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By Cynthia L. Moore
Washington Counsel

National Council on Teacher Retirement

(Information current as of January 24, 2001)

Introduction

The year 2001 holds possibility but also uncertainty.  Possible candidates for enactment are pension reform that includes portability expansion and bankruptcy legislation that contains public pension protections.  Less certain are proposals to address Social Security’s future insolvency, but legislation to restrict how state and local governments, including their retirement systems, use Social Security numbers as identifiers will undoubtedly be introduced. 

New Leadership on Tax Writing Committees

Of all the congressional committees, the two tax writing ones – House Ways and Means and Senate Finance – have the greatest impact on state and local government retirement systems.  These committees have jurisdiction over the pension qualification rules in the Internal Revenue Code (IRC), which provide the principal federal regulation over the systems.  Any change in those committees’ membership has a bearing on them and, in 2001, both committees have new chairmen and several new members. 

Rep. Bill Thomas (R-CA) succeeds Rep. Bill Archer (R-TX) as chairman of the Ways and Means Committee.  Although he has been very involved in health care, his position on the pension issue is not known.  Thus, it is too early to predict whether he will be helpful on the issue.

On the other hand, Sen. Charles Grassley (R-IA), the new chairman of the Senate Finance Committee, is a known quantity.  During the last Congress, he was the Republican sponsor of pension reform.  He succeeds Sen. Bill Roth (R-DE).  Because of his previous support, Chairman Grassley may make pension reform a priority.

Each committee has several new members.  Ways and Means has two new Republicans, Kevin Brady (TX) and Paul Ryan (WI), and a new Democrat, Earl Pomeroy (ND).  Republican Senators John Kyl (AZ) and Olympia Snowe (ME) join the Finance Committee.  The Senate Democratic Leader, Tom Daschle (SD), is re-joining the committee, and four new Democrats will serve:  Blanche Lincoln (AR), Jeff Bingamen (AZ), John Kerry (MA), and Robert Torricelli (NJ).  As with other Senate committees, membership is equally split between the parties, reflecting the 50-50 split in the chamber. 

Pension Reform to be Re-Introduced in House and Senate Shortly

Reps. Rob Portman (R-OH) and Ben Cardin (D-MD) will re-introduce their pension reform bill soon.  The bill will be substantially the same as what the House passed by a vote of 401-25 last year.  They will drop the bill in once they have 50 Republicans and an equal number of Democrats as original cosponsors. 

The Senate leaders of pension reform are also planning early action.  We understand that the sponsors will be the new Finance Committee Chairman, Charles Grassley (R-IA), (who, as noted, was the lead Republican last year) and the senior Committee Democrat, Max Baucus (MT).  Mr. Baucus moved up this year to become the top Democrat on the Committee, taking over from Daniel Patrick Moynihan (NY), who retired.  The timing of the introduction depends on how soon they receive an estimate about the cost of a tax credit for lower income savers (see next item), which they intend to include in their bill.  (The Portman-Cardin bill will not contain the credit, but Rep. Cardin will introduce it as a free-standing measure.)

Tax Credit for Lower-Income Savers Remains to be Settled

Before any pension reform bill gets to President Bush, Congress will have to decide whether to include a tax credit to help lower income savers.  The credit is for eligible workers who contribute to an IRA, 401(k), or other retirement savings plan.  The credit is targeted to lower income employees who are those least likely to have coverage.  Thus, it could broaden coverage if enacted.

Last year the credit created a stalemate.  Sen. Baucus strongly supported the inclusion of it in pension reform and the Finance Committee version of pension reform contained it.  On the other side of the issue was former Ways and Means Committee Chairman, Bill Archer (R-TX), who passionately opposed virtually all tax credits, including this one.  He would not permit pension reform to contain it.  Thus, a standoff occurred that contributed to the failure of Congress to pass the legislation before enactment. 

This year Sen. Baucus remains committed to the credit, but Rep. Archer has retired, so the principal opponent is gone.  Sen. Baucus will not allow pension reform to advance without the credit.  Because the membership on Senate committees is evenly split, he could prevail in his efforts.  As noted above, the Senate version of pension reform will again include the credit.  The only question is what should be the cost.  Once Messrs. Grassley and Baucus make that determination, they will introduce their bill. 

 Prospects for Action on Pension Reform Good, But Timing Unclear

Although supporters of pension reform want to move the bill, prospects for action on it are not clear now.  Several factors will influence whether final passage is achieved.  The primary concern is whether the bill will travel on its own or be attached to a vehicle, e.g., an across-the-board tax bill that will carry a host of issues – controversial and non-controversial alike. 

