[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]



 
                        REDUCING THE TAX BURDEN

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                          JUNE 16 AND 23, 1999

                               __________

                             Serial 106-24

                               __________

         Printed for the use of the Committee on Ways and Means



                    U.S. GOVERNMENT PRINTING OFFICE
60-332 CC                   WASHINGTON : 2000



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

                ENHANCING RETIREMENT AND HEALTH SECURITY

                             JUNE 16, 1999

Advisory of June 2, 1999, announcing the hearing.................     2

                               WITNESSES

American Council of Life Insurance, Jeanne Hoenicke..............
00
American Farm Bureau Federation, Carl B. Loop, Jr................   182
American Hospital Association, Dan Wilford.......................    91
American Society of Pension Actuaries, Paula A. Calimafde........   126
Association of Private Pension and Welfare Plans, Jack Stewart...   117
Blue Cross and Blue Shield Association, Mary Nell Lehnhard.......    83
Business Council of New York State, Inc., Paul S. Speranza, Jr...   195
Butler, Stuart, Heritage Foundation..............................    65
Calimafde, Paula A., American Society of Pension Actuaries, 
  Profit Sharing/401(k) Council of America, Small Business 
  Council of America, and Small Business Legislative Council.....   126
Cardin, Hon. Benjamin L., a Representative in Congress from the 
  State of Maryland..............................................    40
Coyne, Michael, National Federation of Independent Business and 
  Tuckerton Lumber Company.......................................   192
Erisa Industry Committee, J. Randall MacDonald...................   139
Florida Farm Bureau Federation, Carl B. Loop, Jr.................   182
Food Marketing Institute, Paul S. Speranza, Jr...................   195
Goodman, John C., National Center for Policy Analysis............    59
Greater Rochester New York Metro Chamber of Commerce, Paul S. 
  Speranza, Jr...................................................   195
GTE Corp., J. Randall MacDonald..................................   139
Health Insurance Association of America, Charles N. Kahn III.....    72
Hill Slater, Inc., Phyllis Hill Slater...........................   176
Hoenicke, Jeanne, American Council of Life Insurance.............    96
Jefferson, Hon. William J., a Representative in Congress from the 
  State of Louisiana.............................................    43
Johnson, Hon. Nancy L., a Representative in Congress from the 
  State of Connecticut...........................................    20
Kahn, Charles N., III, Health Insurance Association of America...    72
Lehnhard, Mary Nell, Blue Cross and Blue Shield Association......    83
Loop, Carl B., Jr., American Farm Bureau Federation, Florida Farm 
  Bureau Federation, and Loop's Nursery and Greenhouses, Inc.....   182
McCarthy, Jim, Merrill Lynch & Co., Inc., and Savings Coalition 
  of America.....................................................   152
MacDonald, J. Randall, GTE Corp., and Erisa Industry Committee...   139
Market Basket Food Stores, Skylar Thompson.......................   187
Memorial Hermann Healthcare System, Dan Wilford..................    91
Merrill Lynch & Co., Inc., Jim McCarthy..........................   152
National Association of Manufacturers, Ronald P. Sandmeyer, Jr...   178
National Association of Women Business Owners, Phyllis Hill 
  Slater.........................................................   176
National Center for Policy Analysis, John C. Goodman.............    59
National Federation of Independent Business, Michael Coyne.......   192
National Grocers Association, Skylar Thompson....................   187
Pomeroy, Hon. Earl, a Representative in Congress from the State 
  of North Dakota................................................    46
Portman, Hon. Rob, a Representative in Congress from the State of 
  Ohio...........................................................    30
Principal Financial Group, Jack Stewart..........................   117
Profit Sharing/401(k) Council of America, Paula A. Calimafde.....   126
Sandmeyer, Ronald P., Jr., National Association of Manufacturers 
  and Sandmeyer Steel Company....................................   178
Savings Coalition of America, Jim McCarthy.......................   152
Slater, Phyllis Hill, Hill Slater, Inc. and National Association 
  of Women Business Owners.......................................   176
Small Business Council of America, Paula A. Calimafde............   126
Small Business Legislative Council, Paula A. Calimafde...........   126
Speranza, Paul S., Jr., Business Council of New York State, Inc., 
  Food Marketing Institute, Greater Rochester New York Metro 
  Chamber of Commerce, and U.S. Chamber of Commerce..............   195
Stark, Hon. Fortney Pete, a Representative in Congress from the 
  State of California............................................    25
Stewart, Jack, Association of Private Pension and Welfare Plans 
  and Principal Financial Group..................................   117
Thompson, Skylar, Market Basket Food Stores and National Grocers 
  Association....................................................   187
Tuckerton Lumber Company, Michael Coyne..........................   192
U.S. Chamber of Commerce, Paul S. Speranza, Jr...................   195
Wilford, Dan, American Hospital Association and Memorial Hermann 
  Healthcare System..............................................    91

                       SUBMISSIONS FOR THE RECORD

Aetna Retirement Services, Hartford, CT, Thomas McInerney, 
  statement......................................................   210
America's Community Bankers, statement and attachment............   212
American Bankers Association, statement..........................   226
American Federation of State, County and Municipal Employees, Ed 
  Jayne; College and University Personnel Association, Ned Gans; 
  Fraternal Order of Police, Tim Richardson; Government Finance 
  Officers Association, Tom Owens; International Association of 
  Fire Fighters, Barry Kasinitz; International Brotherhood of 
  Police Organizations, Chris Donnellan; International City/
  County Management Association, Michael Lawson; International 
  Personnel Management Association, Tina Ott; International Union 
  of Police Associations, Kimberly Nolf; National Association of 
  Government Deferred Compensation Administrator, Susan White; 
  National Association of Government Employees, Chris Donnellan; 
  National Association of Counties, Neil Bomberg; National 
  Association of Police Organizations, Bob Scully; National 
  Association of State Retirement Administrators, Jeannine Markoe 
  Raymond; National Association of Towns and Townships, Jennifer 
  Balsam; National Conference on Public Employee Retirement 
  Systems, Ed Braman; National Conference of State Legislatures, 
  Gerri Madrid; National Council on Teacher Retirement, Cindie 
  Moore; National Education Association, David Bryant; National 
  League of Cities, Frank Shafroth; National Public Employer 
  Labor Relations Association, Roger Dahl; Service Employees 
  International Union, Clint Highfill; and United States 
  Conference of Mayors, Larry Jones; joint letter................   229
AMR Corporation, Ft. Worth, TX, statement........................   230
Associated General Contractors of America, statement.............   233
Certified Financial Planner Board of Standards, Denver, CO, 
  statement......................................................   235
Committee To Preserve Private Employee Ownership, statement......   236
ESOP Association, J. Michael Keeling, statement..................   240
ESOP Coalition, Somerset, NJ, statement..........................   242
Financial Planning Coalition, statement and attachments..........   243
Food Marketing Institute, statement..............................   248
Investment Company Institute, statement..........................   250
National Association of Manufacturers, statement.................   255
National Association of Professional Employer Organizations, 
  Alexandria, VA, statement and attachment.......................   256
National Newspaper Association, Arlington, VA, Kenneth B. Allen, 
  statement and attachments......................................   262
Private Citizen, St. Louis, MO, statement........................   264
Thomas, Hon. William M., a Representative in Congress from the 
  State of California, statement.................................   268
                               __________

  PROVIDING TAX RELIEF TO STRENGTHEN THE FAMILY AND SUSTAIN A STRONG 
                                ECONOMY

                             JUNE 23, 1999

Advisory of June 9, 1999, announcing the hearing.................   272

                               WITNESSES

Alliance to Save Energy, David Nemtzow...........................   439
American Bankers Association, Larry McCants......................   390
American Council for Capital Formation, Mark Bloomfield..........   377
American Forest and Paper Association, Hon. W. Henson Moore......   427
Andrews, Hon. Michael A., National Trust for Historic 
  Preservation...................................................   431
Associated Builders and Contractors, Inc., Eric P. Wallace.......   448
Baird, Hon. Brian, a Representative in Congress from the State of 
  Washington.....................................................   312
Baratta, Jeffrey A., Stone & Youngberg, LCC and California-
  Federal School Infrastructure Coalition........................   349
Baroody, Michael E., National Association of Manufacturers.......   366
Bennett, Hon. Marshall, Mississippi State Treasurer, Mississippi 
  Prepaid Affordable College Tuition Plan, and College Savings 
  Plans Network..................................................   331
Bloomfield, Mark, American Council for Capital Formation.........   377
Building Owners and Managers Association International, Arthur 
  Greenberg......................................................   395
California-Federal School Infrastructure Coalition, Jeffrey A. 
  Baratta........................................................   349
Capps, R. Randall, Electronic Data Systems Corporation and R&D 
  Credit Coalition...............................................   372
Clement, Hon. Bob, a Representative in Congress from the State of 
  Tennessee......................................................   315
Coalition for Employment Security Financing Reform, Hon. Robert 
  ``Bob'' A. Taft, Governor of Ohio..............................   276
Coalition for Energy Efficient Homes, David Nemtzow..............   439
Coalition of Publicly Traded Partnerships, Charles H. Leonard....   403
College Savings Plans Network, Hon. Marshall Bennett.............   331
Crowley, Hon. Joseph, a Representative in Congress from the State 
  of New York....................................................   316
Danner, Hon. Pat, a Representative in Congress from the State of 
  Missouri.......................................................   297
Detwiler Foundation Computers and Schools Program, Jerry Grayson.   343
Eagle-Picher Personal Injury Settlement Trust:
    Ruth R. McMullin.............................................   454
    Roosevelt Henderson..........................................   456
Electronic Data Systems Corporation, R. Randall Capps............   372
Equity Group Investments, Arthur Greenberg.......................   395
First National Bank, Larry McCants...............................   390
Gillespie, Christina, M.D., Tufts University School of Medicine, 
  and National Health Service Corps Scholarship..................   346
Graham, Hon. Lindsey O., a Representative in Congress from the 
  State of South Carolina........................................   301
Grayson, Jerry, Detwiler Foundation Computers for Schools Program   343
Greenberg, Arthur, Equity Group Investments, National Realty 
  Committee, National Association of Real Estate Investment 
  Trusts, National Association of Realtors, National Association 
  of Industrial and Office Properties, International Council of 
  Shopping Centers, National Multi-Housing Council/National 
  Apartment Association, and Building Owners and Managers 
  Association International......................................   395
Henderson, Roosevelt, Eagle-Picher Personal Injury Settlement 
  Trust..........................................................   456
Hulshof, Hon. Kenny, a Representative in Congress from the State 
  of Missouri....................................................   299
International Council of Shopping Centers, Arthur Greenberg......   395
Kepple, Thomas, Jr., Juniata College and Tuition Plan Consortium.   339
Leonard, Charles H., Texas Eastern Products Pipeline Company and 
  Coalition of Publicly Traded Partnerships......................   403
McCants, Larry, First National Bank, and American Bankers 
  Association....................................................   390
McIntosh, Hon. David, M. a Representative in Congress from the 
  State of Indiana...............................................   309
McMullin, Ruth, R. Eagle-Picher Personal Injury Settlement Trust.   454
Mississippi Prepaid Affordable College Tuition Plan, Hon. 
  Marshall Bennett...............................................   331
Moore, Hon. W. Henson, American Forest and Paper Association.....   427
National Alliance of Sales Representatives Associations, Michael 
  A. Wolyn.......................................................   425
National Association of Industrial and Office Properties, Arthur 
  Greenberg......................................................   395
National Association of Manufacturers, Michael E. Baroody........   366
National Association of Real Estate Investment Trusts, Arthur 
  Greenberg......................................................   395
National Association of Realtors, Arthur Greenberg...............   395
National Multi-Housing Council/National Apartment Association, 
  Arthur Greenberg...............................................   395
National Realty Committee, Arthur Greenberg......................   396
National Trust for Historic Preservation, Hon. Michael A. Andrews   431
Nemtzow, David, Alliance to Save Energy..........................   439
New York City Board of Education:................................
    Lewis H. Spence..............................................   354
    Patricia Zedalis.............................................   354
Rangel, Hon. Charles B., a Representative in Congress from the 
  State of New York..............................................   289
R&D Credit Coalition, R. Randall Capps...........................   372
Spence, Lewis H., New York Board of Education, as presented by 
  Patricia Zedalis...............................................   354
Stone & Youngberg, LLC, Jeffrey A. Baratta.......................   352
Taft, Hon. Robert ``Bob'' A., Governor of Ohio and Coalition for 
  Employment Security Financing Reform...........................   276
Texas Eastern Products Pipeline Company, Charles H. Leonard......   403
Tuition Plan Consortium, Thomas Kepple, Jr.......................   339
Turner, Hon. Jim, a Representative in Congress from the State of 
  Texas..........................................................   303
Wallace, Eric P., Associated Builders and Contractors, Inc.......   448
Wolyn, Michael A., National Alliance of Sales Representatives 
  Association....................................................   435
Weller, Hon. Jerry, a Representative in Congress from the State 
  of Illinois....................................................   293
Zedalis, Patricia, New York City Board of Education..............   354

                       SUBMISSIONS FOR THE RECORD

America's Community Bankers, statement...........................   462
American Association of Colleges of Osteopathic Medicine, Chevy 
  Chase, MD, and Association of American Medical Colleges, joint 
  statement......................................................    00
American Association of Engineering Societies, Theodore T. Saito, 
  letter and attachments.........................................
.................................................................
American Wind Energy Association, Jaime C. Steve, statement......    00
AMT Coalition for Economic Growth, statement.....................    00
Arnold, Kristine S., National Rural Health Association, and 
  University of Health Sciences, College of Osteopathic Medicine, 
  Kansas City, MO, joint statement...............................    00
Ashe, Hon. Victor, Mayor, City of Knoxville, Tennessee, statement    00
Association of American Medical Colleges, joint statement........    00
Blue, Hon. Daniel T., Jr., National Conference of State 
  Legislatures, letter...........................................    00
California Community Colleges, Sacramento, CA, Thomas J. 
  Nussbaum, letter (forwarded by Hon. Robert T. Matsui, a 
  Representative in Congress from the State of California).......    00
Columbia, City of, South Carolina, Hon. Robert Coble, Mayor, and 
  Hon. Stephen Creech, Mayor, City of Sumter, South Carolina, 
  joint statement................................................    00
Construction Financial Management Association, Princeton, NJ, 
  statement......................................................    00
Coverdell, Hon. Paul D., a United States Senator from the State 
  of Georgia, statement..........................................    00
Creech, Hon. Stephen, Mayor, City of Sumter, South Carolina, 
  joint statement................................................    00
CSW Renewable Energy, Central & South West Corporation, Dallas, 
  TX, Richard P. Walker, statement...............................    00
Enron Wind Corp., Tehachapi, CA, Kenneth C. Karas, statement.....    00
Fraim, Hon. Paul D., Mayor, City of Norfolk, Virginia, statement 
  and attachment.................................................    00
Gallegly, Hon. Elton, a Representative in Congress from the State 
  of California, statement.......................................    00
Gary, City of, Indiana, Hon. Scott L. King, Mayor, statement.....    00
Goldstein, David, Natural Resources Defense Council, San 
  Francisco, CA, statement.......................................    00
Higher Education Community: Accrediting Association of Bible 
  Colleges, American Association of Community Colleges, American 
  Association of Dental Schools, American Association of 
  Presidents of Independent Colleges, American Association of 
  State Colleges and Universities, American Council on Education, 
  Association of Advanced Rabbinical and Talmudic Schools, 
  Association of American Universities, Association of Community 
  College Trustees, Association of Governing Boards of 
  Universities and Colleges, Association of Jesuit Colleges and 
  Universities, Coalition of Higher Education Assistance 
  Organizations, Council for Advancement and Support of 
  Education, Council for Christian Colleges & Universities, 
  Council of Graduate Schools, Council of Independent Colleges, 
  National Association for Equal Opportunity in Higher Education, 
  National Association of College and University Business 
  Officers, National Association of Independent Colleges and 
  Universities, National Association of Schools and Colleges of 
  the United Methodist Church, National Association of Student 
  Financial Aid Administrators, North American Division of 
  Seventh-Day Adventists, and Mennonite Board of Education, joint 
  statement......................................................
IRA Charitable Rollover Working Group, Evanston, IL: American 
  Arts Alliance, American Association of Museums, American Bar 
  Association, American Council on Education, American Heart 
  Association, American Hospital Association, American Institute 
  for Cancer Research, American Red Cross, Association for 
  Healthcare Philanthropy, Association of American Universities, 
  Association of Art Museum Directors, Association of Jesuit 
  Colleges and Universities, Baptist Joint Committee, CARE, Inc., 
  Catholic Health Association, Charitable Accord, Council for the 
  Advancement and Support of Education, Council on Foundations, 
  Council of Jewish Federations, Goodwill Industries 
  International, Independent Sector, National Association of 
  Independent Colleges and Universities, National Association of 
  Independent Schools, National Committee on Planned Giving, 
  National Health Council, National Multiple Sclerosis Society, 
  National Society of Fund Raising Executives, Salvation Army, 
  and United Way of America, joint statement and attachments.....    00
Jerardi, Maria J., Washington, DC, statement.....................    00
Karas, Kenneth C., Enron Wind Corp., Tehachapi, CA, statement....    00
King, Hon. Scott L., Mayor, City of Gary, Indiana, statement.....    00
Knoxville, City of, Tennessee, Hon. Victor Ashe, Mayor, statement    00
Mannweiler, Hon. Paul S., National Conference of State 
  Legislatures, letter...........................................    00
Matsui, Hon. Robert T., a Representative in Congress from the 
  State of California, letter and attachment (forwarding letter 
  of California Community Colleges, Sacramento, CA)..............    00
National Association of Home Builders, statement.................    00
National Association of Real Estate Investment Trusts, Steven A. 
  Wechsler, statement............................................    00
National Coalition for Public Education: American Association of 
    Educational Service Agencies, American Association of School 
    Administrators, American Association of University Women, 
    American Civil Liberties Union, American Federation of State, 
    County and Municipal Employees, American Federation of 
    Teachers, American Humanist Association, American Jewish 
    Committee, American Jewish Congress, Americans for Religious 
    Liberty, Americans United for Separation of Church and State, 
    Council of Chief State School Officers, Council of the Great 
    City Schools, Mexican American Legal Defense and Education 
    Fund, National Association of Elementary School Principals, 
    National Association of School Psychologists, National 
    Association of State Boards of Education, National 
    Association of State Directors of Special Education, National 
    Education Association, National PTA, National Rural Education 
    Association, National School Boards Association, New York 
    City Board of Education, People for the American Way, Service 
    Employees International Union AFL-CIO, Union of American 
    Hebrew Congregations, Unitarian Universalist Association, 
    United Auto Workers International Union, and Women of Reform 
    Judaism, joint letter                                            00
National Coalition for Public Education, and Rebuild America's 
  Schools Coalition, joint statement and attachment..............    00
National Conference of State Legislatures, Hon. Daniel T. Blue, 
  Jr., and Hon. Paul S. Mannweiler, letter.......................    00
National Council of Farmer Cooperatives, statement...............    00
National Education Association, statement........................    00
National Rural Health Association, Kristine S. Arnold, joint 
  statement......................................................    00
Natural Resources Defense Council, San Francisco, CA, David 
  Goldstein, statement...........................................    00
Norfolk, City of, Virginia, Hon. Paul D. Fraim, Mayor, statement 
  and attachment.................................................    00
Nussbaum, Thomas J., California Community Colleges, Sacramento, 
  CA, letter (forwarded by Hon. Robert T. Matsui, a 
  Representative in Congress from the State of California).......    00
Rebuild America's Schools Coalition, joint statement and 
  attachment.....................................................    00
Saito, Theodore T., American Association of Engineering 
  Societies, letter and attachments..............................    00
Steve, Jaime C., American Wind Energy Association, statement.....    00
Sumter, City of, South Carolina, Hon. Stephen Creech, Mayor, 
  joint statement................................................    00
Thomas, Hon. William M., a Representative in Congress from the 
  State of California, statement.................................    00
U.S. Securities Markets Coalition: American Stock Exchange, 
  Boston Stock Exchange, Chicago Board Options Exchange, Chicago 
  Stock Exchange, Cincinnati Stock Exchange, NASDAQ Stock Market, 
  National Securities Clearing Corporation, Options Clearing 
  Corporation, Pacific Stock Exchange, and Philadelphia Stock 
  Exchange, joint statement......................................    00
Walker, Richard P., CSW Renewable Energy, Central & South West 
  Corporation, Dallas, TX, statement.............................    00
Wechsler, Steven A., National Association of Real Estate 
  Investment Trusts, statement...................................    00


                ENHANCING RETIREMENT AND HEALTH SECURITY

                              ----------                              


                        WEDNESDAY, JUNE 16, 1999

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:08 a.m., in room 
1100 Longworth House Office Building, Hon. Bill Archer 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

June 2, 1999

No. FC-10

                   Archer Announces Hearing Series on

                        Reducing the Tax Burden:

              I. Enhancing Retirement and Health Security

    Congressman Bill Archer (R-TX), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing 
series on proposals to reduce the tax burden on individuals and 
businesses. It will begin with tax proposals to enhance retirement and 
health security, including strengthening retirement plans, improving 
availability and affordability of health care, and increasing personal 
savings by reducing the tax burden on savings. The hearing will begin 
on Wednesday, June 16, 1999, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:00 a.m. The hearing is 
expected to continue on additional days, which will be the subject of 
supplementary advisories.
      
    Oral testimony at this hearing will be from both invited and public 
witnesses. Also, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Committee or for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The budget resolution adopted by the House of Representatives and 
the Senate on April 15, 1999 (H. Con. Res. 68), directs the Committee 
on Ways and Means to report a tax relief package by July 16, 1999. 
Although the budget resolution does not provide for any net tax relief 
in fiscal year 2000, the tax relief reconciliation bill is to include 
up to $142 billion in tax reduction during fiscal years 2000 through 
2004 and $778 billion during fiscal years 2000 through 2009.
      
    Along with Social Security, employer-sponsored retirement plans and 
personal savings are often viewed as the traditional ``three legged 
stool'' of retirement security. However, about 50 million Americans, or 
nearly 50 percent of the private sector workforce, are not covered by 
an employer-sponsored retirement plan--a rate that has remained 
stagnant over the last 25 years. Only about 20 percent of the 40 
million Americans employed in businesses with 100 or fewer employees 
are participating in a retirement plan. Meanwhile, the personal savings 
rate has fallen to a record low of minus 0.7 percent, continuing a 
long-term trend. At the same time, health security is a continuing 
concern to Americans, with the number of people lacking health 
insurance growing to more than 43 million.
      
    In announcing the hearing, Chairman Archer said: ``We have already 
set aside the Social Security surplus, about $1.8 trillion, to save and 
strengthen Social Security and Medicare, and I am committed to working 
with the President and Democrats to find long-term solutions. At the 
same time, we have an obligation to American taxpayers to provide tax 
relief, because taxes are still too high. It is entirely appropriate 
that we begin this process by looking at ways to enhance Americans' 
retirement and health security.''
      

FOCUS OF THE HEARING:

      
    The focus of the first hearing day will be retirement and health 
security, including strengthening retirement plans, improving 
availability and affordability of health care, and increasing personal 
savings by reducing the tax burden on savings. Proposals to be reviewed 
include pension reforms, health care incentives, long-term care 
incentives, estate and gift tax relief, and savings incentives.
      

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Traci Altman or Pete Davila at (202) 225-1721 no later than the close 
of business, Wednesday June 9, 1999. The telephone request should be 
followed by a formal written request to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. The staff of 
the Committee will notify by telephone those scheduled to appear as 
soon as possible after the filing deadline. Any questions concerning a 
scheduled appearance should be directed to the Committee on staff at 
(202) 225-1721.
      
    In view of the limited time available to hear witnesses, the 
Committee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing. All persons requesting to be heard, whether they are scheduled 
for oral testimony or not, will be notified as soon as possible after 
the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Committee are required to submit 300 copies, along with an 
IBM compatible 3.5-inch diskette in WordPerfect 5.1 format, of their 
prepared statement for review by Members prior to the hearing. 
Testimony should arrive at the Committee office, room 1102 Longworth 
House Office Building, no later than June 14, 1999. Failure to do so 
may result in the witness being denied the opportunity to testify in 
person.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Wednesday, 
June 30, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Committee office, room 1102 Longworth House Office 
Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
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    Chairman Archer. The Committee will come to order.
    The Chair invites guests and staff to take seats so that 
the Members can listen to each other.
    Good morning to everybody. The Committee today begins 
hearing a series on reducing the tax burden on American 
families, individuals, and businesses.
    The Congressional Budget Office confirms that the tax 
burden on our society today is currently at a record peacetime 
high at 21 percent of GDP. President Clinton, on the other 
hand, claims the average American is paying lower taxes than at 
any time since 1976, which may be why he included over $170 
billion in new tax hikes in his budget. But most Americans feel 
that they pay more taxes today than they have in the past and 
not less, which is why Republicans are committed to cutting 
taxes so people can keep more of what they earn.
    Likewise, I know several of my Democratic friends have 
sponsored bills to cut taxes this year, and I look forward to 
working with anyone who has a plausible idea for tax relief for 
the American people.
    Cutting taxes should not be a partisan issue, just as 
saving Social Security and Medicare need not and are not 
partisan issues. In that light, these hearings will explore 
areas where there is bipartisan interest in providing tax 
relief. Today's subjects, health and retirement security, 
including a look at pensions and the death tax, clearly qualify 
in that category.
    Next week, we will focus on family tax relief, including 
reducing the marriage penalty and helping families and students 
pay for the high cost of education, two more areas that have 
attracted bipartisan support. We will also look at ways to 
boost savings and investments so that more Americans can enjoy 
and participate in our strong economy.
    This morning, I am releasing two new studies by the 
American Council for Capital Formation that show how the 
current Tax Code discourages savings and punishes families with 
the confiscatory death tax.
    On the death tax, the research shows that of 24 major 
industrial countries, only Japan's top tax rate of 70 percent, 
is higher than the 55-percent rate in the United States. Fifty-
five percent is way too high, and some estates actually pay a 
marginal rate of 60 percent. No American, no matter their 
income, should be forced to pay the government up to 55 percent 
of their savings when they die, a tax that is triggered by one 
event, not an economic transaction, one event, the death of the 
person who has saved. And that is why we should significantly 
reduce, if not eliminate, the death tax; and I ask my 
Democratic colleagues to work with me to do that.
    The second study is equally disturbing because it 
underscores the one problem that Federal Reserve Chairman Alan 
Greenspan and most economists agree is a major cloud on our 
economic horizon and that is our negative personal savings 
rate. Net private savings in this country today are at an all-
time low for the entire history of our country. As we have 
learned through our Social Security debate, retirement is a 
three-legged stool of personal savings, pensions, and Social 
Security. We know that Social Security is facing serious 
problems. What makes that problem even more serious is the 
other legs of that stool, personal savings and pensions, are 
weak and are being weakened further by the Tax Code.
    Today I ask that we look at ways to make retirement 
security more secure through lower taxes on savings, lower 
taxes on investments, and lower taxes on financial assets on 
which people depend. Taxes are too high, Americans are paying 
too much, and too often our Tax Code punishes Americans who are 
trying to do the right thing for themselves and their families. 
That is wrong, and we should commit ourselves to working 
together to fix that this year.
    I truly believe that we can save and strengthen Social 
Security this year and Medicare and give Americans the tax 
relief they deserve, and I look forward to having the Committee 
work together to try to accomplish exactly that.
    [The following was subsequently received:]
    [GRAPHIC] [TIFF OMITTED] T0332.023
    
    [GRAPHIC] [TIFF OMITTED] T0332.024
    
    [GRAPHIC] [TIFF OMITTED] T0332.025
    
    [GRAPHIC] [TIFF OMITTED] T0332.026
    
UPDATE: An International Comparison of Incentives for Retirement Saving 
                             and Insurance

    ACCF Center for Policy Research Special Reports are published 
periodically to serve as a catalyst for debate on current economic 
policy issues. Contact the ACCF Center for Policy Research for 
permission to reprint the Center's Special Reports
    The ACCF Center for Policy Research is the education and research 
affiliate of the American Council for Capital Formation. Its mandate is 
to enhance the public's understanding of the need to promote economic 
growth through sound tax, trade, and environmental policies. For 
further information, contact the ACCF Center for Policy Research, 1750 
K Street, N.W., Suite 400, Washington, D.C. 20006-2302; telephone: 202/
293-5811; fax: 202/785-8165; e-mail: [email protected]; Web site: http://
www.accf.org.
    Experts predict that today's federal budget surpluses are likely to 
be a relatively short-lived phenomenon. The long-term prosperity of the 
United States remains threatened by the prospect of looming budget 
deficits arising from the need to fund the retirement of the baby boom 
generation in the next century. In addition, the U.S. saving rate 
continues to compare unfavorably with that of other nations, as well as 
with our own past experience; U.S. net domestic saving available for 
investment has averaged only 4.8 percent since 1991 compared to 9.3 
percent over the 1960-1980 period. Though the U.S. economy is currently 
performing better than the economies of most other developed nations, 
in the long run low U.S. saving and investment rates will inevitably 
result in a growth rate short of this country's true potential. A 
country's saving rate is strongly correlated with its rate of economic 
growth, as shown in Figure 1.
[GRAPHIC] [TIFF OMITTED] T0332.027

    The ACCF Center for Policy Research presents this special report in 
order to stimulate debate on tax policy reforms that could encourage 
additional private saving and social security restructuring as well as 
the purchase of various types of mutual fund and insurance products to 
assist baby boomers as they retire in the twenty-first century.
    This report is an analysis of a recent Center-sponsored survey of 
the tax treatment of retirement savings, insurance products, social 
security, and mutual funds in twenty-four major industrial and 
developing countries, including most of the United States' major 
trading partners. The survey, compiled for the Center by Arthur 
Andersen LLP, shows that the United States lags behind its competitors 
in that it offers fewer and less generous tax-favored saving and 
insurance products than many other countries. For example:
     Life insurance premiums are deductible in 42 percent of 
the surveyed countries but not for U.S. taxpayers; for many individuals 
life insurance is a form of saving;
     Thirty-three percent of the sampled countries allow 
deductions for contributions to mutual funds while the United States 
does not;
     More than half of the countries allow a mutual fund 
investment pool to retain earnings without current tax, a provision 
which increases the funds' assets; the United States does not;
     Thirty percent of the countries with a social security 
system allow an individual to choose increased benefits by increasing 
their contributions during their working years; and
     Canada provides a generally available deduction of up to 
$9,500 (indexed) yearly for contributions to a private retirement 
account, compared to a maximum deductible Individual Retirement Account 
contribution of $2,000 for qualified taxpayers in the United States;
    The Center's study demonstrates that many countries have gone 
further than the United States to encourage their citizens to save and 
provide for their own retirement and insurance needs.

                                      Retirement Savings (*Indicates Note)
----------------------------------------------------------------------------------------------------------------
                                  Gross
                                 domestic      Tax-favored                                          Changes in
           Country             saving as a     retirement        Deductible     Annual limit on     portfolio
                                percent of      accounts?      contributions?      deduction?      composition
                                GDP, 1997                                                            taxable?
----------------------------------------------------------------------------------------------------------------
Argentina....................         18.0  No*.............  N/A.............  N/A............  N/A
Australia....................         21.0  Yes.............  No*.............  No.............  No
Belgium......................         22.0  Yes.............  Yes.............  Yes,* not        Generally yes;
                                                                                 indexed.         rate: 56.7%
Brazil.......................         19.0  Yes.............  Yes.............  No.............  No
Canada.......................         21.0  Yes.............  Yes.............  Yes,             No
                                                                                 approximately
                                                                                 US $9,439
                                                                                 indexed.
Chile........................         25.0  Yes.............  Yes.............  Yes,             N/A
                                                                                 approximately
                                                                                 US $20,200
                                                                                 indexed.
China........................         43.0  No..............  N/A.............  N/A............  N/A
Denmark......................         24.0  Yes.............  Yes.............  Generally no*..  Generally yes;*
                                                                                                  rate: 58%
France.......................         20.0  No..............  N/A.............  N/A............  No
Germany......................         22.0  Yes.............  Yes.............  Yes,             N/A
                                                                                 approximately
                                                                                 US $2,178 not
                                                                                 indexed.
Hong Kong....................          N/A  No..............  N/A.............  N/A............  N/A
India........................         20.0  Yes.............  Yes.............  Yes, 20% of      No
                                                                                 contribution,
                                                                                 max. approx.
                                                                                 US $306
                                                                                 indexed.
Indonesia....................         31.0  Yes.............  Yes.............  Yes*...........  Yes, rate: 30%
                                                                                                  or 20% treaty
                                                                                                  rate
Italy........................         22.0  Yes.............  Yes.............  Yes, 2% of       No
                                                                                 wages, max.
                                                                                 approx. US
                                                                                 $306 indexed.
Japan........................         30.0  No..............  N/A.............  N/A............  N/A
Korea........................         34.0  No..............  N/A.............  N/A............  N/A
Mexico.......................         26.0  Yes.............  Yes.............  Yes, approx. US  No
                                                                                 $420 per year
                                                                                 indexed.
Netherlands..................         26.0  Yes.............  Yes.............  Yes,* indexed..  Generally yes
Poland.......................         18.0  No..............  N/A.............  N/A............  N/A
Singapore....................         51.0  Yes.............  Yes.............  Yes,             No
                                                                                 approximately
                                                                                 US $8,559* not
                                                                                 indexed.
Sweden.......................         21.0  Yes.............  Yes.............  Yes,             Generally no
                                                                                 approximately
                                                                                 US $2,300
                                                                                 indexed.
Taiwan.......................          N/A  No..............  N/A.............  N/A............  N/A
United Kingdom...............         15.0  Yes.............  Yes.............  Yes*...........  No
United States................         16.0  Yes.............  Yes.............  Yes*...........  No
Summary......................          25%  67% of countries  63% of countries  54% of           17% of
                                 (average)   answered yes.     answered yes.     countries        countries
                                                                                 answered yes.    answered yes
----------------------------------------------------------------------------------------------------------------


                                                                                   Insurance (*Indicates Note)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Deductible national health insurance                                                                                     Tax treatment of insurance annuity
                                                 premiums?                Deductible private                      Annual increase in      Deductible                     reserves:
                                 ----------------------------------------  long-term health   Deductible private    life insurance    payments to mutual ---------------------------------------
             Country                                                           insurance        life insurance      surrender value        funds for       Investment income   Individual taxed
                                   For individuals?     For employers?         premiums?           premiums?      taxable each year?      retirement          on reserves        on receipt of
                                                                                                                                           purposes?           taxable?        annuity payments?
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Argentina.......................  Yes...............  Yes...............  Yes subject to      Yes subject to      No................  No................  Yes, rate: 33%....  Yes, rate: 33%
                                                                           limits.             limits.
Australia.......................  No................  N/A...............  No*...............  No................  No................  No................  Yes, rate: 36%....  Yes, rate: 33.5%
Belgium.........................  Yes...............  Yes...............  Yes...............  Yes*..............  No................  Yes*..............  Yes, rate: 40.2%..  Yes, rate: 56.7%
Brazil..........................  Yes...............  Yes...............  No................  No................  No................  Yes*..............  Yes, rate: 43%....  Yes, rate: 27.5%
Canada..........................  No................  Yes...............  No................  No................  Yes...............  No................  Yes, rate: 29.1%..  Yes, rate: 31.3%
Chile...........................  Yes...............  Yes...............  No................  No................  No................  Yes*..............  Yes, rate: 15%....  No
China...........................  No................  Yes...............  No................  No................  No................  N/A...............  Yes, rate: 33%....  No
Denmark.........................  N/A...............  N/A...............  No................  No................  No................  No................  Yes, rate: 34%....  No
France..........................  Yes...............  Yes...............  No................  No................  No................  Yes, if retirement  Yes, rate: 41.7%..  Yes, rate: 58.1%
                                                                                                                                       plan is
                                                                                                                                       compulsory.
Germany.........................  Yes, subject to     Yes...............  Yes, subject to     Yes, subject to     No................  Yes, under certain  Yes, rate: 45%....  Generally yes,*
                                   limits.                                 limits.             limits.                                 conditions.                             rate: 55.9%
Hong Kong.......................  N/A...............  N/A...............  No................  No................  No................  No................  Yes, rate: 16%....  No
India...........................  N/A...............  N/A...............  Yes, up to          Yes*..............  No................  No................  Yes, rate: 30%....
                                                                           approximately US
                                                                           $255 per year.
Indonesia.......................  No................  No................  No................  No................  Yes...............  No................  Yes, rate: 30%....  No
Italy...........................  Yes...............  Yes...............  No................  Yes*..............  No................  Yes*..............  Yes, rate: 37%....  Yes, rate: 46%
Japan...........................  Yes...............  Yes...............  Yes, up to          Yes, up to          N/A...............  No................  No................  Yes, rate: 50%
                                                                           approximately US    approximately US
                                                                           $383 per year.      $383 per year.
Korea...........................  Yes...............  Yes...............  No................  Yes...............  No................  No................  N/A...............  N/A
Mexico..........................  No................  Yes...............  No................  No................  No................  No................  N/A...............  N/A
Netherlands.....................  Yes subject to....  Yes...............  Yes subject to....  Yes subject to....  No................  Yes, depending on   N/A...............  N/A
                                  limits*...........                      limits*...........  limits............                       fund type*.
Poland..........................  N/A...............  Yes...............  No................  No................  No................  No................  Yes, rate: 36%....  Yes, rate: 40%
Singapore.......................  Yes*..............  Yes...............  No................  Yes subject to      No................  Yes subject to      Yes, rate: 26%....  Yes, rate: 28%
                                                                                               limits.                                 limits.
Sweden..........................  Yes...............  Yes...............  No................  No................  No................  No................  Yes, rate: 28%....  Yes, rate: 57%
Taiwan..........................  Yes...............  Yes...............  Yes*..............  Yes...............  No................  No................  Yes, rate: 25%....  Yes, rate: 40%
United Kingdom..................  No................  Yes...............  No................  No................  No................  No................  Generally no......  Generally yes
United States...................  N/A...............  N/A...............  Yes subject to      No................  No................  No................  Yes*..............  Yes, rate: 39.6%
                                                                           limits.
Overall number of countries       54% of countries    75% of countries    33% of countries    42% of countries    8% of countries     33% of countries    75% of countries    67% of countries
 answering ``yes''.                answ- ered yes.     answ- ered yes.     answ- ered yes.     answ- ered yes.     answ- ered yes.     answ- ered yes.     answ- ered yes.     answ- ered yes
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                 Social Security Taxes (*Indicates Note)
------------------------------------------------------------------------
                                             Possibility for individual
                  Country                   to choose increased benefits
                                            by increasing contributions?
------------------------------------------------------------------------
Argentina.................................  Yes
Australia.................................  No social security taxes
Belgium...................................  No
Brazil....................................  No
Canada....................................  No
Chile.....................................  Yes
China.....................................  No
Denmark...................................  No
France....................................  No
Germany...................................  Yes under certain conditions
Hong Kong.................................  No social security taxes
India.....................................  No social security taxes
Indonesia.................................  Yes
Italy.....................................  Yes
Japan.....................................  No
Korea.....................................  No
Mexico....................................  Yes
Netherlands...............................  No
Poland....................................  No
Singapore.................................  No social security taxes
Sweden....................................  No
Taiwan....................................  No
United Kingdom............................  No
United States.............................  No
Overall number of countries answering       30% of countries answered
 ``yes''.                                    yes
------------------------------------------------------------------------


                                         Mutual Funds (*Indicates Note)
----------------------------------------------------------------------------------------------------------------
                                        Can an investment pool retain earnings without     Preferential capital
                                                         current tax?                      gains treatment for
               Country                -------------------------------------------------- disposition of interest
                                            Ordinary gain             Capital gain         in investment pool?
----------------------------------------------------------------------------------------------------------------
Argentina............................  Yes if qualifying fund.  Yes if qualifying fund.  No
Australia............................  Yes....................  Yes....................  Yes
Belgium..............................  Yes....................  Yes....................  Yes
Brazil...............................  Yes....................  Yes....................  No
Canada...............................  No.....................  No.....................  Yes
Chile................................  Yes for individuals....  Yes....................  No
China................................  N/A....................  N/A....................  N/A
Denmark..............................  No.....................  No.....................  No
France...............................  No.....................  No.....................  Yes
Germany..............................  No.....................  Generally no...........  No
Hong Kong............................  Yes....................  Yes....................  N/A
India................................  Yes....................  Yes....................  Yes
Indonesia............................  No.....................  Yes....................  No
Italy................................  Yes....................  Yes....................  Yes, rate: 12.5%
Japan................................  No.....................  No.....................  Yes
Korea................................  N/A....................  N/A....................  N/A
Mexico...............................  Yes....................  Yes....................  No
Netherlands..........................  Yes depending on type    Yes depending on type    Generally Yes
                                        of fund*.                of fund*.
Poland...............................  Yes....................  Yes....................  Yes
Singapore............................  Generally Yes..........  Generally Yes..........  Yes
Sweden...............................  N/A....................  N/A....................  N/A
Taiwan...............................  Yes....................  Yes....................  Yes
United Kingdom.......................  No.....................  Yes....................  Yes if qualifying fund
                                                                                          (``PEP'')
United States........................  No.....................  No.....................  Yes
Overall number of countries answering  54% of countries         63% of countries         54% of countries
 ``Yes''.                               answered Yes.            answered yes.            answered yes
----------------------------------------------------------------------------------------------------------------


                      *Notes on Retirement Savings
Argentina...............................  Col. 1: Contributions to
                                           certain approved private
                                           pension funds may be
                                           deductible.
Australia...............................  Col. 2: Superannuation
                                           accounts must be contributed
                                           to by an individual's
                                           employer, currently at a
                                           minimum rate of 6 percent of
                                           salary. Amounts contributed
                                           on behalf of an employee are
                                           not taxable to the employee.
Belgium.................................  Col. 3: Limits vary depending
                                           on the type of fund to which
                                           contributions are made.
Denmark.................................  Col. 3: The maximum deductible
                                           annual contribution to a
                                           capital pension scheme is DKr
                                           33,100 (US $4,833).
                                           Contributions to other
                                           pensions can be deducted
                                           without limit.
                                          Col. 4: A payout from a
                                           capital pension (which is a
                                           lump sum payment) is subject
                                           to tax at 40 percent.
Indonesia...............................  Col. 3: The deductible annual
                                           contribution is limited to
                                           5.7 percent of regular income
                                           for the government-sponsored
                                           program (i.e., Jamsostek) or
                                           20 percent for a Ministry of
                                           Finance-approved private
                                           pension program.
Netherlands.............................  Col. 3: The deductible amount
                                           depends upon the amount of
                                           salary, the duration of
                                           employment, and the type of
                                           pension plan.
Singapore...............................  Col. 3: The annual deduction
                                           limit of S$14,400 (US $8,559)
                                           applies to contributions on
                                           ordinary wages. Contributions
                                           on additional wages not
                                           accruing on a monthly basis
                                           (e.g., bonuses, incentive
                                           payments) are subject to
                                           separate capping rules.
U. Kingdom..............................  Col. 3: The limit on
                                           deductibility of the
                                           contribution varies depending
                                           upon the type of plan and age
                                           of the individual. The
                                           minimum limit is 15 percent
                                           of earnings up to maximum
                                           earnings of uu87,500 (US
                                           $144,445). The limit is
                                           indexed for inflation at the
                                           discretion of the government.
United States...........................  Col. 3: The limitation on
                                           deductibility of the
                                           contribution varies depending
                                           upon the type of plan (e.g.,
                                           for contributions to an
                                           individual retirement account
                                           the annual limit is US
                                           $2,000), the individual's
                                           amount of earned income, the
                                           individual's overall income
                                           level, and the individual's
                                           age.
------------------------------------------------------------------------


                           *Notes on Insurance
Australia...............................  Col. 2: For families with
                                           taxable income less than
                                           A$70,000, a tax rebate of up
                                           to A$450 is allowed to
                                           encourage participation in
                                           private health insurance.
Belgium.................................  Cols. 3,5: Belgium provides a
                                           tax credit (computed by
                                           reference to various items)
                                           when premiums are paid on
                                           life insurance or
                                           contributions are made to a
                                           collective pension savings
                                           account.
Brazil..................................  Col. 5: Payments to domestic
                                           pension funds are deductible.
Chile...................................  Col. 5: Only payments to the
                                           mandatory retirement system
                                           are deductible.
France..................................  Col. 6: The taxable portion of
                                           an annuity payment decreases
                                           based on the age of the
                                           recipient.
Germany.................................  Col. 6: Payments received by
                                           an individual would not be
                                           taxable if the prerequisites
                                           for a tax-exempt life
                                           insurance policy are
                                           fulfilled.
India...................................  Col. 3: The individual is
                                           entitled to a tax rebate of
                                           up to 20 percent of life
                                           insurance premium paid,
                                           subject to the overall limit
                                           of Rs 12,000 (US $306) along
                                           with other items (e.g.,
                                           contribution to a retirement
                                           fund).
Italy...................................  Col. 3: Up to a maximum of
                                           Lit. 2,500,000 (US $1,414),
                                           life insurance premiums paid
                                           can give rise to a
                                           nonrefundable tax credit of
                                           19 percent of the premium
                                           paid.
                                          Col. 5: For employees, same
                                           limits as for life insurance
                                           premiums. For professionals,
                                           the maximum deductible
                                           contribution to a retirement
                                           fund is 6 percent of income,
                                           not exceeding Lit. 5,000,000
                                           (US $2,828).
Netherlands.............................  Cols. 1,2: An individual can
                                           deduct public or private
                                           health insurance premiums
                                           only as an extraordinary
                                           expense and only above a
                                           certain percentage of the
                                           individual's income.
                                          Col. 5: See ``Mutual Funds''
                                           notes section for comments on
                                           mutual funds in the
                                           Netherlands.
Singapore...............................  Col. 1: Singapore does not
                                           have national health
                                           insurance per se, but does
                                           have insurance plans
                                           established under the
                                           approved pension scheme
                                           (Central Provident Fund)
                                           instituted by the government.
Taiwan..................................  Col. 2: The deductible
                                           insurance premium is
                                           NT$24,000 (US $735) per
                                           person if the individual
                                           itemizes.
United States...........................  Col. 6: Income earned on
                                           reserves is taxable, however,
                                           a deduction is permitted to
                                           the extent the earnings are
                                           credited to the account of
                                           the annuity contract.
------------------------------------------------------------------------


                         *Notes on Mutual Funds
Netherlands.............................  Col. 1: The tax treatment of
                                           mutual funds in the
                                           Netherlands varies
                                           significantly depending on
                                           the type of fund. One of the
                                           most important issues is the
                                           question of whether the fund
                                           is a legal entity or only a
                                           cooperation of a group of
                                           individuals. In the latter
                                           case the fund will be
                                           considered transparent, in
                                           other words, for tax purposes
                                           no fund exists and each
                                           individual will be considered
                                           participating in person for
                                           his share in the fund
                                           capital. In that case capital
                                           gains are nontaxable;
                                           ordinary income is taxable at
                                           progressive rates.
                                          If the fund is a legal entity,
                                           a distinction must be made
                                           between foreign funds and
                                           Dutch funds. Foreign funds
                                           are subject to a special
                                           Dutch tax treatment
                                           (taxability of a fictitious
                                           income); the taxability of
                                           Dutch funds depends upon
                                           whether the fund is a special
                                           qualifying fund. For a
                                           qualifying fund, capital
                                           gains are tax free; ordinary
                                           income is subject to tax at
                                           progressive rates.
------------------------------------------------------------------------

    And now I am pleased to recognize my colleague, Charlie 
Rangel, for a statement on behalf of the Minority. And, without 
objection, each Member may insert written statements in the 
record at this point.
    Mr. Rangel.
    Mr. Rangel. Thank you, Mr. Chairman.
    I support the direction in which you are going and taking 
the Committee on behalf of the Congress, and I assume your 
criticism of the President was just by habit, rather than by 
intent, since you are pushing so desperately hard to create a 
bipartisan atmosphere, and that can't be done by just knocking 
the President in terms of advocating tax increases. I think it 
is very important and certainly politically expedient to 
concentrate on tax cuts, and it is going to be hard for you to 
get rid of me in terms of supporting tax cuts.
    Next year, I think we will be supporting even more dramatic 
tax cuts. This is especially so if the Majority is convinced 
that the President is going to veto anything that is done in an 
irresponsible way.
    Having said that, I think we all had agreed, however, that 
before we move in the direction of reducing revenue that we 
would dedicate ourselves to the resolution of the problems that 
we face with Social Security and Medicare. I know we have 
language that says this money has been put in a lockbox, but I 
think it is abundantly clear that the Majority party has the 
key to the lockbox to use for whatever funds they have the 
votes to use it for.
    So I think we would all feel much more comfortable if we 
made more progress in a bipartisan way, of course, in resolving 
Social Security and Medicare before we entertain reducing 
taxes. This is especially so since a large part of your private 
sector investment under the Archer-Shaw plan requires general 
revenues--and bills we are discussing now, of course, would 
reduce general revenues.
    But whatever we do look at, I do hope that the Social 
Security system and the USA account proposal will be included 
in our studies. We should also take into consideration the 
number of individuals who have no health insurance at all. I 
hope we will be able to take a look at the President's proposal 
for tax-exempt bonds so that we will be able to rebuild our 
schools and create an atmosphere where kids can get a decent 
education in the public school level.
    In any event, I look forward to the meetings that we are 
going to have in executive session; and I hope, as you have 
invited the private sector to participate, I am confident that 
you also will invite the administration to participate. These 
are going to be some very sensitive days and weeks and months 
as we both try hard to create a bipartisan atmosphere.
    I agree with you. I know it is doable, that we could come 
up with a bipartisan solution to the Social Security problem 
that our Nation faces. I know that you and the President of the 
United States, both of whom will not be here for the new 
Congress, would want a part of your legacy that this was done, 
and I would hope that this Congress would be a part of that 
history.
    I just want the record to be made abundantly clear that 
before this Committee moves forward in any public way, that we 
expect that we will have the support of the leadership on both 
sides of the aisle in the House; and even though it is 
difficult to get any commitment from the House, it would seem 
to me that at least communication should be made with them as 
we move forward.
    In order to be successful, Chairman Archer, I think we all 
have to be reading from the same page and attempting to move 
forward together in a bipartisan way to resolve a problem that 
Democrats don't have and Republicans don't have but our Nation 
and the kids and the people that will be depending on the 
system will have. I want you to know that you can depend on my 
support in that area, and I thank you for giving me this 
opportunity to express the views of the Minority.
    [The opening statements follow:]

Statement of Hon. Charles B. Rangel a Representative in Congress from 
the State of New York

    I think it's very important, and certainly politically 
expedient, to concentrate on tax cuts. And, it's going to be 
hard for you to get rid of me when it comes to supporting tax 
cuts. Next year, I think we'll be supporting even more dramatic 
tax cuts. This is especially so if the Majority understands 
that the President is going to veto anything that's done in an 
irresponsible way.
    Having said that, I thought we all agreed that before we 
move in the direction of reducing revenue, we would dedicate 
ourselves to the resolution of the problems we face with Social 
Security and Medicare. I know we have language that says this 
money has been put in a ``lockbox,'' but I think it's 
abundantly clear that the Majority Party has the key to the 
lockbox and can use the money for what ever purpose they have 
the votes to use it for.
    I think we all would feel much more comfortable if we made 
major progress, in a bipartisan way of course, in resolving 
Social Security and Medicare before we entertain using any of 
the surpluses to reduce taxes. This is especially so since a 
large part of the private sector investment provision under the 
Archer-Shaw plan requires general revenue financing, and the 
tax bills we are discussing now involve the reduction of 
general revenues.
    I hope that the effect on saving the Social Security system 
and the President's USA Accounts proposal will be considered. I 
hope we will take into consideration the number of individuals 
who have no health insurance at all. I also hope we will be 
able to take a look at the President's proposal for tax credits 
for school modernization bonds, which I sponsored, so that we 
can re-build our schools and create an atmosphere where our 
kids can get a decent education in the public schools.
    In any event, I look forward to the bipartisan private 
meetings that we are going to have. Since you (Chairman Archer) 
have invited the private sector to participate, I'm confident 
that you will also invite the administration to participate. 
These are going to be some very sensitive days and weeks and 
months ahead as we both try hard to create a bipartisan 
atmosphere. I agree with you, Mr. Chairman--I know it's doable 
for us to come up with a bipartisan solution to the Social 
Security problem that our nation faces. I know that you and the 
President of the United States, both of whom will not be here 
for the new Congress, would want this accomplishment to be part 
of your legacy. And I would hope that this Congress would be a 
part of that history.
    I just want to make it abundantly clear that, before this 
Committee moves forward in any public way, we expect that we 
will have the support of the leadership on both sides of the 
aisle in the House. And, even though it is difficult to get any 
commitment from the other House, it would seem to me that at 
least communication should be made with the senators as we move 
forward. If we are to be successful, Chairman Archer, I think 
we all have to be reading from the same page and attempting to 
move forward together in a bipartisan way to resolve a problem, 
that Democrats don't have, and that Republicans don't have, but 
that our nation and future generations have.
      

                                


Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling this hearing to learn 
more about how we can reduce the tax burden facing Americans--
which is at the highest level in history!
    As we learned yesterday in our Health Subcommittee, the tax 
burden for healthcare services disproportionately hits those 
most in need to tax relief to help them afford health coverage. 
While low-income Americans have access to government sponsored 
healthcare and those with higher incomes tend to have 
healthcare coverage through their employers, hard working, 
lower-income and middle-income Americans, especially the self-
employed and those working for small businesses, have limited 
access to seemingly unaffordable coverage.
    A more equitable tax code which provided tax relief for 
individuals who purchase healthcare coverage would not only 
help address the number of uninsured Americans, it would also 
address the issues of portability and greater consumer choice 
in the marketplace. Stimulating competition within the health 
care industry is greatly needed to improve the entire health 
care delivery system.
    As I mentioned yesterday, I am proud of this Committee's 
attention to this issue through the passage of Medical Savings 
Accounts (MSAs). I strongly support the Chairman's bill to 
remove the unnecessary restrictions surrounding these truly 
patient-oriented plans soon for many of their colleagues who 
still remain priced out of the health insurance market.
    In outlining my tax priorities for this year, in addition 
to health care tax relief, I also listed my strong support for 
comprehensive pension reform legislation introduced by Reps. 
Portman and Cardin. Tax relief to help Americans save for their 
retirement is critical and necessary to improve our nation's 
abysmal savings rate.
    I look forward to learning more from our witnesses about 
the factors that contribute to the number of uninsured in 
America today, as well as ways to significantly reduce those 
numbers.
      

                                


Statement of Hon. Richard E. Neal, a Representative in Congress from 
the State of Massachusetts

    Mr. Chairman, as the sponsor of H.R. 1213, the Employee 
Pension Portability and Accountability Act of 1999, I want to 
commend the Administration for its proposals to improve the 
chances for every American to have a secure retirement of which 
an adequate level of retirement income is a crucial factor. The 
proposals are aimed at making it easier for employers to offer 
pension plans, and for employees to retain their pension 
benefits when switching jobs. Proposals to encourage small 
businesses to establish pension plans, and to encourage more 
individuals to utilize retirement accounts are included, as 
well as numerous simplification initiatives.
    As we all know, it is assumed that every worker will have 
retirement income from three different sources--social 
security, private pensions, and personal savings. This so-
called three-legged stool does not exist for many workers, 
either because they work for employers who do not offer a 
pension plan, or the benefits offered are inadequate, or 
because some employees earn too little to save for their 
retirement on their own. While the 106th Congress is expected 
to address the problems of the social security system, it is 
imperative that this Congress expand and improve the private 
pension system as well.
    Many workers, like federal workers in FERS, are eligible to 
save for their retirement through social security, a defined 
benefit plan, a defined contribution plan, and hopefully 
through personal savings. In general, employers in the private 
sector, however, have moved away from offering defined benefit 
plans, much to the detriment of overall retirement savings. 
Since 1985, the number of defined benefit plans has fallen from 
114,000 to 45,000 last year. The number of defined contribution 
plans, conversely, has tripled over the last twenty years. 
While defined contribution plans have the advantage of being 
highly portable, and are an important source of savings, it is 
also important to remember that defined contribution plans were 
intended to supplement, rather than be a primary source of, 
retirement income.
    In addition, we cannot ignore the fact that women and 
minorities face special challenges in obtaining adequate 
retirement savings. For women, this is directly related to 
employment patterns. Women are more likely to move in and out 
of the workforce to take care of children or parents, work in 
sectors of the economy that have low pension coverage rates, 
and earn only 72 percent of what men earn. Fifty-two percent of 
working women do not have pension coverage, and 75 percent of 
women who work part-time lack coverage. For minorities, lack of 
pension coverage and a lower pension benefit level is often 
related to low wages. While 52 percent of white retirees 
receive an employment-based pension at age 55, only 32 percent 
of Hispanic Americans and 40 percent of African Americans 
receive such pensions.
    While these problems cannot be solved overnight, it is 
necessary for us to make improvements in the pension system 
whenever there is an opportunity. Some argue that the best way 
to help low and moderate income workers is to provide an 
incentive for the highest income to have more of a personal 
investment in the pension plan they control. Others would 
argue, perhaps somewhat unfairly, that this is simply a new 
version of trickle down economics. It certainly raises the 
question as to why some proponents of changes in pension law 
rest so much of their case on their assertion that the Chief 
Executive Officers of America's corporations are so indifferent 
to the future of their loyal employees and their families that 
they need an extra $50,000 of pension income themselves in 
order to consider better benefits for everyone else.
    Speaking for myself, I would give it to them if I thought 
those low and moderate income Americans who have little or no 
employer pension benefits because they barely survive from 
paycheck to paycheck, would also benefit. That case has not 
been made. I would be more comfortable if proposals were being 
brought to me by the pension community that would require an 
increase in benefits for the low and moderate income worker in 
conjunction with increasing benefits for the highest paid, but 
that has not occurred.
    There are, however, many proposals in the major pension 
bills that can be supported by all parties, especially but not 
solely in the area of portability. I look forward to working 
with you, Mr. Chairman, and with the other members of the 
Committee on these proposals.
      

