T-9 7 I0 6 8 EBRI 53 24 9 L the relative Mr. Chairman, roles, strengths I am pleased and goals to appear of each before component you today of the toretirement comment upon occurs. I might add that even where it does occur the combined pension/Social previously unfunded liabilities). Neither of these programs, however, is Actuarial reductions for benefits payable before age 65 may be desirable unwarranted sufficient to bonuses meet the wereretirement costing full income career security payroll needs taxpa ofyers all members $2 billion of per our consider Accordingthe to following the May 1979 points Current as they Population make retirement Survey conducted policy. by They theshould Bureau of limits the income replacement capacity of pensions would be diminished. In system. the Pension Equity Tax Act (HR6410). I appear today in my capacity as Research Security benefit structure of such a plan is still more re-distributive than funded on this basis and the taxpayer June burden 7, 1982actually exceeds the normal cost especially in relation to discussions of raising Social Security retirement society. year. Resolving that issue is a tax equity issue. But the public pensions and consider the Census, thethere existing weresystem's more than structure 31 million andactive the relative participants role ofinits private component combination with the redistributive nature of Social Security this would mean Director of Thethe overall Employee goalBenefit of these Research programsInstitute. in combination EBRI is is aretirement nonprofitincome the Civil Service Retirement System. estimates. The military retirement outlays alone in 1979 were $10.3 billion ages. But the policy must be consistent in order to be equitable. equity issues go beyond this. While pensions are agreements between workers and their employers it pensions during that month. According to the private pension plan filings parts. None of the elements in our retirement system exists in a vacuum. an ever increasing share of the elderly would receive inadequate retirement organization dedicated to providing research and analysis which can serve as a adequacy.EBRI Theisrole currently of pensions sponsoring in meeting a major thisstudy goalofhasintegration been expanding whichrapidly is and were equivalent to more than 90 percent of the total "tax expenditure" Also the proposal for freezing the 415 limits deserves scrutiny is still in the public interest to encourage their existence and continued ex- During 1979 the Federal Government had some 83 pension plans that it Policy required changes by Empl that oyeeaff Retirement ect one component Income Security of the system Act (ERISA) have reverberating the actual number benefits from organized retirement programs. This would imply a policy goal of The Honorable Dan Rostenkowski basis in recent for years. sound policy The number towardofemployee tax qualified benefits. plans Prior increased to joining more EBRI than I56,000 being conducted by Dr. James Schulz of Brandeis University and President of the attributed to all private pensions. regardless Chairman, of the House level Waysatand which Means theyCommittee are set. The military and civilian administered. By comparison there were 571,000 tax qualified private sector pansion. There are several reasons that this is so. In our economy today pen- implications may be much higher. for eachIn ofany theevent, complementary the taxparts. incentives granted pension plans the Ways and Means Committee of shrinking the purchasing power of private and Distinguished Members served in 1980asandthemore Deputy thanDirector 68,000 in of1981. the Office Certain of Policy elements Analysis of HR6410 in the may Social in fact Gerontological Society of America. That study will be completed this summer What would be even more disconcerting if the tax payers understood it Federal United retirement States programs House of Representatives are affected by two types of indexation. While plans. In addition there were an estimated 500,000 KEOGH plans in existence at sions are providing a major source of capital. They are providing benefits to have resulted It isin encouraging a very large thatnumber this fact of private is gaining sector recognition. workers sharing The very in these pension programs. If so, why start with private pensions which now receive a Washington, D.C. 20515 Security Administration. Prior to that I was the Deputy Research Director of and slowwill downbethis shared growth. with Specifically the Congress at thethat proposed time.changes to the 415 limits may is those thecovered rate atare which working we aretoward losingretirement ground ontheir Federal wages pensions. grow inAccording two to the that time. Among the Federal plans the Military Retirement System and the "tax rapidly expenditures." growing proportions of the elderly. As they continue to expand in the establishment of the President's Commission on Pension Policy and the nature of minor share of the Federal largesse? RE: Pension Equity Tax Act of 1982 (HR 6410) the Universal Social Security Coverage Study, a study mandated by Congress. Statement do so. In You ofthis Liabilities havecase heard there estimates andisOther a need today Financial forthat a clearer Commitments passagearticulation of HR6410 of thecould United of the result States policyin dimensions. They grow because of promotions and service increments. They also their Civil futuremandate Service they have attests Retirement the potential to System it. Theofaccounted fact alleviating that£or themore some National than of the Commission 90long-term percent on o£benefit Social all Pension equity issues go beyond private pensions. Few will deny that While high income executives benefit from the 140 percent limits, Dear Mr. Chairman & Members: target. While the views that I express here are based on several years of research and reduced benefits for 68 percent o£ those participating in private pensions. I Government grow becauseforofthe annual end of paythe increases fiscal years separate 1979, from1980 theand longevity 1981 (published /merit growth. by pressures that the baby boom poses for Social Security. Our estimates are that pension plan participants. In 1979 the military plan paid $10.5 billion in Security private plans Reformbenefit has devoted from these considerable