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By Cynthia L. Moore
Washington Counsel
National Council on Teacher Retirement (NCTR)

April 28, 1998 Legislative Update

The two questions of most interest to pension groups in Washington these days are:

• Will there be a tax bill onto which pension provisions can be attached? and
  
  
• What will be done to change the financing of Social Security, the trust fund of which is expected to run short of money in about 30 years?

Prospects for a Tax Bill

A key bill supported by NCTR is the Retirement Account Portability Act (RAP) by Rep. Earl Pomeroy (D-ND) and Rep. Jim Kolbe (R-AZ) (H.R. 3503). As previously reported, the bill would provide greater portability for public plans, especially by allowing the use of 403(b) and 457 plan assets to purchase service credit in a governmental defined benefit plan and expanding rollover options for participants in 403(b) and 457 plans. We worked closely with Rep. Pomeroy on these provisions and appreciate his willingness to expand portability options for state and local government employees. Also expected shortly is a pension bill from Reps. Portman (R-OH) and Cardin (D-MD), which may be similar, though likely more comprehensive than the Pomeroy-Kolbe measure.

Congress rarely passes free-standing pension legislation, such as RAP. Thus, we are looking for a vehicle on which RAP could be added. Typically, a tax bill serves that purpose, but this year no obvious candidate has emerged. The most likely possibility, in light of 1998 being an election year, is a measure that includes a tax cut. Here are some past and future contenders:

Legislation to Spend the Budget Surplus? No. At the beginning of the year, Congressional observers thought that the projected budget surplus would serve as a basis for a tax cut. The President brushed that idea off the table when he announced that any surplus should be used to "save Social Security first." Because of the popularity of the program, the Republican leaders in Congress have not disagreed with the President's statement.

Tobacco Settlement? Maybe. The tobacco settlement is also a possible (though now not as likely) candidate. By way of background, Congress, the Administration, the states, and the tobacco companies are negotiating legislation in which the companies will pay billions of dollars to the federal and state governments in exchange for limited immunity from lawsuit. Although the legislation to implement the agreement has not been finalized, both President Clinton and Congress have figured out ways to spend it. The President has earmarked it for new federal spending, including helping to pay for 100,000 new teachers. Republicans in Congress want to use the money for $60-80 billion in tax cuts over the next five years. A tax cut would obviously require tax legislation and would provide the needed vehicle for the Pomeroy-Kolbe RAP Act. The tobacco settlement passed the Senate Commerce Committee overwhelmingly but is now in limbo because the tobacco companies oppose it. Speaker Gingrich says the proposal is too liberal to win approval in the House because it would raise taxes, specifically on cigarettes, and expand federal government regulation over tobacco.

Surplus Budget Surplus (Known as "Surplus-Surplus" for Short)? No. Another way to finance a tax cut is to use "surplus-surplus." The House Budget Committee is considering this approach, which is defined as any budget surplus over and above the surplus projected by the Congressional Budget Office (CBO) at the beginning of this fiscal year. CBO has nixed the idea, however, by sticking with the budget surplus amount of $8-18 billion that it has already projected. If it had come up with a higher number, "surplus- surplus" might have been created and therefore provided the money for a tax cut.

IRS Re-Structuring Bill? Probably Not. This bill has been widely discussed as a vehicle for tax legislation. It is designed to make IRS a kinder, gentler agency. The bill passed the House "clean," i.e., no extraneous items. It has now passed the Senate Finance Committee, where it was approved in a similarly pristine state. It will likely come before the full Senate the week of May 4. There is some talk about it being broadened to include a tax cut and possibly pension legislation, but no means to finance these additions has been put forward.

Irrespective of whether a tax bill emerges, pensions are guaranteed attention in Washington this year. The White House-Congressional Retirement Savings Summit will highlight the issue when it convenes in Washington June 4-5. NCTR will be well represented as both current President Gene Waschbusch of St. Paul, Minnesota and former President Frank Ready of the State of Mississippi will be part of the discussion. We can expect a flurry of legislation to be introduced both before and after the Summit.

Social Security Debate Developing

As previously reported, Congress will likely not act to resolve Social Security's financial woes in 1998, but heed the President's call to develop a consensus this year and take action next year. As Gene Sperling, the President's top economic advisor commented, "there is nothing that compels reform. Social Security's insolvency will not take place for a number of years. To compel action, we need to build a bipartisan consensus now." Driving the debate is the projection that the outflow from the Social Security trust fund will exceed the inflow beginning in 2012 and by 2029, the trust fund will be out of money. (On April 29, the White House announced that the strong economy is expected to provide three additional years of solvency for the trust fund. The announcement was part of a report issued by the Social Security and Medicare Board of Trustees. Thus, 2032 is now doomsday, instead of 2029.)

