revenue.

You now pay $765.30 per month -- but your loan is repaid in 247 months. In a little more than 20 years, your mortgage ends, you no longer pay $765.30 per month. That's a tidy monthly addition to any pension money, Social Security, or other retirement benefit.

You have paid in $100 x 247 months -- a total of $24,700. You do not make 113 payments at $665.30 apiece -- a savings of $75,179.

In fact, the actual gain may be greater because if lenders can formalize a prepayment plan then loans will be paid off faster. Shorter loan terms mean less risk and less risk will lead to lower interest rates.

Reduced ownership costs will rebound throughout the economy. There will be more money for purchases, education, trips, cars, and savings. People, having equity, will be more likely to move up.

This proposal is fast and simple -- and that may be a problem. There are no fancy programs, no massive accounting issues, and no fees for mutual fund managers or stock brokers. Just keep records and fill in the right IRS form.

The proposal made here would extend the benefit of federal tax preferences to low- and moderate-income earners, not just the financial elite. It would speed the creation of equity and positively impact millions of people.

As Martha Stewart would no doubt say, "these are good things."

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