                                


    Chairman Archer. Our first panel today is represented by 
our colleagues--six of our colleagues, and we are pleased to 
have your input to start off this hearing on enhancing 
retirement and health security.
    Mrs. Johnson, would you lead off?

    STATEMENT OF HON. NANCY L. JOHNSON, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mrs. Johnson of Connecticut. Thank you very much, Mr. 
Chairman. I appreciate your holding this hearing on enhancing 
retirement security and health security for all Americans.
    First of all, I think this Committee is uniquely positioned 
to offer the American people a package of reforms that will 
radically enhance retirement security, Social Security reform, 
Medicare reform, and pension reform so that more than 50 
percent of our people can have access to pensions, and long-
term care insurance reform which would radically change 
retirement for Americans in the future. I hope we will get to 
that four-part agenda.
    In starting, I want to talk about health security for all 
of us. Every year, or at least in 1998, the Federal Government 
contributed $111 billion toward tax benefits for people to 
purchase health insurance. Most of that went to the employers 
who purchased health insurance for their employees.
    The employee-provided health insurance system has a unique 
strength. It allows the pooling of insurance costs to lower the 
cost of insurance for the sicker and older individuals in our 
society. In other words, the value of employer-based health 
insurance is much greater than the wage that the single 
employee could receive in the absence of the benefit. It also 
means that the current tax subsidy is more meaningful and 
worthwhile for those who are in poor health or older.
    So the employer system is working extremely well for those 
covered by it, which is about two-thirds of Americans who are 
under 65, but we must do more to make sure that all Americans 
have access to affordable health insurance. Employers find that 
covered employees use fewer sick days, worker morale is higher, 
and worker loyalty is higher.
    It is good business to provide good health benefits to your 
employees. So why doesn't everybody? Well, of course, because 
it is expensive. That is why. And only 28 percent of employers 
with less than 25 workers offer health insurance because it is 
not only expensive in premiums but the overhead is high.
    A recent survey by Hay Huggins showed that small firms with 
fewer than 10 employees carry 35 percent administrative costs 
for health insurance plans, really completely unaffordable.
    There is one thing we can do that we must do now, I hope we 
will do this year, and that is to make the Tax Code fair, to 
treat those who don't get insurance through their employers 
with equity, to allow them the same tax benefit that people who 
receive their health insurance through their employers receive 
today.
    My bill is unique in the history of bills that I have 
proposed in this area and I think in terms of bills on the 
table because it tries to match the benefit that the individual 
uninsured person who is buying his own health insurance on the 
open market gets with the benefit an employee gets in an 
employer-provided plan. So it is far richer.
    It just doesn't look at the tax consequences of wage 
replacement, which is only a very small part of the benefit. It 
looks at the real benefit that a person working for an employer 
who provides health insurance gets and that is health coverage 
at an affordable deductible. So it is very much richer.
    It seeks to provide 60 percent of the cost of health 
insurance, up to $1,200 for the individual and $2,400 for 
couples and families. It would be available for people who 
purchase COBRA as well. It is focused on a credit for the lower 
earners and a deduction for higher earners.
    It is essential to structure any health benefit in that 
way, any tax incentive in that way, because so many without 
health insurance are in the 15-percent bracket where a 
deduction is essentially a very small incentive to purchase. A 
credit really does give them the money to purchase.
    And in my bill we are still working on how to allow them to 
take that credit on a monthly basis so there will be the real 
power to purchase, doing it through income withholding to lower 
the amount of taxes that they pay during the year.
    My bill would create a check off line on the W-2 form to 
remind people that the option is available, and the benefit 
this option would offer them through withholding over the year 
would allow a great majority of those who are uninsured to buy 
insurance.
    Until we provide tax equity for the uninsured, we cannot 
reduce the pool of the uninsured in a way that will allow us to 
get at the ultimate problem which is some amount of subsidy.
    My time has expired so I will just allude briefly to the 
long-term care provisions in my bill.
    We are looking at the cost of Social Security. We are 
looking at the cost of Medicare. We are not looking at the 
costs of long-term care which are going to literally explode 
when the baby-boom generation retires. Already HCFA, the Health 
Care Financing Administration, is spending $40 billion on long-
term care and expects to spend $148 billion by the year 2007, 
which is before the baby boomers start reaching the age when 
they will use long-term care. So I commend the bill that Karen 
Thurman and I have introduced on long-term care to your 
attention.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Nancy L. Johnson, a Representative in Congress from 
the State of Connecticut

    Thank you for calling this hearing today, Mr. Chairman, and 
giving me the opportunity to testify on two issues that I care 
deeply about: health and retirement security. While our tax 
code provides significant benefits in these areas. We must 
improve these benefits if we are to reduce the number of 
uninsured Americans and meet the challenges that we face as the 
number of elderly Americans doubles.
    In 1998, the federal government contributed an estimated 
$111 billion toward tax benefits aimed at the purchase of 
health insurance. The vast majority of these tax breaks went to 
those who held employer-sponsored health insurance. Only $4.3 
billion was in the form of tax deductions taken by individuals 
for out-of-pocket health spending. That leaves $106.7 billion 
devoted to workers who received health insurance through their 
employers--$70.9 billion through the federal income tax and 
$28.2 billion and $7.8 billion in Social Security and Medicare 
taxes, respectively. This employer-based tax break equals 
approximately $1000 for the average family with coverage.
    This favorable tax treatment of employer-based health 
insurance has resulted in the coverage of nearly two-thirds of 
adults under the age of 65. Through group purchasing, it 
spreads the risk of insuring people with varying health needs, 
making insurance costs lower for those who are sicker or older. 
This makes the value of employer-based health insurance much 
greater than the wages that any single employee could receive 
in the absence of the benefit. It also means that the current 
tax subsidy is more meaningful and worthwhile for those with 
poor health.
    Health benefits are consistently ranked as the most 
important employee benefit among workers. In a competitive 
labor market, the promise of health benefits not only makes 
workers more likely to take a job but also more likely to stay 
at a job. In addition, employers offering benefits have found 
that their workers are more productive, through decreased 
number of sick days, improved worker morale, and increased 
loyalty.
    One of the major faults of the employment-based health 
insurance system is that many small employers cannot afford to 
offer health insurance to their workers. Only 28% of employers 
with less than 25 workers offer health insurance, compared with 
over 66% of employers with 500 or more employees. The largest 
reason for small employers not offering health insurance is the 
higher costs they face. Their small size means they cannot 
spread the risk associated with a few unhealthy employees. They 
also face higher administrative costs. A 1998 Hay Huggins 
coverage survey found that overhead costs for firms with few 
than 10 employees exceeded 35%, compared with about 12% for 
firms over 500.
    If we are going to address the problem of uninsured 
Americans, we must help more small employers afford to offer 
health insurance coverage. People working for small businesses 
account for 16% of the under-65 population, but 28% of the 
uninsured. And small businesses provide one of the fastest 
growing employment opportunities.
    The challenge in our voluntary health insurance system is 
to provide equal benefits for people who do not have access to 
employer-sponsored coverage. It is important to preserve the 
current employer-based system because many people prefer 
getting coverage through their job and employer coverage has 
been very successful in covering two-thirds of the workforce. 
As the nature of employment changes, moving to small businesses 
and temporary and contract work, it is necessary that we also 
allow an individually based tax benefit for those who are not 
offered employer-based coverage.
    This is not only a matter of equity in the tax code but 
also a means of addressing the problem of uninsured Americans 
by making health insurance more affordable. Increasing tax 
benefits to individuals would by no means solve the uninsured 
problem, but it would help those who can afford to purchase 
health insurance on their own. If we can isolate this category 
of the uninsured, we will have a better idea of how to approach 
the remaining uninsured, those who need significant assistance 
purchasing health insurance or who lack access to health 
insurance because of their health status. There are many 
reasons that people do not purchase health insurance, so we 
need a multi-faceted approach to solve the problem.
    I am advocating a combination of tax credits and deductions 
for people who purchase their own health insurance. According 
to a Congressional Research analysis of the March 1997 Current 
Population Survey, 52% of the uninsured fall in the 15% tax 
bracket. For the majority of the uninsured, a deduction would 
provide only a 15% discount on the cost of their health 
insurance. A credit, on the other hand, would provide the same 
benefit to all taxpayers. And studies have shown that a 
significant credit is required to encourage people to begin 
purchasing health insurance. Kenneth Thorpe demonstrated in a 
1999 study that a tax credit of $400 would encourage 18% of 
single uninsured workers with incomes at 150% of the federal 
poverty level to participate in a health plan. A credit worth 
double that amount ($800) would raise the participation rate 
among this group to 22%.
    My tax credit proposal, found in H.R. 2020, would offer 
taxpayers a credit worth 60% of the cost of their health 
insurance, up to $1200 for individuals and $2400 for couples 
and families. It would be dedicated to those people who do not 
have access to an employer-sponsored health plan and have 
incomes below $40,000 for individuals and $70,000 for couples 
and families.
    My credit would be available for people who purchase 
individual or COBRA health insurance coverage. Therefore, it 
would have the benefit of increasing the number of people who 
purchase COBRA coverage and lower the costs to businesses of 
providing this coverage. COBRA coverage is costly to businesses 
because the people who tend to buy it are sicker people who 
most need the coverage. Making it more affordable, as my tax 
credit would, has the potential to add more healthy people to 
the pool of people purchasing COBRA.
    Making individual health insurance more affordable would 
also help stimulate the individual health insurance market. 
Currently, only 7-9% of individuals purchase coverage on the 
individual market. My tax credit would create more demand for 
individual insurance and help stimulate the market to come up 
with new products. In addition, we may want to consider other 
health insurance reforms to create broader pooling for 
individual health policies to make them more affordable and 
accessible for people with health care needs.
    Finally, we should develop a tax credit system that makes 
the credits available to people during the year, rather than at 
the end of the tax year. Making the money accessible at the 
time of purchase would help ensure that people can afford the 
coverage. The option that I am examining would allow people to 
increase their income tax withholding to lower the amount of 
taxes that they pay during the year. It would create a check-
off line on the W-2 form to remind people that the option is 
available. The benefit of this option is that people can change 
their withholding form at any time during the year, so they 
could change the withhold when their insured status changes.
    My legislation also would create a tax deduction for 
individuals who pay at least 50% of the cost of their health 
insurance. The deduction would be available for individuals 
whose income is too high to qualify for the health credit or 
who are purchasing group coverage and paying at least 50% of 
the cost. The deduction would enable small employers to offer 
health insurance and take advantage of lower costs through 
pooling, even if they could not contribute a significant 
portion of the cost, knowing that their employees could take a 
deduction for the portion of the cost that they contribute.
    The potential benefit for credits and deductions decreasing 
the number of uninsured is significant. The General Accounting 
Office evaluated a proposal to provide a 30% tax credit and 
found that nearly 40 million non-elderly individuals would have 
been eligible in 1996. The GAO study shows that this approach 
would provide significant assistance to the uninsured--31.9 
million of the eligible individuals were uninsured and would 
have received a tax credit. The Congressional Research Service 
roughly estimated in a 1997 memo that ``allowing taxpayers to 
deduct the full cost of health insurance would increase 
coverage by about 9% for those with a 15% marginal tax rate 
(about 1.4 million adults) and 17% for those with a 28% 
marginal tax rate (about 345,000 adults).'' According to CRS, a 
100% deduction would reduce the number of uninsured by 1.75 
million. Combining a deduction with a credit would, therefore, 
reach a significant number of the uninsured.
    I also want to talk about the issue of long-term care and 
the legislation that I have introduced. Long-term care promises 
to be the most significant health issue of the next century as 
the Baby Boom generation begins to retire and the number of our 
elderly doubles. Medicare and Social Security are two of the 
three government sponsored-programs that are critical to the 
elderly. The other federal program significantly impacted by 
the increasing number of elderly is the Medicaid program 
through its coverage of nursing home care.
    In 1997, Medicaid paid nearly 50% of nursing home care--at 
a cost of $40 billion. Nursing home care averages $50,000 per 
year or $136 per day. The Health Care Financing Administration 
estimates nursing home costs will be $148.3 billion by 2007. If 
Medicaid continues to pay for a significant amount of long-term 
care, this will nearly double Medicaid nursing home costs over 
the next seven years. And this is before the full impact of the 
Baby Boom retirement. Today's 77 million baby boomers start 
turning 85 in 2030. If past trends continue, 20% of those over 
age 85 will need nursing home care.
    How do we deal with these staggering costs? We need to 
encourage people to prepare for the largest threat to their 
retirement security. If we encourage more people to plan ahead, 
we can ensure that we target precious Medicaid dollars to those 
who are truly in need. We began this process in 1996 by passing 
provisions to give greater tax benefits to long-term care 
insurance. But many individuals cannot take advantage of these 
provisions because they do not have health expenses that exceed 
7.5% of their adjusted gross income.
    Congresswoman Karen Thurman and I have introduced the Long-
Term Care and Retirement Security Act of 1999, H.R. 2102, to 
create individual tax incentives for people to meet their long-
term care needs. Our legislation would create an above-the-line 
tax deduction for people who purchase qualified long-term care 
insurance policies, as defined by the Health Insurance 
Portability and Accountability Act of 1996. In effect, people 
would be able to deduct the cost of their long-term care 
insurance policy from their taxable income, eliminating the 
need to meet the 7.5% floor and the requirement to itemize.
    H.R. 2102 would also create a $1000 tax credit for 
caregiving and long-term care services. Family caregivers 
provide a tremendous amount of long-term care services. Their 
role goes far beyond comforting a family member struggling with 
a chronic illness. National studies have demonstrated that 
caregivers provide services estimated to value over $190 
billion annually. Without the assistance of caregivers, more 
people would require institutional care and the public cost of 
long-term care services would increase significantly.
    The other critical problem in the area of long-term care is 
that people are not aware of the need to plan ahead. Seventy-
nine percent of older baby boomers surveyed believe that long-
term care is the greatest risk to their standard of living. 
Despite this concern, people are misinformed about the 
necessity of planning ahead. Several national surveys have 
shown that the majority of people believe that Medicare covers 
long-term care, but it does not. And people are unaware that 
Medicaid qualification requires that they become impoverished.
    H.R. 2102 would address this dire lack of information by 
creating an educational campaign within the Social Security 
Administration targeted toward individuals and employers. The 
legislation would instruct the Social Security Administration 
to provide information to people over 50 as part of their 
existing annual mailing of earnings statements. It would make 
individuals aware of the shortcomings of Medicare and the 
requirement that a person impoverish themself to qualify for 
Medicaid. In addition, it would illustrate the tax benefits 
associated with purchasing long-term care insurance.
    Finally, H.R. 2102 would remove the restrictions placed on 
states in 1993 and encourage more of them to create long-term 
care partnership programs. My legislation would allow people 
who purchase partnership plans to pass along to their children 
in their estates assets equal to 75% of the value of their 
partnership plan. State long-term care partnership programs are 
important because they make long-term care insurance affordable 
for low and middle-income people. By encouraging more people to 
purchase partnership plans, we ensure that people will have 
some private coverage of their long-term care expenses before 
qualifying for Medicaid. Connecticut was the first state to 
form an long-term care partnership, and our experience has been 
that one-third of the people who purchase the policies say that 
they would have disposed of their assets to qualify for 
Medicaid in the absence of a partnership program. As a result, 
the availability of partnership programs helps ensure that 
people use private long-term care insurance before applying for 
the Medicaid program. Most importantly, partnerships are a 
means to help us avoid some of the Medicaid financing of long-
term care expenses, the fastest growing aspect of Medicaid 
spending.
    We need to help Americans protect themselves and their 
hard-earned retirement savings from the catastrophic costs of 
long-term care. The Long-Term Care and Retirement Security Act 
of 1999 would strengthen current law in this area.
      

                                


    Chairman Archer. Thank you, Mrs. Johnson.
    Our next witness is another Member of the Committee, the 
gentleman from California, Mr. Stark.
    Mr. Stark, we will be pleased to hear your testimony.

   STATEMENT OF HON. FORTNEY PETE STARK, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Stark. Thank you, Mr. Chairman.
    I was interested to hear Mrs. Johnson's testimony. This is 
an attempt at bipartisanship. Most of what I am about to 
present to the Committee is a result of several months of labor 
with Republican leadership to attempt to come to an agreement 
that would bring some health care benefits to all Americans in 
a bipartisan manner. We were unable to reach complete closure, 
but I will tell you where we agreed and disagreed as I finish.
    The biggest problem facing America today is the one in six 
citizens with no health insurance, as we learned yesterday. My 
first choice to solve this problem would still be an expansion 
of Medicare to everyone, and my second choice would be 
Congressman McDermott's single-payer system, but those efforts 
are not likely to succeed in a conservative or closely divided 
Congress.
    I have just introduced legislation to try another approach, 
basically the Republican approach, a refundable tax credit 
which I believe could be made to work and which is similar to a 
number of bills already introduced by various Republicans and 
by Congressman McDermott.
    Unfortunately, almost all the current tax bills don't work. 
The tax deductions for uninsured workers do nothing for the 
great number of uninsured in the zero to 15 percent brackets. 
Other bills provide a pitiful amount of money that wouldn't buy 
a decent policy. The biggest problem with the tax credit bills 
is that they waste money by providing basically no wholesale 
market. They force people into the retail market where they are 
subject to the whims of the insurance companies who take 20 or 
30 percent off the top, as Mrs. Johnson said, and they refuse 
to insure the sick and raise rates on older people, so the 
credit eventually becomes inadequate.
    Tax credits to buy insurance without insurance reform are a 
waste, and that is exactly where the leadership--your 
leadership, Mr. Chairman, and I could not come to an agreement. 
We both agreed that there has to be some standard on the 
insurance product so you are not letting people throw their tax 
credit away on something that won't work or provide a windfall 
to the insurance industry. We couldn't find that solution yet.
    But those failures could be addressed. The Health Insurance 
for Americans Act that I have introduced provides a refundable 
tax credit of $1,200 per adult, $600 per child, an aggregate of 
$3,600 per family, which is exactly what we get in subsidy for 
our Federal Employee Health Benefit. We get about $3,600 for a 
family plan, and we have to kick in about $1,200 out of our 
paycheck. This would buy that equivalent of insurance.
    The credit is available to everyone who is not 
participating in a subsidized health plan or eligible for 
Medicare. The credit could only be used to buy qualified health 
insurance, which is defined to be private insurance sold 
through a new Office of Health Insurance in the same general 
manner that the Federal employees buy guaranteed-issue, 
community-rated FEHBP health insurance through the OPM.
    A refundable tax credit sounds like an easy idea, but there 
are some serious problems, and I address those in my written 
statement. There are two I would like to discuss.
    First, how do you limit the credit to those who are 
uninsured and avoid employers substituting the credit for their 
current coverage? If you limit the size of the credit, most 
people will want to continue their current coverage. Still, 
there is no question that this credit is likely to erode 
gradually the employer-based system. Is that bad?
    It is, frankly, probably good that this system would 
gradually erode if there is something to replace it. My bill 
provides that replacement. To the extent that workers today 
have better health care through their employer, their employer 
can continue to provide increased pay for the purchase of 
supplemental health benefits so that both the workers and the 
employers come out ahead.
    The evidence shows us that employers are cutting back on 
benefits every day anyway, and this would be a replacement for 
those who lose it.
    The bill I am introducing does not force an overnight 
revolution, but the current system is dying, and this provides 
a transition.
    There is one monstrous question left: How to pay for it. I 
haven't addressed this issue in my bill but am willing to offer 
a number of options, and I might say the Republican leadership 
was willing to leave this unaddressed in the bill we had worked 
on cooperatively.
    I would like to see the temporary budget surpluses used to 
start the program, but you need a permanent source of 
financing. The fairest way to finance it would be a tax on the 
businesses which do not provide an equivalent amount of 
insurance to their workers. Since many small businesses 
couldn't afford it, we would have to subsidize them.
    Another approach would be that the next minimum wage 
increase would be dedicated to the payment of health insurance 
premiums by those firms who don't offer insurance. In other 
words, a buck an hour is $2,000 a year. That would cover most 
of the cost of employees if the company doesn't have health 
insurance. So the companies who do offer health insurance would 
have a lower minimum wage or there would be a dollar minimum. 
That could pay for it.
    Other sources would be a provider insurance surtax since 
those groups would benefit and no longer have to subsidize the 
uninsured. And, finally, a small national sales tax dedicated 
to health care could work if the public, in fact, was convinced 
that this would insure them.
    I have said that the earlier tax deduction and tax credit 
proposals have serious structural problems. The biggest problem 
is not seeing how they will pay for themselves. Until we are 
ready to agree on how to pay for them, the plans that are 
offered signify nothing. It is time for us to join the rest of 
the world, Mr. Chairman, and insure all of our residents; and 
this is an attempt to find a bipartisan common ground that will 
do that.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Fortney Pete Stark, a Representative in Congress from 
the State of California

    Mr. Chairman, Colleagues:
    The biggest social problem facing America today is that one 
in six of our fellow citizens have no health insurance and are 
all too often unable to afford health care.
    About 44 million Americans have no health insurance. 
Despite the unprecedented good economic times, the number of 
uninsured is rising about 100,000 a month. It is unimaginable 
what will happen when the economy slows and turns down. One 
health research group, the National Coalition on Health Care, 
has estimated that with rising health insurance costs and an 
economic downturn, the number of uninsured in the year 2009 
would be about 61.4 million.
    The level of un-insurance among some groups is even higher. 
For example, in California it is estimated that nearly 40% of 
the Hispanic community is uninsured.
    An article by Robert Kuttner in the January 14, 1999 New 
England Journal of Medicine entitled ``The American Health Care 
System,'' describes the problem well:

          ``The most prominent feature of American health insurance 
        coverage is its slow erosion, even as the government seeks to 
        plug the gaps in coverage through such new programs as 
        Medicare+Choice, the Health Insurance Portability and 
        Accountability Act (HIPAA), expansions of state Medicaid 
        programs, and the $24 billion Children's Health Insurance 
        Program of 1997. Despite these efforts, the proportion of 
        Americans without insurance increased from 14.2% in 1995 to 
        15.3% in 1996 and to 16.1% in 1997, when 43.4 million people 
        were uninsured. Not as well appreciated is the fact that the 
        number of people who are under-insured, and thus must either 
        pay out of pocket or forgo medical care, is growing even 
        faster.''

    Does it matter whether people have health insurance? Of 
course it does. No health insurance all too often means 
important health care foregone, with a minor sickness turning 
into a major, expensive illness, or a warning sign ignored 
until it is fatal. Lack of insurance is a major cause of 
personal bankruptcy. It has forced us to develop a crazy, Rube 
Goldberg system of cross-subsidies to keep the `safety net' 
hospital providers afloat.
    Mr. Chairman, what is wrong with us? No other modern, 
industrialized nation fails to insure all its people. I don't 
believe we are incompetent, but our failure to provide basic 
health insurance to all our citizens is a national disgrace.
    Personally, my first choice to solve this problem would be 
an expansion of Medicare to everyone. My second choice would be 
Rep. McDermott's single payer type program, which is modeled on 
Canada's success in insuring all its people for about 30% less 
than we spend to insure only 84% of our citizens.
    But these efforts are not likely to succeed in a 
conservative Congress or in a closely-divided Congress.
    Therefore, I have just introduced legislation to try 
another approach--a refundable tax credit approach--which I 
believe can be made to work and which is similar to a number of 
bills recently introduced by various Republican members and by 
Rep. McDermott.
    Unfortunately, almost all tax bills simply do not work.
    Some tax bills throw money at people who already have 
health insurance (e.g., 100% tax deductions for health 
insurance for small employers). Others try to solve the problem 
of lack of insurance by increasing the deduction for uninsured 
workers. The fact is, uninsured workers are overwhelming lower 
income workers, and they either pay no tax--so have nothing to 
deduct--or they are in the 15% bracket, so the deduction does 
little to help them with the heart of the problem: health 
insurance is expensive. I would like to enter in the Record a 
study by the GAO which documents, by income category, who the 
uninsured are and why tax deductions do little or nothing to 
help them.
    Other bills provide a pitiful amount of money that wouldn't 
buy a a decent policy. For example, Rep. Shadegg proposes a 
$500 credit, leaving an impossible amount to be financed by the 
average, working, low-income family.
    The biggest problem with all these tax credit bills is that 
if they do provide enough money (such as Rep. Norwood's 
refundable credit of $3600 a family--HR 1136), they waste it by 
providing no `pool' or `wholesale' market and forcing people 
into the retail market where insurance companies take 20 to 30% 
off the top, refuse to insure the sick, and raise rates on 
older people so that for people who really need insurance, the 
credit is woefully inadequate. I would like to include in the 
Record examples of what health insurance policies cost in the 
Washington, DC area for different types of individuals.\1\ You 
will note that the sicker and older you are, the less likely a 
credit will be of any help.
---------------------------------------------------------------------------
    \1\ Excellent documentation of this point is also included in a 
Kaiser Family Foundation study by Chollet & Kirk, March, 1998, 
entitled, ``Understanding Individual Health Insurance Markets: 
Structure, Practices, and Products in Ten States.''
---------------------------------------------------------------------------
    To repeat, tax credits to buy insurance, without insurance 
reform, are a waste, will only help the easy-to-insure, and 
provide a windfall to the insurance industry.
    These failures can be addressed. I think my proposal solves 
many of these problems. The idea of a tax credit approach to 
ending the national disgrace of un-insurance is a new one, 
however, and we desperately need a series of detailed, 
thoughtful hearings to design a program that will provide real 
help and not waste scarce resources on middlemen.
    The Health Insurance for Americans Act I have introduced
    --provides in 2001 and thereafter a refundable tax credit 
of $1200 per adult, $600 per child, and $3600 total per family. 
These amounts are adjusted for inflation at the same rate that 
the Federal government's plan for its employees (FEHBP) 
increases.
    --the credit is available to everyone who is not 
participating in a subsidized health plan or eligible for 
Medicare.
    --the credit may only be used to buy ``qualified'' health 
insurance, which is defined to be private insurance sold 
through a new HHS Office of Health Insurance (OHI) in the same 
general manner that Federal employees ``buy'' health insurance 
through the Office of Personnel Management.
    --any insurer who wants to sell to Federal workers through 
FEHBP must also offer to sell one or more policies through OHI. 
OHI will hold an annual open enrollment period (similar to 
FEHBP's fall open enrollment) and insurers must sell a policy 
similar to that which they offer to Federal workers (but may 
also offer a zero premium policy), for which there is no-pre-
existing condition exclusion or waiting period, for which the 
premium and quality may be negotiated between the carrier and 
OHI, and which must be community-rated (i.e., it won't rise in 
price as individuals age).
    Mr. Chairman, a refundable tax credit sounds like an easy 
idea, but as in all things in America's $1.1 trillion health 
care system, there are some serious problems that have to be 
addressed.
    The major problems with a refundable credit are 1) how to 
get the money to the uninsured in advance, so that the 
uninsured, who tend to be lower income, can buy a policy 
without waiting for a refundable credit?
    2) how to make sure that the credit is spent on health 
insurance and there is no tax fraud?
    I solve both of these problems through credit advances to 
insurers administered through OHI.
    3) how to limit the credit to those who are uninsured, and 
avoid encouraging employers and those buying private insurance 
on their own from substituting the credit for their current 
coverage?
    By limiting the size of the credit, most people who have 
insurance through the workplace or are participating in public 
programs will want to continue with their current coverage. The 
credit is adequate to ensure a good health insurance plan, but 
most workers and employers will want to continue with the 
current system. New Employee Benefit Research Institute data 
shows that the great majority of insured Americans like their 
employer-based system and want to continue it.
    Having said this, there is no question that this credit is 
likely to erode gradually the employer-based system. It is hard 
to see employers wanting to offer new employees a health plan, 
when they can use this new public plan. Indeed, it is likely 
that an employer will say,

          ``I will pay you more in salary if you will go use the tax 
        credit program, you can use some of the extra salary to buy a 
        better policy, or a supplemental policy, and we will both come 
        out ahead.''

    But is this bad? The employer-based health insurance system 
is an historical accident of wage controls during World War II 
where in lieu of higher wages, people were able to get health 
insurance as a fringe benefit. This system is collapsing. No 
one today would ever design from scratch such a system where 
your family's health care depended on where you worked. It is, 
frankly, probably good that this system would gradually erode--
if there is something to replace it. The Health Insurance for 
Americans Act provides that replacement. To the extent that 
workers have better health care through their employer, the 
employer can continue to provide increased pay for the purchase 
of ``supplemental'' or ``wrap-around'' health benefits and can 
even help arrange such additional policies for their workers-
and both workers and employers come out ahead.
    The bill I am introducing does not force an over-night 
revolution in the employer-provided system. But the current 
system is dying, and my bill provides a transition to a new 
system in which employees will have individual choice of a wide 
range of insurers (instead of today's reality, where most 
employees are offered one plan and only one plan).
    Some Members are discussing ending the tax preferences for 
employer-provided health care, either by ending the deduction 
to employers or adding the value of the policy to the income of 
the workers. That would be a revolution. It would very quickly 
end the employer-provided system. And I don't think Americans 
like revolutions on something as important as their family's 
healthcare.
    To repeat, the employer-based health care system is dying. 
The next recession will push it over the edge. It would be wise 
to build this refundable tax credit system now, so that people 
have someplace to go as the system deteriorates. But the public 
opinion polling is very strong: don't legislate the overnight 
termination of the current system.
    4) another key question is how to make the credit effective 
by allowing the individual to buy ``wholesale'' or at group 
rates, rather than ``retail'' or individual rates?
    5) how to make sure that individuals who most need health 
insurance--those who have been sick--are able to use the credit 
to obtain affordable insurance?
    6) how to minimize the problem created when the healthiest 
individuals take their credit and buy policies which are 
``good'' for them (e.g., Medical Savings Accounts), but ``bad'' 
for society because they leave the sicker in a smaller, more 
expensive insurance pool (that is, how do we keep the insurance 
pool as large as possible and avoid segmentation and an 
`insurance death' spiral)?
    Again, the OHI/FEHBP idea largely solves these 3 problems, 
by giving individuals a forum where they can comparison shop 
for a variety of plans that meet the standards of the OHI and 
achieve efficiencies of scale and reduced overhead.
    These questions are the single biggest problem facing the 
refundable credit proposal. Even if we are able to `pool' the 
individuals, will insurers offer an affordable policy to a 
group which they may fear will have a disproportionate number 
of very sick individuals? I think that fear is unfounded. Most 
uninsured are young and healthy, but we do not know for sure 
how the private insurers will respond.
    We may need to develop a national risk pool `outlet' to 
take the expensive risks and subsidize them in a separate pool, 
so that the cost of premiums for most of the people using OHI 
is affordable. Another alternative, and probably the one that 
makes the most sense for society, is to mandate that 
individuals participate in the OHI pool (if they don't have 
similar levels of insurance elsewhere). Only by getting 
everyone to participate can we ensure a decent price by 
spreading the risk. The danger that young, healthy individuals 
will ignore (forego) the tax credit program may be serious 
enough that it will cause insurers to price the OHI policies 
too high, thus starting an insurance ``death spiral'' as 
healthier people refuse to participate and rates start rising 
to cover the costs of the shrinking pool of sicker-than-average 
individuals.\2\
---------------------------------------------------------------------------
    \2\ These are extremely important technical questions. As the July 
1999 EBRI Issue Brief will say,
    Issues such as adverse selection, ``crowd-out'' of private 
insurance by public insurance, or substitution of individual coverage 
for group coverage are inherent to the current voluntary employment-
based health insurance system, and will not be resolved by incremental 
changes made to improve this system. For example, young and healthy 
individuals are more likely than older unhealthy individuals to opt out 
of the employment-based system under certain circumstances. As long as 
the purpose of insurance continues to be the spreading of risk across 
higher-risk and lower-risk individuals, attempts to augment or replace 
the employment-based health insurance system may have unintended side 
effects that do not benefit the majority of the U.S. population.
---------------------------------------------------------------------------
    As I said earlier, previous tax credit proposals fail to 
deal with these key questions and problems. But all the bills 
have helped focus us on this national crisis. Through hearings 
and studies, I hope we can find ways to ensure that these 
technical--but very important questions--are addressed.
    There is one key, monstrous question left: how to pay for 
the refundable credit so we may end the national disgrace of 44 
million uninsured?
    I have not addressed this issue in my bill, but am willing 
to offer a number of options. I would like to see the temporary 
budget surpluses used to start this program--but those 
surpluses are temporary and we need a permanent financing 
source.
    The problem of the uninsured is largely due to the fact 
that many businesses refuse or are unable to provide health 
insurance to their workers. The fairest way to finance this 
program would be a tax on businesses which do not provide an 
equivalent amount of insurance to their workers. Such a tax, of 
course, would slow the tendency of this program to encourage 
businesses to drop coverage. Since many small businesses could 
not afford the tax, we will need to subsidize them.
    Another approach would be to apply the next minimum wage 
increase to the payment of health insurance premiums by those 
firms which do not offer insurance. A 50 cent per hour minimum 
wage increase dedicated to health insurance would pay most of 
an individual's premium.
    Other financing sources could be a provider and insurer 
surtax, since these groups will no longer need to subsidize the 
uninsured and will be receiving tens of billions in additional 
income.
    Finally, to end the national disgrace of un-insurance, a 
small national sales or VAT tax would be in order. If we worked 
together, we could explain and justify a `national health tax' 
to ensure every American decent private health insurance 
regardless of their work status.
    Again, Mr. Chairman, I have said that the earlier tax 
deduction and tax credit proposals have serious structural 
problems. The biggest problem they have is not saying how they 
will pay for themselves. Until Members talk about financing, 
all of these plans are sound and fury, signifying nothing.
    These tax credit bills are obviously expensive, but so is 
the cost of 1 in 6 Americans being uninsured. In deaths, 
increased disability and morbidity, and more expensive use of 
emergency rooms, American society pays for the uninsured. If we 
could end the national disgrace of un-insurance, we would save 
billions in improved productivity, reduced provider costs, bad 
debt, personal bankruptcy, and disproportionate share hospital 
payments.
    Mr Chairman, it is time for America to join the rest of the 
civilized world and provide health insurance for all its 
citizens.
      

                                


    Chairman Archer. Thank you, Mr. Stark.
    Our next witness is Rob Portman.
    Mr. Portman, we would be happy to hear your testimony.

  STATEMENT OF HON. ROB PORTMAN, A REPRESENTATIVE IN CONGRESS 
                     FROM THE STATE OF OHIO

    Mr. Portman. Thank you, Mr. Chairman. It is a delight to be 
here.
    Since this is a hearing in part about retirement security, 
I would like to start by commending you and Chairman Shaw for 
the fine work you have done on the Social Security front and 
the sound proposal that you have given this Committee to 
strengthen the Social Security system.
    But as you are well aware, Mr. Chairman, I also strongly 
believe that this panel should complement that by moving this 
year to significantly increase the availability of retirement 
security for all Americans by strengthening our private 
employer-based pension system. I think it is a great 
opportunity for us, as Mrs. Johnson mentioned earlier.
    This is a critical issue for all Americans, particularly 
the 76 million baby boomers approaching retirement age. That is 
why over the past 2 years we have been working hard on putting 
together a comprehensive set of changes to improve our pension 
system from top to bottom. My partner in this has been my 
colleague, Ben Cardin, who will address the Committee in a 
moment, but we have also worked with many other Members of this 
Committee--Mrs. Johnson, Mr. Weller, Ms. Dunn, Mr. Tanner, and 
others, even some from our other distinguished Committees like 
Mr. Pomeroy, who is also here today to talk about retirement 
security.
    We have done it in a comprehensive way because we believe 
that is the way to build on the pension expansion and 
simplification measures that this Committee has taken the lead 
on in the past, including the SIMPLE, Savings Incentive Match 
Plan for Employees, plan for small businesses.
    I am delighted to say, Mr. Chairman, as of today it is a 
bipartisan group of about 26 Ways and Means Members who have 
cosponsored H.R. 1102, over 90 members in total, an influential 
group, Mr. Chairman; and I ask my colleagues if they would take 
a look at a few charts regarding retirement security that will 
outline the problem that I think Ben is going to have an 
opportunity to go into in some more detail on some of our 
provisions.
    The first simply makes the point that the retirement stool, 
which is the so-called three-legged stool, is very much 
supported by employer-based pensions already. Employer-based 
pensions are along with Social Security and private savings, 
absolutely essential to the retirement security of our 
constituents. This includes, of course, not just the 
traditional defined benefit plans, but when we talk about 
pensions, we are talking about all retirement plans that are 
employer-sponsored, including 401(k)s, 457, 403(b)s, and other 
arrangements.
    The second chart shows that although it is a very important 
part of our retirement system in this country, we have a crisis 
in pensions. Only half of American workers are covered. It 
means about 60 million Americans have no pensions whatsoever. 
That chart is interesting because it shows that since 1983 we 
have made virtually no progress. It has been flat. Forty-eight 
percent of workers were covered in 1983. That chart says, in 
1993, about 50 percent. Unfortunately, that is about the number 
it is today. It has remained flat despite the need for more 
retirement security as a backstop to Social Security.
    It is even worse than that when you look at what small 
businesses offer in terms of retirement security to their 
workers. That chart will show you, at the bottom end toward the 
left, that those small companies, that is, companies with 25 or 
fewer employees where, frankly, most of the new employment is 
occurring, are growing the fastest in terms of adding new 
workers, yet only 19 percent offer anything, even a SIMPLE 
plan, a SEP, self-employed plan, or a 401(k). It is even worse 
than the fact that only half of American workers are covered. 
Those in small businesses have very little chance of having a 
pension at all.
    The next chart gets, Mr. Chairman, to the point that you 
made early on, which is that our personal savings rate in this 
country is at a dangerously low level. You talked about this in 
the context of tax reform in the past, that we ought to focus 
on our tax reform proposal this year on trying to increase 
that.
    Foreigners, frankly, are propping up a lot of our savings 
today, and there is a concern that some of that capital may 
leave this country at some point. And for capital formation, 
for investment, for the economic future of this country, we 
have got to increase our savings rate. This chart simply makes 
obvious the fact that we are back down to the rates we had 
during the Great Depression.
    The next chart shows that with regard to distribution of 
pension benefits, most pension recipients are middle-income 
Americans. A pension, in fact, makes the difference between 
retirement subsistence, mere subsistence, and retirement 
security for millions of Americans.
    I wish you could see that chart better, but the bottom line 
is the folks who are currently receiving benefits are primarily 
in the middle-income category. In fact, if you look at the 
right side of that chart, over 75 percent of workers 
participating in pension plans make less than $50,000 a year.
    With regard to folks who are participating in pensions, 
again this is something that is focused on middle-income 
Americans; 77 percent of current pension participants are 
either middle- or low-income workers. The Portman-Cardin plan, 
again Ben is going to go into more detail on that, basically 
says, let's make it less costly and burdensome for employers to 
establish these new pension plans. The government ought to be 
in the business of encouraging pensions, not discouraging them.
    We also ought to modernize the pension laws to address the 
needs of the 21st century work force, and this is where Earl 
Pomeroy has played a big role in helping us with regard to 
portability.
    The bottom line, Mr. Chairman, is that we strongly believe 
that we ought to preserve our public Social Security system. I 
want to work with you toward that end, but we need to do more. 
Imagine the impact we could have--this panel could have--by 
expanding on the private side so that every American worker 
would have access to a 401(k) or some kind of a pension plan. 
It is a tremendous opportunity, and I urge us to seize it this 
year.
    [The prepared statement follows:]

Statement of Hon. Rob Portman, a Representative in Congress from the 
State of Ohio

    Thank you, Mr. Chairman, for allowing me to testify here 
today. I would like to take this opportunity to commend you and 
Chairman Shaw publicly for your leadership on increasing 
retirement security by strengthening our public Social Security 
system.
    In addition to taking steps to save Social Security, I feel 
strongly that this panel should take steps this year to 
significantly increase the availability of secure retirement 
savings generally--primarily by strengthening our private, 
employer-based pension system.
    This is a critical issue for all Americans--not just for 
current retirees or those 76 million Baby Boomers who are 
nearing retirement age--but also for those young people whose 
ability to enjoy a comfortable retirement in the future will 
depend on the policy approaches we adopt today.
    That's why my Ways and Means colleague from Maryland, Mr. 
Cardin, and I have been working on comprehensive reforms to our 
pension system over the past two years. This year, we have 
introduced H.R. 1102--the Comprehensive Retirement Security and 
Pension Reform Act. It builds on the pension expansion and 
simplification measures this committee has taken the lead on in 
the past--including provisions in the Small Business Jobs 
Protection Act of 1996 that took steps to expand retirement 
plan options for small businesses by establishing the SIMPLE 
plan. And it incorporates pension reform proposals that have 
been put forward by a number of Members of this panel.
    H.R. 1102 will increase retirement security for millions of 
Americans by strengthening that ``third leg'' of retirement 
security--our pension system--including traditional defined 
benefit plans as well as defined contribution plans like 
401(k), 403(b) and 457 arrangements. And it will help those 
Americans who need it most--in fact, 77% of current pension 
participants are middle and lower income workers.
    H.R. 1102 is designed to reverse some disturbing trends in 
our pension system.
     Right now, only half of all workers have a pension 
plan. That means about 60 million Americans don't have access 
to one of the key components to a comfortable retirement.
     And, far fewer than half of employees who work for 
small businesses have access to a pension plan. Today, only 19% 
of small businesses with less than 25 employees offer any kind 
of pension plan. Why? Over the years, the pension laws have 
become so complicated and so costly to set up and administer 
that many small businesses simply can't afford to offer them.
     And, not enough workers have pension coverage at 
the same time that overall savings is dangerously low. In fact, 
the personal savings rate in this country--the amount of money 
people save for retirement and other needs--is at its lowest 
rate since 1933. For economists who are looking beyond our 
immediate apparent economic prosperity as a country, this is 
the most troubling statistic out there.
    Simply put, the Portman-Cardin legislation lets workers 
save more for retirement. We make it easier for employers to 
establish new pension plans or improve existing ones. And, we 
modernize pension laws to address the needs of a changing, 21st 
Century workforce.
    Let me highlight a few of the key provisions.
    Increased Contribution Limits: Over the last 20 years, 
Congress has lowered the annual dollar limits on contributions 
workers can make and benefits they can accrue. These 
restrictions have been an obstacle to adequate private pension 
savings. Portman-Cardin substantially increases the limits for 
alltypes of plans and repeals the current 25% of compensation 
limit on contributions to defined contribution plans--our 
proposal generally restores these limits to 1982 levels.
    Catch-up Contributions: Portman-Cardin increases the limits 
on all employee contributions to all plans by an additional 
$5,000 for workers 50 and older so that they can ``catch-up'' 
for years when they weren't employed, didn't contribute to 
their plan or otherwise weren't able to save. We know from 
research that many Baby Boomers who are now approaching 
retirement age have not saved adequately for their retirement. 
In particular, this catch-up provision will benefit women who 
have returned to the workforce after taking time away to raise 
families.
    Increased Portability: We're told that the average worker 
in the next century will hold nine jobs by the age of 32, and 
workers typically do not stay in any job for more than five 
years until age 40. Portman-Cardin reflects the needs of an 
increasingly mobile workforce. HR 1102 includes ``portability'' 
provisions to allow workers who are changing jobs to roll over 
retirement savings between 401(k)s, 403(b)s and 457s.
    Faster Vesting: Under current law, many employees do not 
become fully vested in a pension plan until they have been with 
an employer for 5 years. Portman-Cardin would lower the vesting 
requirement for matching contributions to 3 years.
    Cutting Pension Red Tape: he increasing complexity of the 
laws governing pensions--both in the private sector and in the 
non-profit and government sectors--has discouraged the growth 
of pension plans. In fact, for many small businesses in 
particular, the costs and liabilities associated with pension 
plans have made it too expensive for many companies to offer 
plans. Larger companies, state and local governments and non-
profits have too often been discouraged from improving existing 
plans because the rules are so complicated and costly. Portman-
Cardin takes steps to cut the unnecessary red tape that has put 
a stranglehold on our pension system.
    We now have more than 90 bipartisan cosponsors and more 
than 60 endorsing organizations from across the ideological 
spectrum--from the U.S. Chamber of Commerce and the NFIB to 
labor organizations like AFSCME and the Building and 
Construction Trades Department of the AFL-CIO.
    I commend Chairman Archer and this entire panel for taking 
a leadership role on preserving our public Social Security 
system. But imagine the impact we would have on our national 
savings rate and overall retirement security if we could give 
every American worker access to a 401(k) or another kind of 
pension plan. This is a tremendous opportunity that I urge this 
panel to seize this year.
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    Chairman Archer. Thank you, Mr. Portman.
    Mr. Cardin, since your name was mentioned, we would be 
happy to receive your testimony.

   STATEMENT OF HON. BENJAMIN L. CARDIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MARYLAND

    Mr. Cardin. Thank you, Mr. Chairman.
    Let me ask unanimous consent that my full statement be 
included in the record.
    Chairman Archer. Without objection.
    Mr. Cardin. Thank you for this opportunity and for holding 
these hearings. I think they are extremely important, as your 
opening statement pointed out.
    I want to thank Mr. Portman for the work he has done on the 
bill that we have filed.
    The debate over retirement security is desperately needed 
in this country. As you have pointed out, our savings ratios as 
a nation are deplorable. Economic trends look good. Budget 
deficits are over. We have got surpluses in the future. 
Unemployment rates are low. Interest rates are low. But the 
savings rates of this Nation as we compare ourselves to any of 
the nations that we like to compare ourselves to is too low. We 
need to do something about it.
    As important as Social Security is--and I do hope that we, 
like you, address the problems of Social Security this year. 
This is the year we should do it. But Social Security alone 
will not be enough. Social Security was never intended to be 
the sole income source for retired Americans. We must 
supplement that with modern, private pension plans.
    That is why Rob Portman and I introduced H.R. 1102, the 
Comprehensive Retirement Security and Pension Reform Act. It is 
rebuilding our Nation's private pension system.
    We use the term ``rebuilding'' because we go back and 
correct some of the mistakes that we have made over the last 2 
decades in pension changes that we have made that have reduced 
the opportunity of Americans to put money away and have made it 
more complicated.
    We have listened to the concerns from Americans across our 
entire country, and we have included provisions to strengthen 
and expand saving opportunities for Americans who work for 
small businesses, large businesses, State and local government, 
and nonprofit organizations.
    First, we increase the limits on retirement savings to 
allow Americans to put more away. We do that for defined 
contribution plans, defined benefit plans and qualified 
compensation. We make it easier for young people to establish 
retirement plans. We take the model that Mr. Thomas and Senator 
Roth used for IRAs and use that for 401(k)s and 403(b) plans. 
We increase the opportunity of Americans to put their plans 
together through portability, recognizing the realities of the 
current labor market by allowing portability between 401(k)s, 
403(b)s, and 457 plans.
    As Mr. Portman pointed out, we simplify dramatically our 
pension laws for both large companies and small companies. We 
remove many of the restrictions on the multiemployer plans that 
discriminate against workers for large companies and unionized 
members, and we also deal with small businesses by eliminating 
some and reforming many of the tests, including the top-heavy 
rules are reformed. We think that will go a long way to make 
pension plans more available to the American public.
    Mr. Chairman, there are many provisions in the Portman-
Cardin legislation. We have tried to listen to all of the 
different interest groups and respond in a reasonable way, but 
we have tried to avoid any of the major controversial areas so 
that we could work in a bipartisan way to get legislation 
enacted this year. And we would urge the Committee in whatever 
vehicle moves through this Congress on the Tax Code that we 
help Americans take care of their needs when they retire and 
include the provisions that are in the Portman-Cardin 
legislation.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Benjamin L. Cardin, a Representative in Congress from 
the State of Maryland

    Mr. Chairman, I am pleased to appear this morning to 
testify before the most distinguished committee of the United 
States Congress.
    Let me start by commending you for holding this hearing and 
to examine new proposals to strengthen our nation's private 
pension and retirement savings system. I am especially pleased 
to be here with such a distinguished panel of witnesses, 
including my good friend and partner in the enterprise of 
pension reform, our colleague Rob Portman.
    The debate over retirement security has attained new 
significance in the past few years. As the ``baby boom'' 
generation approaches retirement, the need to help this 
generation and future generations of Americans live comfortably 
in retirement has gained greater prominence as a legislative 
priority.
    One indication of this need, of course, has been the on-
going national debate over the future of the Social Security 
system. We must all make every effort to make sure that Social 
Security, the most successful social program in our nation's 
history, will continue to be there for current and future 
retirees. I am committed to working with you, Mr. Chairman, and 
with every member of this committee, and with the President, to 
achieve this vital goal.
    As important as Social Security is, however, it is not 
enough. Social Security was never intended by itself to provide 
an adequate standard of living for retired Americans, and it 
cannot fill that role now.
    That is why Rob Portman and I have introduced H.R. 1102, 
the Comprehensive Retirement Security and Pension Reform Act. 
This legislation takes the next step, in a process that began 
with pension reforms enacted over the past three years, in 
rebuilding our nation's private pension system.
    I use the term ``rebuilding'' because in many respects, 
H.R. 1102 simply restores the pension law to what it was a 
decade or two ago. For over a decade, beginning in the early 
1980's, our federal pension policies suffered from a severe 
disconnect between rhetoric and action. While we acknowledged 
the economic advantages of private retirement savings, and 
exhorted Americans to save more, we frequently passed 
legislation that imposed obstacles to the achievement of those 
goals.
    The distressing results are before us in the most recent 
savings statistics. Across the spectrum, the domestic economic 
news is encouraging. Unemployment is low, inflation is low, 
productivity is high, family income is up, economic growth is 
strong. Yet private savings has continued to drop, and now 
stands at the lowest rate since before the creation of Social 
Security.
    H.R. 1102 says we can do better. The bill proposes a number 
of changes that will expand employer-sponsored retirement 
savings opportunities for millions of American workers. In 
developing the bill, we have listened to the concerns from 
Americans across our entire country, from every sector of the 
economy. We have included provisions to strengthen and expand 
savings opportunities for Americans who work for small 
businesses, large businesses, state and local governments, and 
non-profit organizations. We have listened to the concerns of 
public school teachers, plan administrators for Fortune 100 
companies, women and men who own small businesses, and 
representatives of organized labor. We have included specific 
reforms that benefit Americans who participate in multi-
employer pension plans. We have included proposals that will 
strengthen defined contribution plans and defined benefit 
plans, as well as IRAs, 401(k) plans, 403(b) arrangements, or 
457 plans.
    In short, Mr. Chairman, the message of H.R. 1102 is we want 
Americans to save more, and we are determined to help provide 
incentives that will allow and encourage them to do so.
    Let me mention a few of the major initiatives included in 
the bill. Perhaps the heart of the bill is the proposed 
increases in the limits on retirement savings. Over the past 
eighteen years, we have ratcheted down the benefits and 
contributions permitted under qualified retirement plans. These 
changes have contributed to a decline in the number of 
employers sponsoring plans, and reduced opportunities for 
workers to save. We propose turning the clock back to restore 
the limits--on defined contributions, defined benefits, and 
qualified compensation--that have been in effect in past years.
    We would also increase the opportunity for workers to take 
their retirement savings with them when they change jobs. The 
law imposes too many restrictions that prevent workers from 
moving their savings from one type of retirement plan to 
another. We would break down the barriers between 401(k), 
403(b), and 457 plans, allow workers to roll over their funds 
when they move from one job to another.
    Despite the success we have had over the past few years, 
working on a bipartisan basis, with the support of the Clinton 
Administration, in enacting pension simplification reforms, the 
current law is still too complex. It still imposes too many 
restrictions on multi-employer plans, penalizing workers, and 
especially union members, who participate in these plans. H.R. 
1102 will make the law work better for these multi-employer 
plans.
    Current law still imposes too many restrictions on small 
businesses. Less than twenty percent of Americans who work for 
small businesses have the opportunity to save in an employer-
sponsored retirement plan. H.R. 1102 removes many burdensome 
restrictions on small businesses, including reform, but not 
repeal, of the ``top heavy'' rules.
    Mr. Chairman, there is no single answer to the retirement 
savings crisis in our country. In presenting the Portman-Cardin 
proposal to the House, however, we have worked to formulate a 
plan that will take federal pension law in a new direction. We 
want to back up our pro-savings rhetoric with pro-savings 
legislation.
    I appreciate the opportunity to testify before this 
committee today. Two-thirds of the members of our committee, 
with strong bipartisan representation, has cosponsored this 
bill. I look forward to working with all the members of this 
committee to rebuild our nation's private savings system.
      

                                


    Chairman Archer. Thank you, Mr. Cardin.
    Our next witness is William Jefferson.
    We would be pleased to hear your testimony.