The White House has undertaken the first step in that process by organizing a series of national forums, with the assistance of the AARP and the Concord Coalition (the latter is a nonprofit group concerned with controlling the federal budget deficit and paying for the baby boomers' impending Social Security benefits). The first forum took place April 7 in Kansas City, Missouri. Other forums will take place throughout the year, with concrete, bipartisan support for action anticipated in 1999.

Under consideration are a variety of proposals to shore up Social Security's finances, including using the budget surplus to help the system, taxing higher-income recipients, privatizing some Social Security funds, cutting benefits, increasing the payroll tax rate, and raising the benefit eligibility age. According to a Wall Street Journal/NBC Poll (April 24, 1998), Americans express the following views on these ideas:

70% approve of using the budget surplus to help the system;
66% favor raising taxes on benefits of higher-income recipients;
63% support the private investment of some Social Security funds;
86% oppose cutting benefits;
61% reject raising the payroll tax; and
58% oppose increasing the retirement age to 67 sooner than planned.

Examples of proposals before Congress follow.

Social Security Surplus Accounts. Both Republican and Democratic members have introduced legislation setting up accounts in the Department of the Treasury to deposit the surplus until a solution for the system's problems are found. Rep. Bunning sponsored H.R. 3351 that would 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. Rep. Rangel introduced H.R., 3207, the "Save Social Security First Reserve Fund," into which the Department of the Treasury would deposit surpluses pending Social Security reform.

Study Commission. Chairman of the House Ways and Means Committee, Rep. Archer (R-TX) has proposed a commission to recommend reforms in the system (H.R. 3546). The commission would make recommendations to Congress and the White House by February 1, 1999. The House Ways and Means Committee approved the bill April 22. The full House approved it April 29. It is not clear yet whether the Senate favors the idea. The White House opposes it for two reasons. First, the most important issue is to create the political will to change Social Security, not to generate new policy ideas. Second, national forums on the issue are already in place to elicit dialogue on the issue. (See above.) Since 1983, six major bipartisan commissions have studied the issue. The latest was the Social Security Advisory Council, which released its report in late 1996.

Comprehensive Financial Reform, Including Optional Voluntary Private Accounts. Senator Daniel Patrick Moynihan (D-NY) introduced March 18, S. 1792, the Social Security Solvency Act. The bill attempts to address Social Security's problems from a variety of angles, including requiring Social Security coverage for newly hired state and local government employees -- which is extremely controversial for the states, localities, and employees involved. (NCTR favors voluntary, not mandatory, Social Security coverage of state and local employees.)

Adjustment of Payroll Taxes and Return to a Pay-As-You-Go System. Moynihan believes that Social Security is currently collecting too much from American workers. At present, Treasury receives $100 billion more each year in payroll taxes than it pays out in benefits. He proposes adjusted payroll rates that would more closely match annual outlays. Accordingly, his bill would cut the Social Security payroll tax from 12.4% to 10.4% between 2001 and 2024. That rate would stay in place until 2045. At that point, the rate would increase to the current rate of 12.4% and top out at 13.4% in 2060. In order to ensure continued solvency, the Social Security Trustees would make recommendations for a new pay-as-you-go tax rate schedule if the trust funds fall out of actuarial balance.

Optional Personal Accounts. S. 1792 would allow workers, beginning in 2001, to finance a voluntary personal savings account with the proceeds of the 2% cut in the payroll tax. Alternatively, a worker could take the employee share of the tax cut in the form of an increase in take-home pay equal to 1% of wages. Others have also made similar proposals, although many would require mandatory, not optional, personal accounts. These accounts are what is referred to as the "privatization" of Social Security. (See summary of Rep. Sanford's bill, below.)

Increased Amount of Wages Subject to Payroll Tax. The bill would also raise the Social Security wage base to $97,500 by 2003. Under current law, the first $68,400 of wages are subject to the payroll tax in 1997.

Reduced Social Security COLAs. Moynihan proposes to reduce the COLA by 1%. His bill also would establish a Cost of Living Board to determine yearly whether some further refinement is necessary.

Increased Retirement Age. The bill would increase the retirement age by two months per year between 2000-2017, and by one month every two years between 2018-2065. Under present law, the retirement age will go up to 66 years in a few years, and finally to age 67. Moynihan's proposal would result in retirement ages of 68 in 2017 (for workers reaching age 62 in that year), and 70 in 2065 (for workers reaching age 62 in that year).

