Katrina Postpones Key Industry Lawmaking

With the nation's attention now focused on rebuilding New Orleans and other Gulf Coast cities devastated by Hurricane Katrina, common sense would say that a pair of key mutual fund industry issues that were front-burner topics before Congress broke for the summer won't get much attention now that lawmakers are back to work.

President Bush's proposal to privatize Social Security and a renewed push by the fund industry to eliminate the capital gains tax probably won't be near the top of anyone's agenda in Washington until recovery is well under way, according to recent news out of the Capitol.

Despite campaigning for a Social Security overhaul for the better part of a year -

experts agree that the $504 billion program will begin paying out more in benefits than it receives in contributions by 2017 - Bush arguably failed to muster the bipartisan support necessary to push his revision plan forward. The key sticking was his insistence to carve private accounts out of the 70-year-old pension plan. Democrats, as well as a large block of union and retirement organizations, strongly objected to the thought of putting upwards of 4% of a worker's payroll tax into a mix of stock, bond and mutual funds that resembled the government's Thrift Savings Plan. Such a plan would leave a worker's benefits subject to the fickle winds of Wall Street, they said repeatedly, and the only group to gain would be big money managers, who would earn millions of dollars in fees.

The fund industry, meanwhile, has largely refused to join the debate and its opinions of the privatization plan ranged from it being a boon to the retirement sector to a massive headache for money managers, who would be inundated with uneducated investors and a mountain of paperwork for thousands of tiny accounts.

Now, according to a recent editorial from The Republican in Cambridge, Mass., privatization is practically a "dead letter" inside the Beltway, while Thomas Mann, a scholar at the Brookings Institution, told the Washington correspondent for the Times Union in Albany that the proposal was dead even before Katrina's landfall.

"I presume no action [by Congress] at all this fall and possibly none next year," he said.

Sen. Gordon Smith, R-Ore., who backs the president's plan said, "It's off the radar," for now.

In other news, Republicans have decided to delay plans to extend the dividend and capital gains tax cuts, The Wall Street Journal first reported. The 15% tax rate on dividends and capital gains, which was okayed by the president two years ago, doesn't expire until 2008 but a long-term measure was a key element in Bush's fall agenda. A key retirement savings credit for low-income wage earners is a part of the package, too, and it expires next year. The consensus among lawmakers, the WSJ reported, is that there's time to address long-term cuts before the deadlines.

Meanwhile, it's probably safe to assume that a bipartisan proposal offered in May and strongly supported by the Investment Company Institute in Washington that calls for tax-free capital gains on mutual fund earning if the investor does not withdraw, is on the shelf for the near future, as well.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.