Two schools of thought exist on the vehicle.  Some Members of Congress argue that because the bill is bipartisan and was broadly supported in both chambers last year, its passage as a free standing measure would be an early and easy way to show that Congress and President Bush could work effectively together.  Nevertheless, some Democrats may not be ready yet for bipartisanship this early in the President’s term.  In addition, consideration as a free-standing bill eliminates the problem of controversial non-pension-related items from slowing down progress on the bill.

Other Members of Congress want to include the bill in an across the board tax cut.  House Majority Leader Dick Armey (TX) recently suggested rapid action on such a bill to help avert a recession.  His proposal included, in addition to the tax cut, expansion of 401(k) plans and IRAs.  While the House rules allow for orderly consideration of large bills, such as what Mr. Armey is proposing, the Senate rules are more flexible and the bill could be delayed by filibuster or unrelated amendments.  The best way to pass a complex bill in the Senate is to include it in a budget bill, the rules of which limit debate and the type of amendments.  Such a bill will not likely be considered until Spring, however. 

Prospects Bright for Bankruptcy Bill

Last year, Congress passed H.R. 2415, the Bankruptcy Reform Act, which contains public pension protections.  The President pocket-vetoed it, thereby preventing further congressional action.  (Under a pocket veto, if the President fails to take action on a bill within 10 days of receiving it and Congress has adjourned, the bill does not become law.)

The possibility for early action in this Congress is good.  Last year’s sponsors, Charles Grassley (R-IA) in the Senate and George Gekas (R-PA) in the House, plan to re-introduce shortly the identical language of H.R. 2415’s final version.  Bush Administration support looks promising, too, inasmuch as a spokesman says they will accept last year’s bill. 

Social Security Outlook Unclear; Good News for Opponents of Mandatory Social Security

Whereas prospects for pension reform and bankruptcy legislation are good, the possibility of Social Security reform is less certain.  No meaningful activity took place during the 106^th Congress (although the specific issue of the use and display of Social Security numbers took center stage, as discussed below).  Lack of credible data did not cause the inaction.  The program’s trust fund will be out of money in 2037.  At that point, beneficiaries will receive only three-quarters of their promised benefits.  If the issue is not resolved now, future generations will be burdened with a far more expensive problem in the future.

During last year’s campaign, President Bush expressed interest in Social Security reform.  He “believes Social Security is a defining American promise that must be kept.”  He promised not to change benefits in any way for current retirees or those near retirement.  But, to save Social Security for the next generation,

"he will lead a bipartisan effort to reform it by giving individuals the option of voluntarily investing a portion of their Social Security payroll taxes in personal retirement accounts.  These accounts will earn higher rates of return and generate wealth that can be owned and passed on from parents to their children." (Quotation from Bush Transition Web Site)

President Bush has made the following statements about reform:

• Absolutely no change in existing benefits for retirees or near-retirees.

• The Social Security surplus must be locked away only for Social Security.

• Social Security payroll taxes must not be increased.

• The government itself must not invest Social Security funds in the market.

•  Modernization must preserve the disability and survivors components.

• Modernization must include individually controlled, voluntary personal retirement accounts, which will augment the Social Security safety net.  These accounts will earn higher rates of return, have parameters of safety and soundness, and help workers build wealth that can be passed on to their children.  (Emphasis in original.)

 Although privatization is fairly popular among Republicans, it is generally opposed by Democrats.  If President Bush overcomes Democratic opposition and signs into law a new program, state and local government retirement systems will need to consider how a privatized Social Security system affects the retirement systems they administer.  Alternatively, the President or Congress may propose a commission to study the issue, thereby postponing a resolution. 

Of course, lack of action is good news for opponents of mandatory Social Security coverage. Under current law, states and localities are not required to participate in the program, but may voluntarily do so.  Those governments that do not participate have retirement and disability programs that are comparable and, in some cases, superior to Social Security.  Many reform efforts include the mandatory coverage of state and local government employees in Social Security.  The proposals usually cover employees hired after a certain date; existing employees would be unaffected.  Even if the change required only newly hired state and local government employees to participate, it could have a profound impact on state and local government finances.  The Cost Impact of Mandating Social Security for State and Local Governments by the Segal Company estimated the cost to be $26 billion during the first five years of mandatory coverage. 

Restrictions on Use of Social Security Numbers to be Re-Introduced

Congress came close to passing legislation last year that would have restricted how state and local governments, including their retirement systems, use Social Security numbers (SSNs).  In addition, the leader in the effort, Rep. Clay Shaw (R-FL) and chairman of the House Social Security Subcommittee, asked the General Accounting Office (GAO) to study the issue.  His staff is currently reviewing last year’s bill.  He plans to re-introduce it during February or March even though the study will not be completed until later this year.