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Final Score on 1998 Congressional Activity:
Politics and Partisanship-1; Pensions-0

by Cynthia L. Moore
Washington Counsel
National Council on Teacher Retirement

October 28, 1998

I. Introduction

Although 1998 initially looked promising for pension legislation, it turned out to be a year of laying groundwork instead of a year of action. As described below, a new effort to expand the portability of state and local employees pensions has borne fruit and will be a key issue for consideration next year. Other issues attracting attention this year included amendments to the federal Bankruptcy Code to protect pension assets and work on the Social Security reform issue. On the negative side, 1998 stands out as a year when partisanship poisoned the atmosphere and made it difficult for any issue to progress through the minefield of politics. Another big disappointment was the National Summit on Retirement Savings. The Summit drew over 200 pension experts from around the nation to discuss what can be done to promote retirement savings among Americans, but failed to inspire Congress into enacting pension legislation.

II. Ways to Expand Pension Portability for State and Local Government Employees

A. Rep. Earl Pomeroy (D-ND) and Rep. Jim Kolbe (R-AZ) introduced the Retirement Account Portability Act (RAP) (H.R. 3503) to expand in two ways pension portability options for state and local government employees. Other bills that included these options are listed below.

B. Proposal I: Rollovers allowed among various types of retirement plans that are prohibited under current law.

1. Many state and local government employees voluntarily participate in plans known either as "deferred compensation plans" or as "Section 457 plans." Teachers and other school workers have available to them "tax-sheltered annuities," also known as "Section 403(b) plans."

2. Under current law, employees' rights to rollover money into 457 or 403(b) plans are severely limited. RAP would allow employees moving from the public sector to the private sector to rollover money from 457 and 403(b) plans into IRAs or the retirement plans of their new employers.

3. By the same token, workers moving from the private sector to the public sector could roll over their retirement savings into the 457 or 403(b) plan at their new state or local government workplace.

4. Pension money could also be rolled from a 457 or 403(b) plan into a qualified plan, including a governmental defined benefit plan. By the same token, pension money could be rolled from a qualified plan, including a governmental defined benefit plan into a 403(b) or 457 plan. (Note: H.R. 3788, listed below, establishes a $50,000 rollover limit from qualified plans to 457s.)

C. Proposal II: Service credit purchases in governmental defined benefit plans with money from 457 or 403(b) plans without penalties and taxes.

1. Employees of state and local governments, particularly teachers, often move between states and school districts during their careers. Under state law, they often have the option of purchasing past service credit in order to make up for time spent in another state or district. With such purchases, they can earn a pension reflecting a full career of employment in the state in which they conclude their career.

2. Under current law, if state and local government employees wish to use money in their 457 or 403(b) plans to purchase service credit, they may incur large penalties. RAP allows them to use such money without these penalties through either a rollover or a trustee-to-trustee transfer.

D. While RAP removes the legal obstacles described above, it does not require employers to accept rollovers from their new employees nor does it mandate a governmental defined benefit plan to make available the purchase of service credit. Thus, under the Act, a rollover or purchase will occur when the employee chooses to do so and when the employer agrees.

E. Bills that contain the rollover and purchase of service credit proposals (besides RAP, H.R. 3503).

1. S. 2339, the Retirement Security for the 21st Century Act by Senators Graham (D-FL), Grassley (R-IA), Jeffords (R-VT), and Baucus (D-MT).

2. S. 2329, the Retirement Account Portability Act of 1998 by Senators Jeffords (R-VT), Bingaman (D-NM), and Graham (D-FL).

3. H.R. 3788, Retirement Security for the 21st Century Act by Congressmen Rob Portman (R-OH) and Ben Cardin (D-MD).

III. Social Security

A. General Reform

1. It is estimated that Social Security will be no longer able to pay full promised benefits beginning in the year 2032.

2. The funding problem is caused by the 77 million baby boomers who begin to retire in 2011.

3. Various bills have been introduced to address the funding problem.

4. Legislation to reform Social Security (many of the bills contain mandatory Social Security coverage).

a. H.R. 3351 by Congressman Jim Bunning (R-KY) to create a new Treasury account to designate the budget surplus as off-limits to government spending until a solution to Social Security's funding problem is reached.

b. H.R. 3207 by Congressman Charles Rangel (D-NY), the "Save Social Security First Reserve Fund" into which the Department of Treasury would deposit surpluses pending Social Security reform.

c. H.Res. 483 by Congressman Jerrold Nadler (D-NY) opposing individual accounts as a Social Security reform measure.

d. S. 2369 by Senator Bill Roth (R-DE) to dedicate half of the projected budget surpluses over the next five years to the creation of personal retirement accounts (similar to Kasich bill, below).

e. S. 1792 by Senator Daniel Patrick Moynihan (D-NY), the Social Security Solvency Act, to create voluntary personal accounts and make other changes.

f. H.R. 2782 by Congressman Mark Sanford (R-SC) to establish personal retirement accounts and make other changes.

g. H.R. 3456 by Congressman John Kasich, the Personal Retirement Savings Account Act of 1998, to use the projected budget surplus to create personal retirement accounts.