  STATEMENT OF HON. WILLIAM J. JEFFERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Jefferson. Thank you, Mr. Chairman.
    Mr. Chairman and Mr. Rangel and Members of the Committee, I 
am pleased to have the opportunity to testify regarding the 
Small Savers Act. I want to thank Lindsey Graham and Mr. Wexler 
for cointroducing this bill with me.
    I thank the Chairman for holding this hearing on tax 
proposals to enhance retirement and health security through, 
among other things, increasing personal savings by reducing the 
tax burden on savings.
    Retirement security is an important issue to all of us. It 
is important to all Americans, and it is important that we have 
something that we can do this year on this subject.
    By encouraging personal savings, the Small Savers Act 
represents sound economic and social tax and fiscal policy. The 
Small Savers Act represents sound economic and social policy 
because it would result in increased savings and investments by 
millions of Americans.
    Most economists agree that the best way to ensure 
retirement security for future generations is to maintain 
continued and sustained growth of the economy. However, this 
growth is threatened by the low and approaching negative 
personal savings rates in our country. It is alarming that over 
one-third of Americans have no personal savings at all, and 
most who do have less than $3,000. This is not much to retire 
on.
    The Small Savers Act provides four modest tax incentives 
that will induce low- and middle-income Americans to save and 
invest more and reverse this alarming trend.
    First, the Small Savers Act raises the 15 percent tax 
bracket by $10,000 for joint filers, $5,000 for single filers 
phased in over 5 years. As a result, more low- and middle-
income tax payers, actually more than 7 million, will be pushed 
into the lower 15 percent tax bracket and therefore pay a lower 
tax bill. With more money in their pockets, these families will 
have more money available to put toward savings.
    Second, the bill allows taxpayers filing jointly to deduct 
up to $500 of interest and dividend income. Single filers will 
be able to deduct half that amount.
    Third, the bill will allow taxpayers to exempt up to $5,000 
of long-term gain from taxation. These two provisions will 
reduce the tax bias against savings. Under present law, $100 
saved is taxed greater than $100 consumed because the earnings 
on the $100 saved are also subject to tax.
    Finally, the bill allows taxpayers to increase annual 
contributions on traditional IRAs from $2,000 to $3,000 and 
begins index inflation in 2009. Since IRA contributions have 
the attractive feature of being tax deferred, increasing the 
contribution limits will encourage additional savings that can 
be used to help individuals maintain their standard of living 
during retirement.
    The Small Savers Act represents good tax policy because it 
addresses one of the major problems with our current tax 
system, complexity. For most Americans, filling out Federal 
income tax forms has long been a daunting task. Now this task 
has become increasingly more overwhelming with increased 
complexity of the Code. In addition to the complicated form 
1040, many Americans must fill out numerous additional forms in 
order to determine their tax liability. Americans spend 
millions of dollars unnecessarily not on paying their tax 
liability but on paying tax preparation fees.
    If the Small Savers Act is enacted, millions of taxpayers 
will no longer have to pay tax on their interest, dividend or 
capital gains income. Thus, more taxpayers will be able to file 
their taxes using the simpler form 1040 EZ and will no longer 
have to use the complicated form 1040 D or form 1040 schedule A 
to itemize their interest, dividends and capital gains income. 
Taxpayers will save millions of dollars in tax preparation 
fees, money that can be used for further savings.
    The Small Savers Act is also good fiscal policy because it 
does not require using any of the Social Security surplus. The 
Small Savers Act is expensive, to be sure. It costs $134 
billion through fiscal year 2004, and $345 billion over 10 
years. But this figure is less than half of projected $787 
billion in non-Social Security surplus over 10 years. The 
remaining non-Social Security surplus can be prudently invested 
if the Congress should so desire in education, in defense, and 
any other way, perhaps even to pay down the debt.
    Mr. Chairman, the Small Savers Act should in no way be 
viewed as a panacea for the savings crisis facing our country 
or a threat to retirement security. However, this bill is a 
bipartisan compromise from which to start, and I can't 
emphasize it enough that it is something which I think is 
doable this year.
    I commend the Chairman for also including legislation to 
reform our private pension system in this hearing and having 
bipartisan meetings to discuss areas of common ground toward 
the plan to save Social Security. I will continue to work with 
the Chairman, with the other Members of the Committee, my 
colleagues in the House, and with the administration to fashion 
legislation to address all areas of improving retirement 
security.
    Thank you again, Mr. Chairman, for the opportunity to 
testify.
    [The prepared statement follows:]

Statement of Hon. William J. Jefferson, a Representative in Congress 
from the State of Louisiana

    Mr. Chairman and members of the Committee, I am pleased to 
have the opportunity to testify regarding ``The Small Savers 
Act.''
    I thank the Chairman for holding this hearing on tax 
proposals to enhance retirement and health security, through 
among other things, increasing personal savings by reducing the 
tax burden on savings. Retirement security is an important 
issue to me. It is an important issue for my constituents in 
Louisiana and it is an important issue for all Americans.
    By encouraging personal savings, the Small Savers Act 
represents sound economic, social, tax, and fiscal policy. The 
Small Savers Act represents sound economic and social policy 
because it will result in increased savings and investments by 
millions of Americans. Most economists agree that the best way 
to ensure retirement security for future generations is to 
maintain continued and sustained growth of the economy. 
However, this growth is threatened by the low-and approaching 
negative-personal savings rates in this country. It is alarming 
that over one-third of Americans have no personal savings at 
all.
    The Small Savers Act provides four modest tax incentives 
that will induce low and middle-class Americans to save and 
invest more and reverse this alarming trend.
    First, the bill raises the 15% tax bracket by $10,000 for 
joint filers; $5000 for single filers phased in over 5 years. 
As a result, more low and middle income taxpayers--actually 
more than 7 million more--will be pushed in the lower 15% tax 
bracket and pay a lower tax bill. With more money in their 
pockets, these families will have more money available to put 
towards savings.
    Second, the bill allows taxpayers filing jointly to deduct 
up to $500 of interest and dividend income. Single filers will 
be able to deduct half that amount.
    Third, the bill will allow taxpayers to exempt up to $5000 
of long-term gain from taxation. These two provisions will 
reduce the tax bias against savings. Under present law $100 
saved is taxed greater than $100 consumed because the earnings 
on the $100 saved are also subject to tax.
    Finally, the bill allows taxpayers to increase annual 
contributions on traditional IRA from $2000 to $3000 and begins 
indexing for inflation in 2009. Since IRA contributions have 
the attractive feature of being tax deductible, increasing the 
contribution limits will encourage additional savings that can 
be used to help individuals maintain their standard of living 
during retirement.
    The Small Savers Act represents good tax policy because it 
addresses one of the major problems with our current tax 
system--complexity. For most Americans, filling out federal 
income tax forms has long been a daunting task. Now, this task 
has become increasingly more overwhelming with the increased 
complexity of the Tax Code. In addition to the complicated Form 
1040, many Americans must fill out numerous additional forms in 
order to determine their tax liability. Americans spend 
millions of dollars unnecessarily; not on paying their tax 
liability, but on paying tax preparation fees.
    If the Small Savers Act is enacted, millions of taxpayers 
will no longer have to pay tax on their interest, dividend or 
capital gains income. Thus, more taxpayers will be able to file 
their taxes using the simpler Form 1040 EZ and will no longer 
have to use the complicated Form 1040 D or Form 1040 Schedule A 
to itemize their interest, dividend and capital gains income. 
Tax payers will save millions in tax preparation fees. Money 
that can be used for further savings.
    The Small Savers Act is also good fiscal policy because it 
does not require using any of the Social Security surplus. The 
Small Savers Act is estimated to cost $134.7 billion through FY 
2004 ($345.7 billion through FY 2009). This figure is less than 
half of the projected $787 billion in non Social Security 
surplus over 10 years. The remaining non Social Security 
surplus can still be used to fund important spending 
initiatives such as education and defense or to pay down the 
debt.
    Mr. Chairman, The Small Savers Act should in no way be 
viewed as a panacea for the Savings crisis facing our country 
or the threat to retirement security. However, this bill is a 
bipartisan compromise from which to start. I commend the 
Chairman for also including legislation to reform our private 
pension system in this hearing and having bipartisan meetings 
to discuss areas of common ground towards a plan to save Social 
Security. I will continue to work with the Chairman, my 
colleagues in the House and with the Administration to fashion 
legislation to address all areas of improving retirement 
security.
    Thank you Mr. Chairman.
      

                                


    Chairman Archer. Thank you, Mr. Jefferson.
     Our last witness is Earl Pomeroy.
    We are delighted to have you before the Committee and thank 
you for your work that you have done on retirement issues. We 
would be pleased to hear your testimony.

 STATEMENT OF HON. EARL POMEROY, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF NORTH DAKOTA

    Mr. Pomeroy. Thank you, Mr. Chairman. It is indeed a great 
delight to be in the Ways and Means Committee, even for a brief 
time.
    I don't think there is an issue before us more important 
than retirement savings. I commend you for holding this 
hearing.
    In my testimony I want to advance four points for your 
consideration.
    First, retirement savings is a national priority.
    Second, tax cuts in this area should begin by increasing 
the immediate financial incentive for retirement savings 
efforts by families and individuals of middle and modest income 
means.
    Third, tax cuts should be shaped to increase the prospects 
employers will offer and continue pension coverage for their 
work force.
    Fourth, a tax bill should include provisions that include 
the portability of workers' retirement savings.
    First, the national priority. Our population is aging. Our 
savings rates declining. These are ominous trends, and they 
require our attention if we are to avoid the prospect of 
growing numbers of Americans without adequate personal 
resources to meet their needs in retirement years.
    Wonderful breakthroughs in medicine and health care have 
increased the number of years we can hope to live, and that not 
only makes our problem worse--consider the following facts:
    The number of retirees will double as baby boomers move 
into retirement age. The national savings rate is at its lowest 
point in some 60 years. Seventy percent of those with 401(k) 
plans have balances below $30,000 and nearly half below 
$10,000.
    The conclusion I draw from all of this is that stepping up 
retirement savings is a true national imperative. Like the line 
from that old muffler ad, it is a ``pay now or pay later'' 
situation. Either we take steps to help families accumulate 
retirement savings so they can meet their needs with their own 
resources or we pay later through publicly funded programs 
providing the support people require.
    I believe tax cuts in this area represent excellent tax 
policy and return a long-term dividend of reducing demand on 
public programs down the road.
    Retirement savings for middle and modest income families: 
We have achieved a great deal through retirement savings in the 
workplace but, as Mr. Portman mentioned, so many don't have 
that retirement savings opportunity. In North Dakota, four out 
of 10 workers have retirement savings at work.
    Congress needs to enhance incentives for vehicles like 
individual retirement accounts. Now, last Congress we took 
steps in this area, strengthening IRA incentives in several 
areas, none, however, for households in the category $50,000 
and below.
    It is not surprising that these are the very families that 
have the most difficulty saving for retirement. Discretionary 
dollars gets stretched thin just covering basic living expenses 
ranging from school clothes to car repairs. They need a more 
meaningful retirement savings incentive.
    I propose increasing the incentive by establishing a 50 
percent tax credit for IRA contributions of $2,000 or less each 
year for families earning $50,000 or below. An individual is 
$25,000 and below.
    The President has proposed USA, universal savings accounts, 
that is an even more ambitious effort to get savings 
comprehensively established. This IRA tax credit proposal is 
another way of approaching the same issue. I believe you could 
market an IRA tax credit to families like an employer match in 
a 401(k) setting. There hasn't been an incentive for retirement 
savings more effective in my opinion than that employer match 
on the 401(k). Let's apply the same dynamic to the IRA through 
this tax credit.
    Support for pension plans should be stepped up, too. Of all 
the employer-based retirement savings, it is the pension plan 
that offers the most predictable stream of income in 
retirement, but what we are seeing is a dramatic decrease in 
the number of pension plans out there. The number of workers 
covered has diminished over the last 10 years, even though the 
work force has grown substantially, and the number of employers 
offering plans has absolutely just collapsed.
    Congress and the administration--several administrations 
bear much of the responsibility. We have made it too complex, 
too costly; and we need to address that. In 1996, we advanced 
regulatory relief for retirement plans, but that was defined 
contribution plans through the SIMPLE legislation.
    Congresswoman Johnson and I have introduced a bill known as 
SAFE, Secure Assets for Employees, which does basically the 
same type of regulatory relief for defined benefit plans.
    Now, new incentives to save, cost money, and the amount of 
money you will have available for your tax bill, Mr. Chairman, 
will determine what you can do. But removing disincentives to 
save don't cost much money.
    And this would be my final point, portability. We have over 
the years through happenstance in the Tax Code made it very 
difficult for someone to move their retirement savings as they 
move through the work force. Take, for example, someone who 
works for a private for-profit. They would have a 401(k) 
defined contribution plan. If they went to work for a 
nonprofit, they would have a defined contribution 403(b) plan. 
If they later went to work for State government, they would 
have a defined contribution 457 plan. All defined contribution 
plans but none of them convertible one to another.
    When a person has a bunch of little retirement accounts, we 
know what happens. They have them disbursed. When they have 
them disbursed, we know what happens. They spend it. In fact, 
more than 60 percent of the time the money is not fully 
reinvested in retirement savings. So by making it impossible 
for someone to keep their retirement funds in one account we 
encourage disbursement and therefore spending.
    Let's stop that. We introduced a bill called RAP, the 
Retirement Account Portability bill, that would allow for this 
type of rollover. I think there is no public policy served by 
frustrating someone's ability to collect their retirement 
accounts in one place. There is very little cost to the 
Treasury in addressing this legislation; and whatever you do 
with the tax bill, Mr. Chairman, I would hope the portability 
issue is included.
    Thank you for listening to me.
    [The prepared statement follows:]

Statement of Hon. Earl Pomeroy, a Representative in Congress from the 
State of North Dakota

    Mr. Chairman, members of the Committee, thank you for the 
opportunity to appear before you this morning. The topic we 
discuss today--how to encourage greater savings for 
retirement--is one of critical importance to the economic 
health of our people and our nation. No tax cut proposal this 
Committee will consider is more important than those that 
assist America's families in saving for their retirement, and I 
commend you for holding this hearing today.
    In my testimony I will advance four points for your 
consideration:
    1) Retirement savings is an urgent national priority;
    2) Tax cuts in this area should begin by increasing the 
immediate financial incentive for individual retirement savings 
efforts by families and individuals earning modest incomes;
    3) Tax cuts should increase the prospects employers will 
offer and continue pension coverage for their workforce;
    4) A tax bill should include provisions that improve the 
portability of workers' retirement savings as they change 
employers in the course of their careers.

               Retirement Savings as a National Priority

    Our population is aging and our savings rate is declining. 
These are ominous trends that require our attention if we are 
to avoid the prospect of growing numbers of Americans without 
adequate personal resources to meet their needs in retirement 
years. Wonderful breakthroughs in medicine and health care have 
increased the number of years we can hope to live, but that 
serves to make the problem of inadequate retirement savings 
even worse.
    The following collection of facts serve to make the point:
     The number of retirees will double as baby boomers 
move into retirement age.
     The proportion of active workers per retiree will 
move from three to one today to two to one by 2030.
     The national savings rate ran about eight percent 
from World War II to 1980, dropped to four percent thereafter 
and languishes today at or slightly below one percent. (Some 
contend this data, drawn from the Commerce Dept., does not 
capture all of the resources families have available--like home 
equity. In any event, however, our rate of savings is declining 
when it needs to be increasing.)
     70 percent of those with 401(k) plans have 
balances below $30,000 and nearly half (48 percent) are below 
$10,000.
     The fastest growing segment of our population are 
Americans 85 years and older.
    The conclusions I draw from all of this is that stepping up 
retirement savings rates is a true national imperative. Like 
the line from the old muffler ad, our choice is a ``pay now or 
pay later'' proposition. Either we take steps now to help 
families accumulate retirement savings so they can meet their 
needs with their own resources or we pay later with publicly 
funded programs providing the support people require.
    Mr. Chairman and committee members, you will consider many 
areas worthy of tax relief. I strongly believe that tax cuts 
which help families save for retirement is excellent tax policy 
which returns the long term dividend of reducing the demand on 
public programs down the road.

        Retirement Savings for Middle and Modest Income Families

    Perhaps the most successful retirement savings are achieved 
through workplace retirement plans, but only half of those in 
the workforce today have this savings opportunity. In rural 
states the problem is even more severe. In North Dakota, for 
example, only four workers out of ten have workplace retirement 
savings programs.
    Congress needs to continue to enhance the incentive for 
private retirement savings through vehicles like Individual 
Retirement Accounts (IRAs). Last Congress strengthen IRA 
incentives in several ways, most notably the creation of the 
Roth IRA. It did not, however, increase or strengthen the IRA 
incentive for households that find it most difficult to save, 
those earning $50,000 annually or less.
    It is not surprising that the more modest the income the 
more difficult it is to set money aside for retirement. 
Discretionary dollars get stretched thin just covering basic 
living expenses ranging from school clothes to car repairs. 
Modest income families need a more meaningful savings 
incentive.
    I propose increasing the incentive by establishing a 50 
percent tax credit for IRA contributions of $2,000 or less each 
year for families earning $50,000 and individuals earning 
$25,000 annually.
    This proposal is contained in H.R. 226, the Family 
Retirement Saving Act. It would be my expectation that the 
credit opportunity could be marketed similar to the employer 
match incentive in place in many, many employment based 
retirement plans across the country. I believe the employer 
match has proven itself to be the single most effective savings 
incentive we have going. Let's try to apply this dynamic to the 
Individual Retirement Account for our middle and modest income 
families.
    Remember, the new IRA incentives last Congress went to 
those earning between $50,000 and $150,000 annually. It's time 
we direct additional help in this area to those who need it 
most, households at $50,000 and below.

                       Support for Pension Plans

    Of all employer based retirement savings programs, none 
provide a more dependable stream of income in retirement than 
the traditional defined benefit pension plans. Over the last 20 
years, however, the number of employees covered under pensions 
has declined even while the workforce has significantly 
expanded. In addition, the number of employers offering defined 
benefit plans has collapsed.
    Congress and the past several Administrations bear much of 
the responsibility for this disturbing trend by reducing 
incentives for employers while increasing the complexity and 
cost administering a plan to employers. The problem has been 
particularly acute for small employers.
    In 1996 Congress passed regulatory relief for small 
employers offering defined contribution plans. This 
legislation, known by its acronym SIMPLE, has proven successful 
in the marketplace. Now it's time to advance a similar small 
employer initiative for defined benefit plans.
    This week Congresswoman Nancy Johnson and I introduced H.R. 
2190, which is substantially identical to our SAFE proposal 
from the last Congress. This bill would significantly increase 
the appeal to employers of offering a defined benefit plan and 
would greatly simplify the administrative burden by reducing 
complexity and cost of compliance.
    I am also pleased to cosponsor the important legislation 
proposed by Committee members Rob Portman and Ben Cardin. The 
Portman-Cardin bill represents a comprehensive, significant 
effort to further stimulate employer based retirement savings 
plans.

                   Making Retirement Savings Portable

    Mr. Chairman, it costs money to create new incentives for 
retirement savings regardless of whether we expand IRAs or 
address employer based plans. I recognize the size of the tax 
relief legislation will dictate what, if anything, we can 
accomplish in this area.
    Regardless of whether we create new incentives to save (and 
I hope we do!) It does not cost much money to tackle 
disincentives to retirement savings that accumulated over the 
years.
    One of the most significant barriers to savings is the lack 
of portability of retirement savings. In some instances these 
barriers are a happenstance creation of the tax code that serve 
no public purpose whatsoever.
    Take for example the inability to move savings among three 
common forms of defined contribution plans: 401(k), 403(b), and 
457.
    If you begin your career working for state government you 
save under a 457 plan. Moving to a nonprofit may avail you of a 
403(b) opportunity. In your next job perhaps you would have a 
private for profit 401(k) savings plan. Each plan is a defined 
contribution plan but rollovers from one to another are 
prohibited.
    As a result, people often have their accounts dispersed and 
all too often these funds do not get fully reinvested. In fact, 
at least 60 percent of the time funds dispersed are not put 
back into retirement savings.
    In order to address this problem, I have introduced H.R. 
739, the Retirement Account Portability Act (the RAP Act), with 
Rep. Jim Kolbe. This bill unravels the regulatory complexity 
and ends the statutory barriers that prevent workers from 
moving their pensions with them from job to job.
    This bill has industry and labor support, and has been 
endorsed by the Clinton Administration and is included in the 
bipartisan Portman-Cardin bill. Best of all, RAP has only 
negligible cost to the Treasury. Enacting RAP this year is an 
achievable goal that will greatly enhance workplace savings.
    Mr. Chairman, I thank you for your leadership on this issue 
and look forward to working with you.
      

                                


    Chairman Archer. The Chair appreciates the testimony by 
each of you, all of which is very constructive, and now the 
Chair asks if any Members would like to inquire.
    Mr. Thomas.
    Mr. Thomas. Thank you very much, Mr. Chairman.
    I also want to compliment the Members. You are dealing with 
two areas that are absolutely critical, and you have suggested 
a number of very, what I would consider simple, commonsense 
changes, especially the idea of portability, especially the 
ability of setting up a structure which allows for retirement 
security. But I listened very carefully and I didn't hear any 
mention--I may have been negligent, but I don't think so--of 
long-term care proposals.
    I tell my friend from North Dakota that Fram oil filters 
spent a lot of money on that ad, and they are sorry you 
referenced a muffler. The pay me now or pay me later ad is a 
good example. The pitch is a cheap oil filter change and--oil 
change and oil filter--or pay me for a replaced engine.
    Today, given the point that all of you mentioned in terms 
of Americans living longer, the simplest fix for long-term care 
is the time value of money because of the more predictable need 
for that care in later life. So I would just urge you, as you 
are looking at the very positive suggested changes, if you are 
able to expand by definition or structurally include the 
ability to pay for long-term care from a fund created over 
time, health insurance today tends to be acute. Medicare in 
terms of health care needs for seniors is acute. We have some 
surrogates for long-term care today in Medicare, but they, 
unfortunately, are the fastest growing and most difficult to 
control price areas.
    So, in that sense, I would hope that you think about long-
term care as part of a comprehensive retirement security 
package.
    Mr. Chairman, I tell you just as recently as yesterday the 
Health Subcommittee held a hearing on the uninsured. What we 
got out of it was basically that there is no single or simple 
solution.
    Although 43 million Americans are uninsured, when you begin 
examining the various groups, you find some that make incomes 
of more than $50,000, and they choose not to participate in a 
program. What we have been told is that even if you put 
billions of dollars into a program, the percentage change, 
especially if it is a tax credit to try to buy down the cost of 
that insurance, produces only modest increases in the number of 
people who participate in the program.
    Even in those areas that it is 100-percent paid for, for 
low-income, Medicaid and the S-CHIP, State Children's Health 
Insurance Program, from the Balanced Budget Act of 1997, 13.4 
percent of those who are currently uninsured qualify for that 
program. So what we have to do is look at our attempts to 
provide assistance to people who do not now have health 
insurance. We showed it in a way that maximizes the number of 
people who receive it but that, too, shows we are not fooled by 
the belief that the solution to this problem is a simple one or 
that there is a single approach to the very complex picture of 
who is among the uninsured today.
    But I want to underscore the ideas that you are presenting, 
especially to my friends Mr. Portman and Mr. Cardin, frankly, I 
think are just long overdue. No one looked at them. No one 
focused on them. No one pulled them together. You folks have. I 
give you plenty of credit for that.
    Mrs. Johnson, I know, has been wrestling with this 
question, as has Mr. Stark on the health care provision. It is 
something I think that we need to work on, begin the process, 
but that it clearly is not subject to a single fix.
    And with that, Mr. Chairman, if anyone wants to respond to 
anything I said, I would appreciate it. But, please, long-term 
care is an ongoing need. It will increase, and it ought to be 
simple, on the time value of money to look into some kind of 
pension structure.
    Chairman Archer. You have 1 minute to respond.
    Mrs. Johnson of Connecticut. If I may just briefly call 
your attention to the bill that Karen Thurman and I introduced 
that is focused on long-term care. I didn't have time to go 
into it in much detail.
    It does have four provisions. It not only for the first 
time rewards holding of long-term care insurance over time so 
the deduction goes up for the number of years that you hold it 
for the first 5 years, but it also provides a recognition of 
the tremendous contribution that in-home care givers provide 
and eliminates this arbitrary limit on partnership, State 
partnerships, that help people, induce them to buy long-term 
care insurance, an arbitrary provision of Federal law.
    Last, it has a very aggressive educational program so 
people will really understand that neither Medicare nor 
Medicaid provide long-term care except under extraordinary 
circumstances. So the educational provisions are about as 
important as anything else.
    Mr. Thomas. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Archer. Mr. Rangel.
    Mr. Rangel. Thank you.
    Let me first thank my colleagues for the work they have put 
into these very meaningful proposals that are before us.
    Mrs. Johnson, do you believe that we can handle on this 
Committee Social Security, Medicare, and tax cuts this year?
    Mrs. Johnson of Connecticut. I think we can certainly do 
Social Security reform. I think we can and should do Medicare 
reform. I think we can do pension reform. Those are three of 
the--and long-term care reform. So I think we can do retirement 
security reform, and I think the tax reform bill, the effort to 
cut taxes, will have to be paired with the development of 
surpluses that are over and above the Social Security 
surpluses.
    But we do expect to move into years when we have a genuine 
surplus over and above Social Security revenues next year and 
the years thereafter, and I think it is appropriate for this 
Committee to set economic policy, particularly since we have 
heard how catastrophically low our savings rate is. I think it 
is actually imperative for this Committee to set some course 
for this Nation through long-term tax policy and not leave the 
Members thinking this is all going to be free dollars to spend 
on new programs. Our savings rate is catastrophic. There are 
big problems in our providing retirement security, long-term 
care security and those things. So I think almost all of the 
balls are in the court of this Committee in terms of using our 
resources as a nation into the future to provide a strong 
economy and retirement security.
    Mr. Rangel. And the tax cut would be based on projected 
surpluses after Social Security?
    Mrs. Johnson of Connecticut. We have all agreed that we are 
not going to use Social Security revenues for anything other 
than Social Security. So that is a bipartisan agreement and we 
are going to stick to it.
    Mr. Rangel. And Medicare?
    Mrs. Johnson of Connecticut. We did set aside 62 percent 
for Social Security and 15 percent for Medicare, so there is 
some ability to use that surplus to solve the immediate 
problems in Medicare, which I consider to be acute and also for 
long-term reform of Medicare.
    Mr. Rangel. If we did have a tax cut, what year do you 
think that it would become effective?
    Mrs. Johnson of Connecticut. First of all, I would hope 
that part of it would become effective almost immediately. The 
research and development tax credits expire. The work 
opportunities tax credit, which is critical to the 
reemployment, to the employment of welfare recipients, expires.
    Just like we have to budget every year, we have to pass 
some kind of tax legislation every year. As to bigger 
provisions, they will depend on the estimates as to when the 
surpluses exceed the Social Security tax revenues.
    The other provisions in my personal, I am not speaking for 
anyone but myself, I think the extension of the R&D, the 
extension of the work opportunities tax credits demand the same 
attention as the appropriations proposals that we have on the 
floor because losing continuity or breaks in those--that tax 
law are very costly to both the people and the businesses that 
we count on to make our economy strong. I want to make sure 
that they go ahead immediately.
    Mr. Rangel. Do you agree that we ought to enact the revenue 
neutral extended tax bill to make certain that we don't have 
the extended included in the appropriations bill?
    Mrs. Johnson of Connecticut. I think this Congress under 
both Republican and Democratic leadership have used a 
reconciliation very effectively to make sure that the key 
interests of the Nation are addressed across the board, whether 
they are in the tax area or the appropriations area. While it 
may be necessary to use that instrument to some extent this 
year, I think this Committee, under this Chairman, is going to 
pass tax legislation that will stake out in a sense the tax 
policy that will strengthen our economy over the long-term and 
address some of the problems that we have raised today about 
retirement security, pension reform and savings rates.
    Mr. Rangel. What size tax cuts do you think that we are 
talking about?
    Mrs. Johnson of Connecticut. We have a large surplus 
predicted in the outyears, and I think it is our responsibility 
as the tax Committee to help the public understand that sound 
tax policy is critical to a strong economy and a secure society 
in the future. We are at the threshold of seeing our major 
retirement security plans collapse, not just Social Security 
but pensions, too.
    Mr. Rangel. What size----
    Mrs. Johnson of Connecticut. I would say most of that 
surplus ought to be in that tax bill and not be available for 
new programs. The new program demands should be met by making 
government far more efficient than it has been in the past.
    Mr. Rangel. What size tax cut do you think we are talking 
about?
    Mrs. Johnson of Connecticut. I don't know what the 
surpluses will be, Mr. Rangel. I can't answer that.
    Mr. Rangel. You have no idea what we are looking for in the 
tax bill, though?
    Mrs. Johnson of Connecticut. The projections are several 
hundred billion in 5 years, and many more hundred billions in 
10 years.
    Mr. Rangel. Would 800 billion over 10 years sound like 
what----
    Mrs. Johnson of Connecticut. That is what the estimators 
are saying. My goal is that we stake out the majority of that 
money and demonstrate to the people of America how we can 
strengthen the economy and secure us each individually in our 
lives and in our retirement, and I think that is the number one 
obligation of this Congress and far exceeds our obligation to 
spend that on programs in the future.
    Chairman Archer. Does any other Member wish to inquire?
    Mr. Kleczka.
    Mr. Kleczka. A quick question to Mrs. Johnson, you just 
indicated that you think the Congress should, and I am 
paraphrasing, stake out the majority of that money for programs 
that this panel is talking about? For what type of tax cuts?
    Mrs. Johnson of Connecticut. This is not a hearing on the 
tax bill and so there is no sense in my going into the details.
    Mr. Kleczka. Everything that has been discussed by this 
panel could be included in the tax bill.
    Mrs. Johnson of Connecticut. That is why the Chairman is 
very wise to have a hearing on retirement security.
    Mr. Kleczka. I was hoping that you were saying that we 
should stake out a majority of that surplus for the things that 
we are talking about today. Otherwise what this Committee is 
doing is raising some false hopes with the public by having an 
all-day hearing on retirement security and health security. And 
I say if we were to pick up a small portion of all of your good 
ideas, 10 percent of Jefferson and 10 percent of Pomeroy and 2 
percent of the Stark because of the cost, that would more than 
eat up the surplus and there would be no room for estate tax 
changes or capital gains tax elimination.
    So I think we as a Congress have to make some priorities. 
Are these our priorities, the items discussed at this all-day 
hearing on things that are so important not only to the economy 
but to so many Americans? My answer to that is ``Yes.'' We are 
all talking about all sorts of new savings instruments. USA 
accounts are proposed by the administration, the Chairman has a 
new Social Security account which has a mix of stocks and 
bonds. We are recreating the wheel here, my friends. We have 
the savings instruments in place today. Let's make them 
meaningful. Let's take our IRAs and boost them. Let us increase 
the 401K caps. Let us provide for portability and some type of 
interweaving of the current pension plans, like Mr. Pomeroy 
says.
    One of the issues that I have been working on is health 
care for retirees. I had a GAO study done which indicated more 
and more employers are willy nilly canceling their retiree 
health care.
    I had a situation in my district with Pabst Brewing Co. 
where the retirees woke up 1 day and found that the employer 
just canceled their health benefits. I am talking regular 
retirees and early retirees. I had a situation with a 
constituent, an early retiree who had a wife with MS at home. 
With the early retirement package offered to him at age 55 
which included coverage for health care for his wife's 
condition, he thought that he could make it and go home and 
take care of his wife. The day that they canceled his benefits, 
he found out that his health insurance premium with a private 
insurance plan cost more per month than his entire retirement 
benefit.
    So what we are talking about today is important, but my 
friends, it would take the entire surplus that is projected, 
not the Social Security surplus, to address a piece of those 
needs.
    Mr. Portman, what is the CBO estimate of your pension bill 
and Mr. Cardin's pension bill, which I happen to be a supporter 
of?
    Mr. Portman. You sound like a Chairman talking about 
working on priorities. We don't have a Joint Tax Committee 
estimate yet for this year. We are promised one this week. We 
asked for it back in April.
    Last year's bill, which is substantially similar to this 
year's bill, was roughly $9 billion exclusive of the minimum 
distribution proposal over a 5-year period. But remember, we 
are talking about a substantial surplus and a possibility of 
substantial tax relief bill. Over the next few days, we will 
have an estimate and it may be higher because we do get into 
the IRAs, raising the limit from $2,000 to $5,000 in IRAs. If 
you take that out, we hope to be close to where we were last 
year.
    Mr. Kleczka. If we are serious about the dialog that we are 
having today in the Committee, if we are even going to put a 
dent into these problems, problems facing regular Americans, it 
would take the entire surplus.
    So as the Chairman talks about the estate tax and others 
talk around Capitol Hill about eliminating the capital gains 
tax, know that there is not going to be any room for that, plus 
the extenders, which is an expensive piece of pie.
    Mr. Chairman, I thank you for your time. Let's not forget 
our retirees and their health care. I will be introducing 
legislation to help retirees age 55 through 64. You can offer 
them tax deductions for their health care premiums, but if they 
don't have the income to offset it, what is the sense? I will 
have a proposal in the next few weeks which would truly help 
retirees and hopefully you folks on the panel will cosponsor 
what I introduce.
    Thank you, Mr. Chairman.
    Chairman Archer. The gentleman from Wisconsin has given the 
Committee a sneak preview of the real challenge that will be 
before the Committee, which is to accommodate the multiplicity 
of good ideas within the dollars that are available to us under 
the budget. Although we do not have the final estimate on the 
Portman-Cardin-Kleczka, and so forth, bill, simply raising the 
limit on IRAs from $2,000 to $5,000 a year cost $38 billion 
over 10 years. That number I do know.
    In the end we are going to have to really examine 
priorities. I am always fascinated as chairman that I can't 
simply go out and cosponsor every bill for all of the good 
things that we want to see done in tax relief in the Tax Code. 
Members individually can do that. So when a good idea comes 
along, it is easy to jump on board, and then we have bills that 
have a hundred, 200 cosponsors. If each Member began to 
consider the revenue losses that in the aggregate occur as a 
result of all the bills that he or she has cosponsored, we 
would find that it is an impossibility to accomplish all of 
that.
    So the gentleman from Wisconsin has put his finger on a 
very sensitive point that we have all got to consider because 
retirement security is exceedingly important, and that is not 
just the pension side, that is also the health side, which 
includes long-term care. But there are many, many other items 
that are important, too, in a tax bill. We have to sort through 
that.
    Mr. Portman.
    Mr. Portman. If I can just make one comment which relates 
to what Mr. Kleczka and you have raised with regard to the 
revenue impact, we need to keep in mind what you have stated a 
number of times in reference to the guarantee accounts in your 
Social Security proposal, which is with regard to the pension 
side, this is going to increase our savings rate in this 
country, meaning there will be more money invested in the 
markets. There will be more capital formation and increased 
revenues from that. If the Joint Tax Committee had the ability 
to do a dynamic score, it would look quite different, and I 
just raise that because some tax proposals will result in 
higher savings and more general revenues coming in as a result 
of better economic conditions.
    With regard to retirement security, I hope we look at it in 
that context and in the context of how cost effective it is. In 
the retirement area, as you know, you are leveraging a lot of 
private dollars and the nondiscrimination rules ensure that. It 
is an awfully good bargain for the Treasury and you will have a 
much more cost effective way of handling retirement needs by 
making some of these common-sense changes on the retirement 
side.
    Chairman Archer. The issue before us today is a wonderful 
way to kick off our hearings, but we will be holding hearings 
on other aspects of tax relief as we go along.
    I am particularly looking forward to how we tax foreign-
source income and what that is doing to put barriers before our 
ability to compete in the world marketplace, which is going to 
be essential to our economy in the next century. If we don't 
win the battle of the global marketplace, we are not going to 
have the resources to do all of the things that we need to do 
in the next century. I hope every Member will try to attend 
that hearing.
    I think Ms. Dunn wants to be recognized, and then Mr. 
Weller.
    Ms. Dunn. Before this panel leaves, I want to call 
attention to one of the provisions in Mr. Portman's very 
excellent pension reform bill that shows how important 
education is to retirement. There is an area of tax treatment 
of employer provided advice to employees on retirement 
planning, and this is currently a benefit that employers 
provide to employees. They educate their employees on the 
importance of saving for retirement. Currently, this has been 
treated as a fringe benefit by the IRS, but there is some 
concern that the IRS may change their treatment, their tax 
treatment of this particular fringe benefit and calculate it as 
part of the employee's income. I have some concerns about that, 
and the Portman-Cardin bill would codify current practice so 
that it continues to be a fringe benefit. It is not calculated 
as part of income and therefore is much more easily given by 
employers and received by employees.
    Mr. Portman. I thank the gentlewoman. Let me also thank her 
for her help with the catchup provisions in this legislation 
which we did not have a chance to get into. Ms. Dunn helped us 
to focus on that issue which allows for every individual coming 
into the work force at age 50 or above to add an additional 
$5,000 annually to a defined contribution plan, for instance a 
401(k). Who is this going to benefit, all baby boomers but 
primarily working moms who are coming back into the work force 
and want to be able to set aside enough of a nest egg. When you 
are coming in late in the game because of, as Mr. Thomas 
indicated earlier, the time value of money and compounding 
interest, you want to give these people an additional 
incentive.
    On the education side, it is a very important provision of 
the bill. Additionally, I think the impact of having these 
increased contribution limits and encouraging small companies 
to get into these plans is based on two things, and this is 
based on talks with a lot of folks from around the country. One 
is more education because the way that the nondiscrimination 
rules work, owners are going to have to get the middle paid and 
low-income workers involved in the plans in order for the plans 
to meet the nondiscrimination and top-heavy rules. So education 
is a more important component of this, which is great for this 
country and great for workers.
    Second would be bigger matches to encourage again these 
workers who are perhaps not as interested in thinking about 
their retirement, to have some financial incentive. And those 
matches are private money going into the system that might not 
otherwise be there which will help us with regard to our 
savings rate.
    So I thank the gentlewoman for her support and all of her 
contributions.
    Chairman Archer. Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman, and I will direct my 
question to Mr. Portman. I too want to salute you on a couple 
of issues, and I want to mention the catch-up issue which you 
have already discussed regarding giving an opportunity 
particularly to working moms who are trying to make up for 
missed contributions when they were out of the work force while 
they were home taking care of the kids. And I think of my own 
sister Pat, who was out of the work force for years, and who, 
of course, I believe deserves the opportunity to make up for 
that missed contribution.
    I want to direct my question specifically, Mr. Portman, to 
the 415 pension issue, and of course I have been working with 
you and you have a provision in your legislation and I have 
H.R. 1297, which addresses the 415 issue, which I personally 
think is an issue of fairness, and Mrs. Johnson is also 
cosponsoring our legislation.
    The 415 pension limits are arbitrary limits which limit the 
ability of construction workers, those who work for several 
employers. Many times a construction worker can work for two or 
three different contractors. That is why they are in 
multiemployer pension funds, but these limitations 
unfortunately have really penalized folks who get up early, 
sweat and toil, get their hands dirty, and in many cases they 
work so hard at a younger age they are burnt out and worn out. 
And of course the issue of the 415 when it is brought to my 
attention is usually by a group of spouses of laborers, 
ironworkers, operating engineers who have gone to work early 
and of course they come home late and tired, and they found out 
that their pension that they were promised was not quite what 
they--it did not turn out quite as it should be because of the 
415 limits.
    I have a letter here from Laurie Kohr, wife of Larry Kohr, 
a construction worker from Peru, Illinois, and I would like to 
insert this into the record.
    Chairman Archer. Without objection, so ordered.
    [The information follows:]

    Congressman Weller,
    My husband Larry has been a member of a local union for 21 
years. He has worked as a laborer and laborer foreman for a 
local construction company.
    We were delighted when we learned in June 1997 that his 
hard work had paid off and that he had in his 30 credits to 
retire.
    You can only imagine our disappointment when we were told 
that he couldn't collect his full pension because of IRC 415. 
At age 38, and that he attained his credit hours just one 
company his monthly allotment went from $33330.50/mon. To 
$1598.21/mon.
    For us it was a wake up call. It was the first time we had 
heard of IRC 415. Since that time and through a lot of research 
we have learned a lot.
    We have learned that government employees are exempt from 
415. You only have to be in Congress 2 years to have a secure 
pension.
    We have learned that legislation has been introduced for 
the last 3 years and still 415 is affecting many people, not 
only Larry.
    We have also learned that hard work and loyalty to one 
company doesn't always pay-off. This is the hardest lesson of 
all.
    Again, I ask your help. IRC 415 is unfair in more ways than 
I go into here. So, I count on you as my representative to make 
it fair, for everyone.
    I am sincerely grateful for all you have done and I hope to 
hear from you soon.

                                                  Lori Kohr
                                                     Peru, Illinois
      

                                


    Mr. Weller. Thank you. Laurie points out that her husband, 
Larry, because of the 415 limits, he has retired after 20 years 
as a construction worker, and as I pointed out earlier, 
construction is a pretty physically demanding trade, a 
tremendous amount of physical activity, and he recently 
retired. And when he was working, he anticipated that under his 
pension plan, his multiemployer pension plan, he would receive 
almost $40,000 per year, about $3,300 a month before taxes. But 
because of the 415 limits, after 20 years of working hard and 
contributing because of overtime even more than anticipated 
into his pension fund, he is only receiving about $19,178 a 
year or about $1,500 a month and that is less than half of what 
he is entitled to. So these 415 limits are costing real 
families like Laurie and Larry Kohr real money and they are 
being punished.
    Mr. Portman, my question is when it comes down to it, would 
lifting these 415 limits, would they affect the solvency or 
jeopardize the integrity of these multiemployer pension funds?
    Mr. Portman. No, my understanding is that it won't affect 
the solvency of the plans or the funding of the plans. You are 
exactly right, the focus of this is not on the higher paid 
workers, it is on the workers like the example you used. The 
higher paid workers are not going to worry about the 100 
percent of compensation limit because they won't bump up 
against it. So although this proposal has been opposed by some 
people in the past as being helpful to higher paid workers, the 
focus in multiemployer plans is on the person who is the 
construction worker, who is laying the carpet, because this is 
the person based on his years of service and the formula the 
contribution is based on who should get a certain amount but 
then this arbitrary limit comes in and knocks it down.
    Mr. Weller. These 415 limits were established almost 20 
years ago. Essentially, they were to go after some corporate 
executives who had golden parachutes that they were trying to 
create for themselves, but over the years these limits have 
changed, and there are some groups which have been taken out. 
It is my understanding that both teachers, public employees 
were affected by the 415 limits and this Committee and this 
Congress saw the merits of lifting them out from under the 415 
limits.
    Mr. Portman. That is correct.
    Mr. Weller. I know that Mrs. Johnson played a role in that. 
I consider this a fairness issue for the little guy and little 
gal, and I am interested in working with you and the Chairman 
and others on the Committee to ensure that we address this 
fairness issue and lift those who work hard and play by the 
rules, those who work in the construction trades, out from 
under these 415 limits, and I appreciate your cooperation.
    Mr. Portman. I appreciate all of the work that the 
gentleman has put into the multiemployer issue generally in his 
own bill which I have cosponsored and in helping ours.
    Chairman Archer. The Chair again thanks the Members of the 
panel for their participation. It has been very, very helpful.
    The next panel is now invited to come sit at the witness 
table, Dr. Goodman, Dr. Butler, Mr. Kahn, Ms. Lehnhard, Mr. 
Wilford, and Ms. Hoenicke. The Chair welcomes each of you and 
looks forward to your presentation.
    Dr. Goodman, would you lead off. And would you for the 
record identify yourself before you begin your testimony.

   STATEMENT OF JOHN C. GOODMAN, PH.D., PRESIDENT AND CHIEF 
     EXECUTIVE OFFICER, NATIONAL CENTER FOR POLICY ANALYSIS

    Mr. Goodman. My name is John Goodman. I am President of the 
National Center for Policy Analysis. Mr. Chairman, the number 
of Americans who are uninsured is 43 million and rising. This 
is occurring in the midst of a booming economy with 
unemployment at alltime lows. We are spending an enormous 
amount of money on this problem, but the more we spend, the 
worse the problem seems to get. We are spending more than a 
$100 billion on tax subsidies for private insurance, yet while 
some companies have lavish health coverage subsidized by the 
Federal Government to the tune of 50 cents on the dollar, other 
Americans get no tax relief when they purchase their own 
insurance. And among families who have insurance, those in the 
top fifth of the income distribution get 6 times as much help 
as those in the bottom fifth.
    We are also spending an enormous amount of money on health 
care for the uninsured, by our count more than $1,000 per year 
for every uninsured person on a hodgepodge of programs, yet 
there is no overriding mechanism that ensures that resources 
are matched with needs and there is no way for an uninsured 
person to take his $1,000 and spend it on private insurance 
instead. There is a better way.
    I propose a compact between the Federal Government and the 
American people in which the Federal Government defines its 
financial interest in this question and offers to every 
individual and every family a fixed-sum refundable tax credit 
so that people who have health insurance see their taxes 
reduced and when they cease having health insurance, their 
taxes are increased. An important part of this proposal is the 
idea of the local health care safety net. Under the current 
system, people who are uninsured already pay higher taxes 
precisely because they don't get the same tax relief as people 
who have tax-subsidized insurance. By our count, the uninsured 
pay as much in extra taxes each year as the amount of free care 
that they get at the Nation's hospitals. The problem is that 
these extra taxes go to the Treasury and are folded into 
general revenues while the local hospitals must find the 
resources to pay for the free care.
    As an alternative, I propose that the unclaimed tax credit 
money be given to state governments in the form of a block 
grant with only one proviso, that it be spent on indigent 
health care. So the Federal Government would offer every family 
a fixed sum of money. We hope that they choose to spend it on 
private insurance, but if they don't, that money becomes part 
of a safety net for those people who cannot pay their medical 
bills.
    I propose that we phase in the system in a reasonable way. 
We should begin immediately to give people who purchase their 
own insurance the tax credit. We should give the self-employed 
the option to remain in the tax deduction system or the tax 
credit system, and we should give every employer the option to 
remain in the current tax exclusion system or switching to the 
tax credit system. Once in the tax credit system, we would no 
longer be subsidizing wasteful health insurance plans. The 
Federal Government would subsidize only core coverage and 
people would buy additional coverage with their own aftertax 
dollars. We would put employer-provided insurance and 
individually purchased insurance on a level playingfield so 
that the role of the employer would be determined in the 
marketplace and not by the vagaries of tax law.
    We also need to put third-party insurance and self-
insurance through medical savings accounts on a level 
playingfield. The current system encourages us to give all of 
our money to HMOs and encourages abuses of managed care and 
rationing imposed by employers. As an alternative to this, we 
need to expand existing MSAs, medical savings accounts, and we 
need to offer every American a new kind of MSA, a Roth MSA. 
This is an MSA that would wrap around any health insurance 
plan, an HMO, a PPO, fee-for-service, and so forth.
    This plan, Mr. Chairman, also addresses two characteristics 
of the uninsured that have been ignored by previous plans, and 
that is most of the uninsured are uninsured only temporarily 
for part of a year and that the low-income insured need their 
tax refund money at the time the premiums are due in order to 
avoid a loss of take-home pay. I believe there are workable 
mechanisms already in place to solve these problems.
    Finally, Mr. Chairman, this plan could be paid for with 
money that is already in the system. The $40 billion that we 
now spend on the uninsured is one source. The $100 billion that 
we are spending on tax subsidies is another source. And we can 
also carve out existing tax preferences. I see no reason why 
middle-income families should get the $500 tax credit for a 
child if the child is uninsured. I see no reason why middle-
income families should get the full value of its personal 
exemption if the family is uninsured, and I see no reason why a 
low-income family should get a $1,000 EITC, earned income tax 
credit, refund for a child if that child is uninsured.
    Clearly, these choices are political and they are yours to 
make, but I think the goal is one which the vast majority of 
Americans would support.
    Thank you.
    [The prepared statement follows:]

Statement of John C. Goodman, Ph.D., President and Chief Executive 
Officer, National Center for Policy Analysis

    Unwise government policies are largely responsible for the 
fact that the number of Americans without health insurance is 
43 million and rising. Unwise government policies also are 
responsible for the fact that people who have health insurance 
are turning over an ever-larger share of their health care 
dollars to managed care bureaucracies that limit patient 
choices and sometimes give providers perverse incentives to 
deny care.
    After many discussions with others involved in health care 
policy, including analysts at other think tanks, 
representatives of the industry, the medical community and the 
government, as well as members of Congress and their staffs, we 
at the National Center for Policy Analysis have concluded that 
we must fundamentally alter federal government policies to 
eliminate distorted incentives, empower individuals and create 
new options in the health insurance marketplace.
    What I am proposing would not increase the financial role 
of government. The federal and state governments already spend 
more than enough on health care and health insurance through 
tax subsidies and direct spending programs. Instead, what is 
needed is a radical reordering of government programs to make 
them efficient and fair.

                         I. UNIVERSAL COVERAGE

    Whether or not people have health insurance is a national 
issue in which the federal government has a legitimate 
interest. Therefore, we propose that the federal government 
commit a fixed sum of money for health insurance for every 
American (say, $800 per adult and $2,400 for a family of four). 
The commitment should be the same for everyone--rich or poor, 
black or white, male or female.
    Everyone who purchases private health insurance would be 
rewarded with a dollar-for-dollar reduction in income taxes for 
health insurance costs up to a maximum amount (e.g., $2,400 for 
a family of four). The credit would be fully refundable, so 
even those who owe no income taxes would get the same financial 
help.
    The federal role would be purely financial. Private health 
insurance benefits would be determined by individual choice, 
competitive markets and state regulations. This plan is not 
designed to subsidize the full cost of health insurance for an 
average family. In most cases, the federal tax relief probably 
would fund only a core benefits package with a very high 
deductible. Individuals and their employers would be free to 
purchase more complete benefit packages, but they would pay the 
difference with aftertax (unsubsidized) dollars.

             II. A HEALTH CARE SAFETY NET FOR THE UNINSURED

    No one would be forced to purchase private health 
insurance. But those who failed to buy private insurance would 
pay higher taxes because they would receive no tax subsidy. 
Unlike the current system under which higher taxes paid by the 
uninsured simply become part of the Treasury Department's 
general revenues, the ``tax penalties'' paid by the uninsured 
would be rebated to state and local governments for local 
Health Care Safety Nets. This would ensure that those who elect 
to remain uninsured would have access to a social safety net 
with a guaranteed minimum level of funding.
    This federal money for local Health Care Safety Nets would 
be like a block grant with one condition: the money would have 
to be spent on indigent health care. However, no uninsured 
person would have the right to demand a particular health care 
service from the Safety Net. Local authorities would also be 
free to charge fees to the uninsured--especially if it appeared 
that their lack of insurance was willful.
    Safety Net services may not be as desirable as services 
provided by private insurance. Although the commitment of 
federal dollars to the two alternatives (private insurance or 
Safety Nets) would be the same, the amount of money per capita 
available to local Safety Nets is expected to be less than the 
resources available through private insurance. Thus Safety Net 
doctors might not always be the very best doctors, Safety Net 
programs might not be able to meet every health care need, and 
there might be some waiting. These features are consistent with 
the overall goal of creating some form of universal coverage 
while at the same time encouraging private rather than public 
provision of health care.
    These local Health Care Safety Nets could be partly funded 
with federal health dollars currently going to the states and 
partly funded by state dollars that currently fund health care 
for the uninsured. Under this plan, states would receive more 
federal money if their uninsured population expanded and less 
money if it contracted--unlike the current system, where there 
is no necessarily relationship between the amount of federal 
funding and any objective measure of need. Under the plan I am 
describing, the federal government could discharge its 
commitment to the states by counting against that commitment 
dollars in current programs that fund indigent health care, 
provided the states gain full freedom and flexibility to use 
those funds to meet the needs of the uninsured.
    Safety Net dollars could also be used to fund high-risk 
pools. Under current law, states must create opportunities for 
certain uninsurable individuals--those who were previously 
insured--to obtain health insurance; and many have satisfied 
this obligation by creating high-risk pools. This plan would 
encourage the expansion of such risk pools by allowing Safety 
Net money to fund them.

                           III. TAX FAIRNESS

    For the first time, individuals who purchase their own 
health insurance would receive just as much tax relief as is 
provided to employer-sponsored plans. Under the current system, 
employer payments for health insurance are excluded from the 
employee's taxable income--cutting the cost of health insurance 
in half for some middle-income families. By contrast, many 
individuals who purchase their own health insurance must do so 
with aftertax dollars--forcing some people to earn twice as 
much before taxes in order to purchase the same insurance. This 
plan would provide the same tax relief to every taxpayer--
regardless of how the insurance is purchased.
    For the first time, low-and moderate-income families would 
receive just as much tax relief as is provided to high-income 
families. Under the current tax exclusion system, those in the 
highest tax brackets get the most tax subsidy for employer-
provided health insurance--the top 20 percent of families get 
six times as much help from the federal government as the 
bottom fifth. Under this plan, every family would get the same 
tax relief--regardless of the family's personal income tax 
bracket.

                   IV. A RATIONAL ROLE FOR EMPLOYERS

    Under this reformed system, employer-purchased insurance 
and individually purchased insurance would be put on a level 
playing field under the tax law. For those who obtain insurance 
under the tax credit system, amounts spent by the employer on 
health insurance would be included in the employees' taxable 
income. However, employees would receive a tax credit on their 
personal income tax returns--the same tax credit that would be 
available to people who purchase their own insurance. In this 
way, people would get the same tax relief for the purchase of 
private health insurance, regardless of how it was purchased.
    The employer's role would be determined in the marketplace, 
rather than by tax law. Some health reform proposals would 
require employers to provide health insurance; others would 
force employers out of the health insurance business. By 
contrast, this plan would allow the market to determine the 
employer's role: if employers have a comparative advantage in 
organizing the purchase of insurance for their employees, 
competition for labor will force them into that role; if 
employers have no special advantage, they will avoid that role.

       V. PRESERVING EMPLOYER OPTIONS, BUT REWARDING GOOD CHOICES

    Employers would have the option of keeping their employees 
in the current tax regime. Because many employers and their 
employees have made plans and organized their financial affairs 
around the current tax law, an abrupt change to the new system 
could be unfair. However, most employers would have an economic 
incentive to switch to the tax credit system because that would 
allow them to cut waste and inefficiency out of their health 
care plans without losing tax benefits.
    Because the current tax exclusion system rewards those in 
the highest tax bracket the most, it favors high-income 
employees. Because the tax credit system treats all taxpayers 
equally, switching to it would help almost all low-and 
moderate-income employees. Even though their higher-income 
employees might pay higher taxes as a result, employers who 
helped their low-income employees by switching to a tax credit 
regime would be rewarded: the new tax regime would lower the 
cost of their compensation packages and make it easier for them 
to compete for employees in the labor market.

            VI. INCENTIVES TO REDUCE WASTE AND INEFFICIENCY

    The tax credit system described here would give employers 
and employees new opportunities to reduce health care costs. 
Under the current tax exclusion system, employees can reduce 
their tax liability by choosing (through their employers) more 
expensive health insurance plans. As a result, the federal tax 
system encourages overinsurance and waste: An employee in a 50 
percent tax bracket (including state and local taxes) will tend 
to prefer a dollar's worth of health insurance to a dollar of 
wages even if the health insurance has a value of only 51 
cents. By contrast, under the tax credit system no one would be 
able to reduce his or her taxes by purchasing more expensive 
insurance. Since marginal improvements in a health benefits 
package under the tax credit system could be purchased only 
with aftertax dollars, no one would spend an extra dollar on 
health insurance unless it produced a dollar's worth of value.
    The tax credit system would allow employees to manage some 
of their own health care dollars. Current tax law rewards 
employees who turn over all their health care dollars to an 
employer health plan (by excluding such money from taxable 
income), but penalizes (by taxing) income placed in a Medical 
Savings Account. The exception is the pilot MSA program for the 
self-employed and employees of small businesses. As a result, 
current law favors the HMO approach--in which the health plan 
controls all the health care dollars and makes all the 
important decisions--even though individuals might in many 
cases be better managers of their own health care money.
    Under the new plan, individuals who chose the tax credit 
option would be able to deposit a certain amount of aftertax 
income--say, $2,000 per adult with a $5,000 family maximum--
into a Roth MSA. Contributions to Roth MSAs would be allowed 
only for individuals who have at least catastrophic insurance. 
A Roth MSA would be a ``wraparound'' account, designed to fund 
the purchase of any medical expense not covered by a health 
plan; it could be used in conjunction with an HMO as well as 
fee-for-service insurance. Funds in a Roth MSA could only be 
used for medical care or would remain in the account to back up 
a health plan for at least one year. At the end of the one-year 
insurance period, Roth MSA funds could be withdrawn without 
penalty for any purpose, left in the account to grow tax free, 
or rolled over into a Roth IRA.
    This change would put third-party insurance and individual 
self-insurance on a level playing field under the tax law. The 
Roth MSA option would correct the bias in the current tax law. 
Beyond a basic level of insurance funded by the tax credit, 
individuals would choose to spend their aftertax dollars on 
more insurance benefits or place those same dollars in a Roth 
MSA. No one would have an incentive to turn over additional 
dollars to a health plan unless they judged that the extra 
benefits were more valuable than of depositing an equal amount 
in a Roth MSA.
    Just as the tax exclusion for employer-provided health 
insurance encourages people to overinsure, the current system 
of Flexible Spending Accounts (FSAs) encourages people to 
overconsume. As it now stands, employees make pre-tax deposits 
to an FSA to pay their share of premiums and to purchase 
services not covered by the employers' health plan. A use-it-
or-lose-it rule requires that employees spend the entire sum or 
forfeit any year-end balance in the account. This rule 
encourages wasteful spending on medical care at year-end. Under 
the new plan, employees in the tax credit system would no 
longer have an FSA option. Instead, they would have a use-it-
or-save-it Roth MSA option.

                   VII. OPTIONS FOR THE SELF-EMPLOYED

    This plan gives the self-employed a new option: a tax 
deduction for the purchase of health insurance or a tax credit. 
Currently, the self-employed get a partial deduction for the 
purchase of health insurance, and eventually will get a 100 
percent deduction. As an alternative, this plan would allow the 
self-employed to take a tax credit.
    Under the current system, the self-employed may contribute 
to a conventional MSA, provided they have catastrophic 
insurance. Under this plan, the self-employed who elected the 
tax credit would be able to make deposits to a Roth MSA 
instead. They would be allowed to contribute to either a 
conventional MSA or a Roth MSA, but not both during the 
insurance period.

        VIII. SOLUTION TO THE SPECIAL PROBLEMS OF THE UNINSURED

    A refundable tax credit for the purchase of health 
insurance that was previously in the tax code failed because it 
did not address the cash flow problems of low-income families. 
It forced those families to rely on their own resources to meet 
premium payments for the year and wait for reimbursement until 
the following April 15. As a result, the program did not make 
funds available for the purchase of insurance at the time the 
funds were needed. This plan would solve that problem by 
allowing people to assign their rights to the credit to an 
insurance company month-by-month. The procedure would be 
similar to the one under which low-income families can obtain 
advance funds based on their right to collect the Earned Income 
Tax Credit (EITC) through a bank loan arranged by a firm such 
as H&R Block. In this way, individuals would be able to buy 
health insurance without reducing their monthly income. This 
plan also would allow the health insurance tax credit to be 
combined with the Earned Income Tax Credit (EITC), so that 
families could afford a more generous package of benefits.
    Most people who are uninsured are working, and many have 
the opportunity to join an employer plan but decline to do so. 
One reason they decline is that they are required to pay a 
substantial part of the premium. Some join themselves but do 
not insure their dependents. This plan would solve the problem, 
using a procedure similar to the one just described. Currently, 
low-income employees who qualify for the EITC can file a form 
with their employer and receive their EITC ``refunds'' month by 
month. In a similar way, the health insurance tax credit could 
be accessed month by month and used to pay the employee's share 
of the premium. Thus low-income employees could insure 
themselves and their families with no reduction in take-home 
pay. Employees could also combine the health insurance tax 
credit with their EITC refund to obtain more generous 
coverage--again, with no reduction in take-home pay.
    Employers would not be required to opt into the tax credit 
system, but those who did would be able to offer their 
employees a more attractive compensation package and gain a 
competitive edge in the labor market.
    Most people who are uninsured are temporarily uninsured--
usually for a period of less than one year. To meet the needs 
of these people, health reform must make a refundable health 
insurance tax credit flexible enough to fund health insurance 
coverage for part of a year. The techniques described above 
will allow low-income employees to pay premiums month by month 
or even pay period by pay period.