Repeal of Earnings Test. Beginning in 2003, the earnings test would be eliminated for all beneficiaries age 62 and over. Under the test, the benefits of Social Security recipients in their 60's are reduced depending on how much they are earning. Moynihan said that when Social Security was enacted in 1935, the federal government was trying to discourage elderly workers from remaining in the labor force because of the scarcity of jobs. Because the unemployment rate is much lower now, older workers should be encouraged to remain in the labor force.

Mandatory Coverage of Newly Hired State and Local Government Employees. Beginning in 2001, S. 1792 would require all newly hired employees in currently excluded state and local government positions to be covered by Social Security. Moynihan argues that state and local employees were not included in Social Security when it was enacted in 1935 because of the view that the federal government did not have the power to tax state governments. He asserts that subsequent actions by Congress providing for mandatory Medicare coverage of state and local employees have not been challenged. He also points out that the U.S. Supreme Court resolved the issue in Bowen v. Public Agencies Opposed to Social Security Entrapment. In a unanimous decision, the Court upheld a provision in the Social Security Amendments of 1983 that prevented states from withdrawing from Social Security. Moynihan says that "including state and local workers is not only constitutional [based on the Bowen case], it is fair, since most of the five million state and local employees (about a quarter of all state and local employees) not covered by Social Security in their government jobs do receive Social Security benefits as a result of working at other jobs -- part-time or otherwise -- that are covered by Social Security. Relative to their contributions these workers receive generous benefits. Our bill will bring these employees into the system, preventing them from getting a windfall." (By the way, a hearing on the cost of requiring states and localities to participate in Social Security scheduled for March 26 has been postponed and is now tentatively set for May 21. A GAO report, which was the subject of the hearing, has been drafted and should be released around the time (or sometime thereafter) of the re-scheduled hearing.)

Another Comprehensive Approach, Including Mandatory Private Accounts for Some Americans. Rep. Mark Sanford (R-SC) has proposed a measure (H.R. 2782) that would include "full privatization," i.e., the eventual elimination of Social Security as we know it today.

Establishment of PRAs. Once plan fully phased in, the proposal would require all individuals to maintain a "Personal Retirement Account" (PRA), an IRA-like savings plan administered by a custodian.

• 6% of a worker's income would be deducted from his/her paycheck, plus a 6% employer match. Of that amount, 8% would go into the PRA and 4% to the government to help pay for benefits due under the current Social Security system, which, as noted above, would be phased out under plan.
  
  
• Individuals could also contribute any amount above the required minimum. Married couples with a non-working spouse would be encouraged to contribute to the spouse's account.
  
  
• PRAs would have to be invested in a mutual fund-type portfolio until enough was accumulated to pay for an annuity that would provide the equivalent of an $8,500 annual income (same as the 1996 minimum wage). Amounts above that could be invested in any type of asset.
  
  
• Custodians would be regulated by the SEC based on capital adequacy and managerial experience.
  
  
• Fees would have to be disclosed up front.

Insurance to Guarantee Minimum Annual Benefit. An annual premium for insurance would be required. Investment principal up to amount needed for the minimum wage-level annuity would be insured against loss by a fund administered by the SEC or a similar private insurer. Premiums, collected by the custodian, would be based on investment risk. Principal amounts above that level, and all investment earnings, would be uninsured.

Various Ways to Pay Out Amounts at Retirement. Upon retirement, an individual could choose to purchase a life-time annuity, live off the interest in the PRA, or withdraw portions of the principal. Any amount remaining after retiree's death would become part of the estate and would go to beneficiaries or a charity.

Increase in Retirement Age. The proposal would raise the retirement age to 70 by 2029.

COLA Capped. COLA increases would be capped at 0.5% below actual inflation increases to approximate a re-estimate of the CPI.

Social Security Disability Continued. A separate disability trust fund would be created and funded by a dedicated payroll tax.

Medicare Not Affected.

Mandatory Social Security Coverage. Newly hired state and local government employees would be required to participate in Social Security, and presumably, the PRAs, once that portion of the proposal was phased in.

Transition from Existing Program to PRAs-Only Program. Three groups are dealt with in the bill:

• those currently receiving Social Security benefits would have to remain in the existing program;
  
• those currently paying into Social Security could elect to participate in a PRA or stay in the existing program; and
  
  
• those who are not currently receiving benefits or paying into Social Security (i.e., those too young or those who immigrate into the U.S. and begin to work after the PRA plan was inaugurated) would have to participate in a PRA and could not go into existing program.

