COST OF LIVING ADJUSTMEh_S THROUGH TAX QUALIFIED PLANS SUMIiARY OF LEGISLATIVE NEEDS t "-3 • . . ,,_ ° • Overall Problem 2 6 I0 5 43II 7 12 9 Hany employers' pension programs base retirement income on pay levels ANSWER: OUESTiON: QUESTIONS AND ANSWERS REGARDING achieved just prior to retirement. This ensures that initial pension SUPPLEMENTAL RETIREMENT BENEFITS Current law requires essentially that these gratuitous ad hoc _y can't a supplemental retirement benefit be provided under Chairm._sn Jones and Chai_T,_an Pickle, it is a pleasure to appear before you Sun also provides health insurance to retirees and a modest amount of life the One I _:basic ou!d is a say defined purpose that benefit ofourbenefits, retirees, pensionwhich plan, as isa the togroup, provide Sun Company, areeconomic very Inc. satisfied security. Retirementwith This Plan, the is How it In would the canbenefits short-term, wenotdefine sur_prise will "adequate" be themeadequate; main if retirement more effect however, of our of income retirees tax evenpolicy security? modest in is the levels onfuture the of inflation way won'tplans wantcan are to The -_second . : _ tier of benefits may be somewhat "exotic," that is, benefits Sun Company that , Inc. changes in mind. For one thing, we are experiencing more mobile employees, current law? payments be treated as retirement payments which must be funded, -_._ _,,_,:_._}_ 100 tvl, a:sonforc Road quickly erode a pensioner's purchasing power after retirement. Some 0UESTION: -_ _'_' i,k__._- prior to retirement, through a tax-qualified retirement plan Radnor which PA 19087 today representing the views of the Sun Company. Your efforts to look at insurance. After retirement, there is an automatic 50 percent spouse's especially true of retirement benefits. standard of living that they have in retirement, based upon their careers with which designed.provides fixed retirement income and serves as the primary source of engage in some paid work after retirement. aren't employers absolutelyhave necessary addressed for this the problem provisionby of providing economic "ad security. hoc" adjustments who change jobs more frequently than the traditional career employee 2!5 we 293 have 6000 ANSWER: not be forfeited if an employee fails to make a required Why is a Supplemental Retirement Benefit Program ("SRB") important? in retirement benefits; however, this solution is costly, inefficient and contribution at retirement. In 1980 Congress amended ERISA to allow The overall limitations on amounts allocated to a participant's public sector and private sector programs are very important. As I hope to pension provided. APPROXI_iATE RETIREMENT BEI_FITS the Sun Company. In July 1984, for example, one of our retirees testified retirement As we see benefits. it, adequateOur retirement philosophy income is thatisa aretirement shared responsibility plan should provide of the inflationary. attracted in the past. We are asking ourselves whether we need to provide a ANSWER: for nonretirement supplemental payments. However, neither the account in a defined contribution plan is limited to 25% of statute inflationnorerodes the supplemental benefits accrued TESTIMONY payment by regulations retirees during issued their by the careers. compensation, up to a maximum dollar amount. Since the cost of :Lake clear to you today, I believe that the U.S. retirement income system has AS A PERCENTAGE OF EARNINGS AT RETIREMENT These before a stream programs the o£Senate income haveFinance evolved in retirement. Committee. over theTherefore, years John W.forKriebel, the a number Sun then Company of age reasons. plan 77, testified does At one not federal government, employers, and the individuals themselves. In the long-term, however, adverse tax legislation can affect not only the As fa_ ProFosed as the company Solution: itself Supplemental goes, Sun Retirement has evolBenefits ved a basic philosophy with retirement In the future, arransement I think that we shall will penait see a areturn more rapid of emphasis pensionbyaccrual employers for and these by A supplemental retirement benefit is intended to preserve the Department purchasing of an Labor SRB annuity permit is a sustained high (ranging annuity frompurchase approximately program70% to relative buying power of pension payments. At the same time, an comparable to the SRB proposal.OF 120% of final pay), employer contributions to fund an SRB will in been a re:<_arkable success. But the system could nonetheless be improved if The amount of money that Sun spends for its retirement benefits is time how his or retirement another they benefits have been allowedprovhim ided tobysuccessfully enlightened overcome management, a year-long and at allow design lump-sum of a pension distributions plan but from also its defined the typebenefit of program plan. and even the very respect Many to employees employee benefits. accumulate It funds believes for retirement that benefits in defined are contribution part of total en_p!oyees to the basic economic security benefits. If Congress is deternnined mobile workers. We are also trying to understand what the implications of employee has no incentive to devote a portion of his/her account most cases exceed the current