                   IX. HEALTH INSURANCE AND WORKFARE

    The reforms proposed here would make Workfare work. For 
many families, one of the biggest obstacles to getting and 
staying off welfare is the lack of a private insurance 
alternative to Medicaid. This plan would make it possible for 
low-income families to buy into an employer health plan or to 
purchase insurance on their own.
    A related problem concerns people who are laid off or are 
temporarily unemployed while they are between jobs. Periods of 
unemployment are typically periods when family financial 
resources are very limited. The refundable health insurance tax 
credit could bridge the gap, financing the purchase of short-
term insurance or funding COBRA payments that continue coverage 
under a previous employer's plan. Funds in a Roth MSA also 
could help solve the problem, since such funds could be used to 
pay premiums during periods of temporary unemployment.

               X. THE ROLE OF STATE AND LOCAL GOVERNMENTS

    The plan I have outlined is the first plan that defines the 
roles of state and local governments in meeting the needs of 
the uninsured. By keeping the federal role purely financial, 
which largely continues current practice, the plan would make 
state governments responsible for regulating the terms and 
conditions under which health insurance would be bought and 
sold. However, the plan would retain the ERISA preemption that 
exempts from state regulation companies that self-insure 
because such companies are not purchasing insurance in the 
marketplace and because self-insurance often is a socially 
desirable alternative to costly state regulations. State 
governments also would be responsible for operating local 
Health Care Safety Nets. Once the federal financial obligation 
was discharged, state and local governments would assume 
funding responsibility for any remaining problems.
    Although state governments would be obligated to spend 
federal safety net money on the uninsured, they could discharge 
this obligation in many ways. One way would be to set up 
clinics that dispense free services to the low-income 
uninsured. Another would be to enroll the uninsured in an 
expanded Medicaid program. A third option would be to 
supplement the federal grant and assist people in obtaining 
private health insurance.
    Many states subsidize the purchase of private insurance by 
piggybacking on federal practice. They exclude employer 
payments from employee taxable income and/or create special tax 
relief for low-income families. These states could continue 
their current practices or adopt a tax credit at the state 
level. Most would quickly discover that the latter is a better 
use of state resources. States also would be allowed to 
supplement the federal tax credit with a state tax credit of 
their own design, and many probably would do so.
    In general, states will find it in their interest to 
encourage private insurance, because private insurance will 
almost always involve an input of private resources through the 
family premium contributions, whereas the state burden will be 
greater if people depend on state and local funds to meet all 
their health care needs.
    Many states have contributed to the growing number of 
uninsured through unwise regulations. These states could 
continue such practices, but they would pay a heavy (budgetary) 
price for doing so. Since the federal commitment under the new 
plan would be fixed, the federal government could not be held 
hostage to the vagaries of state law.

                           XI. FUNDING REFORM

    Currently, the United States spends more than $100 billion 
on tax subsidies for employer-provided health insurance, with 
much of the money subsidizing wasteful overinsurance and 
rewarding higher-income families who would have purchased 
insurance without the subsidy. Moving to a tax credit system 
would allow employers and employees to avoid many wasteful 
practices without losing tax benefits. As employers and 
employees shift to more economical health plans, employer tax-
deductible expenses for health insurance would fall and taxable 
wages would rise. The extra taxes the federal government would 
collect from the larger taxable wage base would be a source of 
funding to insure the currently uninsured.
    Federal and state spending on health programs for the 
uninsured currently exceeds $1,000 for every uninsured person 
in America. If all of the uninsured suddenly became insured, 
this would free up more than $40 billion a year in current 
spending. Savings made possible by scaling back spending 
programs (as the need diminishes) would be a source of funds to 
finance the tax credit and the Safety Net program.
    America does not need to spend more money on health care--
$1 trillion a year is ample money to meet the nation's health 
care needs. The goal of health reform should be to redirect 
government subsidies and government spending so that those 
dollars are used more wisely and more fairly.
      

                                


    Chairman Archer. Thank you, Dr. Goodman. The next witness 
is Dr. Stuart Butler. The Chair would, number one, thank you, 
Dr. Goodman, for keeping your oral presentation to 5 minutes. 
Your entire printed statements without objection will be 
entered into the record.
    You may proceed, Dr. Butler.

STATEMENT OF STUART BUTLER, PH.D., VICE PRESIDENT, DOMESTIC AND 
          ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

    Mr. Butler. Thank you, Mr. Chairman. I am Stuart Butler. I 
am the vice president for domestic and economic research at the 
Heritage Foundation.
    Mr. Chairman, as Mrs. Johnson and Dr. Goodman have noted, 
there is a tax no man's land in today's health system between 
employer-sponsored health insurance and Medicaid. Working 
families receive an often generous tax exclusion if their 
employer offers health insurance. But if their employer does 
not do so or if dependent coverage is too expensive for the 
worker, families get no help through the tax system for 
purchasing their own coverage. Also many Americans with 
coverage feel locked into their current jobs if a more 
attractive job doesn't provide coverage and they would have to 
pay for their family's health with aftertax dollars.
    Furthermore, there is a growing concern that many Americans 
who have been leaving welfare and taking entry level jobs will 
find themselves facing prohibitive health costs when their 
Medicaid benefits cease. Members of both parties have offered 
bills or are developing legislation to begin to correct the 
huge tax bias facing families who must seek their own health 
insurance. These bipartisan proposals would provide a health 
tax deduction or credit to working families who lack employer-
sponsored coverage. I would urge Congress to take the step this 
year of enacting a partially refundable tax credit for health 
expenses.
    Let me make a few comments about the issues this Committee 
should consider in designing such a credit. First, it is 
important to recognize that a feasible credit this year would 
only be an initial step, not the complete solution. Mr. Stark 
has noted that insurance issues have to be addressed, but I 
believe we should move on the tax side now while we have the 
opportunity.
    Second, while it is true that much of the benefit of a new 
tax credit would go to working people who are already buying 
insurance with aftertax dollars, basic fairness and tax equity 
demands that Americans should receive equal tax relief under 
the new policy to those not now buying insurance. Congress 
should not discriminate against those workers who have already 
made the costly decision of buying insurance to protect their 
families.
    Third, those who argue that the value of the credits under 
discussion are not enough should note that a Federal tax credit 
is just one element of the whole solution. If a larger credit 
could be enacted this year, it would certainly have more 
impact. But a $1,000 credit for a family in Connecticut or 
Texas means that we are $1,000 closer to dealing with that 
family's lack of insurance. States could use the Federal credit 
as the foundation upon which to use Medicaid, S-CHIP or other 
programs in a creative way. States can and should also explore 
innovative pooling arrangements for insurance.
    Fourth, a tax credit would not be a threat to successful 
parts of the employment-sponsored system, especially if it were 
limited to workers who are not offered employer-sponsored 
coverage or for the purchase of dependent coverage. Indeed, 
permitting low-income workers to use a credit to pay for the 
out-of-pocket costs of dependent coverage would strengthen 
employment-based coverage while reducing uninsureds.
    Moreover, to the extent that some smaller employers and 
their employees would find it sensible to cash out of an 
inefficient health plan and let their workers use their credit 
to buy insurance elsewhere, that would improve the coverage for 
these families.
    I agree with Mr. Stark that it could be a good thing if 
some parts of the employment-based system were replaced.
    Fifth, some people argue that low-income people would not 
be able to wait until they filed their tax return to obtain the 
credit, but a family can ask their employer to factor the 
health credit into their withholdings, just as many do with the 
child care credit.
    In addition, Congress can consider incorporating Senator 
Daschle's proposal to allow families to assign their credit to 
an insurance plan in return for reduced premiums. That is not 
unlike of course the way that the Federal Employee Health 
Benefits Program operates.
    Sixth, different credit designs would have different 
implications. For the same revenue cost, a credit of a fixed 
amount would provide the biggest bang for the buck to the low-
income workers. On the other hand, the percentage credit is 
generally more helpful to those who, because of their medical 
situation, need to buy more care.
    In addition, making the credit available against all health 
costs, not just insurance would mean families could make the 
economic decision to buy no frills insurance for major medical 
problems but still get tax relief for routine expenses or 
savings for health expenses.
    It might be best to allow families to choose between a 
percentage credit for all health expenses up to a maximum 
amount, and a fixed amount for insurance meeting minimum 
specifications. Alternatively, Congress could consider a credit 
which combines both of these features or a combined credit 
deduction such as Mrs. Johnson proposes.
    Finally, a health credit would be reasonably compatible 
with long-term tax reform, assuming that some tax preference 
for health care were retained in a reformed Tax Code. For 
instance, a health credit could be folded into the personal 
exemption amount and a flat income tax or into an exempt or 
reduced tax rate feature of a sales tax.
    Mr. Chairman, it is not often that there is such broad 
political support for a tax measure that would begin to make a 
difference to the daily problems of ordinary Americans. I 
believe strongly that the Committee should not let this 
opportunity slip away. I believe you should move ahead with a 
limited tax credit now and continue the discussions that Mr. 
Stark and others have had with the leadership about dealing 
with the tough issues associated with insurance. I believe 
action now can and should be taken on the tax side.
    Thank you.
    [The prepared statement follows:]

Statement of Stuart Butler, Ph.D., Vice President, Domestic and 
Economic Policy Studies, Heritage Foundation

    Mr. Chairman, my name is Stuart Butler. I am Vice President 
for Domestic and Economic Policy Studies at The Heritage 
Foundation. The views I express in this testimony are my own, 
and should not be construed as representing any official 
position of The Heritage Foundation. Some of the following 
material is taken from a forthcoming article I have co-authored 
with David Kendall of the Progressive Policy Institute. 
Nevertheless, some of the conclusions I draw differ from our 
joint position, and thus do not necessarily represent his 
views.
    I am pleased that the Committee is giving consideration to 
incorporating some form of health tax credit into the tax code. 
There is growing support outside Congress for introducing 
changes in the tax code to make it more rational concerning 
health expenditures and to help the uninsured and to help the 
uninsured, and these proposals often include a tax credit 
component. Organizations favoring tax-based reforms include the 
American Medical Association, the National Association of 
Health Underwriters, and scholars in such research 
organizations such as Heritage, the Urban Institute, the 
American Enterprise Institute, the Cato Institute, and the 
National Center for Policy Analysis. Moreover, many members of 
this Committee, as well as members of other House and Senate 
Committees, have either introduced health tax credit bills or 
are considering such legislation. With this growing interest in 
the approach, I believe the time is ripe for Congress to act 
this year on a health tax credit.
    The interest in introducing a health care tax credit stems 
from two related features of the current health care system. 
First, there is a growing recognition that the current 
employer-based system (which is heavily subsidized by the tax 
exclusion for employer-sponsored health insurance) is a very 
inadequate vehicle for providing health coverage in certain 
sectors of the economy. A new health insurance tax credit would 
help stimulate the creation of a parallel health insurance 
system for working people who are not well served by employer-
sponsored insurance. Second, the support for a tax credit 
(rather than, say, a widening of the exclusion or the 
introduction of a deduction) recognizes the inefficiency and 
ineffectiveness of the tax exclusion as a device to help 
Americans afford health care.
    The growing level of uninsurance in this country 
underscores the need for at least modest steps to be taken, and 
its causes reinforce the belief that a tax credit would be a 
sensible step to take. As the Committee is well aware, the 
number of uninsured individuals is over 43 million, with 
uninsurance reaching epidemic proportions in some communities. 
Approximately one third of Hispanic-Americans are uninsured, 
for example, and about one half of the working poor. 
Significantly, the uninsured are predominantly within working 
families. Only about 16 percent of the uninsured are outside 
such families. And while 24 percent are in families with 
workers employed part-time or part of the year, 60 percent are 
in families with an adult working full-time year round.
    Surveys indicate that about 75% of the uninsured say they 
simply cannot afford coverage, or they have lost coverage that 
was once available through their employer.
    While millions of Americans enjoy the certainty of good, 
predictable coverage through their place of work, it is 
becoming increasingly clear that the place of employment is not 
an ideal method of obtaining coverage for many Americans, 
particularly in the small business sector. Unfortunately, 
current tax policy is heavily biased against any other method 
of obtaining coverage.
    Consider the following:
     In an economy with increased job mobility, for an 
ever-larger proportion of the population an employment-based 
group is no longer a stable, long-term foundation for health 
insurance. Even if a family can expect to receive coverage 
whenever the main earner changes jobs, typically there will be 
some change in the benefits available or the physicians 
included in the plan. The higher the degree of job mobility for 
a family or in an industry, the higher the degree of change and 
uncertainty associated with employment-based health insurance.
     While major employers, with a large insurance pool 
and a sophisticated human resource department, may be 
considered a logical institution through which to obtain health 
insurance, this is not the case with most smaller employers. 
These employers typically lack the economies of scale, and 
usually the expertise, to negotiate good coverage for their 
employers, and it should be no surprise that uninsurance is 
heavily concentrated in the small business sector. In 1996, 
just under half of firms below with 50 employees offered 
insurance, while the figure was 91 percent for those with 50-99 
employees and 99 percent of those with more than 200. For those 
firms below 50 employees where most workers earned less than 
$10,000, only 19 percent were offered health benefits. Further, 
Hay/Huggins has found that, in 1988, average administrative 
costs exceeded 35 percent of premiums for firms with fewer than 
10 employees, compared with 12 percent for firms with over 500 
workers.
     Other large, stable groupings exist that could be 
sponsors of health insurance, but these are discriminated 
against in the current tax system. For example, unions could 
carry out exactly the same functions as an employer regarding 
health insurance. Indeed, the Mailhandlers union and other 
unions or employee associations act as plan organizers in the 
Federal Employees Health Benefits Program. But union-sponsored 
plans are quite unusual outside the federal government, because 
enrollees in union-sponsored plans typically are not eligible 
for the tax benefits associated with employer-sponsored 
insurance. Yet, many workers who have only a loose affiliation 
with their employer, or work for smaller employers who do not 
provide insurance, have a long-term, close connection with 
their union. Moreover, the union would be a very large 
potential insurance pool. Similarly, large religious 
organizations, such as consortia of Churches in the African-
American community, would be a far more logical vehicle for 
which to obtain health insurance, thanks to the size of the 
insurance pool and the sophistication of the church leadership, 
than most of the businesses employing members of such churches. 
Yet again, the tax system is biased against these alternatives.

 How the tax system exacerbates failings of employment-based coverage.

    Under the current arrangement for working-age families, 
employees receive a tax exclusion if they allow their employer 
to allocate part of their compensation for a health insurance 
policy owned by that employer. This arrangement helps cause 
uninsurance in several ways. For example:
     Since this tax exclusion is available only for 
employer-sponsored coverage, a working family without employer-
sponsored insurance has no subsidy through the tax code to help 
offset the cost of buying its own coverage or health care. Thus 
families who lose their work-based insurance for any reason, 
such as cutbacks in benefits or jobs by the employer, suffer a 
double blow--not only do they lose the insurance, but they also 
no longer receive a tax subsidy to pay for care. Not 
surprisingly, high degrees of uninsurance are prevalent among 
working families with moderate and low incomes
     The tax benefits available for employer-provided 
coverage are a very inefficient method of helping low-income 
workers to afford care. Since compensation in the form of 
employer-sponsored insurance is excluded from an employee's 
taxable income (avoiding payroll taxes as well as federal and 
state income tax), by far the largest tax benefits go to more 
affluent workers on the highest tax brackets. Those at the 
lowest income levels (especially those who do not earn enough 
to pay income tax) receive little or no tax subsidy. According 
to John Sheils and Paul Hogan (Health Affairs, March/April 
1999) the value of the tax exclusion in 1998 was over $100 
billion at the federal level (including income and payroll 
taxes) and an additional $13.6 in relief from state and local 
taxes. While the average tax benefit per family was just over 
$1000, the tax benefits were heavily skewed towards higher-
income families. Sheils and Hogan estimate that families with 
incomes in excess of $100,000 benefited to the tune of an 
average of $2,357, while families with incomes of less than 
$15,000 received benefits worth an average of just $71 
(although this includes uninsured families receiving no tax 
breaks at all). Some 68.7 percent of all the tax benefits in 
1998 went to families with incomes in excess of $50,000.

                      How a tax credit would help.

    Introducing a tax credit for health expenditures for 
families lacking employer-sponsored insurance would begin to 
rectify the deficiencies in the current tax system and in doing 
so would begin to stimulate the provision of health insurance 
through organizations other than employers. Non-employer 
sponsored coverage would not be intended to replace successful 
company-based plans, but to provide an alternative for families 
who do not have access to insurance through their place of 
work, or where their employer-sponsored coverage is clearly 
inadequate or inappropriate.
    A tax credit would have three key benefits. First, it would 
be worth at least as much to lower-income families as upper-
income families, unlike the tax exclusion which is worth far 
more to people in higher tax brackets. Second, it could be made 
refundable at least against payroll taxes in addition to income 
taxes. This means workers without an income tax liability could 
still claim the credit, thereby providing some help to nearly 
all the uninsured. In contrast, an individual tax deduction for 
health insurance has the potential for reaching only about one-
third of the uninsured, since it would not be refundable and 
many low-income workers do not have any income tax liability. 
Third, a credit would be available regardless of job status and 
would make coverage more affordable for workers between jobs.
    Various credit designs proposed in recent years possess 
these key features. Credit can be a fixed amount or can vary 
according to a variety of factors including a worker's 
expenditure on insurance, income, demographic and geographic 
factors, and health risks. Major tax credit proposals in the 
past have ranged from a sliding-scale credit based on income 
and health expenditures, such as the bill introduced in 1994 by 
Sen. Don Nickles (R-OK) and Rep. Cliff Stearns (R-FL), a fixed-
sum tax credit such as the bill introduced recently by Rep. 
John Shadegg (R-AZ), or a percentage credit against costs, such 
as the bill introduced by Reps. James McDermott (D-WA) and 
James Rogan (R-CA).
    The McDermott-Rogan proposal would provide a refundable tax 
credit for 30 percent of a family's expenditure on health 
insurance, which is based on the value on the current tax 
subsidy for a taxpayer in 15 percent income tax bracket plus 
the exclusion from FICA taxes. The Shadegg proposal would 
provide a dollar-for-dollar, refundable credit of up to $500 
for individuals ($1,000 for families) for the purchase of 
health insurance.
    These different forms of tax credit have subtly different 
effects. For example, a tax credit for a given percentage of 
the cost of insurance could encourage overspending by some 
families, just as the current open-ended subsidy does in 
employment-based coverage although this effect is reduced if 
there is an income cap, or if the total credit is capped. A 
simple percentage credit also could leave low-income people 
still unable to afford coverage. On the other hand, a tax 
credit for a fixed-sum of health care coverage can concentrate 
the most help on the needy and encourages spending only up to 
that amount. That minimizes overinsurance, but families facing 
high costs would incur the full marginal price of needed extra 
services or coverage mentioned earlier. For workers with a 
serious health condition facing higher premiums, the ideal tax 
credit would be a sliding scale credit adjusted upward 
according to the ratio of cash and income. Such a credit would 
have the need to subsidize higher risk workers through 
community rating laws that perversely benefit high-income, 
high-risk workers at the expense of low-income, low-risk 
workers. Most states permit insurance premiums to vary at least 
somewhat according to health risks and demographic factors in 
both the individual and small group markets, the two markets 
mostly likely to be affected by a refundable tax credit. Thus, 
a tax credit for a percentage of spending (especially a sliding 
scale credit) would take better account of these differences.
    A fixed or percentage tax credit could be provided without 
regard to income. But clearly that would mean a lower degree of 
assistance for the poor--for the same total revenue cost--than 
a targeted credit. A tax credit that is targeted toward those 
who can least afford coverage, however, means there must be 
some form of phase-out based on income. Such phase-outs 
necessarily create higher effective marginal tax rates for 
taxpayers who fall in the phase out range. This problem is 
especially pronounced for certain low-income workers, who can 
face marginal tax rates of 100 percent or more due to the 
phase-out of several income-based programs such as the earned 
income tax credit, welfare, day care and Medicaid subsidies, 
housing subsidies, and food stamps. This problem occurs with 
any subsidy arrangement, of course, not only with tax credits. 
More sweeping tax credit reforms, such as the Nickles-Stearns 
bill, resolved this to a large degree by changing the entire 
tax treatment of health care, thereby permitting a very gradual 
phase-out of the credit.

            Some Questions and Answers on Health Tax Credits

Q. Would a tax credit undermine successful employment-based 
coverage?

    A. Not if designed properly. It would help provide an 
alternative with the characteristics of successful employer-
sponsored plans for those currently outside the employment-
based system--such as large, stable group insurance pools and 
administrative economies of scale. But it is important that 
prudent steps be taken to combine a credit with a ``wall of 
separation'' strategy to limit the probability that successful 
employer plans would be dismantled, either because of a 
decision made by the employer, or because individual workers 
preferring the credit undermined the firm's insurance pool.
    Certain design elements could be incorporated into a credit 
to minimize the risk to good employer-sponsored plans. For 
example, the credit might be made available only where 
insurance is not available from the employer.

Q. Would workers with little cash be able to front the cost of 
insurance before they could claim the tax credit?

    A. Yes. The idea that a tax credit means employees would 
have to wait until the end of the year to obtain tax relief is 
a myth. Just as mortgage interest tax relief, or a child care 
credit, is obtained by most families over the whole year by an 
adjustment to their withholdings, the same would be true of a 
credit. In addition, a novel idea proposed by Sen. Tom Daschle 
(D-SD) would simplify things even further for many families. 
Daschle would let the insurer reduce its own tax withholdings 
for each person who voluntarily assigns the value of their 
credit to that insurer for the purpose of purchasing health 
insurance. This approach could be particularly helpful to the 
unemployed if it applied to COBRA plans as well.

Q. Would a credit be an efficient way to provide help? Wouldn't 
much of the money devoted to financing the credit actually go 
to people who are already buying insurance?

    A. While millions of families are uninsured, there are many 
families who lack employer-based coverage but have decided to 
purchase their own insurance, typically with no tax relief. 
Clearly, these families would immediately take advantage of any 
available tax credit to offset the cost of their current 
coverage and/or improve it. For this reason, a significant part 
of the revenue cost of a tax credit would go to these families, 
meaning that only a portion of the revenue costs would be used 
by uninsured families to obtain insurance. Depending on the 
size of the credit (the larger the amount, the more likely 
uninsured families are to take advantage of it), the proportion 
of ``tax expenditures'' leading to actual reductions in the 
uninsurance rate could vary widely.
    Some critics of the tax credit approach conclude that a tax 
credit would be ``inefficient'' in that many people who today 
buy their own insurance would simply use the credit to offset 
their cost without increasing their coverage. But this 
presupposes that equity is not an appropriate objective, in 
part, of the tax credit strategy. Yet one of the aims should be 
to make sure that people of similar circumstances receive the 
same help, and that it should not be considered a policy flaw 
if tax relief is provided to families who have saved elsewhere 
in their household budget to pay for coverage today.

Q. Would a credit be large enough for low-income people to 
afford coverage?

    A. To be sure, studies and surveys suggest that millions of 
low-income Americans still would consider coverage to be 
prohibitively expensive even with a refundable tax credit of, 
say, 30 percent. This observation is used to argue that the 
credit approach would be ineffective. But a tax credit approach 
should not be seen in isolation as a complete solution for all 
the uninsured. Other subsidies and programs exist and are 
needed--but these other approaches are more likely to be 
successful if a family can add part of the cost through a 
federal tax credit. In particular, states have been using their 
own and federal resources (such as Medicaid and SCHIP) to 
provide assistance to families needing health insurance. A 
refundable federal tax credit of, say, $1,000 for a family 
should be seen as a foundation on which to build with these 
other programs and resources. A $1,000 credit means that we are 
$1,000 closer to financing the cost of insurance for a family.

Q. Can other organizations really be as effective as employers 
in organizing coverage?

    A. Yes and no. Many large corporations today have the 
sophistication, scale of buying power, and presence in the 
community to outperform any other organization in organizing 
good, economical health coverage. In the system envisioned by 
the authors these would be the logical vehicles for coverage, 
at least if employment tended to be long term in the firm. 
Moreover, a tax credit system could also allow families to buy 
into the health plans of corporations for whom they do not even 
work, if this makes sense for the corporation. Many large firms 
have made the decision to turn an internal service into a 
profit center for outside customers. The Sprint telephone 
company, for example, grew out of the internal communications 
system of the Southern Pacific Railroad. And John Deere & Co. 
spun off its health benefits operation as an HMO in Iowa. If 
families could obtain tax relief to buy coverage outside their 
own firm, one could imagine large corporations with huge health 
plans deciding in the future to offer a competitive insurance 
service to non-employees.
    In many situations, non-employment based groups would have 
a comparative advantage and would be more logical and skilled 
organizations. Moreover, these groups are not merely potential 
pools for coverage. In many instances they have a ``community 
of interest'' connection with families that means they could be 
expected to work for the long term interest of these families. 
Consider, for instance, the potential of union-sponsored 
insurance in the restaurant and small hotel sector. In this 
sector, firms tend to be small and employee turnover high, 
while unions are available that are large and sophisticated. 
Unions in general have considerable expertise in bargaining for 
health care and would be the health care sponsor of choice for 
many Americans--even for those who do not wish to be active 
union members. In the FEHBP, for instance, the Mailhandlers 
union provides coverage to many federal workers who join the 
union as associate members merely to avail themselves of the 
health plan.
    Groups of churches in the African-American community also 
could be preferred sponsors of care in a system in which 
subsidies and tax benefits were not confined to employment-
based plans. In many communities served by these churches, 
employers are small and employee turnover is high, yet families 
have a strong and continuous affiliation with the church. 
Moreover, America's black churches have a long history of 
serving the secular as well as the spiritual needs of their 
congregations, by providing housing, education, insurance and 
other services.
    To be sure, there are legitimate concerns to be addressed 
in considering the role of such organizations in health care. 
One is the stability of the insurance pool--if individuals can 
easily affiliate or end their affiliation it may be difficult 
to secure coverage without wide price fluctuations over time 
(of course, this is also a problem with small employer pools in 
some industries). Another, linked to this, is the worry that 
adverse selection may undermine the group.
    It is unclear how large these problems are. In the FEHBP, 
for instance, many plans operated by organizations (such as the 
Mailhandlers mentioned earlier) allow individuals from outside 
the base group to affiliate for a small fee simply to obtain 
coverage, and all enrollees are charged the same community 
rate. Yet the groups are surprisingly stable, perhaps due in 
part to the relatively high costs for individuals to calculate 
and make plan choices based on their own predictions of their 
own health care costs. Yet even if stability and adverse 
selection is accepted as a serious concern, steps at the state 
or federal level could be taken to increase the stability of 
the group. For instance, there could be waiting period after 
joining the group before the family could join its health plan. 
In addition, one-year minimum enrollment contracts could be 
required. Another protection might be to place a minimum 
requirement on the membership of the pool, which might be 
achieved through a multi-year consortium of several churches, 
say, to make the pool large enough to withstand the inflow and 
outflow of members. The groups also could operate under 
insurance pooling and rating requirements developed by states.

Q. Would a health care tax credit be a further impediment to 
tax reform?

    A. In a simpler, flatter tax system, there would be no tax 
preference at all for health expenses. If the current tax 
expenditures for health care were to be used to help 
``finance'' an across-the-board rate reduction, it could 
significantly lower the rates in a flat income tax or sales 
tax, which would of itself make health insurance more 
affordable.
    If, however, it is assumed there is little prospect of 
eliminating the tax preference for health costs, a tax credit--
especially a credit of a fixed amount per family--would be 
reasonably consistent with tax simplification. If over time, 
the tax treatment of health care were gradually shifted from 
today's exclusion and deduction system to a credit, this would 
be more compatible with a flat tax or sales tax than the 
current system. The reason for this example, the health tax 
credit could be subsumed into the general exemption for 
families in a flat income tax.
    Growing rates of health uninsurance in the United States 
are unacceptable and will lead to steadily rising pressure on 
Congress to take action. After recognizing the root causes of 
this problem, which lie in the combination of a tax bias toward 
employer-sponsored insurance and the inadequacy of that 
insurance system in certain sectors of the economy, it would be 
prudent for Congress to move quickly but carefully to correct 
the problem. A limited tax credit for expenditures on insurance 
not provided through the place of employment would be a 
sensible step that Congress could take this year. It would not 
mean a radical drop in the number of uninsured, unless there 
was a very large commitment of funds, but would be an important 
first step helping the uninsured and to achieving the general 
reform of tax benefits for health care. It would also stimulate 
the creation of parallel institutions which would sponsor 
insurance in those sectors of the economy where employers are a 
very inadequate vehicle for coverage. But if Congress does not 
take the first step this year, when federal finances are in 
surplus and the economy is strong, it is likely to face far 
more difficulties in taking a step in the future if the economy 
weakens and deficits return.
      

                                


    Chairman Archer. Thank you, Dr. Butler.
    Our next witness is no stranger to the Committee, we are 
happy to have you back before us, Chip Kahn. We will be pleased 
to receive your testimony.

 STATEMENT OF CHARLES N. KAHN III, PRESIDENT, HEALTH INSURANCE 
                     ASSOCIATION OF AMERICA

    Mr. Kahn. Thank you, Mr. Chairman. I am Chip Kahn, 
president of the Health Insurance Association of America. HIAA 
commends the Committee for focusing on the pressing issues of 
health and long-term care insurance coverage. Efforts to 
encourage coverage in both these areas should be priority for 
the Congress. The Tax Code already recognizes the cost of 
coverage as justifiable deductible expenses for individuals and 
businesses. The Committee should consider ways to broaden 
deductibility for insurance premiums to increase tax equity and 
to provide additional incentives to increase the number of 
Americans protected by health and long-term care insurance.
    In response to double-digit inflation in the eighties, 
employer became more cost-conscious purchasers of health care. 
As a result, premium increases dropped dramatically in the late 
nineties. These changes not only kept 5 million more Americans 
insured, but between 1993 and 1997, the number of Americans 
covered by employer-paid insurance increased from 145 million 
to 152 million Americans. Despite what some may say, the 
employer-based private health care system has been remarkably 
successful in expanding coverage. Regardless of this progress, 
however, the number of Americans without health coverage has 
also climbed. This is unprecedented in times when the economy 
is strong and premium growth is modest.
    Today over 44 million Americans are uninsured. That number 
may grow to 53 million Americans in the next 10 years. If the 
economy sours, one in four working-age Americans could find 
themselves without health care coverage. HIAA has developed a 
proposal to increase health care coverage, InsureUSA. This plan 
combines targeted subsidies, tax relief and tax equity. Through 
its implementation, HIAA believes coverage can be expanded to 
reduce the number of this Nation's uninsured by two-thirds and 
we can provide tax relief to assure that all Americans are 
treated equitably by the Tax Code regarding their expenses for 
health premiums.
    The tax policies proposed in InsureUSA would affect over 
100 million Americans. This does not come at a modest cost, but 
it could be more affordable if phased-in over a number of 
years, as the Committee has done with other health-related tax 
relief.
    In my written testimony I outlined the details of HIAA's 
InsureUSA, but today I will comment briefly on the core 
principles underlying the InsureUSA initiative.
    First, to increase coverage, health insurance must be more 
affordable for certain Americans through some type of premium 
subsidization. The primary reason for the high rate of 
uninsurance in this country is that many individuals or their 
employers lack the financial wherewithal to purchase health 
care coverage.
    Two, uninsurance is a multifaceted problem which requires a 
series of targeted approaches. While affordability is the 
primary reason people lack insurance, the uninsured have many 
faces. There is still no silver bullet solution to covering 
more Americans.
    Third, the current private health care market should remain 
a cornerstone of our health care system. The public policy 
debates over health care have taught that expanded coverage can 
only be achieved with policy that does not threaten the private 
coverage that the vast majority of Americans already enjoy.
    Finally, perhaps most importantly, I feel we should build 
on the employer-based system without undermining it. Nine in 
every ten Americans with private coverage get their health 
insurance through their employer. It is a system that works for 
most Americans.
    Mr. Chairman, as the Committee considers policy to ramp-up 
for the advent of the baby-boomer retirement, it is critically 
important to recognize that most Americans have not adequately 
prepared for the cost of long-term care when they need it, and 
many are not aware that Medicare does not cover long-term care. 
Private insurance already plays a critical role in providing 
long-term care protection, and we applaud the administration 
and the Members of Congress who have put forth proposals 
recognizing the role that private coverage can play in 
expanding protection against long-term disabilities.
    Such an expansion will restrain the growth in Federal and 
State expenditures for long-term care over time. Tax policy 
clarifications included in the Health Insurance Portability and 
Accountability Act of 1996 were an important first step. 
However, because HIPAA provides a tax deduction only for 
coverage purchased in the employer-based market, additional 
measures are needed. Individuals purchase 80 percent of long-
term care policies. Therefore, a deduction for individual 
purchase of long-term care insurance would make it more 
affordable to many Americans as well as promote interest in the 
coverage.
    HIAA urges the Committee to include in its tax bill 
Representatives Nancy Johnson and Karen Thurman's measure, the 
Long-Term Care and Retirement Security Act of 1999. If enacted, 
their proposal would make a significant contribution toward 
increasing the number of Americans who seek protection against 
future long-term care expense.
    Thank you, Mr. Chairman, for the opportunity to testify 
today.
    [The prepared statement follows:]

Statement of Charles N. Kahn III, President, Health Insurance 
Association of America

                              Introduction

    Chairman Archer, members of the Committee, I am Charles N. 
Kahn III, President of the Health Insurance Association of 
America (HIAA). HIAA represents 269 member companies providing 
health, long-term care, disability income, and supplemental 
insurance coverage to over 115 million Americans. I appreciate 
this opportunity to speak to you today about the critical role 
tax initiatives could play in making private health insurance 
more affordable for all Americans and further expanding access 
to private long-term care insurance.

Despite Expanding Economy and Success Controlling Costs, Growing Number 
                              of Uninsured

    In response to double-digit health care inflation in the 
1980s, employers became much more aggressive purchasers of 
health coverage. As a result, the nation has experienced a 
dramatic decline in the growth of health insurance premiums 
over the past ten years. Double-digit inflation in excess of 20 
percent in the late 1980s dropped dramatically to low single 
digit rates in the late 1990s, more in line with general 
consumer price index trends. This decline in premium growth 
during the 1990s coincides with dramatic increases in market 
penetration of managed care. Enrollment in PPOs, HMOs, and 
other forms of managed care has tripled during the past 10 
years from 29 percent in 1988 to 86 percent in 1998.
[GRAPHIC] [TIFF OMITTED] T0332.012

[GRAPHIC] [TIFF OMITTED] T0332.013

    It is estimated that the impact of lower insurance prices 
resulting from the growth of managed care and other private 
sector innovations saved consumers between $24 billion and $37 
billion in 1996, and that this savings will grow to over $125 
billion by the year 2000. These savings are critically 
important because the cost of insurance relative to family 
income is the most important factor in determining whether 
people will be insured. Without these savings, some employers 
would not have been able to afford private insurance and would 
have been forced to discontinue coverage for their workers. In 
fact, it is estimated that there would be 3 to 5 million 
additional uninsured Americans right now were it not for these 
lower premium trends during the past few years.
    Despite this progress, however, the number of Americans 
without health insurance coverage has continued to increase 
during the last decade.
[GRAPHIC] [TIFF OMITTED] T0332.011


    It is relatively unprecedented for the ranks of the 
uninsured to be growing at a time when our nation's economy is 
expanding and health insurance premium trends are moderating.
    There are nearly 170 million non-elderly Americans who 
currently enjoy the security of private health insurance, and 
the vast majority receives its coverage at the workplace. But 
for too many Americans, private health insurance is 
unaffordable, and often, government programs like Medicaid do 
not cover these adults.
    Affordability is the key deciding factor when purchasing 
health insurance. Almost six of every ten uninsured individuals 
live in families with incomes less than 200 percent of the 
federal poverty level. In addition, the number of people with 
insurance has declined as health care inflation has continued 
to outstrip the growth in real family income.
[GRAPHIC] [TIFF OMITTED] T0332.010


    There are over 44 million Americans without health 
insurance, and by the end of the next decade that number will 
grow to at least 53 million--one in every five non-elderly 
Americans. If health care costs increase at a faster than 
projected rate, and the economy experiences a downturn, the 
number of uninsured could rise to 60 million--or one in four 
working-age Americans.\1\ Clearly, this is a disturbing trend 
that we, as a nation, cannot afford to let continue.
---------------------------------------------------------------------------
    \1\ Custer, William S., ``Health Insurance Coverage and the 
Uninsured,'' December 1998, Center for Risk Management and Insurance 
Research, Georgia State University, for the Health Insurance 
Association of America.
---------------------------------------------------------------------------

                      HIAA's InsureUSA Initiative

    Last month, the HIAA Board of Directors approved InsureUSA, 
a major initiative to help expand health insurance coverage. 
Building on the success of employer-based health coverage, this 
plan would increase health coverage through a combination of 
targeted subsidies, tax incentives, cost-control measures, and 
education. We already have provided a copy of our plan to all 
members of Congress, including members of this Committee. In 
addition, we have developed a special website, 
www.InsureUSA.org, that provides detailed information about the 
plan and about the uninsured. And, of course, HIAA staff would 
be happy to meet with members of Congress at any time to 
discuss the proposal.
    HIAA's member companies developed InsureUSA after nearly 
one year of deliberations. The plan was shaped considerably by 
research data prepared on behalf of HIAA by William S. Custer, 
Ph.D., as well as other research on the uninsured.
    There are five basic precepts underlying the InsureUSA 
initiative.
     The time is ripe for action. Despite expansions of 
the employment-based health insurance market in recent years, 
the number of Americans without health insurance coverage will 
continue to grow by about 1 million people per year. As noted 
previously, one in every four working age Americans could lack 
coverage by the end of the next decade if steps are not taken 
immediately to stem this tide. Having said that, the individual 
components of InsureUSA could be phased-in over a number of 
years. In addition, because the proposal attacks the core 
causes of uninsurance, specific elements of the proposal could 
be enacted first, without jeopardizing others.
     To increase coverage, health insurance must be 
more affordable for more Americans. The main reason that 
Americans are uninsured is because they cannot afford health 
insurance coverage. Many well-intentioned attempts at insurance 
market reform have had the effect of increasing the cost of 
coverage and increasing the net number of individuals without 
health insurance. Reform, therefore, should both reduce the 
costs of health insurance and provide financial support for 
those who otherwise cannot afford coverage.
     Multifaceted problem requires multifaceted 
approach. While affordability is the primary reason people lack 
health coverage, there are many reasons people lack coverage. 
Rather than advocating a singular approach to insuring more 
Americans, we are advocating a diverse program designed to 
attack the underlying reasons that people are uninsured.
     A strong, vibrant private health insurance market 
should remain a cornerstone of our health care system. Expanded 
coverage must be achieved through means that do not threaten 
the coverage of other Americans or damage the existing private 
market. Competitive markets remain the most efficient and 
responsive mechanisms to provide consumers with coverage. 
Regulations that stifle innovation, flexibility, and 
responsiveness to consumers should be strongly discouraged.
     Reforms should make health coverage more 
affordable within the context of the employment-based private 
health care system, rather than undermining it. Nine in every 
10 Americans with health coverage get their health insurance 
through their employer. And while coverage has declined 
overall, the percentage of Americans with employment-based 
health coverage has increased during the past few years. 
Therefore, InsureUSA would build upon this base, by providing 
targeted subsidies and incentives for those who are less likely 
to benefit from employment-based coverage.
    For the purposes of today's hearing, I would like to 
highlight the tax initiatives proposed in the InsureUSA plan. 
As I mentioned earlier, affordability is a key factor for many 
Americans when purchasing health insurance, and tax incentives 
will help make affordable coverage a reality for those who do 
not have insurance. In addition, these tax initiatives will 
help provide greater equity in the purchase of health insurance 
for small business owners, the self-employed and individuals 
without access to employer-sponsored health insurance. The cost 
of these tax incentives is large, but HIAA estimates that they 
would broadly benefit over 100 million Americans who experience 
inequity under the current tax code.

               Targeted Tax Credits for Small Businesses

    First, I would like to discuss the proposal's tax credits 
for small businesses. Studies show that firm size is one of the 
major factors affecting the cost of health insurance. Smaller 
employers face higher costs when providing health benefits than 
larger firms because their size limits their ability to (1) 
spread risk, (2) self-insure and avoid expensive state mandates 
and taxes, and (3) manage high administrative costs incurred 
because of a lack of staff devoted to health benefits. The 
smallest firms tend to have low-wage employees who live in low-
income families. In fact, 90 percent of the uninsured whose 
family head works for an employer with fewer than 10 employees 
also live in families whose income is less than 200 percent of 
the federal poverty level.\2\
---------------------------------------------------------------------------
    \2\ Custer, William S., ``Health Insurance Coverage and the 
Uninsured,'' December 1998, Center for Risk Management and Insurance 
Research, Georgia State University, for the Health Insurance 
Association of America. 
[GRAPHIC] [TIFF OMITTED] T0332.016


    Therefore, InsureUSA would like to propose a tax credit for 
small employers that could be phased-in beginning with the 
smallest firms:
     40 percent credit for employers with fewer than 10 
employees
     25 percent credit for employers with 10-25 
employees
     15 percent credit for employers with 26-50 
employees
    These credits could help the nearly 39 million Americans 
who belong to families whose head of household works for a 
company with ten (or fewer) employees. If eligibility for such 
credits was extended to all companies with 50 or fewer 
employees, the total would rise to 71 million Americans.
    Furthermore, InsureUSA proposes that all employee 
contributions for health insurance be excluded from taxable 
income (even if not made through a section 125 cafeteria plan). 
This would primarily benefit small employers for whom it is 
often administratively difficult to set up cafeteria plans.

       Targeted Tax Credits for Individuals and the Self-Employed

    InsureUSA also includes tax incentives that target 
individual health insurance purchasers and the self-employed. 
It is a fact that people without access to employer-sponsored 
plans have a higher likelihood of being uninsured. Nearly a 
quarter (24 percent) of self-employed Americans are uninsured, 
and almost three out of ten (28 percent) non-elderly Americans 
in families headed by an unemployed individual lack health care 
coverage.
    Under current tax law, individuals cannot deduct their out 
of pocket health insurance premiums until their medical costs 
exceed 7.5 percent of their income, and the self-employed will 
not have full deductibility until 2003. HIAA's proposal would 
extend full tax deductibility of premiums to everyone 
purchasing individual health insurance policies and would take 
effect upon the date of enactment rather than 2003. As a 
result, coverage would become more affordable for over 12 
million self-employed workers and for nearly 25 million 
Americans living in families headed by a non-worker.

                    Medical Savings Accounts (MSAs)

    While there has not been significant enrollment in medical 
savings accounts (MSAs) under the demonstration authorized by 
the Health Insurance Portability and Accountability Act of 1996 
(HIPAA), statistics compiled by the Department of Treasury show 
that a large proportion of those with MSAs were previously 
uninsured. Therefore, InsureUSA proposes that Medical Savings 
Accounts (MSAs) be made more attractive by:
     simplifying the MSA rules under HIPAA,
     eliminating the ``sunset'' provision for MSAs 
available to the self-employed and small employers,
     extending availability to large employers,
     permitting both employees and employers to 
contribute to MSAs, and
     making it easier for PPOs and other network-based 
plans to offer MSAs.

                   Cost of InsureUSA Tax Incentives 

    Overall, HIAA estimates that changing the current tax 
system to encourage greater health insurance coverage and make 
health insurance more affordable for over 100 million 
Americans, would cost approximately $30 to $36 billion 
annually. We estimate that 71 million people (20 million of 
whom are currently uninsured) would be eligible for the tax 
credit, either through their employer or the employer of their 
family head. As a result of this credit, between 2.6 and 4.1 
million uninsured will gain coverage at a cost in revenue 
expenditures of between $23.8 and $29.3 billion annually. These 
figures are broken down by firm size in the table below.


----------------------------------------------------------------------------------------------------------------
                                                            Receiving Credit    Newly Insured         Cost
                  Firm Size                      Eligible  -----------------------------------------------------
                                               Individuals    Low      High     Low      High     Low      High
----------------------------------------------------------------------------------------------------------------
  Under 10...................................       38.6       20.4     26.3      1.9      3.1     15.7     20.2
  10 to 24...................................       18.3       11.1     12.5      0.5      0.8      5.3      6.0
  25 to 50...................................       14.1        9.9     10.7      0.2      0.3      3.0      3.1
                                              ------------------------------------------------------------------
      Total..................................       71.0       41.4     49.5      2.6      4.1     23.8     29.3
----------------------------------------------------------------------------------------------------------------

    An additional 1.5 and 3.5 million individuals would gain 
coverage through the individual market. Costs to the Federal 
government would be between $7.8 and $8.7 billion in annual 
lost income tax, and the previously uninsured would account for 
between $670 million and $1.5 billion.
    The uninsured have many faces, and tax initiatives will not 
benefit all of them. These incentives that HIAA is proposing 
are part of a broader initiative that includes government 
program expansion to low-income individuals, subsidies for the 
working poor, and a series of actions that would lower health 
care costs and educate consumers.

                              Polling Data

    HIAA released a public opinion survey showing that more 
than 4 out of 5 Americans support the elements of the InsureUSA 
proposal and that 7 out of 10 believe the large number of 
uninsured Americans is a significant national problem requiring 
immediate action. While not all were in support of new taxes, 
most (43 of the 70 percent) felt that, regardless of new taxes, 
the government must act.
[GRAPHIC] [TIFF OMITTED] T0332.017

    Of the 83 percent of Americans who favor the proposals in 
InsureUSA, 60 percent say they would still favor the plan even 
if they were required to pay an extra $100 annually in new 
taxes.
[GRAPHIC] [TIFF OMITTED] T0332.018

    Based on these polling results, it is apparent that the 
majority of Americans believe the time is right for the 
government to address the growing uninsured problem, but more 
importantly, they are confident in the InsureUSA proposal, and 
feel that it meets the challenge.

                             Long-Term Care

    In addition to the critical need to curb the growing number 
of uninsured Americans, policymakers must address what many 
people consider to be the most pressing financial problem--
long-term care coverage. Long-term care is the largest unfunded 
liability facing Americans today, and despite the tremendous 
need for long-term care protection, there is a clear lack of 
adequate planning for it.
    The long-term care insurance market is growing, and the 
policies that are available today are affordable and of high 
quality. There is a critical role for private insurance to 
provide a better means of financing long-term care for the vast 
majority of Americans who can afford to protect themselves. 
Continued growth of the market will alleviate reliance on 
scarce public dollars, enhance choice of long-term care 
services for those who may need them in the future, and promote 
quality among providers of long-term care. HIAA estimates 
reveal that today over 100 companies have sold over 6 million 
long-term care insurance policies, and the market has 
experienced an average annual growth of about 20 percent. These 
insurance policies include individual, group association, 
employer-sponsored, and riders to life insurance policies that 
accelerate the death benefit for long-term care.
[GRAPHIC] [TIFF OMITTED] T0332.019


    HIAA would like to applaud the Administration and the 106th 
Congress' call for programs that would encourage personal 
responsibility for long-term care, help people currently in 
need of long-term care, and increase educational efforts on 
long-term care. Administration and Congressional proposals all 
have an important common factor, the recognition that private 
long-term care insurance plays a vital role in helping the 
elderly and disabled, as well as baby boomers, pay for their 
future long-term care costs.
    The heightened public awareness brought about by these 
proposals coupled with the passage of incentives for the 
purchase of long-term care insurance in the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) have been 
essential first steps in solving our nation's long-term care 
crisis; however, these preliminary tax initiatives are not 
enough. HIPAA provides little added incentive for individuals 
to purchase long-term care insurance because the tax breaks are 
only applicable to employer-sponsored long-term care coverage 
and fail to address the individual market where 80 percent of 
all policies are purchased.

 LTC Insurance Products by Percentage of Policies Sold & Average Age of
                                  Buyer
------------------------------------------------------------------------
                                                 Percent of
      Long-Term Care Product        Percent of    Policies   Average Age
                                    Companies       Sold       of Buyer
------------------------------------------------------------------------
Individual.......................         82.9         80.0           67
Employer-sponsored...............         17.9         13.2           43
LTC Rider to Life Insurance......         17.1          6.7           44
------------------------------------------------------------------------


    Under current law, tax benefits can range from a full 
exclusion from income if one's employer pays the premiums to no 
tax benefit if an individual pays and does not have sizeable 
medical expenses. These disparities lead to inequitable 
results. For many, current law's tax deduction is illusory. 
Today, an individual purchasing an LTC policy can deduct 
premiums only if they itemize deductions and only to the extent 
medical expenses exceed 7.5 percent of adjusted gross income. 
Only 4 percent of all tax returns report medical expenses as 
itemized deductions.
    Recent developments have improved the political climate for 
long-term care insurance, but they are not panaceas and will 
not, by themselves, achieve the optimum public-private 
partnership for long-term care financing. HIAA believes that 
other equally important tax-related changes, at both the 
federal and state levels, could make long-term care insurance 
more affordable to a greater number of people. The expansion of 
this market will restrain future costs to federal and state 
governments by reducing Medicaid outlays.
    Providing additional tax incentives for these products 
would reduce the out-of-pocket cost of long-term care insurance 
for many Americans, increase their appeal to employees and 
employers, and increase public confidence in this relatively 
new type of private insurance coverage. In addition, it would 
demonstrate the government's support for and its commitment to 
the private long-term care insurance industry as a major means 
of helping Americans fund their future long-term care needs.
    As you know, Representatives Nancy Johnson and Karen 
Thurman recently introduced H.R. 2102, ``The Long-Term Care and 
Retirement Security Act of 1999.'' This legislation would:
     Provide an above-the-line tax deduction for LTC 
insurance premiums. The deduction would begin at 50 percent, 
but rise each year the insured keeps the policy in force until 
the deduction reaches 100 percent. (Joint Tax Committee cost 
estimate: $4.0 billion over 5 years and $12.5 billion over 10 
years)
     Provide a $1,000 tax credit to individuals with 
LTC needs, or to their caregivers. The credit would be phased-
in over a three-year period. (Joint Tax Committee cost 
estimate: $5.1 billion over 5 years and $14.0 billion over 10 
years)
     Authorize the Social Security Administration to 
carry out a public education campaign on the costs of LTC, 
limits of coverage under Medicare and Medicaid, the benefits of 
private LTC insurance, and the tax benefits accorded LTC 
insurance
     Encourage more states to establish LTC 
partnerships between Medicaid and private LTC insurance along 
the lines of those operating in Connecticut, New York, Indiana, 
and California.
    HIAA believes that the provisions of ``The Long-Term Care 
and Retirement Security Act of 1999'' are the critical next 
steps to begin preparing individuals, families, and our society 
for the increased LTC needs we know are coming. Congress needs 
to ensure that any tax legislation passed this year 
incorporates provisions to help private LTC insurance assume an 
increasingly prominent role in protecting families from LTC 
costs and easing the financial burden on public programs. By 
the year 2020, the Congressional Budget Office has estimated 
that, at current growth rates in private LTC insurance:
     Medicaid will save $12.4 billion (14% of total 
program nursing home expenditures);
     private LTC insurance will reduce out-of-pocket 
costs by 18%; and
     private LTC insurance will also reduce Medicare 
spending by 4%.
     Savings to individuals and public programs will be 
much greater in subsequent years, as those presently purchasing 
private policies approach and pass 85 years of age. If Congress 
enacts legislation that gives Americans enhanced incentives to 
protect themselves against the costs of LTC, savings to 
individuals and public programs will be still greater.
    In summary, HIAA supports policy that would:
     Enhance the deduction for long-term care insurance 
premiums, such that premium dollars are not subject to a 
percentage of income. The deduction should not be limited to 
situations where employer-provided coverage is unavailable. If 
an employer decides to provide premium contributions, employees 
should be entitled to deductions for the portion that they pay.
     Allow children to deduct premiums paid to purchase 
a policy for their parents and/or grandparents without regard 
to whether the child is providing for their support.
     Permit premiums to be paid through cafeteria plans 
and flexible spending accounts.
     Permit the tax-free use of IRA and 401(k) funds 
for purchases of long-term care insurance.
     Provide a tax subsidy for the purchase of long-
term care insurance.
     Encourage state tax incentives for the purchase of 
long-term care insurance.
    Long-term care tax incentives would largely benefit two 
groups: those who did not have the opportunity to purchase such 
coverage when they were younger and the premiums were lower, 
and as a result, now face the greatest affordability problems 
because of their age; and those younger adults, our current 
baby boomers, who need incentives or mechanisms to fit long-
term care protection into their current multiple priorities 
(e.g., mortgage and children's college tuition) and financial 
and retirement planning.
    Educational effects of such tax incentives could far 
outweigh their monetary value by educating consumers about an 
important issue and, as a result, would help change attitudes. 
In an effort to inform all Americans about the value of long-
term care insurance, HIAA formed the Americans for Long-Term 
Care Security (ALTCS), a broad based coalition of organizations 
sharing a common vision to educate policy makers, the media, 
and the general public about the importance of preparing for 
the eventual need of long-term care and viable private sector 
financing options. When state and federal legislation 
opportunities to advocate private sector options--such as tax 
incentives to purchase long-term care insurance--arise, members 
of ALTCS will encourage swift passage through a variety of 
advocacy, media, and lobbying means.
    Furthermore, ALTCS believes that the government must 
continue to provide a safety net for the truly needy. At the 
same time, the government should provide incentives for private 
sector solutions, such as long-term care insurance, so that 
individuals and families are encouraged to take personal 
responsibility for long term care planning.

                               Conclusion

    The health insurance industry, working with employers, has 
been extremely effective in recent years in slowing premium 
increases, improving health care quality, and expanding 
coverage in the employment-based market. Yet, without 
additional financial support from the government, the number of 
Americans without health insurance coverage will continue to 
grow by about one million people each year into the next 
decade.
    Unfortunately, a series of legislative initiatives being 
considered at both the state and federal level would move us in 
the opposite direction. These mandates and so-called ``patient 
protection'' measures would put affordable private coverage out 
of reach for even more Americans. Instead, we need to work 
together to make the uninsured ``job one.''
    Additionally, tax incentives are needed to spur the growth 
of private long-term care insurance and help the next 
generation of Americans better protect themselves from costs of 
long term care. HIAA supports the use of broad-based state and 
federal funding to subsidize the cost of health insurance for 
those who cannot otherwise afford it. We have witnessed the 
success of favorable tax treatment in helping to expand 
coverage to a large percentage of working Americans. Therefore, 
we believe that providing greater equity under the tax code for 
individuals and the self-employed is a reasonable way to make 
health coverage more affordable for a large number of the 41 
million Americans who currently do not have coverage. H.R. 2102 
and other similar measures would be a very good start. We also 
would encourage Congress to consider tax credits, vouchers and 
other subsidies as a means of making coverage more affordable 
for even more Americans.
    Again, we are encouraged that Congress is addressing the 
issue of the uninsured and considering ways to make private 
health coverage more affordable. We look forward to working 
with you as you consider ways to expand private health coverage 
and provide equitable treatment under the tax code for 
individuals who have taken responsibility for their own health 
care coverage.
    We look forward to working with the members of this 
committee, and other members of congress, to help find ways to 
expand health insurance coverage in the months and years ahead.
    Mr. Chairman, that concludes my testimony. I would be happy 
to answer any questions you may have.
      

                                


    Chairman Archer. Thank you, Mr. Kahn.
    Our next witness is Mary Nell Lehnhard.