President's Views on Privatization. He opposes total privatization, but has said, "a solution that strengthened the system, keeping it universally fair, and protecting disabled and low-wage workers could incorporate use of private accounts." On other Social Security issues, he is not enthusiastic about eliminating the cap on the income subject to the payroll tax; otherwise some people would pay 50 to 100 times more into Social Security than they will ever draw out. Nor is he enthusiastic about raising the payroll tax.

Government, as Opposed to Individual Investment, of Social Security Trust Fund Money in the Stock Market. Although there is considerable agreement that Social Security trust fund money should be invested in the stock market, most of the debate has focused on investment by individuals through private retirement accounts (see the Moynihan, Sanford, and Kasich proposals elsewhere in this report). When the Social Security Advisory Council released its report, seven of the 13 members supported individual investment. The remaining members favored government investment. Likely to prompt debate on the latter form of investment will be the General Accounting Office's just released study, Implications of Government Stock Investing for the Trust Fund, the Federal Budget, and the Economy (GAO/AIMD/HEHS-98-74). (Hearings on the report were held by the Senate Special Committee on Aging on April 16.) Among other things, GAO says that government investment of trust fund money in the stock market will produce higher returns, thereby delaying the trust fund's insolvency, even without structural changes in Social Security. The investment will not solve the long-term financial imbalance, however, but it could reduce the size of other reforms. GAO points out that higher returns are accompanied by higher risk. It also noted the issue of whether such investment raises the problem of government control of individual companies or improper political influence. GAO suggested that the issue could be possibly resolved by passive investments through index funds and rules that require the managers of the trust fund to invest for the exclusive benefit of the Social Security participants. On a related issue, the parliament of Canada has authorized the investment of the assets of Canadian Pension Plan in the stock market. The Plan serves the same purpose for Canadians as Social Security does for Americans.

Other Social Security Legislation

Personal Retirement Savings Account Act of 1998 (H.R. 3456) by Rep. John Kasich (R-OH). The Kasich bill would use projected budget surplus to create personal retirement accounts. Most of the surplus would be divided among these accounts with each account receiving the same amount. The accounts would be in addition to the existing Social Security system, which would not be affected by Kasich's legislation. Individuals would have several options for investing their personal retirement account money, the same as those now available to federal workers in the Thrift Savings Plan. 80% of the surplus would be dedicated to funding the accounts, with the rest going to pay down the national debt.

National Commission on Retirement Policy (NCRP) Proposal Expected. The NCRP, a public-private effort coordinated by the Center for Strategic and International Studies (CSIS), will be proposing legislation shortly that covers all aspects of retirement financing -- Social Security, employer-sponsored pension plans, and personal savings. The Congressional representatives are Senators Gregg (R-NH) and Breaux (D-LA) and Representatives Kolbe (R-AZ) and Stenholm (D-TX).

Recent Pension Legislation

S. 1856, Enhanced Savings Opportunities Act by Sen. Charles Grassley (R-IA). The bill would eliminate the 25% of compensation limit of Section 415(c) of the Internal Revenue Code. The limit affects how much an individual may contribute in any one year to a defined contribution plan. It also affects the limits for Section 403(b) tax-sheltered annuities. Although S. 1856 will not directly affect defined benefit plans, it will help the many teachers who participate in 403(b) plans. The bill would also, as a general principle, eliminate some of the arbitrary limits that impede retirement savings and complicate pension administration. (Note: The Taxpayer Relief Act of 1997 made the 25% of compensation limit inapplicable for purchases of permissive service credit by state and local government employees (codified under IRC Section 415(n)).

H.R. 3672, Employee Pension Portability and Accountability Act of 1998 (EPPA) by Rep. Richard Neal (D-MA). The bill includes IRA payroll deductions and SMART trusts (which are simplified defined benefits plans, a similar idea of which is included in H.R. 1656, the Secure Assets for Employees (SAFE) Plan by Rep. Earl Pomeroy (D-ND) and Rep. Nancy Johnson (R-CT)). EPPA is similar, though not identical, to the White House's pension package, proposed earlier this year.

Federal Proposals to Allow Third Parties to Withdraw Money from Pension Plans.

Attachment of Pension Payments to Satisfy Federal Loans.