applicable limits, if the plan were to plans but do not actually use those funds for retirement purposes. As an balance under employer sponsored savings plans towards retirement be provided under a defined HARRY contribution G. SMITH plan. At the same time, there were QUESTION: better coordination of our various retirement income policies, and substantial. In 1984, for example, for an average of 13,350 active employees, other times, no doubt, companies have been pushed along by strong unions, battle with cancer at the Sloan-Kettering Hospital in New York. And he The existence Sunalternative Company of a program. belie toves employers its In other career providing words, employees Percentages ad thehocdecisions should increases, be ofmade provided Earnings itbyis this suggested enouat gh Committee Retirement income that compensation to change theandtax that incentives in theforaggregate, employee benefits this compensation in connectionshould with tax be more second careers, and more two earner couples mean for the target income. An SRB provides inflation protection as well as an How does an SRB program work? the provision of employer contributions at retirement to purchase an Social employers and employees jointly fund supplemental pension benefits incentive for a participant in a tax qualified savings plan to SRB benefit which have been accrued under a defined benefit plan may for that reason, I commend you forSUNyour COHP_Y, endeavors INC.in this area. Sun paid $29.7 million in F.I.C.A. contributions. Our defined benefit pension federal legislation,Percentage socioeconomic Sun factors, Company, and Inc. employees'Security expectations. The compared to support other the plan a comfortable administration is a definedbasic contribution of lifestyle his benefits and capital that at accumulation Sun the employees' with the plan,uo_ nfavorable which savings is could competitive ha through ve very in an ouremployer's serious industrylong-term existing and in our implications tax geographic qualified for plan areas. theor pl fuSun ature ns believes using of American employer that refo_-_., then I don't disagree with your making changes in some of these replacement rates we have set. ANSWER: dedicate a portion of his/her account balance towards retirement. not ordinarily be forfeited if an employee fails to devote his/her of Employee Retirement Plan Benefit Total contributions and employee accumulations in company savings t}_e programs Aaccount participant balanceinto both a specific a definedplan benefit option, pension such as plananand SRBabenefit. defined expense was $32.8 million. The company's contributions to the defined Earnings Today, experiences the United he hadPopulation States with has theanat publicly excellent Benefit administered system Payable of employer-provided Medicare Payable program.benefits "The Retirement called society. should (technically provide "SunCAP". the This addition called plan adefined l combines amenities contribution a of cashlife. or plans). deferred In designing Thisarrangement permits our retirement a more 401(k) these benefitsbenefit which aren't programs absolutely should necessary. include plans for retirement, capital contribution plan (i.e., a plan which provides a retirement benefit QUESTION: BEFORE at Retirement Earnings Level at age 65 at age 65 Income planned approach to retirement income protection while encouraging Why don't employers simply increase benefits payable under their equal to amounts contributed to a participant's account, plus PreviousQUESTION: witnesses, in particular Mr. Dallas Salisbury of the Employee Benefit as a result. contribution plan was $18.4 million, while employees themselves contributed an private with a sector thrift can plan adminster feature which these programs together beautifully," provide for pre-tax he said. employee And I accumulation, benefits, employees Sun premature aims to use to replace defined death, medical contribution 50-55 percent care, plan disability of funds preretirement toincome, fund retirement income paid time-off, for the The point is, your Committee is not alone in asking these important questions. defined benefit pension plan? earnings) _o is eligible maintained to receive by the the samebenefit? employer will be allowed to elect Si0,000 - _J,c_Q999 8.2_ 26% 44_ 70_ benefits--the purpose for which they were intended. to dedicate a portion of his/her account balance in the defined Research institute SUBCO!-2:ITTEE (EBRI), ON OVERSIGHT have presented AND SUBCOMHITTEE you withONthe SOCIf_ relevant SECURITYnational additional $50 million to the defined contribution plan. The Sun Company's higher quote: contributions, "They paid, doand the a wonderful 65-75 first percent 5 percent job. for Andofthe inwhich lower the private arepaid. matched sector These dollar you targets are for eyeball dollar have been by to etc. Overall,Sun the alsocurrent believesbodythat of its tax benefit code provisions programs are should achieving encouragetheiremployees social But in the process of tax reform, don't undercut the tax incentives that Companies like Sun are analyzing changes in work habits and trying to consider ANSWER: ANSWER: contribution plan (or from other sources, including personal 20,000 - 29,999 51.7 32 32 64 Le$islative Solution Most savings) companies' toward the defined purchase benefit of an plans SRB (i.e., annuity.a plan A participant which promises with a Any employee who terminates service with a vested pension under a data. EBRI's research on this COt-2._ITTEE subject ON is WAYSthe ANDvery MEANSbest that exists, and I annual spending for medical benefits was $36 million, of which $22 million was It is psychologically unsound to assume that human beings, if left to their eyeball set Sun with Company with the the contrib needs administrator utions. of a retired Upon of couple the termination program. in mind.or If And you retirement, we havehavae problem achieved an employee's youthese can to goals. plan In andthesave Sun for Company's their o_ opinion, economic Congress security. has contributed The federalto government, what is an support the basic core of employer-provided retirement and welfare plan the adjustments that are appropriate to accomodate those changes. only specific a vested benefit pension at retirement, in a defined suchbenefit as $i00plan permay month) electcalculate to defined benefit must be entitled to purchase the SRB benefit, no 30,000 - 39,999 12.2 36 24 60 The Internal Revenue Code should be amended to permit inclusion of the benefits payable to an employee at retirement as a percentage of purchase earlier than SRB protection the time he/by shereducing separates his/from her benefit. service. The annuity hope you will give it your careful attention. JOINT HEARING for active employees and $14 million for retirees. We also spend another $5 o_m account go to devices, them; balancewould they isknow provide available who for youinthemselves are. the form You with are of anot logical, lumpa number. sum.sound, SunAnd cost-effecti Company it hashasvjust e,an replacement absolutely brilliant targets thro success ugh story-- a combination with theofprivate definedsector benefit now complementing pension plan likewise, supplemental has an important retirementrole benefit to play provisions in ensuring in current basic tax-qualified economic security benefits, which have been truly succesful. If you do cut tax incentives for final or final average earnings. Provided an employer's salaries will provide an escalating percentage increase in the pension 40,000 - 49 999 12.5 39 19 58 retirement programs. Amendments should allow: keep pace with inflation, the initial pension is generally adequate payable under his employer's defined benefit pension plan. The cost QUESTION: RETIREHENT INCOHE SECURITY IN THE UI_ITED STATES million on long-term disability and over $4 million in death benefits. integrated been arangement a wonderful benefits. with aexmajor perience It insurer, is to therefore be which with very Sun allowsand important employees be retired." fortoanconvert employer That istheir what or some lump our benefits the Social integrated Security and withMedicare Social efforts Security.by providing The follocomprehensive wing table illustrates retirement through those basic programs benefits, like Social then tax Security reformandwill Medicare, end upand hurting throughAmerican reasonable workers, tax What role does federal tax policy play in retirement income security? How to meet is the a retiree's contribution needs. to the However, SRB funded? once the pension is payable, of the annuity will be shared by the employer. Under the proposed 50,000 - 59 999 7.5 40 15 55 o Employer/employee cost sharing in providing supplemental retirement legislation, its purchasingthepower employer's can be contribution rapidly erodedmust by be evenaccrued a modest and rate funded of I would like to answer the four major questions you posed in the press release Altogether, then, the Sun Company's expenditure for the combination of benefits. central precisely retirees sum to ansource think, annuity how -- we andit at achieve asacan Ifavorable say, bethose a it's union interest targets a -- matter to at rate. pro ofvarious vide publicstruincome record. cture and levels leadership, -- and how as and incenti other ves tobenefit stimulate programs additional for necessary millions benefits. of workers, retirees and their retirees, and their families -- instead of helping them. ANSWER: during inflation. the employee's To simply career, raise thebutbenefits need notpayable paid until at retirement the employee in September 6, 1985 60,000 - 69,999 3.0 41 13 54 makes an election to purchase the annuity at retirement. If the anticipation of cost-of-living increases or to index defined benefit During employment, the employer contribution must be funded, subject announcing this hearing, with reference to the experience at the Sun Company, well retirement as economies securityof programs scale and amounted time. to nearly $95 million. Let me emphasize much ofo retirement An employer incometo comes condition fromitsSocial contribution Security for andsupplemental how much comes from families. These benefits are broadly distributed across people of different I think an important first step in answering this question is to understand pensions employee does to inflation not electistoitself purchase inflationary the SRB, the and company's too expensive for to certain