 STATEMENT OF MARY NELL LEHNHARD, SENIOR VICE PRESIDENT, BLUE 
               CROSS AND BLUE SHIELD ASSOCIATION

    Ms. Lehnhard. Mr. Chairman, Mr. Rangel, Members of the 
Committee, I am Mary Nell Lehnhard, senior vice president of 
the Blue Cross and Blue Shield Association. We appreciate the 
opportunity to testify today.
    Blue Cross and Blue Shield plans across the country have 
long supported public and have been active in private 
initiatives to expand coverage to more Americans. We believe 
coverage for the 43 million people who remain uninsured should 
be the top Federal health care priority. We are very pleased 
that the Committee is examining tax-based solutions to this 
problem. In February of this year we released a proposal for 
reducing the number of uninsured built on tax credits and full 
deductibility. Let me get quickly to our recommendation.
    We think the single most effective thing Congress could do 
this year would be to target low-wage workers and small 
businesses. Our proposal would provide tax credits to small 
businesses for their low-wage workers. Small firms have lower 
rates of health coverage than large employers. 35 percent of 
workers and firms with less than 10 employees are uninsured. 
And if you look at the problem of small firms with low-wage 
workers, it is worse. Only 38 percent of small business with 
low-wage workers offer coverage compared to 78 percent of small 
businesses with high-wage workers.
    We believe that expanding--providing a tax credit to small 
businesses for their low-wage workers would make the most 
effective use of scarce resources. By building on the current 
employer-based system, the idea would be simple to implement. 
We recommend Congress focus on low-wage workers and businesses 
of fewer than 10 employees and expand the program as resources 
permit.
    In addition to this tax credit we have proposed full 
deductibility for the self-employed, providing tax 
deductibility for people without employer-sponsored coverage 
and providing Federal grants to States to fund other 
initiatives that expand coverage.
    As I said earlier, we are pleased that Congress is now 
considering a number of tax proposals to expand coverage. The 
most comprehensive of these would delink health insurance from 
employment and move toward an individual coverage-based system.
    These proposals embody the notion of individual enpowerment 
and merit full consideration. However, altering fundamental 
offerings in the way millions of Americans now receive coverage 
will require careful consideration by Congress. In all 
likelihood, moving to this type of comprehensive reform will be 
a long-term process that involves much debate and analysis and 
hopefully a good transition period. Other tax proposals such as 
accelerating full deductibility for the self-employed and full 
deductibility for those who don't have access appear to be 
generating bipartisan interest and could be enacted this year, 
and we support both of these proposals.
    We are concerned about some of the proposals for providing 
parity of coverage between the individual and group markets. 
For example, we are concerned that providing full deductibility 
of individual coverage for those who already have access to 
employer-sponsored plans and proposals that require employers 
to provide the equivalent value of employer-provided benefits 
for employees who opt out of their current employer plan and 
purchase individual coverage in the individual market.
    Our concern is that these proposals would create serious 
unintended consequences for the current employer-based system. 
By allowing individuals to opt out of the employer-based plans, 
these proposals would undermine the tremendous advantages of 
the natural pooling that occurs in an employer plan. Under 
these proposals, younger workers with fewer medical costs would 
be most likely to leave the group and the premiums for those 
who remain would increase significantly. Congress should avoid 
this type of adverse selection against employer plans by 
providing tax incentives for the purchase of coverage in the 
individual and nongroup market only if an individual doesn't 
have access to employer coverage. For example, eligibility 
could be limited to those employees whose employers have not 
offered coverage for some period of time, such as Mrs. Johnson 
has done in her bill.
    Congress should also consider other ways to keep coverage 
as affordable as possible. Our proposal calls on Congress to 
adopt a new litmus test. Under this test, Congress would reject 
legislation such as managed-care regulation, benefit mandates, 
and antitrust exemptions that would increase premiums and 
consequently the number of uninsured.
    In summary, Blue Cross and Blue Shield Association and its 
member plans believe expanding coverage should be the Congress' 
top priority, and we urge Congress to enact targeted tax 
proposals this year.
    [The prepared statement follows:]

Statement of Mary Lehnhard, Senior Vice President, Blue Cross and Blue 
Shield Association

    Mr. Chairman and members of the committee, I am Mary Nell 
Lehnhard, Senior Vice President of the Blue Cross and Blue 
Shield Association. BCBSA represents 51 independent Blue Cross 
and Blue Shield Plans throughout the nation that together 
provide health coverage to 73.3 million Americans. I appreciate 
the opportunity to testify on the increasing number of 
uninsured and what Congress should do to address this problem.
    Since the debate over President Clinton's national health 
plan, when Congress last engaged in a serious discussion about 
the uninsured, Congress has focused much of its health care 
reform efforts on those people fortunate to have access to 
health insurance (e.g., passing health insurance portability 
reforms and debating managed care regulation). Meanwhile, 
despite a robust economy and low unemployment rates, the number 
of Americans without health coverage has grown to over 43 
million.
    BCBSA and Blue Plans across the country have long supported 
public and private initiatives to expand health coverage to 
more Americans. Many Blue Plans have created Caring Programs to 
make available free health coverage to low-income children and 
have initiated a variety of other programs to help the 
uninsured. In addition, BCBSA recently joined the White House, 
other federal officials and children's advocates to launch a 
national outreach program promoting the new Children's Health 
Insurance Program (CHIP), which Congress enacted in 1997.
    But with the number of uninsured continuing to increase, 
the Blues recognize the need for additional action. Blue Cross 
and Blue Shield Plans have taken their commitment to the 
uninsured a step further by creating a two-part program to 
address this challenging public policy problem. BCBSA's Board 
of Directors approved this two-part program in January of 1999, 
and we strongly urge its adoption by Congress.
    I will be making three points during my testimony.
     First, Congress should enact a tax-based solution 
to address the problem of the uninsured.
     Second, Congress should carefully assess the 
impact of alternative tax-based proposals.
     Third, Congress should adopt a ``new litmus test'' 
to reject legislation that would increase health care costs 
and, consequently, increase the number of uninsured.

I. Congress Should Enact A Tax-Based Solution To Address The Problem Of 
                             The Uninsured

Scope Of The Uninsured Problem:

    Before devising its uninsured proposal, BCBSA gathered and 
analyzed the latest information on who the uninsured are and 
why they lack coverage. Most Americans receive health coverage 
through private health insurance--either through an employer or 
by purchasing health insurance on their own. Others receive 
health coverage by enrolling in a government program. But over 
43 million people are without health coverage. The number of 
uninsured has grown steadily during the past decade and, 
without legislative action, is expected to continue to increase 
in the years to come.
    While the uninsured fall into very different geographic, 
age, and racial/ethnic categories, they do have some common 
characteristics. One of the most significant subgroups of the 
uninsured are working Americans.
    The term ``uninsured'' may conjure up images of people out 
of work, but the data suggest otherwise. According to a 1997 
study from the Kaiser Family Foundation, 73 percent of 
uninsured adults are either employed or married to someone who 
is employed. The working uninsured tend to be those who work in 
low-paying jobs, those who work for small firms, and those who 
work in part-time jobs or in certain trades.
     Low-Wage Workers. The cost of health insurance can 
be prohibitive for low-wage workers who must purchase it on 
their own or pay a significant share of an employer-sponsored 
health plan. Almost half (43.5 percent) of the uninsured are in 
families earning less than $20,000 a year, and 73 percent of 
the uninsured are in families earning less than $40,000. 
Moreover, low-income workers are less likely to have access to 
coverage on the job.
     Workers in Small Firms. The working uninsured are 
likely to be employed by firms with fewer than 25 employees--
43% of the uninsured employed in the private sector work for 
firms with fewer than 25 employees. They are also likely to be 
self-employed or dependents of such workers. One of every four 
self-employed individuals and nearly 35 percent of workers in 
firms with fewer than 10 employees are without coverage.
     People In Families with Part-Time Workers. Since 
employment-based coverage is usually only provided to full-time 
workers, the risk of being uninsured increases for people who 
only work part-time. More than one-quarter of people in 
families with only part-time workers are uninsured.
     Workers in Seasonal Trades. Workers in the 
agricultural, forestry, fishing, mining, and construction 
trades are more likely to be uninsured, probably reflecting the 
seasonal employment and the small firms that are characteristic 
of these trades. One third of the 12.5 million workers in these 
trades are without health insurance.
    Other significant subgroups of the uninsured are young 
adults and minority racial and ethnic groups. Adults between 
the ages of 18 and 24 are more likely to be uninsured than any 
other age group, including children. Young adults are 
vulnerable to being uninsured because they may no longer be 
covered under their families' policy or Medicaid, may not yet 
be established in the workforce, and may earn less than older 
adults. 
    Hispanics and African Americans are also more likely to be 
uninsured than the rest of the population. While Hispanics and 
African Americans represent 12.3 percent and 13.1 percent of 
the nonelderly population, respectively, they represent 24.4 
percent and 16.5 percent, respectively, of the uninsured.

Targeted Tax-Based Reforms That BCBSA Urges Congress To Enact:

    BCBSA believes Congress needs to adopt targeted reforms 
that will reduce the existing number of uninsured. Extending 
health coverage to those without it can be achieved quickly and 
most effectively through legislation that is aimed at the 
specific subgroups of the uninsured, such as low-income 
workers, and that builds on the existing employment-based 
health system.
    BCBSA believes these targeted solutions should include:
     Tax Credits To Small Employers For Their Low-
Income Workers. Employees in small firms are more likely to be 
uninsured than those employed by larger companies. The primary 
reason for this higher uninsured rate is that small firms are 
more likely to have a larger share of low-income workers than 
larger firms. About 42 percent of workers in small firms (0-9 
employees) earn less than 250 percent of the poverty level, 
compared to only 27 percent of employees in firms with 100 or 
more employees. Offering tax credits to small firms for their 
low-income workers would decrease the number of uninsured by 
making health coverage more affordable for small businesses and 
their low-wage employees.
    Focusing on low-wage workers as a subset of those in small 
firms targets those most in need of assistance. Workers in 
small firms with a high proportion of low-wage workers are half 
as likely to be offered health coverage as workers in small 
firms with high-wage workers. Only 38 percent of small 
businesses with low-wage employees offer health coverage 
compared to 78 percent of small businesses with high-wage 
employees. A recent analysis by the Alpha Center (see attached 
graph) underscores the importance of focusing on low-wage 
workers in small firms. It shows that low-wage workers (e.g., 
those earning less than $20,000) have considerably lower rates 
of employer-sponsored health coverage than those with higher 
wages and illustrates that low-wage workers in the smallest 
firms are least likely to have employer-sponsored coverage.
    By limiting the tax credit to only low-income employees of 
small businesses, the proposal would avoid subsidizing those 
who should be able to afford coverage on their own (e.g., 
lawyers working for a small firm). BCBSA recommends, given 
scarce resources, that Congress focus on low-income workers in 
businesses with fewer than 10 employees and then expand the 
program as resources permit.
    Employers would administer the tax credit on behalf of 
qualifying employees. Because cash flow is critical for small 
firms, the proposal envisions that employers would provide the 
credit in the form of reductions in the withholding taxes that 
the employer would normally pay. The administrative burden of 
such a system on the employer would likely be very low since 
most employers contract payroll functions to outside firms that 
are easily able to administer such credits on behalf of 
employees.
    Offering tax credits to small firms with low-income workers 
also has the advantage of building on the successful employer-
based health coverage system. The majority of Americans receive 
health coverage through an employer. By building on the current 
employer-based system, BCBSA's tax credit proposal could be 
implemented immediately.
     Full Tax Deductibility For The Self-Employed. 
Expanding the groups of people who can deduct the cost of 
health insurance from their taxable income would assist many of 
the uninsured. Enabling the self-employed to fully deduct the 
cost of health coverage would help the one in four self-
employed people who have no health insurance. Congress has 
already enacted legislation to phase in full deductibility for 
the self-employed. BCBSA believes this phase-in should be 
accelerated.
     Full Tax Deductibility For People Without 
Employer-Sponsored Coverage. Some people, including young 
adults and early retirees, are uninsured because they do not 
have access to employer-sponsored coverage. Making health 
coverage more affordable for those without access to employer-
sponsored coverage would contribute to an increase in the 
overall rate of insurance. This can be achieved by allowing 
them to deduct the full cost of insurance. It would also 
address parity concerns regarding the tax treatment of health 
coverage received through an employer and health insurance 
purchased on one's own.
     Federal Grants for Initiatives That Expand 
Coverage or Provide Care to the Uninsured. Targeted solutions 
should also be developed for groups that may remain uninsured 
despite tax credits and deductibility, including some non-
citizens, minorities, young people and other low-income groups. 
These targeted solutions can best be carried out by offering 
grants to states to fund a variety of initiatives, including 
private programs to expand health coverage, community health 
centers that provide health care to the uninsured, and 
subsidies to state high-risk pools, which make coverage more 
affordable for those requiring extensive medical care.
    We believe this proposal, which is based on tax credits and 
deductibility to targeted subgroups of the uninsured, is the 
most appropriate way to address this problem. BCBSA's proposal 
has several advantages:
     It Could Be Enacted Quickly. BCBSA's proposal does 
not try to reinvent today's health coverage system. It 
recognizes that the current employment-based system works well 
for most Americans and would expand coverage through this 
system. By building upon the current system, BCBSA's proposed 
actions could be implemented quickly. These proposals could be 
enacted without the prolonged congressional debate that would 
be required of more controversial proposals that seek to 
restructure the entire system.
     It Would Be Simple To Implement. Building on the 
current employment-based system would also assure simplicity in 
the execution of BCBSA's proposed reforms. Employers and 
employees are already familiar with the employment-based 
system. Under BCBSA's proposal, there would be no need to 
educate health care purchasers and consumers about new ways of 
receiving health coverage. Using the infrastructure that is 
already in place would also obviate the need to create a new, 
complex bureaucracy to carry out the functions now performed by 
employers.
     It Would Make The Best Use Of Scarce Resources. By 
targeting specific subgroups of the uninsured (e.g., low-income 
workers in small firms), BCBSA's proposed reforms would assure 
that limited government funds would be directed to those most 
in need of assistance and those most likely to take advantage 
of such assistance.

 II. Congress Needs To Carefully Assess The Impact Of Alternative Tax-
                            Based Proposals

    Numerous proposals to reduce the number of uninsured are 
now being considered in Congress. These proposals range from 
modest reforms to comprehensive restructuring of the market. 
They should each be carefully evaluated in terms of the 
potential to improve our health care financing system as well 
as the risk of creating unintended consequences.
    The most comprehensive proposals are those that would ``de-
link'' health insurance coverage from employment and move 
toward an individual-based system. These proposals embody the 
powerful notion of individual empowerment and merit full 
consideration. However, there are many issues that must be 
considered when one contemplates a move that would 
fundamentally alter the way millions of Americans now receive 
health coverage. Assessing the implications of changing to an 
individual-based system in all likelihood will be a long-term 
process that involves much debate and analysis.
    I will limit my comments today to tax changes that could be 
enacted this year since Congress is expected to move forward 
with incremental tax provisions to improve the affordability of 
health coverage this year. We are encouraged by many of the tax 
proposals that are under development. For example, there 
appears to be growing interest in accelerating the full 
deductibility of coverage for the self-employed and providing 
full deductibility for those who do not have access to 
employer-sponsored health coverage, both of which we support.
    Many in Congress are also considering proposals to provide 
for ``parity'' in coverage between the individual and group 
markets. These proposals range from providing full 
deductibility of individual coverage for those who have access 
to employer-sponsored plans--to requiring that employers 
provide the equivalent value of employer-provided benefits to 
employees who ``opt out'' of their employer-sponsored plan and 
purchase their own health coverage in the individual market.
    We are concerned, however, that, while the intent of the 
parity proposals is to provide individuals with more choice, 
they would create unintended consequences for the current 
employment-based system. We are concerned that proposals that 
would allow individuals to opt out of the employment-based 
system in favor of individual coverage would undermine the 
advantages of the natural pooling that occurs in the group 
health insurance market. Given the opportunity to opt out of 
employer-sponsored plans, low-cost workers may be more likely 
to leave these group health plans, resulting in premium 
increases in these groups' rates. The result would be adverse 
selection, which would destabilize group plans.
    While not perfect, the current employment-based system is 
successfully providing health coverage to the majority of 
Americans. For example, one of the advantages of the current 
employment-based system is that it facilitates significant 
cross subsidies. To illustrate, an employer who has a mix of 
young and old, healthy and not so healthy employees will not 
vary the contribution based on expected use of medical 
services. This represents an accepted mechanism for creating 
the cross subsidies that are essential for providing health 
insurance. Without a strategy to assure stable cross subsidies, 
the insurance market would deteriorate.
    To avoid the problems with the parity provisions, BCBSA 
strongly believes Congress should provide tax breaks for the 
purchase of health coverage in the individual market only if 
the individual does not have access to employer-sponsored 
coverage. For example, eligibility for the tax breaks could be 
limited to those whose employers have not offered coverage for 
some defined period of time, have retired or are unemployed.
    Congress must be aware that changes--even seemingly minor 
changes--that affect the employment-based system could make the 
current problem of the uninsured worse. To avoid these 
unintended consequences, BCBSA's short-term proposal 
strengthens the employment-based system. We believe that 
Congress should move quickly on some of these proposals while 
debate continues on more comprehensive reform strategies.

III. Congress Should Adopt A ``New Litmus Test'' To Reject Legislation 
      That Increases Health Care Costs And The Number Of Uninsured

    In addition to looking at tax-based solutions to the 
uninsured problem, Congress should consider other ways to 
preserve the affordability of private health insurance. BCBSA 
believes Congress should adopt a ``new litmus test'' to reject 
legislation that would increase premiums and, consequently, the 
number of uninsured. Federal managed care legislation, new 
benefit mandates and antitrust exemptions for health 
professionals are examples of proposals that would make health 
coverage less affordable for employers and consumers. Congress 
should reject these proposals so that it will not exacerbate 
the uninsured problem.
    In analyzing the uninsured issue, BCBSA found that the cost 
of health coverage is the key determinant of whether working 
Americans have employer-sponsored coverage. We found that high 
annual premium increases were associated with drops in 
employment-based coverage and flat premiums were associated 
with improvements in employment-based coverage. Examining 
premium increases and coverage rates over the past decade 
illustrates this point.
    When health care costs were rising at double-digit rates 
during the late 1980s, the percentage of nonelderly Americans 
with employment-based coverage declined. While 69.2 percent of 
workers had health coverage through an employer in 1987, only 
64.7 percent had employment-based coverage in 1992.
    According to the nonpartisan Employee Benefit Research 
Institute (EBRI), employers have been more likely to offer 
workers health coverage in recent years when health care cost 
increases have been relatively flat. Since 1993, there has been 
an increase in the percentage of people receiving employer-
sponsored health coverage. While approximately 63 percent of 
nonelderly Americans received health coverage through an 
employer in 1993, that figure increased to 64.2 percent by 
1997. Not surprisingly, the average annual increase in health 
benefit costs during this period was only 2.3 percent.
    The first step in addressing the uninsured is to not make 
the problem worse. Given the link between higher costs and 
reduced coverage, Congress should pledge to enact no law that 
will make health coverage more expensive.

                             IV. Conclusion

    Expanding the number of Americans with health coverage 
should be our nation's top health care priority. No single 
solution will solve the uninsured problem, but the targeted 
solutions advocated by BCBSA would effectively reduce the 
number of uninsured.
    We urge Congress to take a series of actions to reduce the 
number of uninsured, including providing tax credits to small 
firms for their low-wage workers, full tax deductibility for 
the self-employed and those without access to employer-
sponsored coverage, and federal grants to states to fund 
targeted initiatives to expand health coverage. We also believe 
Congress should not enact legislation that would increase 
health care costs. Increasing health care costs will only 
increase the number of uninsured.
    BCBSA's tax-based proposal could be enacted quickly, 
implemented simply and would make the best use of scare 
resources. It also avoids the problems that could be created by 
alternative proposals, such as tax proposals that would all 
employees to opt out of employment-based health plans.
    Thank you for the opportunity to speak to you on this 
important issue. BCBSA looks forward to working with Congress 
to address the needs of the uninsured.
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[GRAPHIC] [TIFF OMITTED] T0332.009

      

                                


    Mrs. Johnson of Connecticut [presiding]. Thank you very 
much.
    Mr. Wilford.

     STATEMENT OF DAN WILFORD, PRESIDENT, MEMORIAL HERMANN 
   HEALTHCARE SYSTEM, HOUSTON, TEXAS; ON BEHALF OF AMERICAN 
                      HOSPITAL ASSOCIATION

    Mr. Wilford. Thank you, Madam Chairman. I am Dan Wilford, 
President of the Memorial Hermann Healthcare System in Houston, 
Texas. I am testifying today on behalf of the American Hospital 
Association and its 5,000 hospitals, health systems, networks 
and other providers of care.
    The American Hospital Association's vision is a society of 
healthy communities where all individuals reach the highest 
potential for health. Health care coverage itself does not 
ensure good health or access to services, but the absence of 
coverage is a major contributor to poor health.
    Therefore, the American Hospital Association and its 
members have a long tradition of commitment to improving the 
health care coverage and access for America's uninsured and 
underinsured. AHA has supported incremental steps that can at 
least move our Nation closer to health care coverage for all, 
examples being the Health Insurance Affordability and 
Accountability Act of 1996, the children's health insurance 
program for 1997, and AHA's own campaign for coverage which 
enlisted 1,500 hospitals and health systems in an effort to 
extend coverage in their communities.
    It has been said already that 43 million Americans are 
without health coverage. In Houston, 31 percent of our citizens 
have no insurance coverage compared to 16 percent on a national 
average. That is the largest percentage of a major metropolitan 
city in the United States.
    Congress has a unique opportunity to ease this situation. 
The Federal budget surplus offers opportunities to look for and 
to fund ways to increase health care coverage for Americans. 
With 84 percent of the uninsured living in families that are 
headed by someone who has a job but no health coverage, the 
low-income working uninsured should be our next priority.
    There is a growing consensus that changes in the Tax Code 
can make health care coverage more affordable for the working 
uninsured. Congress will be considering several options. We 
would like to present our views and some ideas that are aimed 
at getting health coverage to more Americans. First, make it 
affordable to people who cannot afford their employer's 
coverage or whose employers don't offer coverage to get 
insurance coverage from another source. This can take the form 
of a refundable tax credit for low-income tax payers who 
qualify for a credit against their income tax for all or part 
of what they spend for health insurance. It can be varied by 
income and family status.
    We can offer tax credits to small employers that purchase 
group coverage. This will give small businesses additional 
financial resources to provide coverage for their employees and 
we can accelerate the deductibility of health payments for 
self-employed. Under current law, self-employed taxpayers are 
not able to get full deductibility of their insurance payments 
until the 2003.
    In addition to Tax Code changes, other reforms can make 
coverage more accessible to the working uninsured. These 
include creating purchasing cooperatives and grants for State 
high-risk pools. In addition, States and the Federal Government 
can make it easier for families to enroll in public programs 
like CHIP and Medicaid.
    In conclusion, Madam Chairman, the fact is that people 
without health insurance are more likely to become seriously 
ill with injuries and illnesses that had they had proper health 
insurance could have been a minor problem. Our emergency 
departments see this every day.
    That is why we support an effort to stem the rising tide of 
uninsured and to bring appropriate medical coverage to all who 
need it. With the working uninsured growing in numbers, we 
agree with the concept of changing the Tax Code to make it 
possible for more low-income workers and their families to have 
health care coverage. We look forward to working with you on 
specific legislation that will do that job properly.
    Thank you.
    [The prepared statement follows:]

Statement of Dan Wilford, President, Memorial Hermann Healthcare 
System, Houston, Texas; on behalf of American Hospital Association

    Mr. Chairman, I am Dan Wilford, president of Memorial 
Hermann Healthcare System in Houston, Texas. I am testifying 
today on behalf of the American Hospital Association (AHA) and 
its 5,000 hospitals, health systems, networks, and other 
providers of care. We are pleased to have this opportunity to 
discuss the critical national goal of getting health care 
coverage to more Americans.
    The AHA's vision is a society of healthy communities, where 
all individuals reach their highest potential for health. While 
health care coverage by itself does not ensure good health or 
access to health care services, the absence of coverage is a 
major contributor to poor health. Therefore, the AHA and its 
members have a long tradition of commitment to improving health 
care coverage and access for America's uninsured and 
underinsured.
    According to the Employee Benefit Research Institute 
(EBRI), the percentage of uninsured Americans has increased 
steadily since 1987. In 1997, 43 million Americans were without 
health care insurance. Congress has a unique opportunity to 
ease this situation right now. According to the Congressional 
Budget Office, the federal budget surplus was $70 billion last 
year, will be $107 billion in 1999, and is projected to reach 
$209 billion by 2002 and then continue to grow. Now is the time 
to look for--and to fund--opportunities to increase health care 
insurance coverage for Americans.
    We've already made headway in several areas, including 
expanding coverage for America's children. With 84 percent of 
the uninsured living in families that are headed by someone who 
has a job but no health insurance, the low-income, working 
uninsured should be our next target.

                          INCREMENTAL PROGRESS

    The AHA believes that every American deserves access to 
basic health care services, services that provide the right 
care in the right setting at the right time. But we also know 
that, as the 1994 health care reform debate clearly 
demonstrated, a single, comprehensive proposal to bring 
coverage to all Americans is unlikely to be successful. 
Incremental steps are a more likely means for increasing 
coverage, and the AHA has supported those steps that we believe 
can at least move the nation closer to health care coverage for 
all.
    The AHA supported the Kassebaum/Kennedy legislation that 
became known as the Health Insurance Portability and 
Accountability Act. We recognized that the immediate impact on 
reducing the number of uninsured was not likely to be 
overwhelming. Nevertheless, we judged it critically important 
to demonstrate that practical, public initiatives could help 
reduce the loss of insurance coverage.
    And we were strong supporters of the Children's Health 
Insurance Program (CHIP). This effort was part of the Balanced 
Budget Act of 1997, and helps states provide health care 
coverage to low-income children. Fifteen percent--or nearly 
eleven million--of children in this country went without health 
insurance in 1997.
    Under CHIP, states can help alleviate this problem by 
purchasing insurance, providing coverage through Medicaid, or 
through some combination of both options. The federal 
government has appropriated $24 billion through 2002 for the 
program. Those funds are allocated based on the number of 
uninsured children in each state, with the state matching the 
federal allotment.
    With almost every state, plus the District of Columbia and 
Puerto Rico, opting in to the program, CHIP got off to a good 
start. In fact, the Health Care Financing Administration (HCFA) 
has reported that, in its first year of operation, the CHIP 
program enrolled nearly one million children. This is momentum 
that is just beginning, and we urge Congress to resist any 
temptation it may feel to divert or reduce federal funds that 
have been allocated for this purpose.
    The AHA, our state association partners, and individual 
hospitals and health systems have been working hard to help 
enroll eligible children in CHIP and Medicaid. Last year, the 
AHA, HCFA, the March of Dimes and WJLA-TV, the local ABC 
affiliate, teamed up with Maryland and Washington, D.C. 
governments to develop public service advertisements urging 
low-income families to sign their children up for free or low-
cost health insurance. Our partnership with HCFA is ongoing, 
and another joint outreach initiative is planned for this 
autumn.
    And as part of the observance of National Hospital week 
from May 9-15, the AHA urged all hospitals to continue their 
commitment to enroll children in Medicaid and CHIP, by 
encouraging participation in the national campaign to Insure 
Kids Now. The campaign has a toll-free hotline with information 
on the low-cost state health insurance programs, and the AHA 
provided hospitals with Insure Kids Now posters with the 1-877-
Kids Now number for their emergency departments or other 
appropriate locations.

                      AHA'S CAMPAIGN FOR COVERAGE

    The AHA's commitment goes beyond these recent efforts. The 
AHA Board of Trustees, after the demise of national health care 
reform, was concerned that the American public had resigned 
itself to the fact that large numbers of Americans were, and 
seemingly always would be, uninsured. The AHA explored a number 
of approaches with many of the leading health policy thinkers 
at a series of policy forums addressing coverage, access, and 
improving population health status. Each of the policy forums 
concluded that:
     incremental initiatives were the most likely path 
to progress in reducing the number of uninsured, and
     state and local initiatives would provide the most 
immediate benefit.
    In the absence of comprehensive federal action, the AHA 
Board of Trustees in January of 1997 adopted a concrete goal of 
reducing the number of uninsured people by four million by the 
end of 1998--the AHA's Centennial year. We took on this 
challenge because the primary task of hospitals and health 
systems is to improve the health of their communities. While 
they care for people who are both insured and uninsured, our 
members see every day that the absence of coverage is a 
significant barrier to care, reducing the likelihood that 
people will get appropriate preventive, diagnostic and chronic 
care.
    The AHA's Campaign for Coverage--A Community Health 
Challenge asked each of our members to help reduce the number 
of uninsured people in their communities. Our state hospital 
association partners worked to reduce the number of uninsured 
in their states. Community-based efforts were key, and included 
encouraging hospitals as employers to provide coverage to all 
employees; working with local employers to develop affordable 
coverage; providing care in a school-based or church-based 
clinic; working with the state Medicaid program to increase the 
participation rate among eligible people; and much more.
    The number of hospital and health system participants in 
the Campaign grew to about 1,500. They found ways to extend 
coverage to nearly 2.5 million uninsured people, and to improve 
access to health care services for another 3.4 million people. 
And through their partnerships with local physicians, other 
caregivers, schools and businesses, health care leaders 
continue to carry the Campaign's message: getting more people 
covered is not a one-time project, but a lifetime's work.
    The next chapter of our campaign is being written. The AHA 
has joined with EBRI, the Milbank Memorial Fund, and the 
Association of American Medical Colleges to form the Consumer 
Health Education Council (CHEC), an organization dedicated to 
expanding coverage for the uninsured. This new organization is 
educating consumers and employers about the need for coverage, 
developing tools to help people choose a health plan, and 
providing the media and public policymakers with information 
about health care coverage.

                             THE NEXT STEP

    Eighty-four percent of the uninsured live in families that 
are headed by workers, some with full-time jobs, others with 
part-time positions. Finding ways to make health insurance more 
affordable for small companies and for low-income workers could 
significantly slow the number of uninsured Americans, by 
getting coverage to the workers and to their families.
    According to an article in Health Affairs journal co-
authored by Jon Gabel, vice president of health systems studies 
at AHA's Hospital Research and Educational Trust, higher-wage 
firms are more likely than lower-wage firms to provide health 
coverage for their employees.
    During the past six years, writes Gabel, the U.S. economy 
added more then 12 million jobs, and the unemployment rate fell 
to its lowest level since 1969. Yet, at the same time, the 
number of uninsured increased from 35 million to 43 million. In 
1997 alone, a year in which the unemployment rate fell from 5.3 
percent to 4.6 percent, the number of uninsured increased by 
nearly 2 million.
    Part of this is due to low-income workers not being offered 
health insurance by their employers. Using data from KPMG Peat 
Marwick's 1998 survey of employers about job-based health 
insurance, Gabel and his colleagues calculated that only 39 
percent of small firms (those with fewer than 200 workers) with 
low-wage employees offered health benefits. Among small firms 
that pay high wages, 82 percent offered health benefits.
    The findings suggest that low-wage families are more likely 
to be insured if they work in firms where most of the employees 
earn higher wages. Further analysis points to cost as another 
ingredient in the growth of the uninsured. While real wages 
declined for low-wage workers, employee contributions for 
single and family coverage rose more than threefold from 1988 
to 1996. The result is that fewer workers could afford to 
accept their employer's health care coverage, and opted to go 
without coverage.

         INCREMENTAL SOLUTIONS TO TARGET THE WORKING UNINSURED

    A look at how our current tax system stimulates health 
insurance coverage can help explain the broader question of the 
uninsured. Of the 84 percent of the population with health 
insurance, employment-based coverage provides the majority with 
health care coverage. The most significant tax incentives for 
employer-based health insurance are: health coverage as a 
deductible business expense; health coverage as an exclusion 
from an employee's gross income; and health coverage as an 
exclusion from employment tax computations such as Social 
Security, Medicare or unemployment compensation.
    The tax incentives are less generous for self-employed and 
individual taxpayers. Self-employed taxpayers may deduct 
payments for health insurance from their adjusted gross income. 
The tax deduction is currently only 45 percent of the amount of 
the insurance, but will increase to 100 percent in 2003. 
Individuals who itemize can deduct any unreimbursed medical 
expenses only if those expenses exceed 7.5 percent of gross 
income. Questions have been raised over how our federal tax 
system creates inefficiencies and market distortions, and 
favors individuals who work and have higher incomes.
    Congress, in particular, should investigate the question of 
how the inequities in the tax code have contributed to the 
current diminishment of health care coverage. However, 
necessary reforms will take years to be fully vetted. The need 
to ensure access to health care for many low-income working 
uninsured is far too pressing to wait. The EBRI data shows us 
that:
     Eighty-four percent of the uninsured lived in 
families that are headed by workers, some with full-time jobs, 
others with part-time positions.
     Adults between the ages of 18-64 accounted for 
almost all of the most recent increase in the uninsured, 
between 1996 and 1997.
     The decline in Medicaid coverage for working and 
non-working adults accounted for the overall increase in the 
uninsured between 1996 and 1997.
     The uninsured are concentrated disproportionately 
in low-income families--over 40 percent earn less than $20,000.
     Nearly half of the working uninsured are either 
self-employed or working in small businesses with fewer than 25 
employees. A growing consensus is emerging to look at 
incremental steps through the tax code to make health care 
coverage more affordable for the working uninsured. The AHA 
believes there are several solutions that can help more 
employees afford health care coverage. Congress will be 
considering several tax credit options. We would like to 
present our views on some ideas we support that are aimed at 
getting health care coverage to more Americans.

Reform the Tax Code

    Make coverage more affordable for the working uninsured
     Make it affordable for low-income people who 
cannot afford their employer's coverage, or whose employers 
don't offer coverage, to get health care insurance from another 
source. This could take the form of a refundable tax credit. 
Low-income taxpayers would qualify for a credit against their 
income tax for all or part of the amount that they spend on 
health insurance. The tax credit can be varied by income and 
family status. For low-income taxpayers the tax credit is 
preferable to tax exclusions and deductions, which favor higher 
income workers. The tax credit, essentially a direct transfer 
from the government, will help low-income workers purchase 
insurance.

Assist employers in offering insurance

     Offer tax credits for small employers that 
purchase group coverage premiums. This would give small 
businesses additional financial resources to provide coverage 
to their employees.
     Accelerate the deductibility of health payments 
for the self-employed. Under current law, self-employed 
taxpayers will not be able to fully deduct their health 
insurance payments until 2003.

Other Reforms

    In addition to changes in the tax code, there are other 
reforms that would help make insurance more accessible to the 
working uninsured. These include:
    Create a mechanism that allows more-affordable insurance
     Create purchasing cooperatives that, through 
strength in numbers, can give small firms more leverage in 
negotiating health care insurance contracts.
     Offer grants for state high-risk pools. High-risk 
pools would allow access to insurance for people with greater 
health care needs.
    Make it easier for families to enroll in public programs
     Give states the option to expand CHIP to include 
families of CHIP-eligible children. Encourage states to use 
temporary Medicaid coverage for individuals that are moving 
from welfare-to-work.
     Expand coverage for low-income pregnant women, 
legal immigrant low-income pregnant women and legal immigrant 
low-income children
     Continue the federal commitment to fund CHIP; 
states are demonstrating strong commitments to CHIP, and 
momentum would be lost if federal dollars are removed
     Encourage outreach to enroll eligible children in 
CHIP and state Medicaid programs

Finance reforms and expansions through the federal budget 
surplus

    The financing of such reforms is a critical policy 
question. The booming economy, and a projected federal budget 
surplus of $107 billion this year alone, offer a unique 
opportunity to help fund many of these initiatives. By 
investing surplus dollars, Congress can realize a substantial 
return as more Americans receive the right health care, at the 
right time, in the right place.

                               CONCLUSION

    Mr. Chairman, America's hospitals and health systems 
believe that every man, woman and child in this country deserve 
basic health care services, and that no one should lack these 
services because they cannot pay for them. It is a fact that 
people who do not have health care insurance are more likely to 
become seriously ill with an illness or injury that, had it 
been treated properly and early, could have been a minor 
annoyance instead of an expensive condition. Our emergency 
departments see this every day.
    That is why we support any effort to stem the rising tide 
of the uninsured, and bring appropriate medical care to all who 
need it. With the working uninsured growing in numbers, we 
agree with the concept of changing the tax code to make it 
possible for more low-income workers and their families to have 
health care coverage. We look forward to working with you on 
specific legislation that would do the job properly.
      

                                


    Mrs. Johnson of Connecticut. Thank you very much, Mr. 
Wilford.
    Ms. Hoenicke.

STATEMENT OF JEANNE HOENICKE, VICE PRESIDENT AND DEPUTY GENERAL 
          COUNSEL, AMERICAN COUNCIL OF LIFE INSURANCE

    Ms. Hoenicke. Thank you, Madam Chairman. I am Jeanne 
Hoenicke, vice president and deputy general counsel of the 
American Council of Life Insurance. The nearly 500 member 
companies of the ACLI offer annuities, life insurance, 
pensions, long-term care, disability income insurance and other 
retirement and protection products.
    My statement echoes some of the speakers you have heard 
before me. It is also a prelude to the retirement panel that 
follows. Over the next 35 years, the number of Americans over 
age 65 will more than double and nearly half of those will 
reach the age of 90. Many of us will spend more than 25 years 
in retirement. This calls for broader and more flexible 
preparation. That preparation includes having assurances of 
many things: That you will not outlive your income; that you 
will not become impoverished even if you need long-term care; 
and that your retirement savings will be protected during your 
working years even if you become disabled or suffer the death 
of a key wage provider, child care provider or homemaker.
    ACLI believes that we need a comprehensive approach to 
retirement security, one that recognizes the increasing 
reliance on private sector solutions, personal responsibility, 
and retirement risks. As leading providers of both accumulation 
and protection products, we are uniquely qualified to assist in 
developing strategies that help Americans adapt to the happy 
advent of a long retirement, but one that has less formal 
guarantees and more uncertainties.
    Retirement security is our number one issue. Social 
Security as it exists today may not continue to provide a 
sufficient level of benefits for the coming generations. 
Policymakers should address this issue now while the economy 
and demographics provide a window of opportunity. At the same 
time, actions taken to preserve and strengthen Social Security 
must not unintentionally weaken the private retirement system.
    Fortunately, the private pension system continues to grow, 
increasing from less than 10 percent of national wealth in 1980 
to close to 25 percent in 1993. Our retirement system must 
continue to respond to America's changing work patterns, 
including the growing importance of small businesses, coupled 
with shorter job tenures, both of which have important 
implications for the future. The ACLI applauds Representatives 
Portman and Cardin for their leadership in ensuring not only 
the maintenance but the expansion of the voluntary employer-
sponsored retirement system. We strongly support their 
legislation, H.R. 1102, and urge Congress to enact it as 
quickly as possible.
    We are also keenly aware that tax incentives have played a 
key role in the growth of annuities and IRAs. These retirement 
products are especially important to the self-employed, a 
growing segment of the work force. Over 80 percent of 
individual annuity owners have household incomes under $75,000, 
close to half have incomes under $40,000. The current tax 
treatment of annuities during the retirement savings phase must 
be maintained and we are very grateful to this Committee for 
its staunch support against efforts to weaken tax incentives 
for individuals who plan responsibility for their full lifetime 
needs through these retirement annuities.
    More Americans need to understand the importance not just 
of accumulating savings, but of planning to protect those 
savings against the uncertainties of what life might hold. We 
should do more to encourage everyone to accept the dual 
challenge of accumulating savings and managing risks to those 
savings. To manage risks, Americans need to have some portion 
of their retirement income in a guaranteed stream of payments 
for their whole life: from Social Security; from employer-
sponsored pensions; and from personal annuities. The Tax Code 
should provide incentive for individuals to guard against 
outliving their savings.
    Tax policy should also promote responsibility for guarding 
against the devastating costs of a long-term illness. The ACLI 
believes that the Code should be amended to permit individuals 
to deduct long-term care insurance premiums for themselves and 
family members as an adjustment to income like the IRA 
deduction. We strongly support the bill introduced last week by 
Representatives Johnson and Thurman which includes this 
important tax incentive.
    Madam Chairman, the future is not what it used to be. We 
urge you to adopt tax policies that reward personal 
responsibility and provide more flexibility for retirements 
that will be longer and very different from the past. 
Accumulating savings for retirement is vitally important. 
Protecting those savings before and in retirement is equally 
important.
    Thank you for providing us with this opportunity to express 
our views, and I would be happy to answer questions.
    [The prepared statement follows:]

Statement of Jeanne Hoenicke, Vice President and Deputy General 
Counsel, American Counsel of Life Insurance

