Everyone agrees on the goal: People who have worked all their lives deserve a comfortable retirement income. But when it comes to how that income should be generated, the only agreement seems to be that Congress probably will end up settling the issue.
Congress will begin that process this week with hearings before the House Subcommittee on Labor-Management Relations.
The problem, according to some parties involved in the debate, is that the issue has been stuck with the label ”pension,” which many consider
–along with insurance and crop reports–boring.
In fact, the committee will be looking at the gamut of retirement income, from Individual Retirement Accounts, Keogh plans for the self-employed and popular 401(k) salary-deferral plans to traditional company-sponsored pension plans.
Most agree the 401(k) plans that allow employees to defer part of their salary into investments that grow tax-free until withdrawal will likely get the most scrutiny. The tax-reform plan outlined last December by the Treasury Department, as well as other proposals being bandied about Congress, proposes scrapping 401(k) in favor of more generous limits for IRAs.
Though the Treasury had tax reform on its mind, others in Congress say there`s a more immediate problem: the growing federal deficit.
Company-sponsored retirement plans represent almost a trillion dollars, said Mark Ugoretz, executive director of the ERISA Industry Committee, formed in 1974 to help the government draft regulations regarding pensions and to represent companies that provide pension plans. (ERISA stands for the Employee Retirement Income Security Act.)
”Pensions represent a very large amount of money, and in tough times there are very envious and jealous glances toward that amount of money from people who are trying to raise additional funds to pay for something else,”
he said.
Perhaps it`s not surprising, then, that companies sponsoring more than the basic pension plans are unsympathetic to the revenue-raisers.
”The tax committees are an improper forum to discuss what should be done with employee benefits,” said Samuel Kohler, director of employee benefits for GATX Corp.
The proper issue is not revenue-raising at all, said Gary Pines, regional director of the Association of Private Pension and Welfare Plans, a national group that is lobbying against taxation of any employee benefits. ”The issue is, what percentage of final pay do you want retirees to live on?” he said.
”What means do you use to get to that percentage? Social Security pays a little, but probably not enough. What other things do you want to do to make up the difference?”
The Treasury proposals would put some limits on contributions to traditional company plans and impose penalties for early withdrawal. The most significant change probably would be eliminating the highly favorable 10-year forward averaging tax treatment available to retirees who take their defined- contribution money all at once.
The biggest issue, however, is the future of 401(k), one of the fastest-growing benefits in the nation in recent years.
Johnson & Higgins, an insurance broker and manager of benefits programs, has conducted roundtable disucsions with clients on tax-reform proposals. Given a choice between taxing some group health benefits or scrapping 401(k), they would rather do away with tax-free health benefits, said Dennis B. McKoy, vice president for employee benefits operations.
The 401(k) plan is ”sacred in their minds,” he continued. ”They feel the concept makes sense. It fits very neatly into their overall strategy for the development of an employee benefit program. It has tremendous
participation and acceptance from all categories of wage earners.”
Companies like 401(k) because it takes some pressure off regular pension plans and puts some retirement responsibility on the individual. Employees like them because plans allow for hardship early withdrawal and loans. As public policy, 401(k) has been touted as a means to ease the burden of Social Security.
Nonetheless, 401(k) is not a universal hero.
Voluntary savings such as 401(k) and IRAs muddy the waters, said Karen Ferguson, executive director of the Washington-based Pension Rights Center.
”The only social objective for a retirement program is that it provides income to those who need it most to make ends meet for retirement,” she said. ”Neither the 401(k) nor the IRA measure up. A fair employer-paid pension program is a better way of providing income to lower-wage and moderate-income people.”
Unions, which have joined with management and insurance groups to lobby against taxation of benefits, consider 401(k) a separate issue from pensions, said Lawrence Smedley, pension spokesman for the AFL-CIO. ”If you`re going to have a pension plan, our basic position is that you should have a defined benefit plan,” he said.
Ugoretz, of the ERISA Industry Group, agreed that IRAs tended to be set up by older, higher-income people. ”But with a 401(k) plan, the use is more evenly distributed among lower-paid and higher-paid, as well as younger workers,” he said.
Harry Malone, manager of employee benefits for Ameritech, said traditional pension plans, which often require 10 years to accrue any pension rights at all, did not serve workers who changed jobs often. ”But 401(k) hits on that need,” he said. ”It allows you to carry it with you.”
Rep. William L. Clay (D., Mo.), chairman of the Labor-Management Relations Subcommittee, said a major issue appears to be overall fairness;
401(k) is available only to employees of companies that choose to set up the program. The Treasury proposals aim at curtailing such programs in favor of ones that can benefit all workers, such as IRAs.
”They`re missing the big picture,” Clay said. ”Don`t take away from those that have, don`t bicker about imperfections in the current system.” A more logical solution, he said, would be to extend tax breaks for people who aren`t included in company-sponsored plans.
Lane Kirkland, president of the AFL-CIO, agreed with that when he addressed the full House Committee on Education and Labor last month.
He called it unfair that all workers didn`t have adequate benefits. ”But such inequities should be resolved through public and private policies that encourage a leveling-up of benefits,” he said, ”not by policies that seek to reduce everyone to the lowest common denominator.” McKoy said that idea probably would win out. ”At the very least, there`s going to be some integration with IRAs–limiting the total a person can put into both plans,” he said. ”What they`re working toward here is some type of help for the small employer who doesn`t have a 401(k) plan.”