limitations, through a defined benefit plan. The 70,000 - 79 999 3.0 42 Ii 53 retirement benefits on the employee's agreement to share a portion most contribution employers. may be forfeited under the proposed legislation. employee may fund his/her portion of the annuity through the where I have worked since the 1950s as Director of Special Projects, Director that the $95ofmillion the cost. total excludes roughly $60 million in pension payments to The average age of our retirees has held steady at about 60.5. About one in Although In the income our Sun levels. benefit Company Sun doesRetirement planning, In not the subscribe oil-related postretirement Plan. to activity the principle employment of ourof company, is automatic not afor factor indexation, example, that all it we Sun Company's retirement and welfare programs are designed to provide why employers provide benefits to begin with. Many policymakers appear to be companies' defined benefit plan (by electing to reduce his/her 80,000 - 89 999 0.9 43 i0 53 QUESTION: QUESTION: pension) or an account balance in a defined contribution of Human Resources, Vice President, and Director of Compensation and Benefits. annuitants, excludes the health insurance contribution for active employees as o Assurance that the employer's contribution to provide supplemental In fivemeeting does some this vsol ocuial nteerpurpose, work and employers about provided one quarter benefits do some in the workcontext for pay, of has of our granted regularapproximately employees --I0I00ad percent hoc increases -- are to covered retireeby the pensions pensionsince plan.1960. give financial consideration security to, andexcept independence in the very for broadest employees,terms, whichwhen arewelong-standing are looking shocked by how much of an employee's total compensation is in benefits. For _%at How have are employers the advantages dealt towith an employee inflation ofonproviding fixed retirement an SRB through income a plan maintained by the same employer or from other personal savings 90,000 - 99 999benefits will0.5 not result in taxable43 income to the employee 9 until 52 in the past? tax-qualified from outside the retirement plan and plan? contributed at the time of retirement. well as spending benefits foraredisability received. and death benefits, and it excludes the the altho Theseuthen-current gh replacement only 15 tax percent targets code.have doToday not regular each include jobs. industry monies Only has 43 saved evolved percent through to don'tathelevel workSunCAP and of Today at special we haveearly a system retirement called arrangements. ORBIT where employees In othermaywords, choosewetoplan use part for oof ur national policy goals. Without the current tax incentives, Sun Company would medical benefits alone, the bill is enormous. The employer portion of the SRB could also be provided through a $i00,000+ 0.7 44 8 52 ANSWER: ANSWER: defined benefit plan in conjunction with an insured benefit. i._at Is Retirement? employees' contributions to the defined contribution capital accumulation plan. don't want to work. Money is not the prime motivator among people who work or retirement program. their If you SunCf_ oareThe and reexamining Anemployer account other employer benefits matching to these to purchase fund that taxits contribution incentives meets contribution an annuity each with for industry's which for this respect supplemental will program different to provide basic isretirement needs. designed taxinflation reform, Tax to employees to have adequate retirement incomes based on Social Security, the be less inclined to develop new programs and would likely reduce existing Most large employers coped with this problem by increasing the Employer annuities purchased outside a tax-qualified plan on behalf benefits over the employee's career. of pensions an employee payableresult to retirees in immediate (as opposed taxation, to those to thewhoemployee, were entitled equal QUESTION: Notes want encourage to work. individuals The mainto moti save. vations, And most we learned of them in do.a recent But if san urveyindividual of Sun policy protection. I wouldhasrecommend hadSunvery matches that little youemployee toview do with benefits contrib theutions reasons in twodollar for tiers. creatin_ for There dollar those aretobenefits, the purchase first Sun benefits Companytopension coincideplan, withandnewtheir limitations, own savingsproviding for retirement. employees and retirees Employee benefits to vested haveterminated an important benefits) socialthrough purpose."ad hoc" Benefits adjustments, are designed payable to to the cash value of the annuity. In contrast, an employer may How is the employee who purchased an SRB annuity protected? o Benefits to be subject to the joint and survivor protections of + contribute out of general towards corporate the purchase assets. ofTraditionally, annuities on behalf these of "adahoc" Retirement is the completion of an employee's tour of duty with an F.I.C.A. contributions made up about 31 percent of the total, defined benefit current law. wants Ctier ompanyofmore retirees, benefits, than the are thetarget tbasic he pleasure replacement benefits of that the rates, work are they just itself, have the