    Thank you, Mr Chairman. I am Jeanne Hoenicke, Vice 
President and Deputy General Counsel of the American Council of 
Life Insurance. The nearly 500 member companies of the ACLI 
offer life insurance, annuities, pensions, long term care 
insurance, disability income insurance and other retirement and 
financial protection products. Our members are deeply committed 
to helping all Americans provide for a secure life and 
retirement.
    Over the next 35 years, the number of Americans over age 65 
will more than double, and nearly half of those will reach the 
age of 90. This means many of us will spend over 25 years in 
retirement. This fast approaching reality calls for broader and 
more flexible preparation. That preparation includes having 
assurance of many things: that you will not outlive your income 
even if Social Security is less than expected and you have no 
company lifetime pension; that you will not become impoverished 
even if you need long-term care; and that your retirement nest 
egg will be protected during your working years even if you 
become disabled, or suffer the death of a key wage provider, 
childcare provider or homemaker.
    Congress has provided an important safety net for the truly 
needy, and has encouraged individuals to take appropriate steps 
to secure their own retirements. The success of today's 
retirement system rests on a healthy Social Security system and 
on federal income tax incentives for private pensions and 
retirement savings. The government role in these programs 
remains essential.
    ACLI believes, however, that we need a more comprehensive 
approach to retirement policy, one that recognizes the 
increasing reliance on private sector solutions, personal 
responsibility, and retirement risks.
    As leading providers of both accumulation and protection 
products, the life insurance industry is uniquely qualified to 
assist in developing strategies to help Americans adapt to the 
happy advent of a long retirement, but one that has less formal 
guarantees, and more uncertainties. Retirement and financial 
security is our number one issue.
    Social Security as it exists today may not continue to 
provide a sufficient level of benefits for the coming 
generations. We believe policymakers must address this issue 
while the economy and demographics provide a window of 
opportunity. At the same time, actions taken to preserve and 
strengthen Social Security must not unintentionally weaken the 
private retirement system.
    Fortunately, the private pension system continues to grow, 
increasing from less than 10 percent of national wealth in 1980 
to close to 25 percent of national wealth in 1993. By 1997, 
assets in the private pension system were nearly $7 trillion, 
including significant growth in defined contribution plans. The 
nation's retirement system has, and must continue to, respond 
to the dynamic nature of Americans' changing work patterns, 
including the growing importance of small businesses and the 
service sector, coupled with the trend toward shorter job 
tenures, all have important implications for the future. Tax 
policymakers need to take these trends into account.
    We have provided the Committee with much information on 
employer-provided pensions, for example, that 77 percent of 
participants have earnings below $50,000 (1997). The ACLI 
applauds Representatives Portman and Cardin for their 
leadership in ensuring not only the maintenance, but the 
expansion of the voluntary employer-sponsored retirement 
system. We strongly support their legislation, H.R. 1102 (the 
Comprehensive Retirement Security and Pension Reform Act), and 
urge Congress to enact it as quickly as possible. The ACLI 
particularly supports the Portman/Cardin proposals to raise the 
limitations on contributions to and benefits from pension plans 
to or above their former levels and increase the limits on 
compensation considered for these purposes. In addition, the 
ACLI strongly supports repeal of the current liability funding 
limit which restricts the ability of an employer to ensure a 
well-funded plan. We also support similar provisions offered by 
representatives on this Committee and throughout Congress.
    At the same time, we are keenly aware that tax incentives 
have also played a key role in the growth of IRAs and 
annuities. These retirement products are especially important 
to the self-employed, a growing segment of the American 
workforce, and to those without employer-sponsored pensions. 
Over 80 percent of individual annuity owners have household 
incomes under $75,000; close to half have incomes below 
$40,000. The current tax treatment of annuities during the 
retirement savings accumulation phase must be maintained. We 
are grateful to this Committee for its staunch support against 
efforts to impose tax dis-incentives for individuals who plan 
responsibly for their full lifetime needs through these 
important annuity retirement products.
    More Americans need to understand the importance not just 
of accumulating savings, but of planning to protect one's 
savings against the uncertainties of what life might hold; 
uncertainties such as becoming disabled or a family provider 
dying early; uncertainties such as outliving one's income or 
needing long-term care. We should do more to encourage all 
Americans to accept the dual challenges of accumulating 
retirement savings and managing risks to these savings.
    To manage retirement risks, Americans need to have some 
portion of their retirement income in a guaranteed stream of 
income for life from Social Security, from employer-sponsored 
pensions, and from personal annuities. The Tax Code should 
promote individual responsibility for guarding against 
outliving one's savings.
    Government tax policy should also promote individual and 
family responsibility for guarding against the devastating 
costs of a long-term, chronic illness. The ACLI believes that 
the Tax Code should be amended to permit individuals to deduct 
long-term care insurance premiums for themselves and family 
members as an adjustment to income, like the IRA deduction. We 
strongly support H.R. 2102, the bill introduced last week by 
Representatives Nancy Johnson and Karen Thurman which includes 
this important tax incentive.
    Mr. Chairman, the future is not what it used to be. We need 
to adopt tax policies that reward personal responsibility and 
provide more flexibility for retirements that will be longer 
and very different from the past. The life insurance industry 
is the only private industry that can provide life insurance 
protection against leaving family members without money should 
a wage provider, childcare provider or homemaker die early; 
that can provide annuities which guarantee income for every 
month a person and his or her spouse lives, no matter how long; 
and that can protect a nest egg from being wiped out due to 
disabilities, or long-term care needs through disability and 
long-term care insurance. Accumulating savings for retirement 
is vitally important; protecting those savings before and in 
retirement is equally important.
    Thank you for providing us with this opportunity to express 
our views and I would be happy to answer any questions.
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    Mrs. Johnson of Connecticut. I thank the panel for their 
presentation. It certainly is true that the future is going to 
be quite different from the past, and one of the stark 
differences is the many, many years that people are going to 
live in retirement, and our failure to this point at least to 
appropriately respond to the changed nature of retirement in 
our public policies.
    Social Security reform, as important as it is, is really 
the easy piece of that. Unless we do a lot of things that we 
have talked about here today, we really won't have retirees 
that are as secure and capable and a strong part of the economy 
in decades ahead.
    I wanted to ask you, Ms. Hoenicke, because the concept of 
annuities has not been popular with the Treasury in recent 
years and come under attack as a source of new revenues in a 
number of subtle ways, could you just talk about the benefits 
of annuity products as opposed to other kinds of products as we 
look toward retirement security?
    Ms. Hoenicke. Surely. The annuity product we believe is 
very important and we are grateful to this Committee's support 
for it over the years. The unique feature that makes it so 
important to this retirement security issue that you are 
considering today is that it is the only product that can 
provide individuals a guarantee against outliving their income. 
If the savings pool they have gathered will not necessarily 
provide them enough money throughout their life, if they have 
purchased an annuity, the insurance company will, with the 
money that they have used to purchase that annuity, provide 
that stream of income. That is very important because we do not 
know how long we are going to live, and we may live a long 
time, happily.
    Mrs. Johnson of Connecticut. Thank you. On the subject of 
the uninsured, I appreciate the many ideas that are now coming 
forth in covering the uninsured. Certainly as we look at the 
problems in Medicare, the confluence of Medicare payment 
problems and the rise in the number of uninsured are posing a 
new threat to hospital services. Hospitals are uniquely 
impacted by the rise of the uninsured, both in terms of your 
emergency room costs and in terms of hospital stays that are 
not compensated by virtue of lack of insured coverage.
    So it is of enormous importance to our hospital system that 
we move aggressively to reduce the number of the uninsured, not 
just from the point of view of their needing better preventive 
care and early intervention, but also in maintaining the 
strength of the institutional capability that this Nation has 
to provide very sophisticated acute care hospital services.
    But as we move to work on the uninsured, a number of you 
have talked about this problem of how do you cover the 
uninsured and not erode the strength of the employer sector.
    One of the critical issues that is not addressed by any of 
our legislation but I think is very relevant is how do we 
stimulate the private sector to provide a broader array of 
policies? We are beginning to see some change. I am beginning 
in my district to see very exciting pairing of medical savings 
accounts with the traditional employer provided accounts giving 
people the option of a medical savings account and then the 
retirement savings that offers in years of low health care 
costs.
    Aetna recently came out with a whole different approach to 
insuring health costs. One of the reasons we can't reach the 
uninsured individual is because the costs are high, whether it 
is for the individual or for the small business, and how can we 
create a greater challenge to the individual market to think 
through the real needs of the variety of people who are 
uninsured and stimulate a broader market, at the same time do 
something to help with the cost. But if we just help with the 
cost, we maintain in a sense the continued rigidity of the 
product in the health market. I am not sure that we are going 
to achieve our goal so it is kind of a nebulous question, but I 
would appreciate your comments on it.
    Mr. Goodman. I would suggest two changes. Two changes. One, 
I think it is important that we have the same tax system 
applying to individuals and to small businesses so that we have 
a level playingfield under the tax law. And as long as we have 
a level playingfield, we are going to find out what the 
employer's role should be in the marketplace and not by the 
artificial mechanism of tax law.
    The other important change largely has to come at the State 
level. In Texas, we are looking very seriously at the idea of 
allowing small businesses to buy their employees into 
individual insurance pools. So you get all the economies of 
group purchasing, whatever economies there are there, and then 
what the employee has is a policy which he owns and can, in 
principal, take from job to job.
    I think if we can open up that mechanism, we will get small 
business more in the role of helping people get into pools 
instead of tying to run its own health insurance plan which a 
small business is not really able to do.
    Mrs. Johnson of Connecticut. Dr. Butler.
    Mr. Butler. I agree with that. I think providing subsidy or 
tax credit will of itself stimulate a lot of activity.
    It is very interesting, for example, that in the FEHBP, the 
Federal Employee Health Benefit Program, you see a plethora of 
employee-sponsored organizations including unions being very 
much involved in a provision of care. Why is that so and not so 
in the rest of the market? Because those plans are eligible for 
the subsidies under the FEHBP.
    If you provide a credit or other kinds of assistance that 
have been mentioned, I think you will see the development of 
those kinds of alternatives. I think if you look at organized 
labor, or if you look at church-based organizations, 
particularly in the African-American community, there are 
natural groupings that are already there as a basis on which to 
build larger pools. I think the way to encourage or even work 
directly with States on a demonstration basis to allow pooling 
to develop. But the credit, which means giving the same tax 
treatment for nonemployment based plans, is the key financial 
step to stimulate this kind of activity.
    Mrs. Johnson of Connecticut. Mr. Kahn.
    Mr. Kahn. I think at the end of the day the kind of 
subsidization that is being discussed here is critically 
important. It will make the difference. But I must say, I think 
there is sort of a countervailing trend. On the one hand, 
plans, and plan purchasers are trying to be cost conscious. On 
the other hand consumers and the employees are demanding more 
choice.
    So more open network plans are where the growth is, where 
the products are and they tend to be more expensive than either 
closed-network HMOs or more high-deductible plans. I think over 
time, particularly in the small employer market, for it to 
work, you are going to see these products, whether they are 
HMOs or very high deductible plans, being the only ones that 
you can have that you can keep affordable. Because at the end 
of the day, whether it is better pooling or whatever, health 
care is expensive and people are going to want a combination of 
coverage for various kinds of illnesses and diseases that will 
be expensive.
    Mrs. Johnson of Connecticut. I do think it is sort of a 
remarkable failure of the American system that we have been 
unable to create pools for individuals, and I have been working 
on that for years and many others in the Congress have. I am 
interested that you think tax equity would help stimulate or 
create the opportunity for a different kind of pooling.
    I think we need to be thinking about pools that also can 
register people for Medicaid. So they both are sort of, in a 
sense public private because we have so many Medicaid-eligible 
people who are not in the Medicaid system. I think only if we 
begin to really have a more comprehensive approach to coverage 
can we do that. As you develop ideas along that line, I would 
appreciate it if you would get back to me.
    Mr. Rangel.
    Mr. Rangel. I have no questions. I want to thank the panel 
for their excellent testimony.
    Mrs. Johnson. Mr. Foley.
    Mr. Foley. This may be slightly off the mark but maybe one 
of you can help me. We are in a debate now on minimum wage and 
increasing minimum wage, and oftentimes at that level the 
employees themselves don't have any health care coverage 
whatsoever. I think if given the option of a dollar in their 
paycheck per hour or some type of health insurance policy, they 
will quickly take the dollar in the paycheck and go without 
coverage.
    One of the big problems in the insurance industry and the 
health care industry and the hospital industry is the fact that 
there is an immense amount of cost shifting to those who have 
the ability to pay who have Medicare or Medicaid or some other 
form. And we are now aggressively debating how should we 
increase minimum wage.
    One of the thoughts I had was rather than necessarily give 
a dollar increase, I would rather figure a way to require 
health insurance coverage thereby reducing the burden that is 
spread amongst society in getting employees covered. Now, it 
may fall on deaf ears in several sectors, but I wondered if any 
of you had looked at that potential kind of policy 
implementation rather than just throwing money to the wind and 
saying now we are going to elevate everybody's paycheck in 
order to keep things consistent in America.
    Can anybody give me an idea about that?
    Mr. Goodman. I can tell you that I prefer the kind of 
approach which encourages people to both have a job and to have 
health insurance. I would be opposed to an approach which 
artificially raises the cost of labor, and therefore is going 
to cause people to be unemployed, especially as we go into an 
economic downturn. So I prefer the tax credit approach that is 
available to people regardless of their wage and for people at 
the bottom of the income ladder, since they are fully 
refundable, it means essentially the Federal Government is 
going to be paying for their insurance.
    Mr. Butler. I agree with that. Assuming for the sake of 
argument that one supports increasing the minimum wage, if you 
go forward with earmarking that for a specific kind of 
insurance coverage, it will create more problems than it solves 
for lots of people because you won't be able to get a one-size-
fits-all solution.
    On the other hand, and whether or not you have an increase 
in minimum wage, the tax credit which offsets the cost of 
coverage gives you a lot more flexibility to do it either 
within the employment base system or outside the employment 
base system. You don't have to have the same degree of 
regulation and one-size-fits-all approach to how people are 
going to use that money for health coverage.
    I think Dr. Goodman's point is correct. If you offer credit 
and people for whatever reason don't take it, then you can look 
at a rebate to the States equivalent to that revenue which has 
not been lost by the Federal Government as a way of dealing 
with people who somehow refuse to take the credit.
    Mr. Kahn. I guess I would have a little concern about 
critical mass of dollars. If someone is actually at the minimum 
wage and you say only a dollar or some small portion of that 
has to go to health insurance, I am not sure there is enough 
critical mass. And, if the employer is not already providing 
them coverage, I think it is problematic. I am not sure where 
it gets you unless you come in with either deductions or 
vouchers for people that are under a certain level of income as 
we have in our InsureUSA Proposal or something to get them 
enough bucks to get a policy that has substance to it and would 
give them the kind of coverage that would sort of move them 
down the field toward decent health care.
    Mr. Wilford. Mr. Foley, I believe the people we experience 
in our emergency departments that come in with no coverage that 
are minimum-wage people probably would put their money in their 
pocket like you are proposing. I think one possible alternative 
might be that the employer be required to provide some kind of 
at least catastrophic coverage for that group so that the major 
catastrophic illnesses could be covered and the more minimum 
coverages be covered in public clinics or other services.
    Mr. Foley. Catastrophic would be helpful, but the problem 
is, as you know, with State mandates on all insurance policies 
it causes the premium to go so high, most people can't afford 
them.
    There are so many things that are added on into a required 
policy. Anybody else want to comment on it? Again, it was just 
an idea. I know the complications are in fact very real. I am 
not suggesting I am for a minimum wage increase, but I think as 
we go down this road, we continue to find ways to increase 
wages and still negate the basic problem that is with us all in 
America, that is the failure to obtain health insurance and 
then it falls on society.
    Nobody is rejected from an emergency room in a hospital. 
They are treated. Somebody pays for it. It is the hospital, it 
is Blue Cross, somebody is going to absorb that cost to 
society; and I just sense that that is a real, real problem in 
insurance coverage. As the fewer become insured, the more the 
burden goes to the insured, the higher the premiums, the fewer 
continue to maintain coverage and the spiral continues. And I 
have got to vote in 3 minutes.
    Mrs. Johnson of Connecticut. Some of us do have to vote. I 
recognize Mr. Cardin for questioning while we are gone. Others 
wanted to come back for questions so we will see how that 
develops. Otherwise we will recess until the next panel.
    Mr. Cardin. I will try to filibuster until a Republican 
gets back, but I am more than happy to take the Chair if you 
would like me to take the Chair.
    Mrs. Johnson of Connecticut. We sort of do that by default, 
Mr. Cardin. Before I leave I did want to mention two things.
    First, I think Mr. Wilford's comment about--I hope you all 
think about this--we have to do something to require States to 
offer at least--because some States don't offer catastrophic 
coverage because catastrophic coverage combined with the 
community health system, which is very significantly federally 
funded, does represent an alternative for--would have 
represented an alternative for many. So there are ways in which 
we need to better knit together the resources we have.
    But last I would like to ask your help once my bill gets in 
in evaluating how many of the uninsured it would cover because 
it is so much a richer credit than anything that has been 
offered. The attempt is to make it equal in goods delivered, 
not in tax value, but in goods delivered to those who get 
employer-provided insurance, and so unfortunately I do have to 
go vote but I would look forward to your input on that once we 
get it in and I will recognize Mr. Cardin for as much time as 
he may choose to consume.
    Mr. Cardin [presiding]. Thank you, Madam Chair. It is nice 
to have the whole Committee. We might decide to mark up Social 
Security reform first, and then we will go from there.
    Let me first thank all of you for your testimony and for 
your work on trying to deal with the problems of the uninsured. 
I would just like to first get your observations on one 
argument that many of you frequently make, that when we pass 
policies here in Washington that could add to the cost of a 
health care premium such as the Patients Bill Of Rights, the 
argument is always made for those who oppose that action that 
by adding to the cost of the insurance premium, we will add to 
the number of people who are uninsured.
    And I accept that as basic economic principal that the 
higher the cost, the more likely that a company will not offer 
health benefits or will terminate or do something else. My 
question is, though, that the projections that I have seen show 
that health cost inflation will go up over the next several 
years at a higher rate than general inflation in our society.
    Therefore, the cost of the current system will continue to 
rise. Does that mean that the number of uninsured will continue 
to grow unless we take some policy direction here in Washington 
to compensate for the additional cost of our system? Is that 
likely to occur?
    Mr. Goodman. I think it is and it is not simply because of 
what is happening in Washington. It is also what is happening 
at the State level, and two bad things are happening. We are 
passing unwise legislation that unnecessarily raises the cost 
of----
    Mr. Cardin. Suppose we do nothing. Suppose we do absolutely 
nothing. Let's say we don't pass these bills. Medical inflation 
goes up at what is projected to be at least three or four or 
five points above what inflation goes up. So the effective cost 
to an employer is going to continue to escalate to maintain the 
current plan. The employer is going to be either, according to 
your economic analysis, either going to have to cut back some 
place, have the employees pay more, or not provide the 
benefits. Is that what is going to happen? And, therefore, 
people are going to be underinsured or uninsured in greater 
numbers if Congress does nothing.
    Mr. Goodman. I think it is a little more complicated than 
that. Other things being equal, high health care costs give 
people incentive to want to be insured against them. So rising 
medical costs can contribute to more people buying health 
insurance and, in fact, that was probably what was happening a 
decade or so ago.
    Mr. Cardin. Then I am a little bit troubled by your 
argument that when we provide certain protections to patients 
that could add to the health care premium cost, that that adds 
to the number of uninsured. That doesn't seem to be logical 
from your--because health care cost is expensive.
    Mr. Goodman. What I am saying is we have passed a lot of 
laws which raise the cost of insuring against those health care 
costs. In other words, for an individual to get basic health 
care coverage, he has to buy into a very expensive package that 
could be less expensive if we didn't have a lot of State 
mandates, a lot of what I think are unwise regulations.
    But the two things that are going to cause the number of 
uninsured to rise are: The increasing cost of the health 
insurance itself as opposed to the cost of health care for 
healthy people.
    And, number two, we are making it increasingly easy for 
people to wait until they get sick before they get health 
insurance.
    Mr. Cardin. Mr. Kahn.
    Mr. Kahn. I think you present a dilemma, but clearly if you 
have a base inflation and then you build on top of that, 
particularly in a given year in one fell swoop, it does affect 
coverage. Now, in what you are describing you are saying the 
logical conclusion of the argument we have been making is a 
death spiral, that there is a point at which you are just 
getting to lose and lose and lose. Actually, you can look at 
the last few years and in many areas there have been zero 
premium increases and there has been, as I described, a 
marginal increase of the number of people covered by 
employment.
    I am concerned over time that, yes, if we don't keep 
premium increases corralled, that we are going to have the 
problem you are describing but to add on top of that the 
mandates in all their various forms, I would argue it just 
makes that more severe.
    Mr. Cardin. I think I would counter by the fact that if we 
keep premiums low by either shifting costs to the patient or 
consumer or by denying adequate health care in the policy, that 
we are--we are going to have underinsured individuals which can 
be just as serious a problem as uninsured. If I can't afford--
if my plan doesn't cover for an emergency visit, and I need to 
have emergency care because of their restrictive definition of 
what is an emergency visit, and I have to pay for that out of 
pocket, I am uninsured; aren't I?
    Mr. Kahn. I think we will have to agree to disagree about 
the extent to which people receive coverage. I think on your 
other point, though, about cost sharing, that study after study 
shows that a little cost sharing is a good thing, and that it 
involves the individual in the cost of care and makes them cost 
conscious, whether it is at the premium level or the 
coinsurance and deductible level.
    At the other level, I guess I am personally, and obviously 
the companies I work for, are not convinced that the set of 
requirements are going to assure patients that what you are 
describing is their perception of what full coverage is. I 
think we will just have to disagree.
    Mr. Cardin. Karen, you want to help me out on this.
    Ms. Lehnhard. I think there is no question that as premiums 
go up, they will go up on their own even without any changes 
here in Washington.
    As premiums go up, we are going to see more shifting--the 
primary thing we will see is more shifting to the employee to 
pay part of the premium and the dilemma is the part they pay is 
not deductible and I have actually--we didn't think of this. 
Some of the proposals actually provide for that deduction which 
some people won't like because that is not creating maybe in 
their minds tough cost sharing, but I think we are getting up 
to the point where it is 50-percent premium sharing by 
individuals.
    That is why in our proposal, we said go ahead and give a 
tax credit to a low-wage worker in a small firm even if their 
employer provides coverage because chances are they are paying 
a significant part of the premium, even if they have got 
coverage.
    The other thing I would mention, and I don't expect it to 
change anybody's mind; but what our plans are telling us it is 
not just patient protection cost, it is confidentiality, 
administrative simplification, year 2000, patient protection 
Federal and State, and the administrative costs are 
significant. But not only that, they are taking the creative 
people who would be developing new products and putting them 
into major systems changes, reinventing how we pay claims in 
some cases and that is what--we are in all lines of business, 
and I hear that the diversion from product development is 
significant.
    Mr. Cardin. I think that is a good point. I don't disagree 
with the points of making the system as cost effective as 
possible and some of the beneficiaries payments do make the 
system more cost effective. You raise a good point about 
premium deduction by those employers who do offer health care 
plans.
    Of course, we are trying to balance between getting more 
people adequately insured and just making it easier for 
employers to work with employees not to provide health benefits 
because they have the tax advantages without the employer-
sponsored plan. So there is a balancing point here, but I think 
most of us agree that the Tax Code should help those people who 
currently don't have health insurance become insured.
    Mr. Chairman, thank you.
    Mr. English [presiding]. Thank you. And I appreciate the 
opportunity to extend a few questions to the panel myself.
    A number of you have made, I think, a very compelling 
argument for a tax credit as part of an initiative toward 
universal access to affordable care which, to me, is a more 
realistic goal than universal coverage, although some of you 
may disagree with that.
    I would like to get my arms around your notions of how to 
design such a credit to have the maximum impact and maximum 
effectiveness. Dr. Butler, how large a credit do you think 
would be appropriate and what income limits would you suggest?
    Mr. Butler. You know, Mr. English, I think that almost begs 
the question of what kind of revenue costs are you 
contemplating, because the simple fact is that the larger the 
credit you provide, the larger the impact is going to be on the 
uninsured. There is no question about that.
    There is also no question that if you give a relatively 
small credit, you are not going to affect many people who are 
currently uninsured, but you are going to ease the burden on 
people who are struggling paycheck to paycheck to buy insurance 
outside the place of work. So, in a sense, it is kind of hard 
to answer your question. The proposals that have been put 
forward that would, say, provide a 30-percent credit would 
probably reduce uninsurance by somewhere between 1.5 and 2 
million, something of that order. Much of the value of that 
credit would go to people who are currently buying insurance 
out of pocket, after tax which I think is a good thing in 
itself. So it is a little difficult to answer your question.
    Mr. English. Let me assume then for a moment that we have a 
$1,000 credit. How far would that go in providing an adequate 
level of buying power for most families assuming an interaction 
with other programs such as Medicaid?
    Mr. Butler. Well, if you assume an interaction with other 
programs like CHIP and Medicaid and so on, then it would get 
you quite a long way toward your goal. But if you are looking 
at people only having that credit available to buy insurance, 
and no other method of assistance, then clearly as you go down 
the income level the net cost to the person taking the credit 
is still getting to be a very substantial portion of their 
income. And for some it is probably going to be prohibitive, so 
they are not going to accept the credit under those kinds of 
cases.
    That is why I think the approach is to try to combine a 
fixed amount, a larger fixed amount for people at the low end, 
maybe in combination with a percentage credit is probably the 
right way to go. When we looked at a much more substantial 
reform a few years ago which would have replaced the entire tax 
exclusion with a credit system, we looked at a sliding scale 
refundable credit which would go up to, I believe it was 60 to 
70 percent of the cost for those who were at the lowest end. 
That would substantially reduce the uninsurance rates.
    Mr. English. If we were--Ms. Lehnhard, did you want to add 
something to that?
    Ms. Lehnhard. I would just add we actually did modeling on 
this at $1,200 tax credit for very small firms less than 10 at 
225 percent of poverty. As a conservative modeling, we were 
very struck by the number of people who don't pick up coverage. 
The model showed about 1.9 people out of 7 million potentials 
pick up coverage which suggests you really almost have to pay 
the full cost, and then you still don't pick up the entire 
population.
    Mr. English. Dr. Butler, to follow up, I think what you are 
contemplating here is clearly refundable tax credit.
    Mr. Butler. At least partially refundable against payroll 
tax----
    Mr. English. Do you see any potential fraud problems with a 
credit like that, or is that going to be relatively easy to 
enforce?
    Mr. Butler. It depends how you design it. A fully 
refundable credit does raise lots of issues because you are 
dealing with people who don't file taxes and so on. There is a 
long history of problems with those kinds of subsidies via the 
tax system.
    I think if you are looking at a system which is essentially 
run through the withholding system, which you can do with a 
refundable credit against income taxes and payroll taxes, then 
proof of insurance becomes an element. The employer can at 
least be your first line of defense in terms of what is this 
person actually using it for. I think you can deal with a lot 
of problems.
    I also mentioned in passing a proposal that Senator Daschle 
offered a while ago to say as an additional, as an alternative, 
the idea of transferring the credit to an insurer in return for 
a lower premium to that person may also be a way of dealing 
with less likelihood of fraud in those kinds of situations. 
Again, that is not unlike what happens in the FEHBP where you 
get an after-subsidy price as an employee.
    Mr. English. That brings me to one other question; but 
first Mr. Kahn, did you have something to add?
    Mr. Kahn. Yes, Mr. English. I think you might want to look 
at this structurally differently though. To focus on how big 
the credit has to be I think maybe--it is a legitimate question 
but maybe the wrong question.
    Instead when we did our proposal, we looked at the poorest 
of the poor, and those near poor, under 200 percent of poverty 
and basically said that either an expansion of the CHIP Program 
or some kind of voucher but something that was done probably 
through the States probably through the welfare system in terms 
of determining what their income was is better than using the 
tax structure.
    Trying to help people at that level through the tax 
structure, one, as you say, leads to fraud and abuse issues, 
and two, leads to issues such as to how do you locate them. 
Also in our plan, we would give a credit to certain small 
employers directly if they purchase insurance. It is a costly 
proposal, but on the other hand it gets to the issue that Mary 
Nell Lehnhard was talking about which is it is the smallest 
employers who provide many of the jobs, particularly for the 
poorest people, who cover the least people and, in a sense, if 
you can get the bucks to the employer through the tax system, 
that may be a more efficient way than trying to get some of 
these dollars through to people in a credit that is going to be 
very difficult to design.
    Ms. Lehnhard. We took one more twist on that. We said just 
don't do it for all workers in small firms. Do it for the low-
income workers in small firms.
    Mr. English. Mr. Goodman.
    Mr. Goodman. First on the fraud question, there is fraud in 
the EITC program. The most frequent form of fraud is people 
claim kids that aren't their kids. But if you are claiming a 
tax credit for health insurance and you have the insurance 
company there, well, the insurance company presumably knows who 
it is insuring, who it is not.
    If an employer is involved as Dr. Butler said, the employer 
would be monitoring. So you bring more monitors into the 
system. The more monitors in the system means a lot less fraud. 
Now, as to the efficient way to do this, almost no one really 
is talking about--when they are talking about refundable tax 
credit--talking about handing people cash and saying go buy 
health insurance.
    I think we are all talking about a system under which you 
go through employers and you go through insurance companies in 
order to reduce the premium to the employee or to the buyer and 
pay for that with tax relief and the employer does the 
financial transaction or the insurance company does the 
transaction.
    So we don't have to go find people who are uninsured. It 
will happen through the place of work.
    Mr. English. Very good. Any other contributions?
    Mr. Butler. I would just add one point about the credit to 
employers, which I am fairly skeptical about because I think 
that one of the key issues, as has been discussed before, is 
how to get people into larger groups and larger pools.
    Look at a very small employer with five employees who is 
trying to buy insurance today in a pretty dismal market that 
they face. To say we will give them a credit and argue that 
that is more efficient than allowing the employee a credit to 
go and join a larger pool somewhere else, I don't think that 
argument holds. An individualized credit is much more 
appropriate for the very small business sector than subsidizing 
the employee-employer through a credit or any kind of system.
    Mr. English. Ms. Lehnhard, briefly.
    Ms. Lehnhard. I would just make one quick point. On the 
pooling of small employers, you don't have cases any more where 
groups of five are on their own. Every State has passed laws 
which require an insurance company to pool all of their small 
employers.
    It used to be you would have different products. You would 
segregate your risks. You can't do that anymore. Each Blue 
Cross and Blue Shield Plan will have all of its small employers 
in one pool. So the States have done a great public policy by 
stabilizing the small group market and requiring that pooling.
    Mr. Kahn. I guess I would argue if you had more money in 
the system for those smaller employers so there were more 
people participating, it would only enhance the pools that are 
being described that are already in the small group market.
    Mr. English. Thank you.
    Thank you very much for your participation today, and I 
will dismiss this panel. Let me turn this over and recognize 
Mrs. Thurman to inquire.
    Mrs. Thurman. Thank you, Mr. Chairman. You like that sound?
    Dr. Butler, I am intrigued because yesterday of course we 
had a panel before the medical--or the Health Subcommittee that 
talked again about the 43 million and yesterday we did some 
press on the issue of expansion of Medicare for 55 to 64 and 
with the issue that you brought up where you talk about 
nonemployment base groups actually are more logical and skilled 
in their organization, do you feel that way about opening up 
some of those government programs that are available to help 
expand some of the coverage in these areas?
    Mr. Butler. I don't think the two points are connected. 
What I argued was: First one has got to think about what are 
the best vehicles to provide insurance. And there are several 
criteria, one of which is there should be a long-term 
affiliation, so you are not going in and out of the pool. It 
should be large so that it is big enough to spread the risks 
and so on. I pointed out that there are organizations that 
currently exist to fulfill a lot of those functions, and maybe 
we ought to explore how to deal with some of the wrinkles that 
you have to deal with. I mean labor unions, churches, other 
kinds of groups like that.
    Mrs. Thurman. Would this be one that you would feel should 
be explored then for the 55-year-old to 64-year-old going into 
Medicare because in some cases it could be a spouse who is now 
65 whose spouse is younger and has no affiliation because 
whatever job or employment they were at no longer exists. So 
the idea would be to expand it in some of those areas 
particularly for Medicare----
    Mr. Butler. I don't think it is necessary to reach the 
condition I mentioned because, for example, if you did have 
people who had a union-sponsored plan and had tax relief and a 
tax credit, whether or not they were employed, then that system 
would function for the people who are 60 to 65 who are not 
currently in Medicare.
    Those people would be able to continue coverage under the 
existing organization that they are affiliated with and would 
get tax relief if the kind of recommendations we have made 
would continue. I think when you start talking about bringing 
Medicare down into that group, and I know this is an issue that 
has been proposed and we have argued about it before, I think 
you have got all sorts of questions about who would choose to 
do that, what the liability would be for the government, what 
kind of adverse selection would occur against Medicare, whether 
Medicare is best for them or whether they should continue in 
something we already have.
    I don't think it makes a lot of sense to say to somebody 
who turns 60 and has good coverage, say through a labor 
organization, you are basically going to have to drop this and 
go in to Medicare.
    Mrs. Thurman. I don't think that has been called for.
    Mr. Butler. The ideal situation would be to allow people to 
join organizations when they are working, throughout their 
working life and to continue into Medicare. My argument would 
be that we should look at making Medicare much more flexible so 
that these kinds of more indigenous organizations could become 
a central part of the Medicare delivery system rather than 
doing the opposite.
    Mrs. Thurman. I was just looking at your definition of what 
you had considered.
    Let me ask the panel, the CRS has done a fairly extensive 
report on all of the tax benefits in current law as for 
providing insurance through, for example, the employment base 
plans. There are some tax deductions, medical expense 
deduction, all of us know that is a very difficult threshold to 
meet, but in fact it is there. You have got cafeteria plans. 
You have got self-employed deductions. You have got flexible 
spending accounts, medical savings accounts, both military and 
Medicare, none of which is considered as part of our income.
    I mean, it seems to me that we have a hodgepodge in many 
ways of tax credits available to us today, and still we have 43 
million people not getting health care. And I personally asked 
the question yesterday, and I am going to ask this panel. In 
these different categories of insurance tax deductions that we 
have, are they working today? How many of that 43 million 
people have the advantage of these tax credits that are not 
using them, and have we looked at why they are not using them?
    Mr. Kahn. I believe, Mrs. Thurman, that they are working 
today but there are a lot of gaps. There are people who don't 
work in large firms or firms that take advantage for their 
employees of all those. And second, if you look at the problem 
of uninsurance, it is primarily a problem of income and people 
who work in small firms.
    Mrs. Thurman. I understand the small firm but let's say for 
example, the self-deduction--I mean for somebody who is--owns 
their own business. Do we know how many people out there who 
are not taking advantage of that? And that is a very small 
firm. Those are some issues that I am really concerned that we 
are----
    Mr. Kahn. We are taking advantage of that based on income. 
Law firms that are all partners and they are self-employed, 
they are taking advantage of it and Joe's bar and grill that is 
just two people, self-employed, are probably not. So I think it 
comes down to income at the end of the day. You can only use a 
tax benefit if there is income there to enjoy it. That is one 
of the issues that is important.
    Mr. Goodman. But it is a hodgepodge on the tax side almost 
as bad as the hodgepodge over on the spending side. It seems to 
me like there is a very strong case to be made with treating 
everyone the same, fairness. You say we are going to give a tax 
break to you if you buy health insurance and it is going to be 
x dollars and it is going to be the same whether or not you get 
it through an employer or you are self-employed or you have to 
go buy it on your own.
    We strongly favor having that tax credit be just as 
generous for the low-income person as the high-income person 
whereas today it is all geared to the people in the higher 
brackets.
    Mr. Butler. The overwhelming volume of the tax relief 
available for health care is for people who are connected to 
the health insurance system through their place of work or are 
affluent because for the 7.5-percent threshold, for example, 
you have got to itemize, you have got to have significant 
expenses, and you have got to be able to afford those expenses. 
So the huge gap is the people who are outside the employment 
base system and are relatively low income.
    That is why I think all of these proposals that have been 
put forward are focusing on that group, and I think they should 
do.
    Mr. Kahn. If I could make one other point too. That 7.5 
percent was totally arbitrary, and it was done in tax reform.
    Mrs. Thurman. Why does that not surprise me?
    Mr. Kahn. Because they needed the money to make the whole 
tax reform work, and it was one of the areas. It was lower for 
years, I mean, for eons. I can remember the day, I was working 
for Senator Durenberger at the time, and I said don't do that 
and he went and did it as other Members did.
    But the point is that is arbitrary and I think actually if 
you are looking at things to help people, that is one item that 
even though obviously you have to itemize is arbitrary and 
probably too high.
    Ms. Hoenicke. If I could add one thing and my only role on 
the health side of this panel is with respect to long-term 
care, and I think that is clearly an area where there is a huge 
gap in the Tax Code. There is no deduction for long-term care 
and that is a medical expense.
    Mrs. Thurman. Nancy and I are working on that.
    Ms. Hoenicke. We know you are, and I wanted to say thank 
you again as we did in our statement. Thanks.
    Mr. English. I thank the gentlelady for her contribution. 
Do any other Members wish to inquire? The Chair recognizes Mr. 
McInnis.
    Mr. McInnis. Thank you, Mr. Chairman. I would only make one 
point. Dr. Goodman, toward the end of your remarks, sir, you 
point out that the income tax credit apparently should apply to 
the low income as well as the high income. That is not a tax 
credit at the low income. Tax credit is applied to income. Once 
you go to someone who doesn't have the income but gets the tax 
credit instead, that is a welfare program so you should 
distinguish between the two.
    Mr. Goodman. I don't mind if you rhetorically distinguish 
it that way, but what I am saying is presuming the government 
has an interest on whether people insure because if they don't 
insure, they can show up at hospitals and incur medical bills 
that have to be paid for by the rest of us.
    Mr. McInnis. I will reclaim my time. I don't disagree with 
that, but I think we need to distinguish and I think you need 
to distinguish, doctor, when you talk about that at some point 
you need to subsidize it in the form of a welfare instead of a 
tax credit against income. That concludes my question, Mr. 
Chairman, thank you.
    Mr. English. Thank you, Mr. McInnis. I want to thank this 
panel for their extraordinary contribution to the discussion 
here today and I would like to invite forward the next panel 
which will consist of Jack Stewart, assistant director for 
Pension, Principal Financial Group of Des Moines, Iowa, on 
behalf of the Association of Private Pensions and Welfare 
Plans; Paula A. Calimafde, chair of the Small Business Council 
of America, Bethesda, Maryland, and a member of the Small 
Business Legislative Council, and also on behalf of the 
American Society of Pension Actuaries and the Profit Sharing/
401(K) Council of America; J. Randall MacDonald, executive vice 
president for human resources and administration of the GTE 
Corp. of Irving, Texas, and a member of the board of directors 
of the ERISA Industry Committee; and Jim McCarthy, vice 
president and product development manager of the Private Client 
Group for Merrill Lynch & Co., Inc., Princeton, New Jersey, on 
behalf of the Savings Coalition of America.
    I welcome this panel.
    You are invited to give your testimony up until the red 
light blinks. We would encourage you to stay within the time 
parameters. We still have one more panel to go afterward and we 
look very much forward to your contribution. I recognize Mr. 
Stewart.

   STATEMENT OF JACK STEWART, ASSISTANT DIRECTOR, PENSIONS, 
   PRINCIPAL FINANCIAL GROUP; DES MOINES, IOWA; ON BEHALF OF 
        ASSOCIATION OF PRIVATE PENSION AND WELFARE PLANS

    Mr. Stewart. Thank you, Mr. Chairman. I am Jack Stewart, 
assistant director of Pension at the Principal Financial Group 
of Des Moines, Iowa. I am here on behalf of APPWP, the 
Association of Private Pension and Welfare Plan, the Benefits 
Association.
    APPWP is a public policy organization representing 
principally Fortune 500 companies as well as other 
organizations such as Principal that assist plan sponsors in 
providing benefits to employees. It is a privilege for me to 
testify before the Committee and I want to extend the APPWP's 
thanks for your personal commitment to the issue of helping 
American families achieve retirement security.
    You have shown steadfast dedication to seeing that all legs 
of our retirement income stool, Social Security, employer-
provided pensions, and personal savings are made strong for the 
future.
    I want to focus my comments on steps we can take together 
to strengthen the pension and savings legs of this stool. As 
the Committee begins to craft the upcoming tax bill, we urge 
you to include in that bill, H.R. 1102, the Comprehensive 
Retirement Security and Pension Reform Act of 1999, introduced 
by Representatives Portman and Cardin. H.R. 1102 will extend 
the benefits of pension coverage to more American workers and 
will offer new help to American families saving for retirement. 
Ninety Members of Congress have now cosponsored this bill 
including 26 Members of this Committee. And the coalition 
supporting it includes 64 organizations ranging from major 
employer groups such as APPWP to the Building and Construction 
Trades Department of the AFL-CIO, to the National Governors' 
Association.
    I want to focus my remarks on what APPWP considers to be 
the backbone of H.R. 1102, how the Federal Government can 
encourage employers to create and maintain tax-qualified 
retirement plans. I will briefly touch on five areas of the 
bill that are critical to this effort, restoration of 
contribution and benefit limits, simplification of pension 
regulations, small business incentives, enhanced pension 
portability, and improved pension funding.
    One of the most significant reforms in 1102, and in 
Representative Thomas' H.R. 1546, is the restoration to 
previous dollar levels of several contribution and benefit 
limits that cap the amount that can be saved and accrued in 
workplace retirement plans. These caps have been reduced 
repeatedly for budgetary reasons and are lower today in actual 
dollar terms--to say nothing of the impact of inflation--than 
they were many years ago.
    Based on my 22 years of experience in the retirement plan 
arena, I am convinced that restoring these limits will result 
in more employers offering retirement plans. Restored limits 
will convince businessowners that they will be able to fund a 
reasonable retirement benefit for themselves and other key 
employees, will encourage these individuals to establish and 
improve qualified retirement plans, and will result in pension 
benefits for more rank-and-file workers.
    Restored limits are also important to the many baby boomers 
who must increase their savings in the years ahead in order to 
build adequate retirement income. The catchup contribution 
contained in the bill, which would permit those employees who 
have reached age 50 to contribute an additional 5,000 each year 
to a defined contribution plan, will likewise address the 
savings needs of baby boomers and will provide an especially 
important savings tool for the many women who return to the 
work force after raising children.
    Another vitally important component of H.R. 1102 is the 
simplification of many Tax Code sections and pension rules that 
today still inhibit our private retirement system. I have found 
that these complicated rules deter many small employers from 
offering retirement plans and make plan administration a costly 
and burdensome endeavor for companies of all sizes. The bill 
simplification measures include needed flexibility in the 
coverage and nondiscriminations tests, repeal of the multiple 
use test, and an earlier funding valuation date for defined 
benefit plans and reform of the separate lines of business 
rules.
    H.R. 1102 also contains several important measures aimed at 
making it easier for small businesses to offer retirement 
plans. First and foremost, the bill streamlines and simplifies 
top-heavy rules. The legislation also assists small businesses 
with plan startup administration costs through a tax credit, 
reduced PBGC insurance premiums and waived IRS user fees as 
well as simplified reporting.
    Based on my experience working with small companies, I am 
convinced that these changes will make our retirement system 
more attractive to small employers.
    APPWP is also pleased that H.R. 1102 would repeal the 150 
percent of current liability funding limit imposed on defined 
benefit plans. This would cure a budget-driven constraint that 
has prevented employers of all sizes from funding the benefits 
they have promised to their workers. In conclusion, I want to 
thank you again for the opportunity to appear today to share 
APPWP's views on ways to enhance retirement security for 
American families.
    We look forward to working with you in the weeks ahead to 
enact the reforms contained in 1102 as part of your broader 
effort to make our Nation's tax laws simpler and less 
burdensome. Thanks.
    [The prepared statement follows:]

Statement of Jack Stewart, Assistant Director, Pensions, Principal 
Financial Group; Des Moines, Iowa; on behalf of Association of Private 
Pension and Welfare Plans

    Mr. Chairman and members of the Committee, I am Jack 
Stewart, Assistant Director--Pension at the Principal Financial 
Group of Des Moines, Iowa. I am here today as the 
representative of the Association of Private Pension and 
Welfare Plans (APPWP--The Benefits Association). APPWP is a 
public policy organization representing principally Fortune 500 
companies and other organizations such as the Principal that 
assist employers of all sizes in providing benefits to 
employees. Collectively, APPWP's members either sponsor 
directly or provide services to retirement and health plans 
covering more than 100 million Americans.
    It is a privilege, Mr. Chairman, for me to testify before 
the Committee today and I want to extend APPWP's thanks for 
your personal dedication to the issue of helping American 
families achieve retirement security. You have shown steadfast 
dedication to seeing that all legs of our retirement income 
stool--Social Security, employer-provided pensions and personal 
savings--are made strong for the future.
    I want to focus my comments on the steps we can take 
together to strengthen the pension and savings legs of this 
stool. As you and the Committee begin to craft the upcoming tax 
bill, APPWP believes there is a clear step that you can take to 
extend the benefits of pension coverage to even more American 
workers and to offer new help to American families saving for 
retirement. That step is inclusion and passage of H.R. 1102, 
the Comprehensive Retirement Security and Pension Reform Act of 
1999, which was introduced in March by Representatives Rob 
Portman (R-OH) and Ben Cardin (D-MD) together with a large 
group of bipartisan cosponsors. Representatives Portman and 
Cardin have once again rolled up their sleeves and done the 
heavy lifting that is required to master the intricacies of our 
pension laws and to craft reform proposals that are responsible 
and technically sound. With this bill, they have continued 
their long-standing commitment to retirement savings issues and 
have demonstrated both leadership and vision in setting a 
comprehensive course for improvement of our nation's 
employment-based retirement system. Eighty-four Members of 
Congress have now cosponsored H.R. 1102--including 25 members 
of this Committee--and the coalition supporting it includes 64 
organizations ranging from major employer groups such as APPWP 
to the Building and Construction Trades Department of the AFL-
CIO to the National Governors Association.
    Mr. Chairman, while H.R. 1102 contains a whole series of 
important reforms, I would like to focus on the five areas of 
the bill that APPWP believes are of particular importance for 
advancing our nation's pension policy--(1) restoration of 
contribution and benefit limits, (2) simplification of pension 
regulation, (3) new incentives for small employers to initiate 
plans, (4) enhanced pension portability, and (5) improved 
defined benefit plan funding.

             Restoration of Contribution and Benefit Limits

    One of the most significant reforms in H.R. 1102 is the 
restoration of a number of contribution and benefit limits to 
their previous dollar levels. These limits cap the amount that 
employees and employers may save for retirement through defined 
contribution plans as well as limit the benefits that may be 
paid out under defined benefit pension plans. Many of these 
dollar limits have been reduced repeatedly since the time of 
ERISA's passage. Today, they are far lower in actual dollar 
terms--to say nothing of the effect of inflation--than they 
were many years ago.
    During the 1980's and early 1990's, Congress repeatedly 
lowered retirement plan contribution and benefit limits for one 
principal, if frequently unstated, reason: to increase the 
amount of revenue that the federal government collects. It is 
time to put an end to that type of short-term policy-making. It 
is true that under federal budget scorekeeping rules, proposals 
that encourage people to contribute more to retirement savings 
cost the federal government money in the budget-estimating 
window period. Yet incentives that effectively increase 
retirement savings are among the best investments we can make 
as a nation. These incentives will pay back many times over 
when individuals retire and have not only a more secure 
retirement, but also increased taxable income. Increased 
retirement savings also generates important investment capital 
for our economy as a whole.
    It is time that retirement policy--rather than short-term 
budgetary gains--guide Congress'actions in the plan limits 
area. H.R. 1102 wisely takes this approach by restoring a 
series of contribution and benefit limits to their intended 
levels. H.R. 1546, introduced by Representative Thomas, also 
restores a number of these limits. These limit restorations 
give practical significance to the calls by the President, Vice 
President and bipartisan congressional leadership last June at 
the National Summit on Retirement Savings to allow Americans to 
save more effectively for their retirement.
    Restored limits are critical for a number of reasons. They 
would help return us to the system of retirement plan 
incentives intended at the time of ERISA's passage. In our 
voluntary pension system, it has always been necessary to 
incent the key corporate decision-makers in initiating a 
qualified retirement plan in order that rank-and-file workers 
receive pension benefits. An important part of generating this 
interest is demonstrating that these individuals will be able 
to fund a reasonable retirement benefit for themselves. The 
contribution and benefit limit reductions of recent years have 
reduced the incentives for these decision-makers, giving them 
less stake in initiating or maintaining a tax-qualified 
retirement plan. Based on my 22 years of experience in the 
retirement arena, particularly my work with small and mid-sized 
companies, I am convinced that restoring these limits will 
result in greater pension coverage. Restored limits will 
convince business owners that they will be able to fund a 
reasonable retirement benefit for themselves and other key 
employees, will encourage these individuals to establish and to 
improve tax-qualified retirement plans, and will thereby result 
in pension benefits for more rank-and-file workers.
    Restored limits are also important so that the many baby 
boomers who have not yet saved adequately for retirement have 
the chance to do so. A reduced window in which to save or 
accrue benefits clearly means one must save or accrue more, and 
restoring limits will allow this to occur. Of particular 
concern is the fact that it appears that older baby boomers are 
not increasing their level of saving as they move into their 
mid-to-late 40s. Rather, they are continuing to fall further 
behind--with savings of less than 40 percent of the amount 
needed to avoid a decline in their standard of living in 
retirement.
[GRAPHIC] [TIFF OMITTED] T0332.014


    Every day's delay makes the retirement savings challenge 
more difficult to meet, and every day's delay makes the 
prospect of catching up more daunting. Individuals who want to 
replace one-half of current income in retirement must save 10 
percent of pay if they have 30 years until retirement. These 
same individuals will have to save 34 percent of pay if they 
wait until 15 years before retirement to start saving.
[GRAPHIC] [TIFF OMITTED] T0332.015


    Along with restored limits, H.R. 1102 contains a specific 
tool to help workers meet this savings challenge. The catch-up 
contribution contained in the bill--which would allow those who 
have reached age 50 to contribute an additional $5,000 each 
year to their defined contribution plan--will help address the 
savings needs of baby boomers and will be an especially 
important savings tool for women. Many workers find that only 
toward their final years of work, when housing and children's 
education needs have eased, do they have enough discretionary 
income to make meaningful retirement savings contributions. 
This problem can be compounded for women who are more likely to 
have left the paid workforce for a period of time to raise 
children or care for elderly parents and thereby not even had 
the option of contributing to a workplace retirement plan 
during these periods.
    The catch-up provision of H.R. 1102 recognizes these life 
cycles and also acknowledges the fact that, because Section 
401(k) plans have only recently become broadly available, the 
baby-boom generation has not had salary reduction savings 
options available during much of their working careers. The 
catch-up provision would help ensure that a woman's family 
responsibilities do not result in retirement insecurity and 
would help all those nearing retirement age to meet their 
remaining savings goals. While some catch-up contribution 
designs would create substantial administrative burden for plan 
sponsors, the simple age eligibility trigger contained in the 
Portman-Cardin bill does not and will result in more companies 
offering this important savings tool to their workers.
    There is an additional savings enhancement contained in the 
bill that APPWP wishes to highlight briefly. Under current law, 
total annual contributions to a defined contribution plan for 
any employee are limited to the lesser of $30,000 or 25% of 
compensation. Unfortunately, the percentage of compensation 
restriction tends to unfairly limit the retirement savings of 
relatively modest-income workers while having no effect on the 
highly-paid. For example, a working spouse earning $25,000 who 
wants to use his or her income to build retirement savings for 
both members of the couple is limited to only $6,250 in total 
employer and employee contributions. By removing the percentage 
of compensation cap, H.R. 1102 would remedy this unfortunate 
effect of current law and remove a barrier that blocks the path 
of modest-income savers.
    Some have expressed concern that restoration of benefit and 
contribution limits would not be a good use of tax expenditure 
dollars and that dollars spent in this way would 
disproportionately benefit high-income individuals. We at APPWP 
believe this concern is misplaced and that analyzing pension 
reforms purely from a current year tax deferral perspective 
misses the point. It should be no surprise, after all, that in 
our progressive tax system where many lower-income individuals 
have no tax liability, pension tax preferences like other tax 
preferences flow in large part to those at higher-income 
levels. Yet in reforming the pension system, we should focus 
not on who receives the tax expenditure but rather on who 
receives the pension benefit. And with respect to pension 
benefits, our employer-sponsored system delivers them fairly 
across all income classes. Of married couples currently 
receiving retirement plan benefits, for example, 57% had 
incomes below $40,000 and nearly 70% had incomes below $50,000. 
Of those active workers currently accruing retirement benefits, 
nearly 45% had earnings below $30,000 and over 77% had incomes 
below $50,000.\1\ Restoration of benefit and contribution 
limits will bring more employers into the private system, and, 
as these figures demonstrate, this system succeeds at 
delivering benefits to the working and middle-income Americans 
about whom we are all concerned.
---------------------------------------------------------------------------
    \1\ Source: Analysis of the March 1998 Current Population Survey 
performed by Janemarie Mulvey, Ph.D., Director, Economic Research, 
American Council of Life Insurance
---------------------------------------------------------------------------

                             Simplification

    Another vitally important component of H.R. 1102 is the 
series of simplification proposals that will streamline many of 
the complicated tax code sections and pension rules that today 
still choke the employer-provided retirement system. 
Unfortunately, in my many years dealing with small and mid-
sized employers, I have seen that the astounding complexity of 
today's pension regulation drives businesspeople out of the 
retirement system and deters many from even initiating a 
retirement plan at all. Not only are businesspeople leery of 
the cost of complying with such regulation, but many fear that 
they simply will be unable to comply with rules they cannot 
understand. We must cut through this complexity if we are to 
keep those employers with existing plans in the system and 
prompt additional businesses to enter the system for the first 
time. Simplifying these pension rules will also further your 
goal, Mr. Chairman, of making our tax code simpler and more 
understandable for American citizens and businesses.
    A more workable structure of pension regulation can be 
achieved only by adhering to a policy that encourages the 
maximization of fair, secure, and adequate retirement benefits 
in the retirement system as a whole, rather than focusing 
solely on ways to inhibit rare (and often theoretical) abuses. 
This can be accomplished by ensuring that all pension 
legislation is consistent with continued movement toward a 
simpler regulatory framework. In short, simplification must be 
an ongoing process. Proposals that add complexity and 
administrative cost, no matter how well intentioned, must be 
resisted, and the steps taken in earlier pension simplification 
legislation must be continued. Current rules must be 
continuously reexamined to weed out those that are obsolete and 
unnecessary. Representatives Portman and Cardin have led past 
congressional efforts at simplification, and APPWP commends 
them for continuing this important effort in their current 
bill.
    As I indicated, Mr. Chairman, H.R. 1102 contains a broad 
array of simplification provisions to address regulatory 
complexity. Let me briefly mention a few that APPWP believes 
would provide particular relief for plan sponsors. First, the 
legislation would provide flexibility with regard to the 
coverage and non-discrimination tests in current law, allowing 
employers to demonstrate proper plan coverage and benefits 
either through the existing mechanical tests or through a facts 
and circumstances test. Second, the bill would repeal the 
duplicative multiple use test, which will eliminate a needless 
complexity for employers of all sizes. Third, the bill would 
promote sounder plan funding and predictable plan budgeting 
through earlier valuation of defined benefit plan funding 
figures. And fourth, the bill would reform the separate lines 
of business rules so that these regulations serve their 
intended purpose--allowing employers to test separately the 
retirement plans of their distinct businesses.
    APPWP believes that the cumulative effect of the bill's 
regulatory reforms will be truly significant. Reducing the 
stranglehold that regulatory complexity holds over today's 
pension system will be a key factor in improving the system's 
health and encouraging new coverage over the long-term. As H.R. 
1102--and pension legislation generally--progress through this 
Committee and the Congress, Mr. Chairman, we would urge you to 
keep these simplification measures at the very top of your 
reform agenda.

                       Small Business Incentives

    While the various changes I have outlined above will assist 
employers of all sizes, H.R. 1102 also contains several 
important measures specifically targeted at small businesses. 
As you may be aware, Mr. Chairman, pension coverage rates for 
small businesses are not as high as they are for larger 
companies. While the number of small employers offering 
retirement plans is growing,\2\ we need to take additional 
steps to make it easier and less costly for today's dynamic 
small businesses to offer retirement benefits to their workers.
---------------------------------------------------------------------------
    \2\ A 1996 survey by the Bureau of Labor statistics revealed that 
42% of full-time employees in independently-owned firms with fewer than 
100 employees participated in a pension or retirement savings plan. 
This was up from 35% in 1990. See Pension Coverage: Recent Trends and 
Current Policy Issues, CRS Report for Congress, #RL30122, April 6, 
1999.
---------------------------------------------------------------------------
    H.R. 1102 takes a multi-faceted approach to making it 
easier for small employers to offer retirement plans. First and 
foremost, H.R. 1102 streamlines and simplifies the top-heavy 
rules, which are a source of unnecessary complexity for small 
employers and are one of the largest barriers deterring small 
companies from bringing retirement plans on-line. The 
legislation will also assist small companies with the costs of 
initiating a retirement plan. Small employers will be offered a 
three-year tax credit for start-up and administration costs, 
they will be eligible for discounted PBGC premiums on their 
defined benefit plans, and they will no longer be required to 
pay a user fee for obtaining a letter of tax qualification from 
the IRS for their plan. Based on Principal's extensive 
experience in the small business market, and my own personal 
work with small companies, I am convinced that these changes, 
in combination with the limit restorations and simplifications 
described above, will make our private retirement system 
substantially more attractive to American small business. The 
important result will be access to employer-sponsored 
retirement plans for the millions of small business employees 
who today lack the opportunity to save for retirement at the 
workplace.

                              Portability

    Another important advance in H.R. 1102 is the cluster of 
provisions designed to enhance pension portability. Not only 
will these initiatives make it easier for individual workers to 
take their defined contribution savings with them when they 
move from job to job, but they will also reduce leakage out of 
the retirement system by facilitating rollovers where today 
they are not permitted. In particular, the bill's provisions 
allowing rollovers of (1) after-tax contributions and (2) 
distributions from Section 403(b) and 457 plans maintained by 
governments and tax-exempt organizations will help ensure that 
retirement savings does not leak out of the system before 
retirement.
    The bill's portability initiatives will also help eliminate 
several rigid regulatory barriers that have acted as 
impediments to portability. Repeal of the ``same desk'' rule 
will allow workers who continue to work in the same job after 
their company has been acquired to move their 401(k) account 
balance to their new employer's plan. Reform of the ``anti-
cutback'' rule will make it easier for defined benefit and 
other plans to be combined and streamlined in the wake of 
corporate combinations and will eliminate a substantial source 
of confusion for plan participants. We specifically want to 
thank Representatives Portman and Cardin for the refinements 
they have made to their portability provisions in response to 
several administrative concerns raised by APPWP and others. We 
believe the result is a portability regime that will work well 
for both plan participants and plan sponsors.

                      Defined Benefit Plan Funding

    APPWP is also pleased that H.R. 1102--as well as H.R. 
1546--includes an important pension funding reform that we have 
long advocated. The bills' repeal of the 150% of current 
liability funding limit for defined benefit plans would remove 
a budget-driven constraint in our pension law that has 
prevented companies from funding the benefits they have 
promised to their workers. The calculation of this funding 
limitation requires a separate actuarial valuation each year, 
which adds to the cost and complexity of maintaining a defined 
benefit plan. More importantly, the current liability funding 
limit forces systematic underfunding of plans, as well as 
erratic and unstable contribution patterns. Limiting funding on 
the basis of current liability disrupts the smooth, systematic 
accumulation of funds necessary to provide participants' 
projected retirement benefits. In effect, current law requires 
plans to be funded with payments that escalate in later years. 
Thus, employers whose contributions are now limited will have 
to contribute more in future years to meet the benefit 
obligations of tomorrow's retirees. If changes are not made 
now, some employers may be in the position of being unable to 
make up this shortfall and be forced to curtail benefits or 
terminate plans. Failing to allow private retirement plans to 
fund adequately for the benefits they have promised will put 
more pressure on Social Security to ensure income security for 
tomorrow's retirees.
    The problems caused by precluding adequate funding are 
compounded by a 10 percent excise tax that is imposed on 
employers making nondeductible contributions to qualified 
plans. This penalty is clearly inappropriate from a retirement 
policy perspective. Employers should not be penalized for being 
responsible in funding their pension plans. The loss of an 
immediate deduction should, in and of itself, be a sufficient 
deterrent to any perceived abusive ``prefunding.''
    The net effect of the arbitrary, current liability-based 
restriction on responsible plan funding, and the 10 percent 
excise tax on nondeductible contributions, is to place long-
term retirement benefit security at risk. With removal of this 
limit and modification of the excise tax, H.R. 1102 would 
provide the enhanced security for future retirees that comes 
with sound pension funding.

            Additional Proposals to Boost Retirement Savings

    Our testimony today has focused on only a few of the 
important changes contained in H.R. 1102. There are many other 
proposals in the bill that would help American families to save 
for retirement, and I want to touch briefly on a few of them 
before concluding.
     First, the bill includes an important change in 
the tax treatment of ESOP dividends that would provide 
employees with a greater opportunity for enhanced retirement 
savings and stock ownership. Under current law, deductions are 
allowed on dividends paid on employer stock in an unleveraged 
ESOP only if the dividends are paid to employees in cash; the 
deduction is denied if the dividends remain in the ESOP for 
reinvestment. Under H.R. 1102, deductions would also be allowed 
when employees choose to leave the dividends in the plan for 
reinvestment, encouraging the accumulation of retirement 
savings through the employee's ownership interest in the 
employer.
     Second, H.R. 1102 creates a new designed-based 
safe harbor--the Automatic Contribution Trust (ACT)--which 
encourages employers to enroll new workers automatically in 
savings plans when they begin employment. Automatic enrollment 
arrangements such as the ACT have been shown to boost plan 
participation rates substantially, particularly among modest-
income workers.
     Third, the legislation would remedy the 
uncertainty and complexity that today surrounds the tax 
treatment of employer-provided retirement counseling. All 
employer-provided retirement planning, including planning that 
does not relate to the employer's plans, would be excludable 
from employee's income under H.R. 1102. The bill would also 
make clear that employees could purchase retirement counseling 
through salary reduction on a pre-tax basis. Since many 
employers provide retirement education to their employees or 
would like to do so, it is critical that the law surrounding 
the tax treatment of this benefit be clear. Moreover, given the 
importance and popularity of 401(k) plans, where the primary 
responsibility for saving and investing falls on employees, 
employers should continue to be encouraged to provide 
information and education about these plans.

                               Conclusion

    Mr. Chairman, the complexity of America's workplace and the 
diversity of America's workforce require that we maintain an 
employment-based retirement system that is flexible in meeting 
the unique needs of specific segments of the workforce and that 
can adapt over time to reflect the changing needs of workers at 
different points in their lives. For this reason, there is no 
single ``magic'' solution to helping Americans toward a more 
secure retirement. Rather a comprehensive series of responsible 
and well-developed proposals--such as those found in H.R. 
1102--is the best way to make substantial progress in 
strengthening our already successful private retirement system 
and we urge their inclusion in your upcoming tax bill.
    Mr. Chairman, thank you again for the opportunity to appear 
today to share APPWP's views on ways to improve the retirement 
security of American families. We commend your commitment to 
this goal and salute Representatives Portman and Cardin, and 
those with whom they have worked, for crafting and cosponsoring 
a bill that will make this goal a reality. We look forward to 
working with you in the weeks ahead to enact these pension and 
savings reforms as part of your broader effort to make our 
nation's tax system simpler and less burdensome.
      

                                


                                                      June 16, 1999

The Honorable Bill Archer Chairman,
Committee on Ways & Means
U.S. House of Representatives
Washington, DC 20515

    Dear Chairman Archer:

    The undersigned group of organizations dedicated to promoting long-
term savings for retirement would like to express our strong support 
for H.R. 1102, The Comprehensive Retirement Security and Pension Reform 
Act of 1999, which has been introduced by Representatives Rob Portman 
and Ben Cardin.
    Thanks in large part to your efforts and leadership, Congress has 
taken important steps in recent years to strengthen the employer-
sponsored retirement system and to aid American families in saving for 
retirement. Yet we share your conviction that much more can and should 
be done in this area. We believe that The Comprehensive Retirement 
Security and Pension Reform Act of 1999 will substantially advance the 
goals of expanded pension coverage and increased retirement savings.
    Offering a comprehensive retirement reform agenda, H.R. 1102 would 
encourage employers, particularly small employers, to establish and 
maintain workplace retirement plans and would provide enhanced 
opportunities for Americans to save by increasing contribution and 
benefit limits in these plans. It would facilitate the portability and 
preservation of retirement benefits--for both private and public 
retirement systems--and would allow for stronger funding of pension 
plans. H.R. 1102 would also simplify many of the overly complex rules 
governing retirement plans, reducing the administrative and cost 
barriers that have made it difficult for many employers to offer 
retirement benefits and ensuring that today's business transactions are 
not inhibited by outdated and unnecessary pension regulation. We 
believe the reforms contained in H.R. 1102 would mark an important step 
forward for our nation's retirement policy and would extend the 
benefits of pension coverage and retirement savings to many more 
American families.
    We look forward to working in close partnership with you to see The 
Comprehensive Retirement Security and Pension Reform Act of 1999 
enacted this year. Thank you again for your efforts on this critical 
policy issue.

            Sincerely,

American Council of Life Insurance

American Society of Pension Actuaries

Association for Advanced Life Underwriting

Association of Private Pension and Welfare Plans

College and University Personnel Association

Employers Council on Flexible Compensation

ERISA Industry Committee

Government Finance Officers Association

International Personnel Management Association

Investment Company Institute

National Association of Life Underwriters

National Association of Manufacturers

National Association of State Retirement Administrators

National Conference on Public Employee Retirement Systems

National Council on Teacher Retirement

National Defined Contribution Council

National Employee Benefits Institute

National Rural Electric Cooperative Association

National Telephone Cooperative Association

Profit Sharing/401(k) Council of America

Securities Industry Association

Small Business Council of America

U.S. Chamber of Commerce

      

                                


    Mr. English. Thank you, Mr. Stewart.
    Ms. Calimafde, we look forward to your testimony.

STATEMENT OF PAULA A. CALIMAFDE, CHAIR, SMALL BUSINESS COUNCIL 
OF AMERICA, BETHESDA, MARYLAND; AND MEMBER, AND DIRECTOR, SMALL 
BUSINESS LEGISLATIVE COUNCIL; ON BEHALF OF AMERICAN SOCIETY OF 
PENSION ACTUARIES, AND PROFIT SHARING/401(K) COUNCIL OF AMERICA

    Ms. Calimafde. I am Paula Calimafde. I am a practicing tax 
lawyer for more than 23 years in the qualified retirement plans 
and estate planning area. I am the chair of the Small Business 
Council of America. I am a director of the Small Business 
Legislative Council. I was a delegate appointed by Majority 
Leader Trent Lott to the National Summit on Retirement Savings. 
I was appointed by the President to the 1995 White House 
Conference on Small Business and served as the Commissioner of 
Payroll Costs at the 1986 White House Conference on Small 
Business where that section covered Social Security and 
retirement policy.
    Today I am also representing the American Society of 
Pension Actuaries whose members provide actuarial consulting 
administrative services to approximately one-third of all the 
retirement plans in the country, many of which are small 
business plans. I am also representing the Profit Sharing/
401(K) Council of America whose members represent about 3 
million plan participants.
    I want to discuss the reasons why a small business chooses 
not to sponsor a qualified retirement plan. We know that the 
coverage in the small business area is lagging and lagging 
seriously. The best of the statistics show small businesses 
cover somewhere in the 35 percent to 40 percent area, and those 
are the optimistic numbers. So why don't owners of small 
businesses want to sponsor retirement plans? They use a cost-
benefit analysis.
    Imagine a company that has three owners, four employees, 
and at the end of the year has $100,000 of profit. The owners 
can choose to put that money back into the company. They can 
also choose to establish a retirement plan and contribute some 
or all of that 100,000 for all of the employees, including 
themselves, or they can each take out $33,000 in compensation.
    And that is the key to understanding why a lot of small 
businesses don't sponsor retirement plans. In order to induce 
that company to establish a retirement plan and make the 
contribution, the owners must perceive that they will be better 
off with a retirement plan than they would be putting the money 
back into the company or taking it out as compensation. If the 
plan is perceived by owners to be a headache, to require extra 
paperwork, require extra costs to administer the plan both 
inside and outside of the company, as not allowing the owners 
to get enough benefits out of the plan, to subjecting the 
company to audits from IRS on complex and technical rules and 
not being appreciated by employees, then they are not going to 
join the system.
    If the owners do not think there is sufficient benefit in 
the plan for them, they will not join the system. This has been 
the situation we have been facing in the late seventies, all of 
the eighties and the early nineties. It is only recently that 
Congress has begun to realize that extra rules, extra burdens, 
and extra costs do not incentivize small businesses to join the 
qualified retirement plan system.
    H.R. 1102 is the first major piece of legislation to reach 
out in a reasonable manner for small businesses to bring them 
into the system. We now know because the April 6, 1999 CRS 
report for Congress entitled Pension Coverage, Recent Trends 
and Current Policy Issues, that once a small business 
establishes a retirement plan, that coverage or participation 
in that plan is at roughly the same high levels as found in the 
larger businesses. This is a key statistic to understand.
    What it means is that if a small business will join the 
system, and will sponsor a retirement plan, participation is at 
the same high level that you would have in a bigger plan. It is 
roughly 85 percent--85% of all the employees of the company 
participate in that plan. In other words, excellent coverage 
results.
    I want to take a minute and look at the top-heavy rules. 
This is probably not the most important part of this bill. The 
limits--returning the limits to where they stood 17 years ago 
is more important. Increasing the 404 deduction limit is more 
important but make no mistake, the changes to the top-heavy 
rules that are in H.R. 1102 will help small businesses sponsor 
plans by rolling back some of these unnecessary burdens in the 
top heavy area. You know this is a well-grounded piece of 
legislation when it is criticized by both ends of the spectrum.
    Some criticize this bill because they say it does not go 
far enough. These individuals maintain that the top-heavy rules 
are an abomination, that they are obsolete, and that they are 
the number one reason cited by small businesses why small 
business will not sponsor a retirement plan.
    On the other hand, some criticize this bill because they 
believe in effect by trying to roll back some of the extra 
burdens, it is akin to allowing the proverbial camel's nose 
under the tent and that repeal will result in a future bill. 
Just because you have helped out a little bit in this bill, it 
is inevitable that repeal will follow.
    Actually H.R. 1102 is a middle-ground approach. It keeps 
the meat of the top-heavy rules. It keeps the required minimum 
benefits and it keeps the somewhat accelerated minimum 
vesting--accelerated vesting, but it rids the system of some of 
the onerous burdens. In my opinion and in the opinion of those 
I am representing today, ASPA, Profit Sharing Council of 
America, Small Business Legislative Council, and the SBCA, this 
bill would do a tremendous amount to help small businesses and 
let them sponsor retirement plans which would give increased 
security to literally millions of Americans.
    [The prepared statement follows:]

Statement of Paula A. Calimafde, Chair, Small Business Council of 
America, Bethesda, Maryland; and Member, and Director, Small Business 
Legislative Council; on behalf of American Society of Pension 
Actuaries, and Profit Sharing/401(k) Council of America

    The Small Business Council of America (SBCA) is a national 
nonprofit organization which represents the interests of 
privately-held and family-owned businesses on federal tax, 
health care and employee benefit matters. The SBCA, through its 
members, represents well over 20,000 enterprises in retail, 
manufacturing and service industries, virtually all of which 
sponsor retirement plans or advise small businesses which 
sponsor private retirement plans. These enterprises represent 
or sponsor well over two hundred thousand qualified retirement 
plans and welfare plans, and employ over 1,500,000 employees.
    The Small Business Legislative Council (SBLC) is a 
permanent, independent coalition of nearly one hundred trade 
and professional associations that share a common commitment to 
the future of small business. SBLC members represent the 
interests of small businesses in such diverse economic sectors 
as manufacturing, retailing, distribution, professional and 
technical services, construction, transportation, tourism, and 
agriculture. Because SBLC is comprised of associations which 
are so diverse, it always presents a reasoned and fair position 
which benefits all small businesses.
    The American Society of Pension Actuaries (ASPA) is an 
organization of over 4,000 professionals who provide actuarial, 
consulting, and administrative services to approximately one-
third of the qualified retirement plans in the United States. 
The vast majority of these retirement plans are plans 
maintained by small businesses.
    The Profit Sharing/401(k) Council of America (PSCA) is a 
non-profit association that for the past fifty years has 
represented companies that sponsor profit sharing and 401(k) 
plans for their employees. It has approximately 1200 company 
members who employ approximately 3 million plan participants. 
Its members range in size from a six-employee parts distributor 
to firms with hundreds of thousands of employees.
    I am Paula A. Calimafde, Chair of the Small Business 
Council of America and a member of the Board of Directors of 
the Small Business Legislative Council. I am also a practicing 
tax attorney (over 20 years) who specializes in qualified 
retirement plans and estate planning. I can also speak on 
behalf of the Small Business Delegates to the 1995 White House 
Conference on Small Business at which I served as a 
Presidential Delegate. At this conference out of 60 final 
recommendations to emerge, the Pension Simplification and 
Revitalization Recommendation received the seventh highest 
ranking in terms of votes. H.R. 1102, the Comprehensive 
Retirement Security and Pension Reform Act, introduced on March 
11, incorporates many of the most important recommendations 
made by the delegates to the 1995 White House Conference on 
Small Business.
    Why did the delegates consider this recommendation to be so 
important as to vote it as the seventh out of the final sixty 
recommendations? The reason is simple--small business wants to 
be able to join the qualified retirement system. For small 
business, the qualified retirement plan is the best way to save 
for its employees' retirement. Based in part on the current tax 
law, many small businesses do not provide nonqualified pension 
benefits, stock options and other perks. Unfortunately, many, 
if not most, small businesses perceive the qualified retirement 
plan area to be a quagmire of complex rules and burdens. It is 
perceived as a system which discriminates against small 
business owners and key employees. The Conference Delegates 
understood that if the retirement system became more user 
friendly and provided sufficient benefits that they would want 
to join it. By doing so, they could provide for their own 
retirement security, while at the same time providing valuable 
retirement benefits for their other employees.
    As a delegate appointed by Senator Trent Lott to the 
National Summit on Retirement Savings, I was able to share 
information and concerns with fellow delegates in break out 
sessions. Even though small business retirement plan experts, 
administrators and owners were not well represented, their 
ideas came through loud and clear in the break out sessions. 
Calls for repeal of the top heavy rules, increases in 
contribution limits, particularly the 401(k) limit, elimination 
of costly discrimination testing in the 401(k) area, and a 
return to the old compensation limits, were repeated across the 
break out sessions. There were even individuals calling for 
support of a particular piece of legislation--the Portman-
Cardin retirement plan bill (this was last year's bill). Of 
course, many ideas were discussed particularly in the 
educational area, but an impartial observer would have noticed 
that the small business representatives were very united in 
their message--increase benefits, decrease costs. In other 
words, when undertaking a cost/benefit analysis, small business 
currently perceives the costs too high as compared to the 
benefits to be gained.
    At the Summit, the following problems facing small 
businesses in the retirement plan area were brought up: staff 
employees' preference for cash or health care coverage, the 
revenue of the business beings too uncertain, the costs of 
setting up the plan and administering it being too high, 
required company contributions (i.e., the top heavy rules) 
being too high, required vesting giving too much to short term 
employees, too many governmental regulations, and benefits for 
owners and key employees being too small. When asked what could 
break down these barriers, the following answers were given: 
reduce the cost by giving small businesses tax credits for 
starting up a plan; repeal the top-heavy rules; reduce 
administration; allow owners and key employees to have more 
benefits; and change lack of employee demand by educating 
employees about the need to save for their retirement now. Some 
micro small businesses believed that until they were more 
profitable nothing would induce them to join the system.
    Today we are here to focus on employer coverage and 
employee participation issues, explore ways to remove 
burdensome regulatory requirements, improve the level of 
benefits that workers may accrue towards their retirement and 
overall how to strengthen retirement plans. SBCA, SBLC, ASPA 
and PSCA all strongly support the landmark legislation, H.R. 
1102. This legislation if enacted, will promote the formation 
of new small business retirement plans, significantly reduce 
overly complex and unnecessary regulatory requirements, 
increase portability and overall provide more retirement 
security for all of the Americans who work for small business.
    I want to share with you two real life examples. A visiting 
nurses association in Vermont just established a 401(k) plan. 
The average salary of the roughly 150 participants is $17,000. 
90% of the employees decided to participate in the plan by 
saving some of their current salary for future retirement 
security. The average amount saved from their salaries and put 
into the 401(k) plan was 8%. Many were at the 10% to 15% 
levels. Some of the employees would have gone beyond 15% if 
they had been allowed to do so. Many of these employees live in 
very rural areas of Vermont, but they understood the message--
it is imperative to save now for your retirement security 
later. They understood it's primarily their responsibility to 
provide for their retirement income not the federal 
government's responsibility.
    A criticism sometimes aimed at the retirement plan system 
is that it is used disproportionately by the so-called ``rich'' 
or the ``wealthy.'' Practitioners who work in the trenches know 
better. The rules governing the qualified retirement system 
force significant company contributions for all non-highly 
compensated employees if the highly compensated are to receive 
benefits. The 401(k) plan, in particular, is a tremendous 
success story. Employees of all income levels participate, even 
more so when there is a company match. The real example set 
forth above is not unusual (though perhaps the level of savings 
is higher than normal).
    Here's another example. This is a local company 
specializing in testing new drugs, particularly those designed 
to prevent or slow down AIDS. The company started off about 20 
years ago with roughly 20 employees. For each of the last 20 
years, this company has made contributions to its profit 
sharing plan in the amount of 8% to 10%. The company has now 
grown to about 220 employees. Their long-timers now have very 
impressive retirement nest eggs. The company believes this 
money has been well spent. It enjoys the well-deserved 
reputation of being generous with benefits and employee turn-
over is way below the norm for this industry.
    This is a retirement plan success story--a win-win 
situation. The company has a more stable and loyal workforce of 
skilled employees. The employees in turn will have retirement 
security. This plan benefits all eligible employees regardless 
of income level. Every eligible employee in the company has 
received in effect an 8% to 10% bonus every year which was 
contributed on their behalf into a qualified retirement trust 
where it earned tax free growth.