Rep. Steve Horn (R-CA) is considering legislation that would include the use of pension payments of individuals who are delinquent in re-paying federal loans (e.g., student loans, small business loans, and Department of Agriculture loans). Both public and private pension organizations, including NCTR, have written him urging the deletion of this provision from any proposed legislation. We understand that Rep. Horn is looking favorably at that possibility. As of April 28, the Congressman had not introduced any legislation.

Bankruptcy.

Amendments are being considered to bankruptcy legislation currently before the Senate and House Judiciary Committees that would clarify the treatment of a bankrupt plan participant's interest in his/her pension. Among other things, the proposal would protect the bankrupt individual's interest from creditors. The Senate bill, S. 1914, is pending before Committee. The House bill, H.R. 3150, was marked up in subcommittee April 23 and reported to the full Committee. To our knowledge, the clarifying amendments were not included in it.

Medicare Commission Moving Forward; Buy In Bill has Attracted Interest

The National Bipartisan Medicare Commission got underway April 20-21. It met to define the problems facing Medicare and to hear from top experts about the future threats to Medicare's solvency. Sen. John Breaux (D-LA) and Rep. Bill Thomas (R-CA) are leading the 17-member Commission, which must report its findings by March 1999.

The Commission is looking at a wide range of options from eliminating the current program to expanding. In the area of expansion, it is looking at the Medicare Early Access Act of 1998 (H.R. 3470) by Rep. Pete Stark (D-CA) and (S.1789) by Sen. Daniel Patrick Moynihan (D-NY). The Act would expand Medicare to those under 65 in two ways and make some other changes. The sponsors intend the bill to be cost neutral.

Individuals who are 62-65 years old without health insurance could buy into Medicare by paying monthly premiums and repaying any extra costs to Medicare through "deferred premiums (i.e., an add-on to the regular monthly premium) between ages 65-85. Individuals who "bought in" would pay base premiums of about $300 a month during the months of enrollment between ages 62 and 65. The "deferred premium" is initially estimated to be $16 a month for each year or part of a year that a person chooses to enroll between ages 62 and 65. For example, if someone enrolled for two years, the deferred premium would be an additional $32 each month (2 years times $16).

Individuals aged 55 to 62 who are eligible for unemployment insurance (and their uninsured spouses) may buy into Medicare through a premium. This coverage is estimated to cost $400 a month. Once an individual reached age 62, he/she would have to transfer to the program described in the previous paragraph.

Workers aged 55 and older whose retirement health insurance is terminated by their employer may buy into their employer's health insurance for active workers for 125% of the group rate. This is an expansion of the COBRA health continuation benefits program, not a Medicare program.

Payment for Start-Up Costs.

The Congressman also proposes the Medicare Fraud and Overpayment Act of 1998 (H.R. 3471). The Senate bill is S. 1788 by Sen. Moynihan. The Act offers a package of Medicare anti-fraud, waste, and abuse provisions to pay for start-up costs while the Deferred Premiums are being collected and for any costs not covered by premiums.

USERRA Clarification Approved

The House Veterans' Affairs Committee approved a bill (H.R. 3213) that makes clear that veterans' re-employment protections are applied to state and local governments. The protections are set out in the Uniformed Services Employment and Reemployment Rights Act (USERRA), which is the latest of a series of federal laws, first enacted in 1940, that provide persons who serve for a limited period in the U.S. Armed Services the right to return to civilian employment. USERRA applies to both public and private employers, regardless of size. The Committee approved H.R. 3213 on March 11. It was passed by the House on March 24. It is now pending in the veterans committee of the Senate.

The 50 States and the District of Columbia employ a significant number of persons who also serve their country through service in the National Guard and the Reserve components of the military services. Although disputes between state agencies and employees about the scope and meaning of USERRA and its predecessor laws have arisen from time to time, state employers regularly afford persons serving in the Armed Forces and Selected Reserve the rights guaranteed by these laws. Recently, however, several States have taken the position that the 11th Amendment to the Constitution makes USERRA inapplicable to state agencies. The argument is based on a 1996 Supreme Court Decision, Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996). The Court held that Congress was prohibited by the 11th Amendment from allowing individuals to sue States for violating Federal statutes. At least two U.S. district courts have ruled in favor of defendant States in actions brought under USERRA since that 1996 decision.

To overcome the effect of the Seminole case as may be interpreted in USERRA claims, H.R. 3213 would substitute the United States for an individual veteran as the plaintiff in enforcement actions in cases where the Attorney General believes that a State has not complied with USERRA. The bill also makes several technical changes.

For further information about the issues in this report, contact Cindie Moore at 703-243-3494.