5. Of particular interest are proposals to "privatize" Social Security.

a. Privatization means the investment of Social Security assets in equities and other investments. Currently, assets are invested in non-marketable government bonds.

b. Controversy surrounds who should do the investing. (1) Many bills (see list above) would create individual retirement accounts for all working Americans into which a portion of their Social Security payroll tax would be deposited. Each worker would decide how the money in the account would be invested. (2) Rep. Earl Pomeroy (D-ND) is proposing to allow some federal government entity invest the money in a manner similar to the way private, state, and local government pension plan administrators now invest the money.

6. Impact of Social Security reforms on states, localities, their employees, and retirement systems.

a. NCTR published The National Council on Teacher Retirement's Resource Book on Social Security: A First Look at the Impact of Proposed Social Security Reforms on States, Localities, their Employees, and Retirement Systems (Sept. 1998). (Contact NCTR at 512-335-0055 if you need a copy.)

b. The publication looked at the impact of the following proposals:

(1) Increasing payroll tax, therefore, less money available for salary increases and pension contributions.

(2) Increasing wage base ($68,400 in 1998), i.e., workers must fund a greater part of their retirement through reduced compensation.

(3) Raising Social Security normal retirement age (SSNRA) to 70 (SSNRA -- now 65, but it will eventually go up to 67).

(a) If employees work until SSNRA, it could reduce the cost of defined benefit plans because of a longer funding period and a shorter pay-out period; (b) On the other hand, if employees retire before SSNRA, there may be pressure to increase "bridge" payments between retirement and beginning of receipt of SS benefit; and (c) Some employees, due to bad health, may not be able to work up to older NRA.

(4) "Means testing" Social Security benefits. (a) Lower income workers have less incentive to accumulate their own savings because to do so may reduce their SS benefits. (b) Higher income workers, who will likely become ineligible for SS benefits, will no longer support program.

(5) Proposed changes to dependent, disability, and survivor benefits. (Depends on current program in state or locality.)

B. Mandatory coverage of newly hired state and local government employees.

1. Proposal in most pieces of major Social Security reform legislation.

2. Would extend Social Security's solvency by two years (from 2032 to 2034); stated another way, it would provide 10% of the total amount needed to keep Social Security solvent.

3. Rep. Jim Bunning requested the General Accounting Office (GAO) to look at the impact of mandatory coverage.

a. GAO made interim report at congressional hearing on May 27, 1998.

b. GAO released final report on August 18, 1998.

c. Findings: (1) Mandatory coverage would benefit the Social Security program. (2) The impact of mandatory coverage on employers, employees, and their pension plans would vary depending on their response. (3) Mandatory coverage raises legal considerations, but any legal challenge would not likely succeed. (4) States would require up to four years to implement mandatory coverage.

C. Social Security Exemption for Students Employed by State Schools, Colleges, or Universities.

H.R. 4328, the omnibus appropriations bill, allows the states to change their laws between January 1, 1999, and March 31, 1999, to exclude service earned by students while employed by a college, university, or school at which they are also students. If a state approves the change, students are not converted to uncovered status until June 30, 2000. In addition, the state's decision to disregard earned service for students may not be reversed. (Signed into law October 21, 1998.)

IV. Other Legislation of Interest

A. Bankruptcy: Amendments to protect a debtor's interest in his/her pension plan and to allow bankrupt plan participants to repay plan loans was part of large bankruptcy legislation (H.R. 3150 did not contain the loan provision; S. 1301, did). A conference committee agreed on October 7 to a compromise between the House and Senate versions of the bill. The conference agreement passed the House but not the Senate, thus it died when Congress adjourned.

B. Securities Litigation: The House passed H.R. 1689 on July 22 that will limit the conduct of securities class actions under State law by a vote of 340-83 (with one voting present). As with the Senate version (S. 1260), the bill contains an exception for lawsuits by state and local government pension plans. The Senate passed its bill on May 13. S. 1260 was sent to the President for signature on 10/22/98, and as of 10/29/98 it has not been signed.

C. Patients' Bill of Rights/HMO Reform: The House narrowly passed a patients' rights bill (H.R. 4250 by Rep. Gingrich) that will establish a set of protections for Americans in managed-care plans. The bill, passed on July 24, contains safeguards that would make it easier for patients to get emergency room bills paid, visit ob-gyns and pediatricians, and appeal when they believe they have been improperly denied care. The Senate did not act on H.R. 4250 so it died at the end of the session.

D. Y2K

1. S. 2000, by Sen. Robert Bennett (R-UT), would require pension plan fiduciaries covered by ERISA to consider year 2000 computer problems in making investment decisions by mandating them to determine whether the issuer of any security in which the fiduciary seeks to invest the assets of the plan has, or is taking, steps to substantially eliminate any year 2000 computer problem faced by the issuer, and whether such security is traded on a market that is prepared to operate without any interruption due to the year 2000 computer problem. Died at the end of the session.

2. S. 2392, by Sen. Robert Bennett (R-UT), would encourage the disclosure and exchange of information about Y2K problems by offering, among other things, temporary antitrust exemption for any agreement for the purpose of correcting a Y2K problem. It passed Senate on September 28 and House on October 1 and became public law on October 19, 1998.