 Some Surprising Good News--Participation Is High in Retirement Plans 
  Sponsored by Companies With Fewer Than 100 Employees and Even With 
                        Fewer Than 25 Employees

    Recently, the Congressional Research Service issued a 
Report for Congress, entitled ``Pension Coverage: Recent Trends 
and Current Policy Issues,'' authored by Patrick J. Purcell, 
Analyst in Social Legislation. This report gives an excellent 
overview of the current coverage trends for retirement plans, 
though it is relying on data through 1997. Thus, in the small 
business area, it is not picking up any additional plan 
sponsorship and thus, coverage, due to the new SIMPLE and some 
of the real simplications that have been accomplished in the 
last several retirement plan bills. (Put down the bills) of the 
last several Congresses. A quick perusal of the many tables 
shows small business lagging in many areas of coverage. For 
example, Table 3. Participation in Pension or Retirement 
Savings Plans by Size of Firm shows in Panel A, that in 1997, 
83.3% of employees in firms with 100 or more employees had 
employers who sponsor a pension or retirement savings plan. 
This is contrasted to 58.1% of employees in companies with 25 
to 99 employees have employers who sponsor such a plan. Worse, 
only 30.3%of employees in firms with under 25 employees have 
employers who sponsor such a plan. It is clear that the size of 
the company impacts retirement plan sponsorship, but in the 
very next table a very interesting pattern emerges.
    Panel B: Percentage of employees in firms that sponsored a 
plan who participated in the plan shows that in 1997, 88.2% of 
employees in firms with 100 or more employees that sponsor a 
pension or retirement savings plan participated in the plan. 
However, 85.5% of employees in companies with 25 to 99 
employees which sponsor such a plan participated. And again, 
the trend holds--84.8% of employees in firms with under 25 
employees whose employers sponsor such a plan participate. In 
short, when small businesses sponsor retirement plans, the 
employees participate at just about the same levels as in 
larger companies. This is a very meaningful statistic and can 
be interpreted to mean that the key is to incentivize small 
business to sponsor retirement plans--once this occurs, 
meaningful participation results. Another way of saying this is 
it is critical to make the system attractive to small business. 
H.R. 1102 does just this--it strips away unnecessary burdens 
and increases incentives to attract small businesses to the 
qualified retirement plan system.

 Three Major Reasons Why Small Businesses Choose Not To Sponsor a Plan

    There are three major reasons why a small business chooses 
not to adopt a retirement plan and H.R. 1102 addresses all 
three.
    First, lack of profitability. H.R. 1102 addresses this 
problem by adding a new salary reduction only SIMPLE plan. This 
is a plan that a small business will adopt regardless of its 
lack of profits because it costs the company almost nothing to 
sponsor. This plan rests on an IRA framework so the company has 
no reporting requirements or fiduciary responsibilities. Also 
the company is not required to make any contributions to the 
plan--so profitability is irrelevant. The plan will give every 
eligible employee of the company a chance to contribute $5,000 
for his or her own retirement security each year.
    The second major reason why small businesses do not sponsor 
retirement plans is because the system is perceived (and 
deservedly so) as too complex and costly. The devastating 
legislation of the 80's and early 90's layered additional 
requirements on small business with overlapping and 
unnecessarily complex rules aimed at preventing abuse in the 
system or discrimination against the non-highly compensated and 
non-key employees. In fact, it often comes as a shock to those 
trying to strengthen the retirement plan system for small 
business that the system has harsher rules designed 
specifically for small business. Probably the most offensive of 
these rules are the so-called ``top heavy rules.'' Because of 
the mechanical tests associated with the top-heavy rules, 
almost all small business plans are top-heavy. When a plan is 
top-heavy, the small business must make special required 
contributions which increase the cost of the small business 
plan and vesting is slightly accelerated. In addition to extra 
rules being placed on small business plans, all plans were 
being subjected to constant changes. These annual changes in 
the law and the regulations combined with reduced benefits, 
first brought the system stagnation and then decline. This 
legislation was prompted by the need to get short term revenue 
and where better to look then the pension system that no one 
understood and few were watching. It was also prompted by a 
need to rid the system of some real abuse (for instance back 
about 20 years ago, it was possible for a retirement plan to 
only make contributions for employees who earned over the 
social security wage base, this rule was eliminated and for 
good reason). Unfortunately, rather than using a fly swatter, a 
nuclear bomb was detonated and we ended up with a system in 
real disrepair. H.R. 1102 preserves the safeguards for non-
highly compensated employees so that they are fully protected, 
while stripping away the unnecessary and overlapping rules so 
that true simplification is achieved.
    H.R. 1102 provides reasoned answers. By stripping away 
needless complexity and government over regulation in the form 
of micro management, the system will have a chance to revive. 
This bill would go a long way towards removing the significant 
burdens imposed on small business by the top heavy rules. It 
would simplify portability. It would repeal the absurdly 
complex and unnecessary multiple use test. It would truly 
simplify the system without harming any of the underlying 
safeguards.
    Some have criticized H.R. 1102 for not repealing the top-
heavy rules because they are obsolete, discriminatory and serve 
as a real road block for small businesses to enter the 
qualified retirement plan system. Others have criticized H.R. 
1102 as the first step towards repeal of the top-heavy rules--
this is the camel's nose under the tent theory--if you try to 
remove any burdens, it's just a matter of time before all the 
rules are repealed. Interestingly, H.R. 1102 by stripping away 
the absurd burdens in the top heavy rules (for instance, 
requiring companies to look back only 1 year instead of 5 to 
determine who is a key employee to reduce extensive 
recordkeeping) while keeping the two meaningful provisions of 
the top-heavy rules--extra contributions required and 
accelerated vesting has tried to reach a middle ground on this 
difficult issue.
    Costs would be reduced by eliminating user fees and 
providing a credit for small business to establish a retirement 
plan. This credit would go a long way towards reducing the 
initial costs of establishing a plan.
    The third reason why small businesses stay away from the 
retirement system is that the benefits that can be obtained by 
the owners and the key employees are perceived as too low. It 
is no secret that small business owners believe that the 
retirement plan system discriminates against them. Short 
vesting periods and quick eligibility have provided more 
benefits for the transient employees at the expense of the 
loyal employees. Cutback in contribution levels hurt key 
employees and owners, (of course they hurt the non-highly 
compensated also, but it took a long time to understand there 
was a very real correlation between what the small business 
owners could put away for themselves and their key employees 
and what would be put in for the non-highly compensated 
employees).
    H.R. 1102 solves this problem also. This legislation 
understands there are two pieces to the puzzle--a reduction in 
complexity and costs is essential but is not sufficient by 
itself. A second piece is required. Increasing the contribution 
limits (in reality reversing the limits) to where they stood in 
1982 is equally important.
    It is interesting to examine where these limits would be 
today if the law in 1982 had not been enacted. The defined 
contribution limit which was $45,475 in 1982, assuming a 
constant 3% COLA would have been $75,163 in 1999. This is where 
401(k) limit would have been also. Only in 1987, was the amount 
an employee could save by 401(k) contributions on an annual 
basis limited to $7,000 and the ``ADP'' tests could further 
limit the amount (below $7,000) for the highly compensated 
employees. The defined benefit limit which was at $136,425 in 
1982, assuming a constant 3% COLA would be at $225,490 today. 
These numbers assume a constant COLA of 3%. The true number 
during those years would be closer to an average of 4%-5%.
    Given how critical it is for people to start saving for 
their own retirement today, it seems most peculiar to have 
limits harsher than what they were 17 years ago. Some people 
say that these limits will not operate as an incentive to small 
businesses to sponsor the plan and will only be used by the so-
called ``rich.'' Not only will the increased limits serve as an 
incentive to small businesses to sponsor a retirement plan, but 
the higher limits will be enjoyed by employees who are not 
``rich''. For instance, it is very common today for both 
spouses to be employed. Quite often, these couples decide that 
one of the spouse's income will be used as much as possible to 
make contributions to a 401(k) plan. Today, the most the couple 
can save is $10,000 (and if the participant spouse makes more 
than $80,000 or makes less but is a 5% owner of a small 
business, then the couple might not even be able to put in 
$10,000). Often, the couple would have been willing to save 
more. These couples might make $40,000, $50,000 or more, but 
they are not ``rich.'' It is only because both spouses are 
working, that they are making decent income levels--we should 
provide the means by which they can save in a tax advantaged 
fashion while they can.
    This same principle applies particularly to women who enter 
and leave the work force intermittently as the second family 
wage earner. They and their families stand to benefit the most 
from increased retirement plan limits because the increased 
limits will provide the flexibility that families require as 
their earnings vary over time and demands such as child 
rearing, housing costs and education affect their ability to 
save for retirement.
    Many mid-size employers rely less on their existing defined 
benefit plan to provide benefits for their key employees and 
more on non-qualified deferred compensation plans. This is a 
direct result of the reduction in the defined benefit plan 
limit. In 1974, the maximum defined benefit pension at age 65 
was $75,000 a year. Today the maximum benefit is $130,000, even 
though average wages have more than quadrupled since 1974. 
Thus, pensions replace much less pre-retirement income now than 
they did in the past. In order for these ratios to return to 
prior levels, the maximum would have to be over $300,000 now. 
The lower limits have caused a dramatic increase in non-
qualified pension plans, which provide benefits over the 
limits. They help only the top-paid employees. This has caused 
a lack of interest in the defined benefit plan since there is 
no incentive to increase benefits since the increases cannot 
benefit the highly compensated employees or key employees. This 
is unfortunate since increases affect all participants. The 
importance of bringing these limits back to the 1982 levels 
cannot be underestimated. They are crucial if small business is 
to be persuaded to join the system.
    Prior to the last several Congresses which worked hard to 
improve the system, the thrust of the laws was how to prevent 
any conceivable abuse and how to limit what the upper middle 
income and upper income employees could receive from a 
retirement plan. Interestingly, it is often obvious for a 
member of Congress to understand that if the upper 2 to 3 
quintiles of income earners are removed from the social 
security system that it could prove the death knell for the 
system because the top earners would be disenfranchised and 
would no longer have any interest in the system. Interestingly, 
this is exactly what has happened during the mid-70's through 
the early 90's in the retirement plan system, but even though 
the same concept applied, it was not apparent. By now it should 
be apparent to all that we have disenfranchised large numbers 
of employees from the qualified retirement system and that this 
has brought about its stagnation and decline.
    Rumors have been circulating to the effect that 20% of all 
retirement plan benefits generated by both the private 
retirement plan system and the governmental retirement system 
go to the top 1% of taxpayers, 75% go to the top 20% of 
taxpayers and less than 10% go to the bottom 60% of taxpayers. 
These rumors appear to be attributable to a talking points 
sheet entitled ``Distribution of Pensions Benefits under 
Current Law'' prepared by the Office of Tax Analysis, 
Department of the Treasury, 1/29/99. Even though it is entitled 
``Distribution of Pension Benefits,'' it seems clear that all 
of the statistics are based on how projected tax expenditures 
for pension contributions and earnings are ``received.'' Half 
of the total projected ``tax expenditure'' is allocated to 
government plans. Even taking into account that 30% of the 
taxpayers pay no tax (so would receive no tax expenditure), the 
numbers still appear to be out of line. It appears that couples 
where both spouses work have been treated as one individual and 
income has been imputed to the couple from a variety of 
sources. The concept of ``tax expenditure'' itself is 
controversial. The theory is based on the premise that all 
sources of money should be taxed and ``belong'' to the 
government. When the government foregoes its collection of this 
money it becomes a ``tax expenditure.'' This is in contrast to 
the theory which states that the government is only entitled to 
tax certain enumerated items and no others. However, these 
rumors have started they are not based on fact and they do a 
real disservice to the people who are trying to revitalize the 
retirement plan system at a time when it is critical to do so.
    Interestingly, the American Council of Life Insurance has 
concluded a research project authored by Janemarie Mulvey, 
Ph.D, Director of Economic Research, May 19, 1999. This study 
defines pension benefits as benefits coming from employer-
sponsored plans, federal, state and local and military, but 
does not include lump sum payments. This study shows that the 
system provides meaningful benefits for many individuals who 
are in the low to middle income ranges. For example, the report 
found that:
    Among Married Couples Receiving Pensions: \1/3\ had incomes 
below $30,000 (median income); 57% had incomes below $40,000 
(average income).
    Nearly 70% of those receiving pensions had income below 
$50,000
    These types of statistics are based on real data and show 
that meaningful benefits are being received by employees who 
have average income.
    Another major ``fix up'' in this bill deals with Section 
404. This section limits a company's deductible contribution to 
a profit sharing plan to 15% of all participant's compensation. 
This limit presently includes employee 401(k) contributions. 
This means that if an employer chose to make a 15% contribution 
to a profit sharing plan, then no employee would be allowed to 
make a 401(k) contribution. Realizing the absurdity of this 
rule, H.R. 1102 would no longer count employee contributions 
(401(k)) towards the 15% overall deduction level.
    Even more importantly, the 15% level would be raised to 
25%. This change would allow small businesses to sponsor one 
plan in place of two plans that are now required to accommodate 
a contribution greater than 15%. This would generate real 
savings to the small business since only one plan document, one 
summary plan description, one annual 5500, etc. would be 
required instead of two.
    This bill is indeed comprehensive legislation which will 
inject needed reforms into the pension system and by doing so 
will truly provide retirement security for countless Americans. 
It will increase small business coverage and it is important 
that we all work hard to see this entire bill enacted into law.
    The Department of Labor's ERISA Advisory Council on 
Employee Welfare and Benefit Plans recently released its Report 
of the Working Group on Small Business: How to Enhance and 
Encourage The Establishment of Pension Plans dated November 13, 
1998. This report provides eight recommendations for solving 
the problems facing small businesses today in the retirement 
plan area. Interestingly, these recommendations mirror many of 
those that came out of the National Summit on Retirement 
Savings.
    The Advisory Council report calls for a Repeal of Top-Heavy 
Rules, Elimination of IRS User Fees, an Increase in the Limits 
on Benefits and Contributions, an Increase in the Limits on 
Includable Compensation, the Development of a National 
Retirement Policy, Consider the development of Coalitions, Tax 
Incentives and the Development of a Simplified Defined Benefit 
Plan.
    The Report explains the legislative development of the top-
heavy rules and then summarizes the layers of legislation that 
occurred subsequent to their passage which made them obsolete. 
The Report states, ``The top-heavy rules under Internal Revenue 
Code Section 416 should be repealed....Their effect is largely 
duplicated by other rules enacted subsequently....They also 
create a perception within the small business community that 
pension laws target small businesses for potential abuses. This 
too discourages small business from establishing qualified 
retirement plans for their employees.''
    It is important to note that the Portman-Cardin legislation 
dramatically improves the top-heavy rules and significantly 
reduces administration expenses associated with them.
    The Report calls for the elimination of User Fees imposed 
by IRS. The Report in part states, ``The imposition of user 
fees adds another financial obstacle to the adoption of 
qualified retirement plans by small business. Although user 
fees apply to all employers--large and small--the cost of 
establishing a plan is more acutely felt among small employers. 
User fees do not vary by size of employer....Now that the 
budget deficit has become a budget surplus, the economic 
justification for user fees is much diminished. User fees 
should be repealed.''
    H.R. 1102 addresses the user fee issue to assist small 
businesses in sponsoring retirement plans.
    The Advisory Council Report calls for increasing the limits 
on benefits and contributions:
    ``The defined benefit and defined contribution plan dollar 
limit were indexed by ERISA and were originally established in 
1974 at $75,000 and $25,000 respectively. From 1976 to 1982, 
the indexing feature was allowed to operate as intended and the 
dollar amounts grew to $136,425 and $45,475. Under the Tax 
Equity and Fiscal Responsibility Act of 1982, the dollar limit 
on defined benefit plans was reduced to $90,000 and the dollar 
limit on defined contribution plans was reduced to $30,000. ...
    ``These reductions in the dollar amounts are widely 
believed to have been revenue driven. These reductions had the 
net effect of adjusting downward the maximum amount of benefits 
and contributions that highly-paid employees can receive in 
relationship to the contributions and benefits of rank and file 
employees. ...
    ``In order to give key employees the incentive needed to 
establish qualified retirement plans and expand coverage, we 
recommend that the $30,000 dollar limit on defined contribution 
plans be increased to $50,000 which will help partially restore 
the dollar amount to the level it would have grown to had the 
indexing continued without alteration since the dollar limit 
was first established in 1974.
    ``Second, we recommend that the $90,000 dollar limit on 
defined benefit plans be increased to $200,000 which will 
restore the dollar amounts lost through alterations in the 
dollar amount since 1974, while maintaining the 1:4 ratio 
established in 1982 as part of TEFRA.
    ``Third, we recommend, that in the future, indexing occur 
in $1,000, not $5,000 increments which has had the effect of 
retarding recognition of the effect of inflation.''
    And finally the report concludes, ``we recommend, that 
actuarial reductions of the defined benefit plans dollar limit 
should be required only for benefits commencing prior to age 
62. This was the rule originally enacted in 1974 as part of 
ERISA.''

 The Portman-Cardin legislation increases the contribution limits with 
  respect to all of the retirement plans. As discussed in more detail 
 below, this is perhaps one of the most important changes that can be 
         made to the system to increase small business access.

    The Report also calls for a corresponding increase in the 
limit on includable compensation for similar reasons. ``Under 
ERISA, there was no dollar limit on the amount of annual 
compensation taken into account for purposes of determining 
plan benefits and contributions. However, as part of the Tax 
Reform Act of 1986, a qualified retirement plan was required to 
limit the annual compensation taken into account to $200,000 
indexed. The $200,000 limit was adjusted upward through 
indexing to $235,843 for 1993. As part of the Omnibus Budget 
Reconciliation Act of 1993, the limit on includable 
compensation was further reduced down to $150,000 for years 
after 1994. Although indexed, adjustments are now made in 
increments of $10,000, adjusted downward. In 1998, the indexed 
amount is $160,000.'' ``We recommend that the limit on 
includable compensation be restored to its 1988 level of 
$235,000 be indexed in $1,000 increments in the future.''

The Portman-Cardin legislation will return the compensation limit back 
   to where it stood in 1988. The system is perceived by many small 
 business owners as discriminatory against key employees; this type of 
  change will allow it to be perceived as more fair to all employees.

    The Report develops a number of recommendations in the area 
of education, including using public service spots on 
television, radio and in the printed media to educate the 
public and raise the awareness of the need to prepare and save 
for retirement. Virtually all of the Report's recommendations 
in this area also were made at the National Summit on 
Retirement Savings. This is a critical area for small business. 
Clearly, more small businesses will want to sponsor retirement 
plans if retirement benefits are perceived as a valuable 
benefit by their employees.

   One of the direct benefits to come out of the National Retirement 
Summit is the educational spots being put on the air by ASEC and EBRI. 
  It is critical for the public to become educated about the need to 
 start saving for their retirement and the benefits of starting early.

    The Report calls for tax credits that could be used as an incentive 
for a small business to adopt a qualified retirement plan or to offset 
administration costs or even retirement education costs.

H.R. 1102 provides tax credits as an incentive for small businesses to 
                        adopt retirement plans.

    Finally the Advisory Council calls for a Simplified Defined Benefit 
Plan.
    The graying of America, and the burden that it will place on future 
generations, should not be ignored. The American Council of Life 
Insurance reports that from 1990 to 2025, the percentage of Americans 
over 65 years of age will increase by 49%. This jump in our elderly 
population signals potentially critical problems for Social Security, 
Medicare and our nation's programs designed to serve the aged.
    While we must shore up Social Security and Medicare, it is clear 
that the private retirement system and private sources for retiree 
health care will have to play a more significant role for tomorrow's 
retirees. The savings that will accumulate for meeting this need will 
contribute to the pool of capital for investments that will provide the 
economic growth needed to finance the growing burdens of Social 
Security and Medicare. The policy direction reflected by H.R. 1102 will 
ensure that sufficient savings will flow into the retirement plan 
system so as to provide a secure retirement for as many Americans as 
possible.
    The last two bills passed by this Congress to enhance the 
retirement system and retirement savings began the process of 
simplifying the technical compliance burdens so that small businesses 
are able to sponsor qualified retirement plans. H.R. 1102 represents 
another huge step forward. Indeed, if this legislation becomes the law, 
only a few changes remain to fully restore the system to its former 
health prior to the onslaught of negative and complex changes of the 
1980's while retaining the needed reforms introduced during that 
period.
    SBCA, SBLC, ASPA and PSCA strongly support the following items in 
H.R. 1102 which will greatly assist businesses, and particularly small 
businesses, in sponsoring retirement plans:

401(k) Changes

    The 401(k) Plan is a tremendous success story. The excitement 
generated by this plan is amazing. Prospective employees ask potential 
employers if they have a 401(k) plan and if so, what the investment 
options are and how much does the employer contribute. Employees meet 
with investment advisors to be guided as to which investments to 
select, employees have 800 numbers to call to see how their investments 
are doing and to determine whether they want to change investments. 
Employees discuss among themselves which investment vehicles they like 
and how much they are putting into the plan and how large their account 
balances have grown.
    The forced savings feature of the 401(k) plan cannot be 
underestimated and must be safeguarded. When a person participates in a 
401(k) plan, he or she cannot remove the money on a whim. Savings can 
be removed by written plan loan which cannot exceed 50% of the account 
balance or $50,000 whichever is less. Savings can be removed by a 
hardship distribution, but this is a tough standard to meet. The 
distribution must be used to assist with a statutorily defined hardship 
such as keeping a house or dealing with a medical emergency. This is in 
contrast to funds inside an IRA or a SIMPLE (which is an employer 
sponsored IRA program) where the funds can be accessed at any time for 
any reason. True, funds removed will be subject to a 10% penalty (which 
is also the case for a hardship distribution from a 401(k) plan), but 
preliminary and totally unofficial data suggests that individuals 
freely access IRAs and SEPs (also an employer sponsored IRA program) 
and that the 10% penalty does not seem to represent a significant 
barrier. In fact, this is why the SIMPLE IRA starts off with a 25% 
penalty for the first two years an individual participates in SIMPLE in 
hopes that if a participant can accumulate a little bit he or she will 
be tempted to leave it alone and watch it grow. Nevertheless, there is 
a distinct difference between asking the employer for a loan or a 
hardship distribution and having to jump through some statutorily and 
well placed hoops versus simply removing money at whim from your own 
IRA.
     Increasing 401(k) contributions from $10,000 to $15,000 is 
a significant, beneficial change which will assist many employees, 
particularly those who are getting closer to retirement age.
     Opening up the second 401(k) Safe Harbor, the ``Match Safe 
Harbor'' to small businesses by exempting it from the Top-Heavy Rules 
is a valuable change which places small businesses on a level playing 
field with larger entities.
     We believe that the voluntary safe harbors will prove to 
be the easiest and most cost effective way to make the 401(k) plan user 
friendly for small businesses. If a small business makes a 3% 
contribution for all non-highly compensated employees, or makes the 
required matching contributions, then the company no longer has to pay 
for the complex 401(k) antidiscrimination testing (nor does it have to 
keep the records necessary in order to do the testing). We recognize 
that many companies will choose to stay outside the safe harbor because 
the 3% employer contribution or required match ``cost of admission'' is 
too high and because it is more cost-effective to stay with their 
current system (including software and written communication material 
to employees). Many believed that small business would embrace the 
voluntary safe harbors that do away with costly complex testing. 
Unfortunately, because of some serious roadblocks placed in the path of 
the voluntary safe harbors by the Internal Revenue Service, it is not 
clear what the future of the safe harbors will be.
     Unfortunately, IRS is imposing a Notice Requirement which 
is very restrictive and will probably cause most small businesses not 
to be able to use the safe harbor this year. IRS Notice 98-52, which 
was published November 16, 1998, requires that a business adopting 
either safe harbor give written notice (in the case of a calendar year 
plan) by March 1st. Now let's examine the rationale behind the notice 
requirement and see whether this type of restriction is justified. 
Remember there are two safe harbors--one is a prescribed company match 
to employee 401(k) contributions, the other is a non-elective 3% 
contribution. A non-elective 3% contribution means that every eligible 
employee receives this contribution whether or not he or she makes 
401(k) contributions. The rationale for notice in the context of the 
match safe harbor is self evident. An employee may very well change his 
or her behavior and contribute more 401(k) contributions knowing that a 
match is going to be made.
    There appears to be no rationale for notice in the context of the 
non-elective 3% contribution--no employee is going to change any 
behavior on knowing that a contribution will be made for them at the 
end of the year.T1 The problem of course is compounded when dealing in 
the small business world. Unless an outside advisor has informed a 
small business that it must give a fairly extensive written notice by 
March 1st and the company complies, it will not be able to take 
advantage of the safe harbor for this entire year. My guess is that 
there will be many, many small businesses this year who would have 
taken advantage of the 3% non-elective safe harbor but will not be able 
to do so because they had not been informed of the requirements of this 
overly restrictive notice requirement. Thus, they will not be able to 
rid themselves of the complex and costly 401(k) anti-discrimination 
testing this year.
    IRS also has stated that the 3% non-elective contribution must be 
paid to every non-highly compensated employee regardless of whether 
they have completed 1000 hours and whether he or she is employed on the 
last day of the plan year. This is more restrictive than either the 
rule for normal plan contributions or the rule for the top-heavy 
minimum contributions. Again, there seems to be no rationale for a safe 
harbor which is designed to help small business avoid complicated 
testing to be made so restrictive.
    IRS has also stated publicly that if the notice has not been given 
correctly or the plan otherwise failed to satisfy the safe harbor after 
electing it (and remember the company is required to elect basically a 
month before the beginning of the plan year), then the plan is 
disqualified. This type of severe penalty will certainly be the death 
knell of the safe harbors for if a small business has to worry about 
disqualification, it will simply stay away from them. A cynic might 
observe that the IRS is doing everything it can to make sure it does 
not carry out Congressional intent. Even statutorily, the Services' 
position cannot be sustained, since the safe harbor is entitled as an 
alternative means to satisfy the non-discrimination tests.
    SBCA, SBLC, ASPA and PSCA suggest that the notice requirement be 
changed to within 30 days of the close of the plan year for those 
companies selecting the 3% non-elective contribution safe harbor. This 
change will allow word to get out to small business about this option 
and give them time to comply with the notice requirement. We also 
suggest that the 3% non-elective contribution be made to either all 
non-highly compensated employees who have worked 1,000 hours or to 
those employees who are employed on the last day of the plan year, but 
not both. We also suggest that it be made clear in writing that if a 
small business does not comply with the safe harbor election, that the 
plan falls back to the regular 401(k) discrimination rules not be 
disqualified.
     Increasing the IRC Section 404 15% deduction limit to 25% 
is a major change which will appreciably assist small businesses. 
Section 404 limits a company's deduction for profit sharing 
contributions to 15% of eligible participants' compensation. Because of 
this rule, today many companies, including small businesses, sponsor 
two plans because the 15% limit is too low for the contributions they 
are putting in for their employees. Most often a money purchase pension 
plan is coupled with a profit sharing plan to allow the company to get 
up to a 25% deduction level. By requiring companies to sponsor two 
plans where one would do, administration expenses and user fees are 
doubled. Each year the company is required to file two IRS 5500 forms 
instead of one. The company is required to have two summary plan 
descriptions instead of one. This change would truly simplify and 
reduce administration expenses and exemplifies the outside of the box 
thinking found in H.R. 1102. In fact, it is interesting to contemplate 
whether Section 404 serves any meaningful function today.
     The Qualified Plus Contribution is an exciting concept 
which may prove to be sought after by employees contributing 401(k) 
contributions.
     Excluding 401(k) contributions made by the employees from 
the IRC Section 404 15% deduction limit will make these plans better 
for all employees. Today, employee 401(k) contributions are included in 
the Section 404 limit. Section 404 limits a company's deduction for 
profit sharing contributions to 15% of eligible participants' 
compensation. This limit covers both employer and employee 401(k) 
contributions. This limitation now operates against public policy; 
either employer contributions are cut back which works to the detriment 
of the employees' retirement security or employee pre-tax salary 
deferred contributions must be returned to the employee. Thus, 
employees lose an opportunity to save for their retirement in a tax-
free environment. This is particularly inappropriate since the employee 
has taken the initiative to save for his or her retirement, exactly the 
behavior Congress wants to encourage, not discourage.
     Repeal of the complicated ``Multiple Use Test'' is a very 
welcome change and will benefit the entire retirement plan system. This 
test was nearly incomprehensible and forced small businesses (really 
their accountants or plan administrators) to apply different anti-
discrimination tests to employer matching contributions than what may 
have been used for the regular 401(k) anti-discrimination tests.
     Allowing employee-pay all 401(k) plans for small business 
is fair. Portman-Cardin would allow a key employee to make a 
contribution to a 401(k) plan sponsored by a small business without 
triggering the top-heavy rules were triggered so that the small 
business was required to make a 3% contribution for all non-key 
employees. Not only is this a trap for the unwary since many small 
businesses, including their advisors, are unaware of this strange rule, 
but it is also unfair since a larger company would be able to sponsor 
an employee-pay-all 401(k) plan and not have to make any employer 
contributions to the plan. The regular 401(k) anti-discrimination tests 
are more than sufficient to ensure that the non-highly compensated 
employees are treated fairly vis a vis the highly compensated 
employees.
     The so-called ``Catch-Up Contributions'' for people 
approaching retirement may be helpful for small business employees, 
particularly those who were not able to save while they were younger.

Changes to Plan Contribution Limits

    Perhaps the most important change in the retirement 
legislation is increasing the dollar limits on retirement plan 
contributions, removing the 25% of compensation limitation and 
increasing the compensation limitation.
     Increasing the $150,000 compensation limit to 
$235,000 is an important change which will bring the plan 
contributions back into line with 1998 dollars. The $150,000 
limit in 1974 (ERISA) dollars is about $46,500 (assuming 5 
percent average inflation). This is far below the $75,000 that 
represented the highest amount upon which a pension could be 
paid under then-new Code Section 415 (back in 1974). This 
cutback has hurt several groups of employees--owners and other 
key employees of all size businesses who make more than 
$150,000 and mid-range employees and managers (people in the 
$50,000 to $70,000 range) who are in 401(k) plans and in 
defined benefit plans. This cutback was perceived by owners and 
other key employees of small businesses as reverse 
discrimination and as a disincentive in establishing a 
retirement plan.
     Increasing the defined contribution limit from 
$30,000 to $45,000 and the defined benefit limit from $130,000 
to $180,000 are strong changes which will increase retirement 
security for many Americans. These numbers are in line with 
actual inflation.

Top Heavy Rules

    These rules are now largely duplicative of many other 
qualification requirements which have become law subsequent to 
the passage of the top-heavy rules. They often operate as a 
``trap for the unwary'' particularly for mid-size businesses 
which never check for top-heavy status and for micro small 
businesses which often do not have sophisticated pension 
advisors to help them. These rules have always been an unfair 
burden singling out only small to mid-size businesses. The 
changes made in H.R. 1102 will significantly simplify the 
retirement system with little to no detriment to any policy 
adopted by Congress during the last decade. The top-heavy rules 
have required extensive record keeping by small businesses on 
an ongoing 5 year basis. They also have represented a 
significant hassle factor for small business--constant 
interpretative questions are raised on a number of top-heavy 
issues and additional work is required to be done by a pension 
administrator when dealing with a top-heavy plan, particularly 
a top-heavy 401(k) plan.
    SBCA, SBLC, ASPA and PSCA support the repeal of the family 
attribution for key employees in a top-heavy plan, as well as 
finally doing away with family aggregation for highly 
compensated employees. These rules require a husband and wife 
and children under the age of 19 who work in a family or small 
business together to be treated as one person for certain plan 
purposes. They discriminate unfairly against spouses and 
children employed in the same family or small business.
    We also support the simplified definition of a key employee 
as well as only requiring the company to keep data for running 
top heavy tests for the current year rather than having to keep 
it for the past four years in addition to the current year.

SIMPLE Plans

    It is exciting to see that the SIMPLE is attracting so many 
small businesses. We believe, though, that the SIMPLE plan 
should be viewed as a starter plan and that all businesses, 
including the very small, should be given incentives to enter 
the qualified retirement plan system as quickly as possible. 
The SIMPLE is an IRA program, as is the old SEP plan and in the 
long run true retirement security for employees is better 
served by strengthening qualified retirement plans rather than 
SIMPLES and SEPs. This is simply because employees have a far 
greater opportunity to remove the money from IRAs and SEPs and 
spend it--the forced savings feature of a qualified retirement 
plan is not present. While we appreciate that for start-up 
companies or micro businesses, a SIMPLE or the proposed salary 
reduction SIMPLE is the best first step into the retirement 
plan system, the company should be encouraged to enter the 
qualified retirement system as soon as possible. By making the 
SIMPLE rules ``better'' than the qualified retirement system, 
the reverse is achieved. Thus, we hope that the ``gap'' between 
the 401(k) limit ($15,000) and the SIMPLE limit ($10,000) and 
the salary reduction SIMPLE limit ($5,000) is carefully 
preserved so that the system does not tilt in the wrong 
direction.
    We do not believe that any other new plans than those set 
forth in H.R. 1102 are needed. We now have a very good mix of 
plans--from those which provide flexibility and choice to very 
simple plans for the companies who do not want administration 
costs.

Required Minimum Distribution Rules

    We support exempting a minimum amount from the required 
minimum distribution rules. We would encourage the Committee to 
also consider whether the rule which delays receiving 
distributions for all employees, other than 5% owners, until 
actual retirement, if later, should be extended to 5% owners. 
There seems to be no policy rationale for forcing 5% owners to 
receive retirement distributions while they are still working.
    We also respectfully suggest the following:
    1. Allow direct lineal descendants of the participant, in 
addition to a spouse, to be able to roll-over a plan 
contribution to an IRA. Today, if a participant dies and names 
the spouse as beneficiary, the spouse can ``roll-over'' the 
retirement plan assets into an IRA, rather than receiving 
payments from the retirement plan. On the other hand, if a 
participant dies and names his or her children as the 
beneficiaries, the children cannot roll-over the assets into an 
IRA and will in most cases be forced to take the distribution 
in one lump sum. This triggers the problem set forth in 2 
below.
    2. Provide an exemption of retirement plan benefits from 
estate taxes. As mentioned above, if the children are forced to 
take a lump sum distribution (and assuming they have no 
surviving parent), the entire retirement plan contribution is 
brought into the estate of their parent who was a plan 
participant and is subject to immediate income tax. This is the 
fact pattern where the plan distribution is reduced by up to 
85% due to taxes--federal and state income taxes and federal 
and state estate taxes. This is why people often say they don't 
want to save in a retirement plan because if they die the 
government takes it all and the children and grandchildren 
receive way too little.
    3. Section 404(a)(7) should be eliminated. Section 
404(a)(7) is an additional deduction limitation imposed on 
companies that sponsor any combination of a defined benefit 
plan and a defined contribution plan. When a company chooses to 
sponsor both types of plans, then it is limited to a 25% of 
compensation limit. The defined benefit plan is subject to a 
myriad of limitations on deductions and contributions. The 
defined contribution plan is likewise subject to its own 
limitations on deductions and contributions. This extra 
limitation often hurts the older employees who would otherwise 
receive a higher contribution in the defined benefit plans. 
Often companies simply choose not to sponsor both types of plan 
because of this limitation.

Plan Loans for Sub-S Owners, Partners and Sole Proprietors

    This is a long overdue change to place all small business 
entities on a level playing field. We support this change.

Repeal of 150% of Current Liability Funding Limit

    This is a very technical issue, but basically defined 
benefit plans are not allowed to fund in a level fashion. Code 
Section 412(c)(7) was amended to prohibit funding of a defined 
benefit plan above 150 percent of current ``termination 
liability.'' This is misleading because termination liability 
is often less that the actual liability required to close out a 
plan at termination, and the limit is applied to ongoing plans 
which are not terminating. This provision is particularly 
detrimental to small businesses who simply cannot adopt a plan 
which does not allow funding to be made in a level fashion. The 
changes made to this law by H.R. 1102 are critical for small 
businesses to be able to sponsor defined benefit plans.
    We also applaud the change in the variable rate premium 
which will assist small businesses which are not allowed to 
fund in a proper fashion because of this limitation.
    A small business will go through a cost-benefit analysis to 
determine whether to sponsor a qualified retirement plan. A 
number of factors are analyzed including the profitability and 
stability of the business, the cost of sponsoring the plan both 
administratively as well as required company contributions, 
whether the benefit will be appreciated by staff and by key 
employees and whether the benefits to the key employees and 
owners are significant enough to offset the additional costs 
and burdens. The legislation being contemplated by this 
Committee will dramatically improve the qualified retirement 
plan system. By making the system more user friendly and 
increasing benefits, more small businesses will sponsor 
retirement plans. Easing administrative burdens will reduce the 
costs of maintaining retirement plans. The changes would 
revitalize the retirement plan system for small business as it 
is perceived by small businesses as more fair to them. Finally, 
the positive changes made by Congress in the 1980's would be 
retained and the time tested ERISA system would stay in place. 
Ultimately, it is essential for this country to do everything 
possible to encourage retirement plan savings so that 
individuals are not dependent upon the government for their 
retirement well-being.
      

                                


    Mr. English. Thank you, Ms. Calimafde.
     Mr. MacDonald, we look forward to your testimony.

 STATEMENT OF J. RANDALL MACDONALD, EXECUTIVE VICE PRESIDENT, 
 HUMAN RESOURCES AND ADMINISTRATION, GTE CORP., IRVING, TEXAS; 
             ON BEHALF OF ERISA INDUSTRY COMMITTEE

    Mr. MacDonald. Good afternoon. My name is Randall 
MacDonald. I am executive vice president of human resources and 
administration of GTE, and a member of the board of directors 
of the ERISA Industry Committee on behalf of whom I appear 
today.
    I am here today to urge that the Full Committee enhance 
retirement security by, first, approving H.R. 1102; second, by 
extending the current authority of section 420 of the Internal 
Revenue Code that permits the use of excess pension assets to 
fund current retiree health obligations; third, by permitting 
ESOP dividends to be reinvested without loss of dividend 
reduction for employers; and finally, by resisting the efforts 
to prevent employers from establishing cash balance and other 
innovative and creative defined benefit plan designs.
    H.R. 1102 corrects many of the problems that are a product 
of the multiplication of the many changes during the past 12 
years. The law did not always impose the current dizzying array 
of limits on the benefits that can be paid from and 
contributions that can be made to tax-qualified plans.
    Between 1982 and 1994, however, scores of laws were enacted 
that repeatedly allowed the ERISA limits on benefit funding. 
H.R. 1102 reverses this trend, and none too soon. This 
Committee does not need to be reminded that the baby-boom 
cohort rapidly is nearing retirement. If we delay action, many 
employers will not have the cash available to pay for rapid 
increases in pension liabilities, and workers will not have 
time to accumulate their savings. H.R. 1102 thus provides an 
opportunity that we cannot afford to pass up.
    Consider this. While retirement savings are accumulating in 
tax qualified plans, they fuel the engine of America's economic 
growth. According to the most recently available statistics, 
pension funds held 28.2 percent of our Nation's equity market, 
15.6 percent of the taxable bonds, and 7.4 percent of cash 
securities.
    Many of today's workers' savings and benefit opportunities 
are significantly restricted by current limits. Limits imposed 
on defined benefit plans imprudently delay funding.
    Pensions are not a benefit for the rich. Most plan 
participants, by the way, are compensated at less than $30,000.
    Finally current law has created a world in which an 
increasing number of people who make decisions about 
compensation and retirement security depend instead on unfunded 
qualified plans for the bulk of their retirement savings.
    ERIC, the ERISA Industry Committee, believes the restored 
limits regarding compensation and regarding the benefits that a 
defined benefit plan may provide will be particularly 
beneficial in increasing the retirement security available to 
American workers.
     H.R. 1102 also promotes pension portability by eliminating 
a significant number of stumbling blocks created by the current 
law. For example, ERIC is especially appreciative that the bill 
repeals the same desk rule. ERIC also supports the bill's 
provisions that facilitate plan-to-plan transfers by providing 
that receiving plan need not maintain all of the optional forms 
benefits under the sending plans.
    ERIC would expand the bill's provisions to allow rollovers 
of after tax contributions. Current rules not only are 
confusing to employees but force them to strip a portion of 
their savings from their accounts just because the savings were 
made with after tax dollars.
    Current law relating to ESOP discourages reinvestment of 
retirement savings and increases leakage. H.R. 1102 remedies 
the law by permitting employers to deduct dividends paid to the 
ESOP when the employees are allowed to take the dividends in 
cash or to leave them in the plan as a reinvestment vehicle for 
retirement security.
    The Committee will also consider this year the extension of 
420 which permits the use of excess pension assets in support 
of companies' retiree health benefits. This has been a highly 
successful effort over the past several years and should be 
continued.
    Finally, we are concerned with the unbalanced, inaccurate, 
and inflammatory publicity surrounding the so-called cash 
balance and other hybrid defined benefit plan designs. Certain 
cash balance and similar plans meet employee demands, 
especially our new generation in the work force, by providing 
an understandable, portable, and secure benefit where 
employers, nonemployees, bear the investment risk and the 
participants benefit is guaranteed by the PBGC, Pension Benefit 
Guaranty Corporation.
    A significant number of large- and medium-size employers 
have adopted the new plan design breaking the ``golden 
handcuffs'' and letting their workers out of ``pension jail,'' 
if you will. The plans have become very popular among the 
increasing number of workers, particularly women, who expect to 
move in and out of the work force and who do not believe that 
they will remain with one employer for their entire career. 
That completes my prepared statement.
    [The prepared statement and attachments follow:]

Statement of J. Randall MacDonald, Executive Vice President, Human 
Resources and Administration, GTE Corp., Irving, Texas; on behalf of 
ERISA Industry Committee

    My name is Randall MacDonald. I am Executive Vice President 
Human Resources and Administration for GTE Corp. I also serve 
on the Board of Directors of The ERISA Industry Committee, 
commonly known as ``ERIC,'' and I am appearing before the 
Committee this afternoon on ERIC's behalf.
    ERIC is a nonprofit association committed to the 
advancement of the employee retirement, health, and welfare 
benefit plans of America's largest employers. ERIC's members 
provide comprehensive retirement, health care coverage, and 
other economic security benefits directly to some 25 million 
active and retired workers and their families. ERIC has a 
strong interest in proposals affecting its members' ability to 
deliver those benefits, their cost and effectiveness, and the 
role of those benefits in the American economy.
    ERIC has played a leadership role in advocating responsible 
solutions to the critical retirement and health care coverage 
issue that face our nation. In addition, ERIC recently 
published policy papers and studies that have received wide 
acclaim. These include:
    --The Vital Connection: An Analysis of the Impact of Social 
Security Reform on Employer-Sponsored Retirement Plans,
    --Getting the Job Done: A White Paper on Emerging Pension 
Issues, and
    --Policy Statement on Health Care Quality and Consumer 
Protection.
    ERIC also has proposed numerous amendments to current law 
designed to facilitate the provision of employee benefits by 
employers and to promote national savings. The organization and 
its members have worked closely with the Ways and Means 
Committee for over twenty-five years to resolve important 
policy questions and to devise practical solutions to the often 
vexing problems facing the Committee and the country.
    ERIC is gratified that, in holding this hearing, the 
Committee and its Chair have displayed a strong interest in 
affirmatively addressing long-term retirement security issues. 
ERIC believes strongly in the importance of addressing these 
security issues now. The need to do so is reflected in 
legislation before the Committee. At least five comprehensive 
pension reform bills have been introduced in the House of 
Representatives in this Congress. They include:
    --H.R.739, The Retirement Account Portability Act, by Reps 
Earl Pomeroy (D-ND) and Jim Kolbe (R-AZ), et al.,
    --H.R.1102, The Comprehensive Retirement Security and 
Pension Reform Act, by Reps. Rob Portman (R-OH) and Ben Cardin 
(D-MD), et al.,
    --H.R. 1213, Employee Pension Portability and 
Accountability Act of 1999, by Rep. Richard Neal (D-MA), et 
al.,
    --H.R.1546, Retirement Savings Opportunity Act of 1999, by 
Rep. Bill Thomas (R-CA), and
    --H.R.1590, Retirement Security Act of 1999, by 
Representative Sam Gejdenson (D-CT), et al.
    In addition, H.R.1176, The Pension Right to Know Act, by 
Rep. Jerry Weller (R-IL), et al., would have a significant 
impact on defined benefit plans sponsored by major employers 
such as the members of ERIC. Several of these bills have 
companion measures that have been introduced in the U.S. 
Senate.
    ERIC will be pleased to provide the Committee with detailed 
comments on any of these bills. Our testimony today, however, 
will focus on H.R. 1102 and H.R. 1176 and comment on the use of 
excess pension assets to pay for other critical employee 
benefits such as medical benefits for retirees.

                  H.R. 1102--Effective Pension Reform

    ERIC would like to focus the Committee's attention on 
H.R.1102, The Comprehensive Retirement Security and Pension 
Reform Act, sponsored by Committee members Rep. Rob Portman and 
Ben Cardin and cosponsored by many Members of this Committee 
and of the House. ERIC thanks Congressmen Portman and Cardin 
and their staffs for the vision, wisdom, and commitment that 
they have displayed in crafting and introducing ground-breaking 
retirement security legislation. H.R.1102 makes significant 
reforms that will strengthen the retirement plans that 
employers voluntarily provide for their employees and improve 
the ability of workers to provide for their retirement.
    ERIC advocates the speedy enactment of major provisions in 
H.R. 1102 that will (1) increase benefit security and enhance 
retirement savings, (2) increase pension portability, and (3) 
rationalize rules affecting plan administration.

       Increased Benefit Security and Enhanced Retirement Savings

    The Internal Revenue Code imposes a dizzying array of 
limits on the benefits that can be paid from, and the 
contributions that can be made to, tax-qualified plans. It was 
not always that way.
    The limits originally imposed by ERISA in 1974 allowed 
nearly all workers participating in employer-sponsored plans to 
accumulate all of their retirement income under funded, tax-
qualified plans. Between 1982 and 1994, however, Congress 
enacted laws that repeatedly lowered the ERISA limits and 
imposed wholly new limits. [See Attachment A].The cumulative 
impact of constricted limits has been to reduce significantly 
retirement savings and imperil the retirement security of many 
workers.
    H.R.1102 turns this tide at a critical time. This Committee 
does not need to be reminded that the baby boom cohort is 
rapidly nearing retirement, and that it is critical for them 
and for our nation that baby boomers have all the incentives 
and resources they need to prepare for their own retirement. 
Retirement planning is a long-term commitment. If we wait until 
this group has begun to retire, it will be too late. Many 
employers will not have cash available to pay for rapid 
increases in pension liabilities, and employees will not have 
time to accumulate sufficient savings. We must act now. The 
provisions of H.R.1102 open the door. It is an opportunity we 
cannot afford to pass up.
    Just as many of the laws restricting retirement savings 
were enacted to increase federal revenues, restoring benefit 
and contribution limits to the more reasonable levels necessary 
to help employees prepare for retirement will reduce federal 
revenues over the short term. ERIC recognizes that the 
Committee has many needs to consider, but ERIC strongly urges 
the Committee to work with us to ensure that the laws enacted 
today clearly provide for increased retirement savings 
opportunities in the future. In reviewing these provisions, 
Congress should consider the following:
     Deferred taxes are repaid to the government. 
Savings accumulated in tax-qualified retirement plans are not a 
permanent revenue loss to the federal government. Taxes are 
paid on almost all savings accumulated in tax-qualified plans 
when those savings are distributed to plan participants and 
beneficiaries. Workers who save now under most types of plans 
will pay taxes on those savings when they retire in the future. 
In 1997, tax-qualified employer-sponsored retirement plans paid 
over $379 billion in benefits, exceeding by almost $63 billion 
the benefits paid in that year by the Social Security Old Age 
and Survivors Insurance (OASI) program. In future years, 
benefits paid from qualified plans will increase dramatically. 
For example, the 1991 Social Security Advisory Council predicts 
the percent of elderly receiving a pension will increase from 
43 percent in the early 1990s to 76 percent by 2018.
     Tax-qualified retirement plans help all workers. 
Budgetary figures analyzing the distributional impact of 
estimated tax expenditures for retirement savings in a way that 
indicates that a ``disproportionate'' share of the tax 
expenditure inures to higher-income taxpayers can be extremely 
misleading in this regard. Such analysis ignores both the fact 
that the top few percent of taxpayers pay most of the income 
taxes collected and the fact that older workers, who are 
nearing retirement often have larger accruals than younger 
workers who are just starting out. Such analysis also is 
misleading because it obscures the importance of tax deferral 
in making it economically possible for lower-income workers to 
save for retirement. According to calculations by the American 
Council of Life Insurance based on data contained in the March 
1998 Current Population Survey, over 50 percent of the pension 
benefits paid go to elderly with adjusted gross incomes below 
$30,000. Such analysis also overlooks the fact that the vast 
majority of participants in employer-sponsored plans are not 
highly compensated individuals. The same ACLI study shows that 
over 77 percent of individuals accumulating retirement savings 
in pension plans in 1997 had earnings below $50,000 and nearly 
45 percent had earnings below $30,000. In addition, among 
married couples receiving a pension today, 70 percent had 
incomes below $50,000 and 57 percent had incomes below $40,000. 
Among widows receiving a pension, nearly 85 percent had incomes 
below $50,000 and 55 percent had incomes below $25,000.
     Retirement savings fuel economic growth. While 
retirement savings are accumulating in tax-qualified plans, 
they serve as an engine for economic growth and thereby 
indirectly produce additional revenue for the federal 
government and directly enhance the ability of the nation to 
absorb an aging population. In 1994, pension funds held 28.2% 
of our Nation's equity market, 15.6% of its taxable bonds, and 
7.4% of its cash securities. In a time of increased concern 
about national savings rates, retirement plans have been a 
major source of national savings and capital investment.
     Today's limits restrict workers' savings. Many of 
today's workers' savings and benefits opportunities are 
significantly restricted by current limits. Recently, in one 
typical ERIC company, workers who were leaving under an early 
retirement program and who had career-end earnings of less than 
$50,000 had the benefits payable to them under their tax-
qualified defined benefit plan reduced by the Internal Revenue 
Code limits. Recent studies by the Employee Benefit Research 
Institute of contribution patterns in 401(k) plans indicate 
that many older workers are constrained by the dollar limits on 
contributions to 401(k) plans. The qualified plan limits also 
curtail the efforts of women and other individuals who have 
gaps in their workforce participation or in their pension 
coverage to make significant savings in a timely manner.
     Today's limits delay retirement funding. Limits 
imposed on defined benefit plans imprudently delay current 
funding for benefits that workers are accruing today. Funding 
is restricted because tax-law limits arbitrarily truncate 
projections of the future salaries on which benefits will be 
calculated. As a result, in some cases, the employer is still 
funding an employee's benefits after the employee has retired. 
This situation will become more burdensome for plan sponsors as 
the large baby-boom cohort moves to retirement. One of the 
major purposes of ERISA was to avert precisely this kind of 
benefit insecurity.
     Today's limits divide the workforce. The 
retirement security of all workers is best served when all 
workers participate together in a common retirement plan, as 
was the case until recent years. The current system has created 
a bifurcated world in which business decision-makers (as well 
as more and more of those who work for them) depend 
increasingly on unfunded nonqualified plans for the bulk of 
their retirement savings. Not only does this cause unnecessary 
complexity in business administration, it diverts energy and 
resources away from the qualified plans.
    H.R. 1102 does not fully restore all limits to their ERISA 
levels. It merely begins that process. Restoring limits to more 
rational levels will be critical to providing retirement 
security to working Americans in the coming decades. Let me 
briefly highlight some of the specific provisions that are of 
particular concern to ERIC members:
    H.R. 1102 (Sec. 101) restores the limits on early 
retirement benefits to more appropriate levels. Under ERISA, 
benefits payable from a tax-qualified plan before age 55 were 
actuarially reduced from a $75,000 dollar limit. In 1999, the 
limit at age 55 is approximately $52,037--more than $20,000 
less than the limit set in 1974. The reduction in limits for 
early retirement--which already results in reduced benefits for 
early retirees and disabled workers earning $50,000 and less--
will become even more severe as the Social Security retirement 
age increases to age 67. H.R.1102 eliminates the requirement 
for actuarial reductions in benefits that commence between age 
62 and the Social Security retirement age.
    Currently scheduled increases in the Social Security 
retirement age, as well as rapidly changing work arrangements, 
mean that early retirement programs will continue to be 
attractive and significant components of many employers' 
benefit plans. Where an employer maintains only tax-qualified 
plans, employees whose benefits are restricted suffer a long-
term loss of retirement benefits. Where the employer also 
maintains a nonqualified plan that supplements its qualified 
plan, employees might accrue full benefits, but the security 
and dependability of those benefits are substantially reduced. 
Since benefits under nonqualified plans are generally not 
funded, and are subject to the risk of the employer's 
bankruptcy, nonqualified plans receive virtually none of the 
protection that ERISA provides.
    H.R. 1102 (Sec. 101) restores the compensation limit to the 
1993 indexed amount. ERISA had no limit on an employee's 
compensation that could be taken into account under a tax-
qualified retirement plan. The Tax Reform Act of 1986 imposed a 
limit of $200,000 (indexed) per year. The Omnibus Budget 
Reconciliation Act of 1993 reduced the limit, and the 
Retirement Protection Act of 1994 slowed down future indexing. 
The 1999 compensation limit is $160,000. If the Tax Reform Act 
limit had remained in effect, the limit today would be 
$272,520. H.R. 1102 would increase the limit to $235,000.
    Although this limit might appear to be aimed at the most 
highly paid employees, it has a substantial effect on employees 
much farther down the salary scale. In a defined benefit plan, 
the principal consequence of the reduced limit is to delay the 
funding of the plan. In plans where benefits are determined as 
a percentage of pay, projected pay increases are taken into 
account in funding the plan. This protects the plan and the 
employer from rapidly increasing funding requirements late in 
an employee's career. However, projected salary increases today 
are truncated at the compensation limit, or $160,000. The 
result is that funding of the plan is delayed--not just for the 
highly paid but for workers earning as little as $40,000.
    This restriction is particularly troublesome today since it 
delays funding for a very large cohort of workers: the baby 
boomers. The limit will result in higher contribution 
requirements for employers in the future. Some employers will 
not be able to make these additional contributions, and they 
may have to curtail the benefits under their plans.
    H.R. 1102 (Sec. 112) permits employer-sponsored defined 
contribution plans to allow employees to treat certain elective 
deferrals as after-tax contributions. In 1997, Congress created 
a new savings vehicle, commonly known as the Roth IRA. Under 
this savings option, individuals may make after-tax 
contributions to a special account. The earnings on those 
contributions accumulate on a tax-free basis, and no tax is 
assessed on distributions if certain conditions are met. H.R. 
1102 and H.R. 1546 permit employers to offer a similar option 
within the employer's 401(k) plan.
    Employer plans offer several advantages to individual 
savers. Payroll deduction programs make decisions to save less 
painful and regular savings more likely to occur. Where 
available, employer matching contributions provide an immediate 
enhancement of savings. Because plans generally allow each 
participant to allocate his or her account balance among 
designated professionally-managed investment funds and index 
funds, participants enjoy the benefits of professional benefit 
management. Participants in employer-sponsored plans also are 
more likely to have free access to information and assistance 
(e.g., decision guides or benefits forecasting software) that 
enable them to make better informed investment decisions.
    Employees who find the tax treatment of these new accounts 
attractive will, under the bill's provision, be able to enhance 
their savings while not losing the benefits of participating in 
an employer plan. To the extent that individuals who find these 
accounts attractive are concentrated among the lower-paid, 
offering such accounts within the employer's 401(k) plan also 
will help to prevent erosion of the plan's ability to comply 
with nondiscrimination tests and will preserve the plan and its 
savings potential for all employees.
    H.R. 1102 (Sec. 202) repeals the 25% of compensation limit 
on annual additions to a defined contribution plan. Under 
current law, the maximum amount that can be added to an 
employee's account in a defined contribution plan in any year 
is the lesser of $30,000 or 25% of the employee's compensation. 
H.R.1102 and H.R. 1546 repeal the 25% limit.
    The 25% limit does not have a practical impact on a 
company's upper echelon employees. For example, for an employee 
earning $200,000 per year, the dollar limit is lower than the 
25% limit. Because of the 25% limit, employers are often forced 
by the law to limit the contributions on behalf of lower-paid 
employees, especially employees who take advantage of the 
savings feature in a Sec. 401(k) plan. Repealing the 25% limit 
will eliminate this problem.
    Repealing the 25% limit also will benefit the significant 
number of employees who want to increase their retirement 
savings at opportune times in their careers, including women 
who have reentered the work force after periods of child-
rearing and others who need to catch up on their retirement 
savings after periods during which other financial obligations 
restricted their ability to save.

