Life insurers fighting major Bush initiative

WASHINGTON -- President Bush viewed it as one of his most elegant ideas: Allow anyone to put $5,000 per year into a "Lifetime Savings Account," pay no taxes on the earnings, and withdraw the money at any time, for any reason. The architect of the plan, an assistant secretary of the Treasury named Pamela Olson, said last year: "We'd like to see as many advertisements for lifetime savings accounts as we do for lipstick and light beer."

But the White House plan, which is coveted by the mutual fund industry as a potential bonanza, so far has faltered largely because of the opposition of the American Council of Life Insurers, which fears the idea could cost it billions of dollars of business. Vice President Cheney vowed just before Election Day the administration would revive it if the Republican ticket won reelection, setting off a new flurry of lobbying.

Now, in a classic Washington fashion, the plan's architect has been hired by the plan's opponent. Olson this month began working as an adviser to the insurance industry, performing the "very important function of giving us guidance and advice as to how to continue to successfully fashion our argument," according to the council's chief executive, former Oklahoma Governor Frank Keating.

Olson, in an interview last Thursday, was asked why she is on retainer to the group that is leading the fight against the plan she designed.

"There are lots of strange things that happen in Washington," she replied. Despite joining her opponent, she said she still thinks the savings accounts would be one of the best ways to improve the nation's dismal savings rate.

The story of the accounts is a case study in the way a proposal is hyped on the campaign trail and torn apart by lobbyists. The story may foreshadow the coming fight over the separate issue of whether private accounts should be allowed in Social Security, with the life insurance and mutual fund industries already lining up for a place at the negotiating table.

Indeed, for all of the publicity about private accounts in Social Security, the Lifetime Savings Accounts could have an even bigger impact on the way people save money. Under one plan being seriously considered by Bush, taxpayers could put a maximum of $1,000 per year of their annual Social Security taxes into private accounts. (Some alternative plans being proposed by congressional Republicans call for much larger private accounts.) Social Security private accounts also are not expected to be tax free, and they can be tapped only at retirement. By contrast, the $5,000 annual contributions to lifetime accounts can be invested in any way, withdrawn at any time, and the earnings are tax free.

The idea behind the Lifetime Savings Accounts is that they would be attractive to people who are confused or turned off by the array of complex tax rules. Retirement plans such as individual retirement accounts and 401(k) plans have numerous restrictions, the biggest being that contributors cannot touch the money for many years unless they are willing to pay stiff tax penalties.

Bush has also proposed a companion plan for retirement savings accounts, which would replace some existing IRAs and would have more restrictions on when money can be withdrawn than a Lifetime Savings Account. People could contribute to the lifetime accounts for shorter-term savings and retirement savings accounts for the longer term.

Until she left the Treasury Department last year, Olson was the chief advocate for the lifetime accounts, saying they would be particularly beneficial to lower- and moderate-income workers who are reluctant to put money into savings accounts that cannot be touched until retirement without tax penalties.

"Lower-income individuals often do not have the resources to save for the distant future and are unwilling to take the risk of locking up their savings in tightly restricted accounts," Olson testified before a House committee on Feb. 12, 2004. "These individuals tend not to have access to the sophisticated advice needed to navigate the complex, and often conflicting, rules that govern the existing savings vehicles. LSAs have been designed to make the decision easy."

Keating, in an interview at the headquarters of the American Council of Life Insurers in Washington, said he often debated Olson over the issue when she was at the Treasury. Keating is opposed to the idea because he said it would hurt life insurance companies that offer products designed for long-term savings, including annuities, 401(k)s, and some types of life insurance policies.

"If the LSA passed, an accountant would say don't put money in a 401(k)," Keating said, referring to employer-sponsored retirement plans that have penalties for early withdrawal. He mocked the Lifetime Savings Account as "a spending account, not a savings account . . . It is bad policy, and it doesn't solve the [savings] crisis facing America."

Keating said he hired Olson, now an attorney with the Washington firm of Skadden, Arps, for her expertise on the matter. "The LSA mother is Pam Olson," he said. "Pam is on retainer to us. She is a very candid individual. She is a brilliant woman if you have to have an adversary."

Keating, who describes himself as a conservative Republican, acknowledged that on the lifetime account issue, he is at odds with some who otherwise shared his political philosophy, including the president. The desire to remove the tax on deferred savings, he said, is driven by dogmatic antitax attitudes. "A number of my fellow conservatives think the only good tax is a repealed tax," Keating said.

Senator Craig Thomas, the Wyoming Republican who has been the major sponsor of the lifetime accounts, said he cannot understand why the life insurance industry would oppose the idea. "I don't think there is anything wrong with a little competition, as a matter of fact," Thomas said. "It is hard for me to understand the relationship between the two things. Life insurance is one thing; savings for retirement is another."

A key proponent of the plan is the Securities Industry Association, which represents mutual fund companies such as Boston's Fidelity Investments. Lifetime accounts would pump billions of dollars into such firms, according to Liz Varley, the association's vice president and director of retirement policy.

Varley said the White House seemed unaware the idea would create such controversy. "There was a very strong lobbying push by that [life insurance] industry to ensure that the LSAs did not get a lot of support from anybody other than Treasury," Varley said. When the White House saw opposition forming, "they never took ownership of the proposal, and we are hoping that will change."

Yet one of the plan's biggest backers is Cheney, who frequently campaigned on the issue.

Olson, meanwhile, said she hopes that by working for the life insurance industry she can play a role in devising programs that encourage savings. "I have not changed my mind about the benefits of the LSAs," she said, adding that "it is too early to tell" what will happen with them when a White House tax-reform panel studies the issue this spring.

Michael Kranish can be reached at kranish@globe.com.