the basic to feeling save needs money of of making for humanity thata but the it annuity plays at a really retirement. key role Thisin provides determining a total their ofshape 15 annual and their retirement future with a lowered level of economic security. To the extent that these tax addressANSWER: the basic needs that arise from aging, death, illness, disability and payments had to be renewed on a year-to-year basis and were participant through a tax-qualified plan without causing the Tax Reform increasingly expensive and administratively burdensome. From a participant Since the employer's to recognize portion tax of on the the distribution contribution is until funded the employee through a organization, and the time when the individual turns his or her attention to pension expense about 34 percent, defined contribution plan contributions levels. purpose. i. Retirement in 1984 at age 65 with 35 years of service. increases. contribution, associated with Your and Con_ittee aging, the enjoyment disability, could of helpbeing illness American with and others. indudeath. stry Financial provAnd ide there some necessity inflation are some or _at are the major sources of retirement income today? incentives are "rolled-back" by Congress as part of tax reform, financial so forth. People also need to be able to cope with inflation after defined retiree'sbenefit viewpoint, plan, adthehocbenefit payments is were subject alsotounsatisfactory. existing fundingGiven begins to receive payments under the annuity, and then only to the The Treasury's recent tax reform proposals and most other similar the contingent nature of the payment, the retiree could not rely on requirements extent employer-derived and guaranteed amounts by PBGC, are actually employeesreceived who participate in a givenintax other activities. comprised 19 percent, and health insurance for retirees about 15 percent of money protection newer forms foapproaches r efor xtras of benefits, retirees are implicitly secondary iflike yourecognize 401(k), would reasonsapprove which theforneed work working. legislation to very encourage well These(H.R. in defined findings this 3179)benefit conte that for xt Sun is by independence of workers and retirees would be replaced by greater dependence retirement, either so I would the increments add to that granted list of to basic his pension needs in theprevious need to years accumulate or such year. a At program the same will time, be fully the protected. employer contribution At the sameattime, retirement even if plans. The supplemental retirement income proposals described above are under the the benefit employer's the SRBisprograms discontinued, decision provides to increase thethe employee employee his orwill herwith still pension an be incentive in entitled response toto the $95 million total. Company 2. retirees Historicalaccordsalary with results increasesfrom ofa 6Z nationwide /year. survey conducted for In before At Sun promoting talking Sun, maintains you, designed wecapital about are sponsored aco to the carefully ncerned accumulation strengthen effects by abRep. odesigned utofretirement that the tax Kennelly, changing can policy retirement be plans Chairmen used, oncomposi employer which program fortion Pickle, provide example, pro for ofvision our lifeti career Rep. towork bmof ue Archer, y employees, benefits, for income inflation ce and and on the public programs. The public programs, as this Committee certainly to current inflation. capital for devote retirement. account In balances other built words,upbenefits during anprovide employee's economic careersecurity. for the pro rata portion of the benefit accrued during the time the (technically called defined benefit plans) by addressing the impact of benefit was in effect. retirement income. Finally, the use of a tax-qualified plan as a Currently, the Sun Company has approximately 12,500 active employees and inflation on fixed income provided under this type of plan at nominal the National Council on Aging. As health and longevity continue to improve, Iwhich others. of protection would our issocie say H.R. intended for ty, that 3179 retirees. andyou to would wemeet have are encourage their re toviewing distinguish income the our spread replacement retbetween iremen of this t needs. the income typeshort-term of plans This postretirement wi program tand h these the is knows, have serious long-term problems of their own. Sometimes we become so enmeshed in the technical details that we lose sight of vehicle to provide supplemental retirement benefits assures QUESTION: revenue costs. employees In spite ofthat these the drawbacks, benefits will why be can't distributed employers equitably continue and to that HCW:jlw approximately 10,400 retired workers and survivors of retired workers. benefit adjustment to offset inflation. Attached to my statement is a fact made up of two plans. past increase and basic currentpensions increases using in ad pension hoc payments? benefits will be continued. EJBSRB 1 sheet that more fully explains the benefits of this legislation. I hope these remarks have been helpful to the Committee J and would be happy to J HCWI 1 HCWI 2 N_] 3 r'e_.-[,ortJ f_ any qUe-_£_O_LT,you My |1"_Ve. long-tetnn impacts.