so-called time "tax toexpenditures." the consideration Public of the role these limits could well account for the creation of many secondary plans. The Attached, please find my statement on provisions of the above proposed analysis sponsored Is the goal by various to keep private high income and public earnersorganizations, from shieldingthey "tooare much" my own have not tried to verify those estimates but I do know that plan terminations the As their Department wages of growTreasury, their retirement Bureau ofbenefits Government growFinancial because Operations) in both systems the legislation. benefits by early next to 1.5 century millionmore beneficiaries. than three-fourths The Civil of all Service elderly System households paid $12.5 will be of retirement pensionsprograms, does also.on Each the other of thehand, component are directly elementsfinanced of the U.S. through retirement tax beneficial result, however, is that the employers of such executives must also and income do from not represent taxes? One thething official thatposition should beofkept EBRIin ormind any other is that organization. employees tripled during the implementation of ERISA and are still running much higher unfunded benefits liabilities are calculated in on thethe twobasis largest of Federal earningsretirement toward theprograms end of Federal grew by receiving The Employee a pension. Benefit Research Institute stands ready to conduct billion in benefits to 1.6 millionStatement beneficiaries. of By comparison all private system revenues hascollected evolved in from response the general to anpublic. economicBecause need. There publichas plans beenare little financed be covered by the secondary plan for it to be tax qualified. There is the analysis of this legislation or alternative proposals upon request. benefiting Myfrom testimony maximumtoday contributions makes threewill basic probably points.still First, be subject our retirement to high than before ERISA's implementation. $147 service. billion OnceinFederal fiscal pension 1980 andbenefits $128.7 billion commenceinthey 1981.areThe fully annual indexed growth forin sector plans Social paidSecurity $25.6 billion and pensions in benefits are both to 8.7 vital million to thebeneficiaries continued retire- that coordination by "real expenditures" of this evolution, they should however. certainly Bothenter equity into andany economic discussion efficiency of clear potential for the elimination Sylvester J.of Schieber, the 140 percent Ph.D. limits to result in some I appreciate the opportunity of presenting views to you on this Research Director tax system rates is in a set retirement. of integrated In those parts.instances Policiesthethat taxaffect treatment pensions of pension or Social With the problems of Social Security as yet unresolved it may be pre- the present value of future Federal pension obligations for taxpayers is increases legislation. in the consumer price index. Private employees, by and large, year. While Federal employment comprises less than 5 percent of total ment income security of older Americans. Their roles are complementary and dictate pension that equity weissues begin to linked consider to tax retirement policy. policy Becauseonofathe morecomplementary comprehensive secondary plan terminations. Plan terminations or forgone plan creations could contributions is more a tax deferral than a tax reduction. It should also be Security benefits or private savings affect the ability of the entire system to mature to take major policy steps that could potentially jeopardize the running at ten times the total annual tax expenditures for all private benefit from the same kind ofRespectfully indexation as Submitted, Federal workers receive prior to employment the Federal pension benefits in 1979 exceeded all private sector basis that reinforces than we have thetraditionally. advantages of each. It is in this context that pension nature of Social Security and pensions, the relationship of Social Security to potentially have theirEmployee full effect Benefit about Research the time Institute Social Security will be kept assureinadequate mind thatretirement a large share income ofsecurity the "taxfor expenditures" the elderly.attributed Second, pension to retirement income security of today's workers. This is not to suggest that pensions. equity retire;aent. should They be do considered. not, in any significant numbers, receive comparable pensions payments in that year. public plans must also be considered. before the Social Security is this society's joint retirement endeavor. Through buffeted by the baby boom retirement problem. The elimination of the special equity pensionsmust result lookfrom beyond theprivate low taxpensions. rates applied The purpose against of pension the HR6410, benefitstofor this legislation is without merit or that new policy initiatives are not THE PENSION EQUITY TAX ACT post-retirement benefit increases. In order for there to be pension equity, PENSION EQUITY This is ANDa TAXES tax equity issue because the taxpayers bear the burden. I£ it, employers The Social and employees Securityparticipate coverage issue in ais program one that thatthe isgeneral redistributive, public does deferrals for a few high-wage Ways earners and Means may lead Committee to the reduction of valued promote retirees.equity Theseinlow ourtax pension ratessystem occur largely is not best because served of by theadjusting favorablethe taxtax appropriate. I merely want to suggest that we h'b need to step back and take a Without doubt it is time that the Congress began to focus on pension the Federal retirement programs Sy would rester have J. Scie to beersubjected to comparable the CivilWithout ServiceaRetirement doubt, theSystem tax incentives were funded provided on a normal by Congress cost basis have it would helping not fully theunderstand lower-wageorearner there relatively would be amore much than greater those outcry who earn for its more. It is benefits for many more middle income workers. Is it really the desire of the House of Representatives Re search Director treatment treatment of of Social privateSecurit pensions y benfits, alone. not Finally, special I wish treatment to raise of pensions. several equity broaderand lookrelated at alltax elements issues.of But the that retirement focus