July 19, 2000
The approach of passing large tax cuts seriatim, when those tax cuts are not paid for, unwisely abandons fiscal discipline. Pension legislation should be considered in a fiscal framework that guarantees that important national priorities -- such as providing affordable prescription drug coverage and rebuilding our crumbling schools -- are met, and that protects the Federal Government's ability to extend the life of Medicare and Social Security and pay down the debt. In that context, the Administration would like to work with Congress to build on the current system to help all Americans to save for retirement.
H.R. 1102 does include a number of provisions that would make a valuable contribution to the improvement of the employer pension system. Indeed, the President's budget incorporates a number of the proposals either intact or in different forms, including provisions to increase portability of retirement plan accounts. But various other provisions of H.R. 1102 are counterproductive. For example, H.R. 1102 would raise the maximum amount of business owners' and executives' compensation that can be considered for contributions under a retirement plan, a provision that would benefit only one percent of employees, and would weaken the pension anti-discrimination and "top-heavy" protections for many moderate- and lower-income workers.
Provisions such as these could lead to cuts in retirement benefits for moderate- and lower-income workers, while benefits for highly paid executives are maintained or even increased. This would be particularly unfortunate in light of the severe disparity in the adequacy of retirement savings for moderate- and lower-income workers as compared to high-income individuals. Currently, two-thirds of pension tax expenditures go to families in the top 20 percent of the income distribution, while only two percent goes to families in the bottom 40 percent.
In addition, H.R. 1102 would raise the contribution limits for employee-financed savings vehicles such as 401(k) plans and IRAs. Currently, fewer than 5 percent of 401(k) plan participants make the maximum allowable contribution and only 4 percent of taxpayers contribute the annual maximum $2,000 to an IRA. These increases could lead to a displacement of traditional employer-financed pensions in favor of such employee-financed vehicles, shifting the burden of initiating retirement saving onto workers. These self-financed vehicles historically have had lower participation rates for lower- and moderate-income workers, for whom saving is hardest and who derive little or no benefit from existing tax incentives. Thus, the limit increases would not significantly increase plan coverage or national savings.
A better approach is to enact pension and retirement savings incentives to reach the tens of millions of working Americans who do not participate in employer-provided pension plans and have little or no other retirement savings. The President's budget proposals would provide enhanced incentives for employers to cover such workers. The Retirement Savings Account approach would provide progressive tax incentives for moderate- and lower-income workers to contribute to employer plans and IRAs. Similarly, the proposed small business tax credit for employer contributions to qualified plans on behalf of non-highly compensated employees would target benefits to those who need them most. This approach builds on the current system to expand access rather than conveying additional benefits to those who already have adequate retirement savings.
The importance of protecting workers' retirement benefits has been demonstrated also in the context of conversions to cash balance pension plans. The Administration believes that legislation imposing meaningful disclosure requirements, such as the Administration's proposal which received strong bipartisan support last year, and a prohibition on cash balance wear-aways -- both normal retirement benefits and early retirement benefits -- should be enacted, and should be a part of any broad-based retirement savings legislation. H.R. 1102 fails to require adequate disclosure and does not call for any additional protections for workers affected by cash balance conversions.
The Administration also strongly opposes any provisions that would weaken protections for participants by allowing biased investment advice from persons with a conflict of interest, or provisions that would otherwise weaken our ability to protect workers' pension and health benefits.
H.R. 1102 would affect receipts; therefore, it is subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990. The Administration has not yet completed its estimates of the costs of the bill; however, based on the estimates of revenue losses made by the Joint Committee on Taxation ($1.1 billion for FY 2001 and $16.1 billion for FYs 2001-2005) , the absence of any offsets to H.R. 1102 could cause a sequester of Federal resources.