should system,not private be solely and public, toward and limits, adjusted to account for the post-retirement COLA protection afforded cost 56.5 percent of covered payroll. This would not amortize any previously encouraged both the prevalence and design of private pension plans. Private portable, resolution. helping The problem the mobile is that and stable roughlyworker 2.5 million alike.Federal Historically, workers,it3 has million Ways and Means Committee to reduce the pension benefits of middle-class For the sake of discussion assume that the 415 limits are established Federal questions retirees. about specific elements of the legislation being considered. We have be sure of the relative roles we want each program to play before making major Attachment private plans. In the context of the Pension Equity Tax Act the estimates by workers? accrued unfunded liabilities but only meet currently accruing liabilities. The employer contributions to qualified plans are deductible business expenses. shared State and thelocal benefits workers of growing and a growing nationalnumber productivity of nonprofit with each employees wave of arenew not 8 June 1982 not begun to assess the ultimate impact of the provisions of this bill in the legislative at some lower changes. level. This In theispursuit the position of pension that equity the Administration how do the proposed and Congress the Congressional But the freeze Budgeton Office the 415 andlimits, Department at whatever of Treasury level, suggshould est that notHR6410 be employees covered under this system contribute 7 percent o£ their earnings to Neither covered employer by Socialcontributions Security. Most norofthethese return workers on thewill assets ultimately in the pension get Social fund retirees. It is an element of our retirement system that has become totally On Social Security integration the concern seems to be that employers actuarial context ofreductions an interdependent match upretirement with what is system. provided Suchbyassessments Federal pensions? should be have prudently taken with regard to the National Commission on Social Security would result in relatively small increases in total Federal revenue. In com- judged solely on a comparative basis. More important are the absolute ef- woven are treated into our as economic taxable income fabric.to the participants in the pension until benefits Security the pension benefits plan which on anleaves extremely the taxpayer preferential withbasis. a liability This of is often 29.5 percent. referred are taking undue advantage of the redistributive nature of Social Security. Reform. The Neither viewsthe inCivil this statement Service nor aremilitar thoseyofprograms the author haveand actuarial do not necessarily reductions for developed prior to the implementation of legislation that is bound to have parison fects ittomaythehave Federal over pension time. Atnumbers, first, Ithe have suggested been citing limits they would become affect in-a In 1979 this would have amounted to $16.7 billion that the taxpayers would have are actually paid. Unpublished data from the Office of Tax Analysis, to as theBut "double Social dipper" Security problem is not although enough.that Employer label is pensions misleading. have evolved In 1939 The intent, implementation and implications of the integration regulations are reflect the views of the Employee Benefit Research Institute, its Trustees, members, or other staff. normal retirement benefits prior to age 65. Under Civil Service most classes significant effects. Finally, I want to thank you for allowing me to appear today. In significant. small minority of current pension participants. Over time as the general level Department been required of the to ante Treasur up.y estimates The Military thatRetirement the preferential System is taxtotally treatment the House of Representatives Report on the Social Security Amendments of that for many reasons -- some implicit, others explicit. Some pensions predate probably the most misunderstood aspect of pension policy today. The evidence RETIRI_ENT INCOME SECURITY SYSTEM of workers are eligible for normal retirement benefits by age 55 with 30 years closing, I offer the services of the Employee Benefit Research Institute in If the bill cannot be justified on the basis of its "revenue of wages rises the portion of the workforce affected would increase. Freezing provided noncontributory private£or pensions those reduced covered Federal and has tax a normal revenues costbyo£$11.3 49 percent billiono£in year called these preferential benefits "unwarranted bonuses" and warned that Social Security but most have come to exist since 1940 when Social Security that is used to assess integration is either old or unrepresentative of the In our research at EBRI we have argued that decision makers should of service, age 60 with 20 years and age 62 with only five years. The median assisting you in this study and policy formulation process in whatever way we enhancement" capabilities then it should be judged in the context of national the limits would result in their value declining over time in real dollar terms payroll. This would have equated to a taxpayer liability o£ $8.9 billion in fiscal 1979, $12.9 billion in 1980, and $14.7 in 1981. These forgone tax benefits "such bonuses were first are unwise paid.and Certainly endangerone theofsolvency the reasons of the that system." pensionsThe have 1980 universe of plans. If the concern is that some workers are being integrated can. age at normal retirement under the military retirement program is age 39. retirement and relativepolicy. to wages. In order As more to and do that, more people it is necessary would bumptoup carefully against determine the 1979 just to meet currently accruing liabilities (i.e., no amortization of revenues are often referred to as tax expenditures by fiscal policy analysts. become report so ofpopular the Universal is thatSocial SocialSecurity SecurityCoverage benefitsStudy by alone Groupare estimated not these out of a pension then we should at least know of the prevalence with which it EMPLOYEE BENEFIT RESEARCH INSTITUTE EMPLOYEE BENEFIT RESEARCH INSTITUTE 1'920 N _;tr,:L't, NV, _A'a.hin_ton, D(_ 200_6 -ft'l,.'phonc (202) 65.9.0670 Iq20 N _trcct, N_V _Va,hington. D( 200 _6 lclcphom" 1202) 6_L)-0670