                     Increased Pension Portability

    Employers and employees are increasingly involved in 
mergers, business sales, the creation of joint ventures, and 
other changes in business structure.\1\ H.R. 1102 promotes 
pension portability by eliminating a number of significant 
stumbling blocks to portability created by current law. The 
bill will substantially improve employees' ability to transfer 
their retirement savings from one plan to another and to 
consolidate their retirement savings in a single plan where 
they can oversee it and manage it more effectively and 
efficiently.
---------------------------------------------------------------------------
    \1\ One large pension manager (T. Rowe Price) reported that 40% of 
the new plans that it set up in 1995 resulted from mergers, 
acquisitions, and divestitures.
---------------------------------------------------------------------------
    H.R. 1102 (Sec. 303), which allows an employee's after-tax 
contributions to be included in certain rollovers, should be 
expanded. Under current law, any portion of a distribution that 
is attributable to after-tax employee contributions cannot be 
included in a rollover to another employer's plan or to an IRA. 
The rule unnecessarily and unwisely reduces the employee's 
retirement savings, and is inconsistent with the Congressional 
policy of encouraging employees to preserve their retirement 
savings. H.R.1102 allows after-tax money to be included in a 
rollover to an IRA.
    While we applaud the direction set by this provision of 
H.R. 1102, ERIC proposes that the provision be expanded to 
allow after-tax rollovers to qualified employer plans that 
accept them. Both H.R. 1213 (by Rep. Neal) and S.741 (by Sens. 
Graham and Grassley) provide for rollovers either to an 
employer plan or to an IRA.
    H.R. 1102 (Sec. 304) facilitates plan-to-plan transfers. 
Current Treasury regulations unnecessarily impair an employee's 
ability to transfer his or her benefits from one plan to 
another in a direct plan-to-plan transfer. The regulations 
provide that when a participant's benefits are transferred from 
one plan to another, the plan receiving the assets must 
preserve the employee's accrued benefit under the plan 
transferring the assets, including all optional forms of 
distribution that were available under the plan transferring 
the assets. The requirement to preserve the optional forms of 
benefit inhibits the portability of benefits because it creates 
significant administrative impediments for plan sponsors that 
might otherwise allow their plans to accept direct transfers 
from other plans.
    H.R. 1102 resolves this problem by providing that the plan 
receiving the assets does not have to preserve the optional 
forms of benefit previously available under the plan 
transferring the assets if certain requirements are met. The 
provision will encourage employers to permit plan-to-plan 
transfers and will allow employees to consolidate their 
benefits in a single plan where they can oversee and manage 
their retirement savings effectively and efficiently.
    H.R. 1102 (Sec. 305) repeals the Sec. 401(k) ``same desk'' 
rule. As a result of the sale of a business, an employee may 
transfer from the seller to the buyer but continue to perform 
the same duties as those that he or she performed before the 
sale. In these circumstances, under the Sec. 401(k) ``same 
desk'' rule, the employee is not deemed to have ``separated 
from service'' and the employee's Sec. 401(k) account under the 
seller's plan must remain in the seller's plan until the 
employee terminates employment with the buyer. This prevents 
the employee from rolling over his Sec. 401(k) account to an 
IRA or consolidating it with his or her account under the 
buyer's plan.
    Although current law (Internal Revenue Code 
Sec. 401(k)(10)) provides some relief where the seller sells 
``substantially all of the assets of a trade or business'' to a 
corporation or disposes of its interest in a subsidiary, the 
relief provided by current law is deficient in many respects. 
For example, in the case of an asset sale, the sale must cover 
``substantially all'' the assets of the trade or business and 
the buyer must be a corporation. In some cases, it is not clear 
whether the ``substantially all'' standard has been met; in 
others, the transaction does not qualify as a sale; and in 
still other cases, the buyer is not a corporation.
    More importantly, Sec. 401(k) plans are the only tax-
qualified plans that are subject to the ``same desk'' rule. 
[See Attachment B]
    As employees continue to change jobs over the course of 
their careers, it often is difficult for them to keep track of 
their accounts with former employers and difficult for former 
employers to keep track of former employees who may or may not 
remember to send in changes of address or otherwise keep in 
touch with their former employers' plans.
    There is no justification for singling out Sec. 401(k) 
plans for special restrictions on distributions in this way, 
and ERIC strongly supports repeal of the Sec. 401(k) ``same 
desk'' rule, included in H.R. 1102, as well as in H.R. 739 and 
H.R. 1590.
    H.R. 1102 (Sec. 510) allows ESOP dividends to be reinvested 
without the loss of the dividend deduction for the employer. 
Under current law, an employer may deduct the dividends that it 
pays on company stock held by an unleveraged employee stock 
ownership plan (``ESOP'') only if the dividends are paid out in 
cash to plan participants. By favoring early distributions, 
this rule discourages retirement savings and increases 
``leakage'' from the retirement system, much like the 
prohibition on including after-tax savings in a rollover (see 
comments on section 303 of H.R. 1102, above).
    Some employers attempt to cope with the restrictions 
imposed by current law by allowing participants to increase 
their Sec. 401(k) deferrals by the amount of the dividends 
distributed to them. However, this arrangement is convoluted, 
confusing to employees, and effective only up to the legal 
restrictions on Sec. 401(k) deferrals.
    H.R. 1102 remedies this unsatisfactory situation by 
allowing an employer with an ESOP to deduct dividends paid on 
employer securities held by the ESOP whether paid out in cash 
or, at the employee's election, left in the plan for 
reinvestment.

                 Rational Rules for Plan Administration

    Superfluous, redundant, confusing and obsolete rules 
encumber the administration of tax-qualified retirement plans. 
These rules unnecessarily increase the cost of plan 
administration, discourage plan formation, and make retirement 
planning more difficult for employees. Many provisions before 
the Committee significantly advance the work Congress began in 
earlier bills to strip away these regulatory ``barnacles.'' For 
example:
    H.R. 1102 (Sec. 22) updates the definition of an ERISA 
``excess'' plan. ERISA provided for ``excess benefit plans,'' 
that is, nonqualified plans maintained exclusively to pay 
benefits that have been curtailed by the limits in the Internal 
Revenue Code. However, in 1974 the IRC included only the limits 
imposed by IRC Sec. 415. Since that time, a limit has been 
imposed on compensation that can be taken into account under a 
qualified plan [IRC Sec. 401(a)(17)], and several additional 
limits have been imposed on contributions to 401(k) plans. 
These new limits have never been reflected in ERISA's 
definition of ``excess benefit plan.''
    Unless ERISA's definition of an ``excess benefit plan'' is 
updated to reflect the new IRC limits, a rapidly increasing 
numbers of employees will see their retirement benefits 
substantially diminished. The new limits are most damaging to 
older workers who are at the height of their earning capacity 
and ability to save for retirement. Many such workers have been 
unable to set aside sufficient retirement savings earlier in 
their careers because of family obligations such as housing and 
education.
    H.R. 1102 (Sec. 523) allows employers to provide suspension 
of benefit notices through the summary plan description (SPD). 
One of the chief impediments to the creation and maintenance of 
defined benefit plans is their administrative cost and 
complexity. While some of that complexity is inherent in the 
design of these plans, much of it is due to excessive and 
wasteful regulation. The Department of Labor's regulation 
requiring individual ``suspension of benefit'' notices is a 
glaring example of such over-regulation.
    Most defined benefit pension plans provide that, in 
general, benefits do not become payable until the employee 
terminates employment. Pursuant to Department of Labor 
Regulations, however, a plan may not withhold benefit payments 
after an employee has attained normal retirement age, unless 
during the first calendar month or payroll period after the 
employee attains normal retirement age, the plan notifies the 
employee that his or her benefits are suspended. The notice 
must meet complex and detailed specifications. The notice 
requirement should be changed for the following reasons:
     Employees who continue working past the plan's 
normal retirement age do not expect to begin receiving benefit 
payments until they actually retire. Thus, many employees who 
receive the notice view it as a waste of plan assets. For 
others, the notice is perceived as a subtle attempt by the 
employer to expedite their retirement.
     The notice requirement also creates substantial 
record-keeping and paperwork burdens for employers. Regardless 
of the number of employees affected, the employer must incur 
the cost of installing a system to identify and notify each 
employee who works beyond the plan's normal retirement age or 
who is re-employed after attaining normal retirement age.
     In spite of the most conscientious efforts by plan 
administrators to comply with the DOL requirement, errors 
inevitably occur. Unfortunately, a plan that fails to provide 
the required notice to even a single affected employee risks 
losing its tax-qualified status--exposing the plan, the 
employer, and all of the plan's participants and beneficiaries 
to enormous financial penalties.
    The SPD is the primary vehicle for informing plan 
participants and beneficiaries about their rights under 
employee benefit plans. Plans are required by ERISA to supply 
copies of the SPD to participants and beneficiaries, and 
participants have been educated to consult their SPD's for 
information about their benefit plans. As such, the SPD is the 
most appropriate--and effective--mechanism for delivering 
information about the payment of benefits to participants.
    Other provisions. H.R. 1102 makes other changes that remove 
significant regulatory burdens and will enable plan sponsors to 
design plans that meet the needs of their individual 
workforces. For example, section 504 contains modifications 
that will make the separate line of business rules of current 
law more workable. Today's separate line of business rules are 
so complex that many employers have given up trying to use them 
even though the companies involved have significantly diverse 
lines of business. The nature of today's business combinations 
and alliances differs significantly from just a decade ago, 
making it more important to have workable separate line of 
business rules. ERIC looks forward to working with the 
Committee on this and other similar provisions.
    Congress should reject Sec. 501 of H.R. 1102, which changes 
the way in which the qualification standards are enforced. 
Under current law, a plan may be disqualified for failing to 
meet the Internal Revenue Code's qualification requirements 
even if the failure was inadvertent and even if the employer 
has made a good faith effort to administer the plan in 
accordance with the qualification requirements. ERIC has long 
been concerned with this serious problem, and it is very 
appreciative of the interest that the sponsors of H.R.1102 have 
taken in this issue.
    ERIC, however, advocates an enforcement policy that 
emphasizes correction over sanction; that encourages employers 
to administer their plans in accordance with the qualification 
standards; that encourages employers to remedy promptly any 
violations they detect; that reserves IRS involvement for 
serious violations; and that applies appropriate sanctions only 
where employers fail to remedy serious violations that they are 
aware of.
    The Internal Revenue Service has incorporated these 
principles in its Employee Plans Compliance Resolution System 
(``EPCRS''). In formulating and improving EPCRS, the Treasury 
and the Service have been very responsive to the concerns 
expressed by ERIC and other groups. Although we believe that 
improvements can and should be made in EPCRS, we believe that 
improvements are best made at an administrative level, where 
changes can readily be made to respond to changing 
circumstances and to newly-identified issues. If the Committee 
believes that legislation is necessary, we suggest that the 
legislation encourage the Treasury and the Service to expand 
and improve their existing programs.

    Avoiding Misdirected Regulatory Burdens Such Those in H.R. 1176

    As pension law evolves, ERIC urges that Congress avoid 
imposing new regulatory burdens on employer-sponsored plans. 
Several provisions before the Committee, contrary to the 
proposals highlighted above, would continue to heap new 
requirements on plans. Contrary to Congress's objective of 
increasing pension coverage, these requirements, added to those 
of existing law, will encourage plan terminations and 
discourage any employer not already in the pension system from 
entering. ERIC's concerns with H.R. 1176, developed in response 
to media analysis of plans that have been changed from 
traditional defined benefit plans to cash balance plans are 
explained in more detail below.
    H.R. 1176 imposes new notice requirements when a change in 
plan design results in significant reductions in the rate of 
future benefit accruals. Under ERISA Sec. 204(h), plans must 
notify participants in advance of any plan amendment that will 
result in a significant reduction in the rate of benefit 
accruals under the plan.
    ERIC's members invest large sums of money and substantial 
resources in ensuring that employees have a full understanding 
of their benefit plans and any changes to those plans. ERIC is 
concerned that modifications currently proposed to legal 
disclosure requirements will add significantly to plan costs 
without enhancing employee understanding, impose requirements 
that are difficult if not impossible to satisfy, and hinder the 
ability of employers to adjust their plans to meet changing 
business circumstances or changing employee needs. Any of these 
results would defeat the purpose of the amendment by making it 
more difficult for employers to offer significant retirement 
savings opportunities for their employees.
    Recently, legislation has been introduced in response to 
recent news articles and 90-second ``in depth'' TV reports 
concerning conversions of traditional defined benefit plans to 
cash balance plans. The media reports have failed to provide 
balanced background material for understanding the dynamics of 
change in retirement security plans. Attached to this testimony 
is a detailed briefing document to assist the Committee in 
understanding cash balance and other ``hybrid'' defined benefit 
plan designs as well as the recent media controversy and the 
impact of the proposed legislation. [See accompanying brief 
``Understanding Cash Balance and Other ``Hybrid'' Defined 
Benefit Plan Designs'']
    ERIC is particularly concerned that H.R. 1176 requires the 
distribution of information that frequently will be misleading. 
In addition, the bill saddles employers with data collection 
and reporting requirements obligations that are oppressive and 
impractical.
    Cash balance plans are defined benefit plans that express 
the benefit in the form of an individual account balance. As 
such, these plans are welcomed and understandable by employees, 
are easily portable, and accrue benefits more rapidly in an 
employee's career than a traditional defined benefit plan. At 
the same time, participants in a cash balance plan receive all 
the protections of a defined benefit plan that are not 
available to individual account plans such as 401(k) plans: 
employee participation is automatic, contributions are made by 
the employer, the risk of investment return is borne by the 
employer, and the benefit is guaranteed by the Pension Benefit 
Guaranty Corporation.
    Unfortunately, H.R. 1176 requires employers to distribute 
information that often will effectively mislead employees. 
Under the Pension Right to Know Act, whenever a ``large'' 
defined benefit plan is amended in a way that results in a 
significant reduction in the rate of future benefit accrual for 
any one participant, the plan must provide an individually-
tailored ``statement of benefit change'' to every plan 
participant and alternate payee. The ``statement of benefit 
change'' must be based on government-mandated assumptions and 
must project future benefits at several time intervals under 
both the old and new plan provisions.
    The problem is--
     Projections of future benefits are inherently 
unreliable. Even minor changes between the interest rates 
required to be used under the bill and rates that in fact occur 
over time can have a dramatic impact on the value of benefits 
accrued by individual employees.
     Projections of an employee's possible future 
benefits required by the government and provided by the 
employer are easily misinterpreted by the employee as 
guarantees that benefits will accrue according to the 
projections provided.
     The benefit statements required by the bill will 
lead employees to believe that the plan offers a lump-sum 
option that it might not actually provide.
     The benefit statements required by the bill ignore 
other changes in the employer's ``basket of benefits.''
     By requiring projections of future benefit 
accruals under the old plan's provisions--which are no longer 
operative--the bill falsely implies that participants have the 
option to retain the old provisions.
    H.R. 1176 also imposes burdens on employers that are 
intolerable and unjustified. For example,
     Under the bill, whenever a defined benefit plan is 
amended, the employer must analyze the effect of the amendment 
on every individual participant and alternate payee to 
determine whether the amendment significantly reduces the rate 
of future benefit accrual for any one of them.
     If the employer finds that the amendment 
significantly reduces the rate of future benefit accrual for 
any one participant or alternate payee, the bill requires the 
employer to prepare an individually-tailored statement of 
benefit change for every participant and alternate payee.
     Existing plans often include numerous features 
that apply only to certain individuals. For example, groups of 
employees often have been grandfathered under prior plan 
provisions frequently attributable to their participation in a 
predecessor plan that merged into the existing plan following a 
merger or acquisition. Most of the calculations for these 
employees (which could easily run into the thousands in a large 
company) will have to be performed by hand.
     Many employees also are subject to individual 
circumstances that will affect their benefits--e.g. an 
employee's benefit might be subject to a Qualified Domestic 
Relations Order (QDRO) or the employee might have had a break 
in service or a personal or military leave. The calculations 
for many of these employees also will have to be performed by 
hand.
     The calculations required by the bill must be 
completed before the changes in the plan become effective. This 
can take several months. New calculations regarding the 
employees' actual accrued benefit values must then be 
calculated after the plan becomes effective, since only then 
will the applicable interest rate and other variables as of the 
effective date be known.
    The bill also imposes disproportionate and oppressive tax 
penalties. At a time when Congress is properly focusing on 
expanding employer-sponsored retirement plans, the Pension 
Right to Know Act will have the opposite result. The bill will 
have a chilling effect on sponsorship of any form of defined 
benefit plan, pushing medium and large employers to turn to 
compensation and benefit forms that place employees more at 
risk for their own economic and retirement security.

                 Flexible Funding for Employee Benefits

    Retirement security relies not only on adequate cash 
resources. For many, the availability of employer-provided 
retiree medical coverage has materially enhanced their standard 
of living in retirement. Internal Revenue Code (IRC) 
Sec. 401(h) allows a pension plan to provide medical benefits 
to retired employees and their spouses and dependents if the 
plan meets certain requirements.
    These restrictions on 401(h) accounts indicate that only 
new contributions--not existing plan assets--can be used to 
fund a 401(h) account. If the plan is very well funded--so that 
the employer is no longer making any contributions to the 
plan--401(h) is not available. Recognizing that this arbitrary 
restriction unnecessarily imperiled the security of retiree 
medical benefits, Congress in 1990 enacted IRC Sec. 420 to 
permit a pension plan to use part of its surplus assets to pay 
current retiree medical expenses. Although 420 was originally 
scheduled to expire at the end of 1995, Congress later extended 
the life of 420 until 2000.
    Section 420 does not allow advance funding of future 
retiree health liabilities. But because it allows pension 
assets to be used for current retiree health care expenses, 420 
permits excess pension assets to be used productively. In 
addition, because 420 relieves employers of the need to make 
tax-deductible payments for retiree health benefits, 420 raises 
federal tax revenues.
    In order to make a 420 transfer, the employer must meet a 
number of requirements, including the following:
     The transferred amount may not exceed the excess 
of the value of the plan's assets over the greater of the 
plan's termination liability or 125% of the plan's current 
liability. This is designed to assure that the plan retains 
sufficient assets to cover the plan's pension obligations.
     The transferred amount also may not exceed the 
amount reasonably estimated to be what the 401(h) account will 
pay out during the year to provide current health benefits on 
behalf of retired employees who are also entitled to pension 
benefits under the plan. Key employees are not included.
     The pension plan must provide that the accrued 
pension benefits must become nonforfeitable for any participant 
or beneficiary under the plan as well as for any participant 
who separated from service during the year preceding the 
transfer.
     Section 420 also includes a five-year maintenance 
of effort requirement. When 420 was originally enacted, the 
employer was required to maintain the same retiree health costs 
for the five years following the 420 transfer.
     In 1994, Congress changed this cost-maintenance 
requirement to a benefit-maintenance requirement. Under the 
benefit-maintenance requirement, the employer must maintain 
substantially the same level of retiree health benefits during 
the five years following the transfer.
     In addition, ERISA requires the plan administrator 
to notify each participant and beneficiary of the amount to be 
transferred and the amount of the pension benefits that will be 
nonforfeitable immediately after the transfer. Notice must also 
be provided to the Labor Department and any union representing 
plan participants.
    The Senate Finance Committee recently voted to extend 
Sec. 420 through September 30, 2009. The Committee also voted 
to replace the benefit-maintenance requirement with the pre-
1994 cost-maintenance requirement. We encourage this Committee 
to consider the Finance Committee's action.
    That completes my prepared statement. I would like to thank 
the Chair and the Committee for giving ERIC the opportunity to 
testify. I will be happy to respond to any questions that the 
members of the Committee might have.
      

                                


                              Attachment A

       A Historical Summary of Limits Imposed on Qualified Plans

     IRC Sec. 415(b) limit of $120,000 on benefits that 
may be paid from or funded in defined benefit (DB) plans. Prior 
to ERISA, annual benefits were limited by IRS rules to 100% of 
pay. ERISA set a $75,000 (indexed) limit on benefits and on 
future pay levels that could be assumed in pre-funding 
benefits. After increasing to $136,425, the limit was reduced 
to $90,000 in TEFRA (1982). It was not indexed again until 
1988; and it was subjected to delayed indexing, i.e., in $5000 
increments only, after 1994 (RPA). RPA also modified the 
actuarial assumptions used to adjust benefits and limits under 
Sec. 415(b). The limit for 1999 is $130,000. If indexing had 
been left unrestricted since 1974, the limit for 1999 would be 
approximately $238,000.
     IRC Sec. 415(b) defined benefit limit phased in 
over first ten years of service. ERISA phased in the $75,000 
limit over the first ten years of service. This was changed to 
years of participation in the plan (TRA '86).
     IRC Sec. 415(b) early retirement limit. Under 
ERISA, the $75,000 limit was actuarially reduced for 
retirements before age 55. TEFRA imposed an actuarial reduction 
for those retiring before age 62 (subject to a $75,000 floor at 
age 55 or above); and TRA '86 imposed the actuarial reduction 
on any participant who retired before social security 
retirement age and eliminated the $75,000 floor. For an 
employee retiring at age 55 in 1999, the limit (based on a 
commonly-used plan discount rate) is approximately $52,037.The 
early retirement reduction will become even greater when the 
social security retirement age increases to age 66 and age 67.
     IRC Sec. 415(c) limit of $30,000 on contributions 
to defined contribution (DC) plans. ERISA limited contributions 
to a participant's account under a DC plan to the lesser of 25% 
of pay or $25,000 (indexed). The $45,475 indexed level was 
reduced to $30,000 in TEFRA (1982); indexing also was delayed 
by TRA '86 until the DB limit reached $120,000. RPA restricted 
indexing to $5000 increments. The 1999 limit is still $30,000. 
If indexing had been left unrestricted since 1974, the 1999 
limit would be approximately $79,600.
    5. IRC Sec. 415(c) limit of 25% of compensation on 
contributions to defined contribution plans. Prior to ERISA, 
the IRS had adopted a rule of thumb whereby contributions of up 
to 25% of annual compensation to a defined contribution plan 
generally were acceptable. ERISA limited contributions to a 
participant's account under a DC plan to the lesser of 25% of 
pay or $25,000 (indexed). Section 1434 of Public Law 104-188 
alleviates the more egregious problems attributed to the 25% 
limit for nonhighly compensated individuals by including an 
employee's elective deferrals in the definition of compensation 
used for Sec. 415 purposes. Public Law 105-34 alleviates an 
additional problem by not imposing a 10% excise tax on 
contributions in excess of 25% of compensation where the 
employer maintains both a defined benefit and defined 
contribution plan and the limit is exceeded solely due to the 
employee's salary reduction deferrals plus the employer's 
matching contribution on those deferrals.
    6. Contributions included in the IRC Sec. 415(c)'s defined 
contribution plan limit. ERISA counted against the DC limit all 
pre-tax contributions and the lesser of one-half of the 
employee's after-tax contributions or all of the employee's 
after-tax contributions in excess of 6% of compensation. TRA 
'86 included all after-tax contributions.
    7. IRC Sec. 415(e) combined plan limit. Under ERISA, a 
combined limit of 140% of the individual limits applied to an 
employee participating in both a DB and a DC plan sponsored by 
the same employer. E.g., if an employee used up 80% of the DC 
limit, only 60% of the DB limit was available to him or her. 
TEFRA reduced the 140% to 125% for the dollar limits. Section 
1452 of Public Law 104-188 repeals the combined plan limit 
beginning in the year 2000.
    8. IRC Sec. 401(a)(17) limit on the amount of compensation 
that may be counted in computing contributions and benefits. 
TRA '86 imposed a new limit of $200,000 (indexed) on 
compensation that may be taken into account under a plan. OBRA 
'93 reduced the $235,000 indexed level to $150,000. RPA 
restricted future indexing to $10,000 increments. The 1999 
limit is $160,000. If this limit had been indexed since 1986 
without reduction the 1999 level would be $272,520.
    9. IRC Sec. 401(k)(3) percentage limits on 401(k) 
contributions by higher paid employees. Legislation enacted in 
1978 that clarified the tax status of cash or deferred 
arrangements also imposed a limit on the rate at which 
contributions to such plans may be made by highly compensated 
employees. TRA '86 reduced this percentage limit. Section 1433 
of Public Law 104-188 eliminates this requirement for plans 
that follow certain safe-harbor designs, beginning in the year 
1999.
    10. IRC Sec. 401(m)(2) percentage limits on matching 
contributions and after-tax employee contributions. TRA '86 
imposed a new limit on the rate at which contributions may be 
made on behalf of HCEs. Beginning in the year 1999, section 
1433 of Public Law 104-188 eliminates this requirement for 
matching payments on pre-tax (but not after-tax) elective 
contributions of up to 6% of pay if those payments follow 
certain safe-harbor designs.
    11. IRC Sec. 402(g) dollar limit on contributions to 401(k) 
plans. TRA '86 imposed a limit of $7000 on the amount an 
employee may defer under a 401(k) plan. RPA restricted further 
indexing to increments of $500. The 1999 indexed limit is 
$10,000.
    12. IRC Sec. 4980A--15% excise tax on ``excess 
distributions.'' TRA '86 imposed an excise tax (in addition to 
applicable income taxes) on distributions in a single year to 
any one person from all plans (including IRAs) that exceed the 
greater of $112,500 (indexed) or $150,000 (or 5 times this 
threshold for certain lump-sum distributions). RPA restricted 
indexing to $5000 increments. The limit was indexed to $160,000 
in 1997. In addition, TRA '86 imposed a special 15% estate tax 
on the ``excess retirement accumulations'' of a plan 
participant who dies. Section 1452 of Public Law 104-188 
provides a temporary suspension of the excise tax (but not of 
the special estate tax) for distributions received in 1997, 
1998, and 1999. Public Law 105-34 permanently repeals both the 
excess distributions tax and the excess accumulations tax, for 
distributions or deaths after 12-31-96.
    13. IRC Sec. 412(c)(7) funding cap. ERISA limited 
deductible contributions to a defined benefit plan to the 
excess of the accrued liability of the plan over the fair 
market value of the assets held by the plan. OMBRA (1987) 
further limited deductible contributions to 150% of the plan's 
current liability over the fair market value of the plan's 
assets. Public Law 105-34 gradually increases this limit to 
170%.
    14. ERISA Sec. 3(36) definition of ``excess benefit plan.'' 
ERISA limited excess benefit plans to those that pay benefits 
in excess of the IRC Sec. 415 limits. Other nonqualified 
benefits must be paid from ``top hat'' plans under which 
participation must be limited to a select group of management 
or highly compensated employees.
    LEGEND:
    ERISA--Employee Retirement Income Security Act of 1974
    HCE--highly compensated employee
    IRC--Internal Revenue Code
    IRS--Internal Revenue Service
    OBRA '93--Omnibus Budget Reconciliation Act of 1993 (P.L.103-66)
    OMBRA--Omnibus Budget Reconciliation Act of 1987 (P.L.100-203)
    P.L.104-188--The Small Business Job Protection Act of 1996
    P.L.105-34--The Taxpayer Relief Act of 1997
    RPA--The Retirement Protection Act of 1994 (included in the GATT 
Implementation Act, P.L.103-465)
    TEFRA--The Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 
97-248)
    TRA '86--The Tax Reform Act of 1986 (P.L. 99-514)
      

                                


                              Attachment B

   APPLICATION OF SAME DESK RULE TO PAYMENTS FROM TAX-QUALIFIED PLANS
------------------------------------------------------------------------
               Type of Plan                  Does Same Desk Rule Apply?
------------------------------------------------------------------------
Conventional Defined Benefit Pension Plan.  No
Cash Balance Pension Plan.................  No
Money Purchase Pension Plan...............  No
Profit-Sharing Plan.......................  No
Stock Bonus Plan..........................  No
Employee Stock Ownership Plan.............  No
Employer Matching Contributions...........  No
After-Tax Employee Contributions..........  No
Sec.  401(k) Contributions................  Yes \1\
------------------------------------------------------------------------
\1\ The same desk rule also applies to Sec.  403(b) and Sec.  457(b)
  plans, which are nonqualified plans sponsored by governmental and tax-
  eemployers.

      

                                


I. Understanding Cash Balance and Other ``Hybrid'' Defined Benefit Plan 
Designs

    The rapid emergence of new, dynamic technologies and 
obsolescence of many existing products and services, the need 
to respond to new domestic and global competitors, and the 
changing attitudes toward career and work by employees in many 
industries, requires that many employers change their 
incentives to attract and retain talented employees. For 
workers and employers in new and changing industries, and for 
those employees who do not anticipate a single career with one 
employer but who still value retirement security, the 
traditional defined benefit plan design has given way to cash 
balance and similar ``hybrid'' defined benefit pension plans.
    The new plans are responsive to and popular with many 
employees: the benefits are understandable, secured by the 
federal Pension Benefit Guaranty Corporation (PBGC), and 
provide greater benefits to women and others who move in and 
out of the workforce. Moreover, the employer bears the risk of 
investment for benefits that are nevertheless portable, and 
employees under the new plans avoid ``pension jail'' and 
``golden handcuffs.''
    Recent news articles and 90-second ``in depth'' TV reports 
have failed to provide useful and balanced background material 
for understanding the dynamics of change in retirement security 
plans. Moreover, legislation based on media coverage in an 
effort to correct reported problems has been misdirected and 
overreaching.
    In order to start fresh and balance the scales, The ERISA 
Industry Committee has prepared the accompanying materials that 
identify the issues in the present debate and describe why many 
employers have shifted from traditional defined benefit plan 
designs.
    The ERISA Industry Committee (ERIC) is a non-profit 
association committed to the advancement of employee 
retirement, health, and welfare benefit plans of America's 
largest employers and is the only organization representing 
exclusively the employee benefits interests of major employers. 
ERIC's members provide comprehensive retirement, health care 
coverage and other economic security benefits directly to some 
25 million active and retired workers and their families. The 
association has a strong interest in proposals affecting its 
members' ability to deliver those benefits, their cost and 
their effectiveness, as well as the role of those benefits in 
the American economy.
    We hope that these materials will help in understanding the 
new direction many employers are taking to provide retirement 
security. We hope to be in touch with you directly in the 
coming weeks. In the meantime, please feel free to call on any 
of us for information or assistance.

            Very truly yours,
                                            Mark J. Ugoretz
                                                          President
                                          Janice M. Gregory
                                                     Vice President
                                            Robert B. Davis
                                         Legislative Representative

    [Additional attachments are being retained in the Committee 
files. Attachments may be accessed at www.eric.org]
      

                                


    Chairman Archer [presiding]. Thank you, Mr. MacDonald.
    Mr. McCarthy, welcome to the Committee. We will be pleased 
to receive your testimony.

     STATEMENT OF JIM MCCARTHY, VICE PRESIDENT AND PRODUCT 
DEVELOPMENT MANAGER, PRIVATE CLIENT GROUP, MERRILL LYNCH & CO., 
INC., PRINCETON, NEW JERSEY; ON BEHALF OF SAVINGS COALITION OF 
                            AMERICA

    Mr. McCarthy. Thank you, Mr. Chairman. My name is Jim 
McCarthy. I am principally responsible for tax product 
development at Merrill Lynch. Today I am here representing the 
Savings Coalition. I am honored to be here and pleased that the 
Committee is taking such a proactive stance in this area.
    The Savings Coalition is a broad-based group of parties 
representing 75 member organizations all of whom are interested 
in increasing the rate of personal savings in this country. We 
represent homebuilders, realtors, health care companies, 
financial services industries, a list of the Savings Coalition 
members is attached to my commentary.
    As you all know, we have a looming savings crisis in this 
country and I would--to put it in a larger context, I would 
argue that success or failure in this area will cascade either 
positive or negative results into the rest of the personal 
financial health of Americans. The inadequacy of a retirement 
savings pool will have disastrous effects, for example, in 
things like the ability to fund education or health care costs. 
So, as a result, while the savings shortfall is of sufficient 
magnitude to gather everyone's attention, since it is the 
largest pot of assets that tends to be held by American 
workers, its spillover effect, if dealt with correctly and 
solved, is magnified by that preeminent position.
    The members of the Savings Coalition ask you, Mr. Chairman 
and the Members of the Committee, to enact the provisions of 
H.R. 1546, Congressman Thomas' bill also entitled the 
Retirement Savings and Opportunity Act of 1999. Among other 
changes, that legislation would substantially expand personal 
savings by increasing the maximum permitted IRA contribution 
from $2,000 to $5,000. It would eliminate a number of 
interrelated and complex caps on eligibility, counterproductive 
income limits and allow additional catchup contributions to 
IRAs for those nearing retirement.
    Before going into the provisions of 1546 in more detail, 
let me congratulate the Members of the Committee on their work 
in 1997 to, in essence, bring the IRA out of retirement. Our 
experience at Merrill Lynch indicates, for example, that the 
new Roth IRA, which originated in this Committee under the name 
of the American dream savings account, could well be the most 
effective new savings generator since the successful expansion 
of the 401K plans in the early eighties and nineties.
    This has been a critical step in strengthening the private 
savings leg of the traditional three-legged stool. We think in 
large measure the Roth IRA has had the success because of its 
relative simplicity. For example, at Merrill Lynch, we have 
seen an increase of more than 80 percent in IRA contributions 
in the last year. That is an astounding number that I would 
like to put in historical context in just a moment, but given 
that it is the first year of a financial instrument or an 
account vehicle being in place, an 80-percent increase in 
contributions is just a staggering kind of launch of acceptance 
and internalization by the American public.
    Also in our 401(k) business, for example, we have seen less 
leakage out of our system because of the heightened--In 
defining leakage, I refer to the number of distributions that 
are not rolled over to either an IRA or a subsequent employer 
plan, in part because we believe of the heightened public 
awareness of the need to both quantify and then attack through 
aggressive savings the challenge of saving adequately for 
retirement.
    An interesting aspect of the Roth IRA expansion, for 
example, is that we have seen a tremendous increase in the 
amount of traditional IRA contributions. We have had almost a 
60-percent increase in the number of traditional IRA 
contributions that we have had and what we think is that if 
people come to the door asking for ways to focus on retirement 
savings, they will leave with the solution that fits them best.
    We know the personal savings rate in this country has 
dropped from roughly 8 percent during the sixties and seventies 
down to what many would argue is a very anemic one-half of 1 
percent currently, and in certain months we have been negative.
    While we believe that the nature of the statistic is not 
perfect, we believe that this is an area that needs to be 
addressed. Our own research, we have Douglas Bernheim, a 
Stanford economics professor, who prepares a baby-boom index 
for us. That index currently stands at 32 percent, which means 
there is 68 percent inadequacy of retirement savings.
    Let me just get into some of the provisions of H.R. 1546.
    First and foremost, we need to raise the contribution limit 
from $2,000 to $5,000. That limit has been in place since 1981. 
It is far short of the $5,000 that would be the limit in the 
event that a number had been originally indexed.
    We also think that it is increasingly important to 
eliminate the complexity and the interrelation between 
eligibility and income deductions, especially in a married 
couple. Because, in effect, we have imposed a marriage penalty 
on savings, for people who want a simple and portable vehicle 
in which to make their retirement savings. We think that this 
is especially important in that the bulk of job creation is 
happening in the small employer market and, as a result, 
traditional plan coverage is not rising there as fast as it is 
in the larger employer market.
    The last provision is catch-up provisions for those over 
50, the ability to, in effect, fund a plan that has not been 
adequately funded before. We think that it is particularly 
important to women who have been out of the work force or who 
may be more transitory in the work force, and we urge with all 
emphasis and haste that the Committee enact H.R. 1546.
    Thank you.
    [The prepared statement follows:]

Statement of Jim McCarthy, Vice President and Product Development 
Manager, Private Client Group, Merrill Lynch & Co., Inc., Princeton, 
New Jersey; on behalf of Savings Coalition of America

    Mr. Chairman, let me commend you and the other members of 
this Committee for holding this hearing today. Savings, and 
particularly retirement savings, is the key to America's long-
term economic prosperity.
    I am Jim McCarthy, Vice President and Product Development 
Manager, Private Client Group, for Merrill Lynch & Co., Inc. I 
am here today representing the Savings Coalition of America. 
The Savings Coalition is a broad-based group of parties 
interested in increasing personal savings in the United States. 
The 75 member organizations of the Savings Coalition represent 
a wide variety of private sector organizations including 
consumer, education and business groups; senior citizen groups; 
home builders and realtors; health care providers; engineering 
organizations; and trust companies, banks, insurance companies, 
securities firms, and other financial institutions. A list of 
the members of the Savings Coalition is attached.
    With Americans saving less than at any time since World War 
II, we stand at a crossroads. For individuals (including 
especially the baby boom generation), inadequate savings today 
will lead to a retirement crisis in the next century. If 
Americans do not begin saving more for retirement soon, the 
pressures on the Social Security system that are caused by the 
aging of our population will be compounded. With Americans 
living longer, millions of Americans will face prolonged 
retirements without the financial wherewithal to meet day-to-
day needs. Moreover, if low savings rates continue at the 
national level, they will, over time, lead to higher interest 
rates and slower economic growth--further increasing the 
difficulty of dealing with the problems raised by the changing 
demographics of our population. For these and many other 
reasons, doing something now to enhance retirement savings is 
critical.
    Traditionally, retirement security for Americans has been 
based on the so-called ``three-legged stool''--Social Security, 
employer-sponsored retirement plans and personal savings. 
Dealing with our nation's ongoing savings shortfall effectively 
will require that each of those legs be strengthened. In 
particular, Congress should not ignore the critical personal 
savings leg of the three-legged stool and the Individual 
Retirement Account, or IRA, has proven over the last 25 years 
to be the most effective method for focusing personal savings.
    Mr. Chairman, the members of the Savings Coalition ask you 
and the other members of this Committee to enact the provisions 
of H.R. 1546--the Retirement Savings Opportunity Act of 1999, 
introduced by Congressman Thomas. Among other important 
changes, that legislation would substantially expand personal 
savings by increasing the maximum permitted IRA contribution 
from $2,000 to $5,000, eliminating the complex and 
counterproductive income limits on IRA participation, and 
allowing additional catch-up contributions to IRAs for those 
approaching retirement.

                        IRAs and Roth IRAs Work

    Before going into the provisions of H.R. 1546 in more 
detail, let me congratulate the members of this committee for 
beginning the process of bringing the Individual Retirement 
Account ``out of retirement'' in 1997. Our experience at 
Merrill Lynch indicates that the new Roth IRA (which originated 
in this Committee under the name American Dream Savings 
Accounts) could well be the most effective new savings 
generator since the successful expansion of section 401(k) 
plans in the 80s and early 90s.
    One need go no further than the advertisements in the 
newspapers and other media to see that the Roth IRA changes 
that Congress enacted in 1997 have revitalized America's 
interest in the IRA. With expanded advertising, more and more 
people have begun asking questions about the new savings 
options available to them. In the process, they are becoming 
better educated about the importance of saving for retirement. 
For many, there has been a growing awareness of how far behind 
they are in saving for a financially secure retirement.
    Although it is still early, our Financial Consultants tell 
us that many of our customers are responding to the pro-savings 
message that the Roth IRA sends. Significantly, they are 
increasing their savings not only through Roth IRAs, but also 
through traditional IRAs and other savings vehicles.
    As with any new financial product, consumer interest builds 
over time. But under almost any reasonable measure, the Roth 
IRA has been a tremendous success. Industry-wide statistics are 
not yet available for 1998, the first year that the Taxpayer 
Relief Act of 1997 IRA changes went into effect, but 
preliminary results at Merrill Lynch show an unprecedented 
increase in IRA activity. Through December 1998, we have seen 
an increase of more than 80 percent in the number of total IRA 
contributions over the same period in 1997--an astounding 
increase for a new savings vehicle. This includes new Roth IRAs 
and increased contributions to traditional IRAs. And we can 
expect contributions for 1999 and beyond to increase even more 
as consumer awareness grows, just as IRA contributions grew 
steadily between 1982 (the first year IRAs became universally 
available) and 1986 (when IRA access was severely restricted).
    One interesting aspect of the Roth IRA expansion is that we 
have seen considerable spillover savings resulting from the 
Roth IRA advertising. For example, we have experienced a 
sizable increase in traditional deductible IRA contributions. 
To some extent that increase is attributable to the changes 
that were enacted in 1997 expanding the availability of 
deductible IRAs. However, we have seen people who were always 
eligible for deductible IRAs come back because they did not 
realize they were eligible in the past. They have called to ask 
about the Roth IRA, but have decided to contribute to a 
traditional IRA or another savings vehicle. The Roth IRA 
legislation deserves the credit for putting those people back 
in the savings habit.
    To illustrate how big a success the Roth IRA and other 1997 
Act IRA changes have been, one need only compare the early 
stages of today's developing IRA market with the early stages 
of other new savings vehicles created by Congress--including 
earlier versions of the IRA. Once again, we won't have complete 
statistics for quite some time, but when you compare the IRA 
activity we have seen in 1998 with our early experience with 
other products, the success of the 1997 IRA changes becomes 
clear.
    In calendar year 1998, Merrill Lynch established more than 
two and one half times more new IRAs than we established during 
the same period in 1982, the first year of universal IRA 
eligibility. This despite the fact that the IRA available in 
1982 was simpler, available on a fully-deductible basis to most 
Americans, and more tax-advantaged (due to higher marginal 
income tax rates that were in effect in 1982). Additionally, 
with the ongoing popularity of the 401(k) plan, the Roth IRA 
has succeeded in the face of a variety of other alternative 
choice's. Similarly, the new Roth IRA has been extremely well 
received when compared with other recently introduced tax 
vehicles. In 1998, for example, Merrill Lynch established one 
hundred times more Roth IRAs than Medical Savings Accounts.
    These recent developments, confirm what we already knew 
from earlier experience, the IRA works at increasing individual 
savings. The IRA has proven time and again to be the single 
most effective vehicle for encouraging personal retirement 
savings by Americans.

                          Need for More Change

    Despite the initial success of the changes enacted in 1997, 
there is no question that current savings incentives will not 
be sufficient to reverse America's serious savings shortfall. 
The 1997 Act IRA changes were important steps in beginning the 
process of improving the incentives to save. But more change is 
needed.
    Since the 1970s the U.S. personal savings rate has declined 
steadily. During the 1960s and 70s, our national savings rate 
averaged around 8% per year. In the last half of the 80s, it 
dropped to about 5.5% and in the 90s it has dropped to a 3.6% 
annual average. Last year, the savings rate was an anemic \1/2\ 
of 1 percent, the lowest level since the Great Depression of 
the 1930s.
    It is the baby boom generation that is in the most danger. 
Research by Stanford University economist Douglas Bernheim, who 
compiles an annual Baby Boom Retirement Index for Merrill 
Lynch, has consistently shown that the baby boom generation has 
fallen as much as two-thirds behind the rate of savings that 
they need to maintain their current standard of living in 
retirement. It is our responsibility to help the baby boom 
generation (and future generations) to start saving more. If we 
do not accomplish that goal soon, the financial burden that 
will be placed on our Social Security system, our economy, and 
ultimately our children and grandchildren, in the next 
millennium could be disastrous.
    While there are many causes for our national savings 
shortfall, one of the main reasons is that our tax system 
continues to penalize savings and investment. What became known 
as the Roth IRA was an innovative step to correct that 
imbalance. The additional proposals made in H.R. 1546, are the 
next logical steps toward providing every American with a 
meaningful opportunity to save for a secure retirement.
    Let me highlight a few of the changes proposed in the H.R. 
1546 that we believe would have the most beneficial impact.

                                Why 2K?

    The current $2,000 maximum IRA contribution has been in 
place since 1981. H.R. 1546 would increase the maximum IRA 
contribution to $5,000 for both Roth and traditional IRAs (and 
would index that limit for future inflation). That change is 
long overdue--almost 20 years overdue. The limit on IRA 
contributions has been stuck at $2,000 since 1981. If the IRA 
contribution limit had been adjusted for inflation since IRAs 
were created in 1974, Americans could now contribute about 
$5,000 per year to an IRA. Of all retirement savings plans, 
only the IRA limit has never been indexed for inflation.
    As things stand today, the maximum IRA contribution is not 
adequate to meet the growing retirement needs of Americans. 
Future retirees can look forward to longer life expectancies 
and more years in retirement. When combined with continuing 
inflation in medical costs (which are especially important for 
those in retirement) and the long range financial challenges 
facing the Social Security Trust Fund, it becomes clear that 
the need for a significant personal savings component in 
retirement is becoming even more critical than it was in the 
past. A two-legged, stool consisting of Social Security and 
employment-based retirement plans, cannot be expected to meet 
the increasing need. Also, for many of the more than 50 million 
workers who are not covered by an employment-based retirement 
plan, IRAs may be the only retirement savings opportunity.
    Interestingly, we have found that more than 90% of our 
customers contributing to an IRA fund it at the annual $2,000 
maximum. They save the maximum amount permitted and commit that 
amount to long-term retirement savings. With higher 
contribution limits, we fully expect that many of those 
individuals will save more.
    Even for those who do not contribute the maximum in every 
year, the higher contribution limit will allow flexibility to 
make IRA contributions in the years that they have the 
resources to make the contributions. For example, a family 
where one spouse remains at home to care for children will 
often not have disposable income for large IRA contributions. 
When the children are older, however, the couple may be better 
able to make IRA contributions. The higher contribution limit 
will allow that couple to make larger IRA contributions during 
the years they can afford to do so.
    Let me also note that in the course of our experience with 
millions of IRAs we have found that there is a very strong 
correlation between the size of an account and the attention 
and discipline that an individual affords to that account. Put 
simply, once an account achieves a certain ``critical mass,'' 
it becomes the individual's nest egg and they become much more 
disciplined with respect to that account balance. They become 
less likely to make withdrawals and more likely to continue 
adding to the account. Conversely, relatively small accounts 
have a tendency to go dormant after only one contribution and 
are more likely to be withdrawn. Of course, every person's 
``critical mass'' is different, but by raising the maximum 
initial IRA contribution, the chances that more people will 
start down the savings path (and stick to it) will be increased 
substantially.

                          Eliminate Complexity

    Today, eligibility for traditional deductible IRAs, Roth 
IRAs and spousal IRAs can be determined only after the taxpayer 
works through a complex maze of eligibility requirements that 
include a variety of income limitations and phase-outs. Which 
of the various eligibility limits applies depends, in part, on 
the type of IRA the individual wishes to establish and whether 
the individual (or the individual's spouse) actively 
participates in certain types of employment-based retirement 
plans.
    The current IRA eligibility limitations (which were 
initially included in the Tax Reform Act of 1986) are 
unnecessarily complex and counterproductive--doing far more 
harm than good. Those limitations substantially impair the 
potential effectiveness of IRAs as a savings promoter and 
should be repealed as proposed in H.R. 1546. Without the income 
limits, we would see increased savings among all income classes 
and would also eliminate the marriage penalties that are 
inherent in the structure.
    Even with the improvements included in the 1997 Act, many 
middle income Americans are still not eligible for a fully 
deductible IRA. For couples with income above $51,000 and 
individuals with income above $31,000, the fully deductible IRA 
is generally not an option. Although the Roth IRA was wisely 
made available to a broader segment of the population, the 
application of income limits on Roth IRAs remains detrimental.
    To begin with, the current income limits impose a severe 
marriage penalty on certain couples. Take, for example two 
individuals who will earn $30,000 each this year. If they are 
unmarried, both are allowed to make fully deductible $2,000 
contributions to an IRA. If they marry, however, their IRA 
deductions will be reduced to $200 each. Under today's tax 
rules, that couple faces an increase of $1,250 in their Federal 
income taxes just for getting married, and $1,000 of that 
marriage penalty (about 80%) is attributable to the eligibility 
limits currently imposed on deductible IRAs. H.R. 1546 would 
eliminate that marriage penalty.
    Our experience has also shown that the people who are 
harmed most by the income limits are not the wealthy. To the 
truly wealthy, the relatively small IRA tax advantage has 
little affect on their overall tax burden. The people who are 
harmed by the income limits are those who are stuck in the 
middle. These are people who do not necessarily have 
sophisticated tax planners and accountants giving them advice. 
They will only proceed in committing their money into an IRA if 
they are confident that they will not get tripped up by the 
rules. Some of these people will delay contributions to make 
sure they will qualify, and then later forget to make the 
contribution or spend the money before they get around to 
making a contribution. Others may qualify for a full or partial 
IRA this year, but still will not contribute because the 
contribution permitted this year is too small, or because they 
assume they won't qualify in the future and they don't want to 
start contributing if they are not sure they will be able to 
continue the process in future years. Still others are confused 
and believe they may have to withdraw the funds if their income 
goes up in the future.
    The end result of today's complicated limits on IRA 
eligibility is that contributions are not made by many of those 
who are technically eligible (or partially eligible) under the 
rules in a given year. This same chilling effect has been in 
effect since Congress originally imposed income limits on 
deductible IRA eligibility in 1986. Before the 1986 Tax Reform 
Act, the IRA was available to all Americans with earned income. 
The year after the income limits on IRAs went into effect, 
contributions by those who remained eligible dropped by 40%.\1\
---------------------------------------------------------------------------
    \1\ Testimony of Lawrence H. Summers, currently Deputy Secretary of 
the Department of the Treasury, before the U.S. Senate Committee on 
Finance, September 29, 1989.
---------------------------------------------------------------------------
    In restoring universal IRA eligibility and--the rule that 
was in effect before 1986--H.R. 1546 would help all Americans 
to save more. By eliminating the complexity in the current 
rules, Americans will be presented with a consistent and 
understandable pro-savings message--a clear consensus path to 
follow toward retirement security. That message will be 
reinforced by the general media, financial press, financial 
planners, and word-of-mouth. As families gain confidence in the 
retirement savings vehicles available to them, more and more 
will commit to the consensus path.

                         Catch-up Contributions

    H.R. 1546 would also allow those age 50 and older to make 
additional IRA contributions of $2,500 per year. This change 
could be a critical step in helping people who are closer to 
retirement to save more. We believe that this type of targeted 
change could be particularly effective because as people 
approach retirement age they become more focused on retirement 
needs. In many cases, individuals forego making an IRA 
contribution in a particular year because of insufficient 
income, illness, temporary unemployment, a decision to stay 
home with children, or pay for their children's education. 
Annual contribution limitations prevent these individuals from 
making-up for lost retirement savings once the cash-flow crisis 
is over or their income rises.
    Women, in particular, are more likely to have left the paid 
workforce for a period of time to care of children or elderly 
parents. During those years they were probably not eligible (or 
did not have the resources) to make retirement savings 
contributions. Allowing an IRA catch-up would help ensure that 
a woman's decision to fulfill family responsibilities does not 
have to lead to retirement insecurity.
    It is also worth noting that many of those in today's 
population who are approaching or have reached age 50 did not 
have IRAs or 401(k) plans available through most of their 
working careers. They did not have the same opportunities to 
save that today's generations have. Instead, due to changes in 
the structure of the American workplace, they were caught in 
the transition from a relatively robust system of defined 
benefit pensions to the self-reliance focus of today's defined 
contribution landscape. Giving the baby boom generation the 
chance to catch-up for years they may not have saved adequately 
is not only fair, it is critical to helping them build a bridge 
to a financially secure retirement.
    In the end, each American must accept significant 
responsibility for his or her own retirement security. But the 
government must help by reducing the tax burden on those who 
save and by making the choices simple and understandable. With 
that end in mind, our national retirement savings strategy must 
include an effective set of incentives that will expand 
personal savings. And the proven IRA vehicle should be the 
backbone of that effort.
    The IRA changes enacted in the 1997 Act were a significant 
first step toward an improved set of rules for promoting 
personal savings. But more remains to be done. Today, with an 
improved federal budgetary picture, it is time to act on 
additional proposals, like those included in H.R. 1546, that 
will directly address America's impending retirement savings 
crisis. Enhanced retirement savings incentives are the most 
effective investments we can make as a nation. Those 
investments will pay back many times over in increased 
retirement security for Americans and in a stronger economy. 
For these reasons we urge the members of this Committee to 
include proposals that will strengthen the IRA as part of any 
legislation that is reported this year.
      

                                


           SAVINGS COALITION OF AMERICA MEMBER ORGANIZATIONS

Aetna Retirement Services
Alliance of Practicing CPAs
American Association of Engineering Societies
American Century Investments
American Council on Education
American League of Financial Institutions
Americans for Tax Reform
Bank of America
Charles Schwab Corporation
Citigroup
Coalition for Equitable Regulation and Taxation
Consumer Bankers Association
Credit Union National Association
Edward D. Jones & Company
Financial Network Investment Corporation
G.E. Capital
HD Vest Financial Services
Household International
Independent Insurance Agents of America
Investment Company Institute
Institute of Electrical & Electronics Engineers--U. S. Activities
Merrill Lynch & Company, Inc.
Mortgage Bankers Association of America
National Association for the Self-Employed
National Association of Federal Credit Unions
National Association of Independent Colleges and Universities
National Association of Uniformed Services
National Taxpayers Union
Prudential Securities, Inc.
Retirement Industry Trust Association
Savers & Investors League
Securities Industry Association
The Bankers Roundtable
United Seniors Association
United States Chamber of Commerce
Wheat First Butcher Singer
A.G. Edwards, Inc
America's Community Bankers
American Bankers Association
American Council for Capital Formation
American Express Financial Advisors
American Nurses Association
Association of Jesuit Colleges and Universities
Bankers Pension Services
Chase Manhattan Bank
Citizens for a Sound Economy
College Savings Bank
Countrywide Credit Industry
Delaware Charter Guarantee & Trust Company
Fidelity Investments
First Trust Corporation
Gold & Silver Institutes
Home Savings of America
Independent Community Bankers of America
Institute for Research on the Economics of Taxation
International Association for Financial Planning
Lincoln Trust Company
Morgan Stanley Dean Witter
NASDAQ Stock Market
National Association of Enrolled Agents
National Association of Home Builders
National Association of Realtors
National Rural Electric Cooperative Association
PaineWebber, Inc.
Resources Trust Company
Retirement Accounts, Inc.
Scudder Kemper Investments
Sterling Trust Company
USAA
United States Chamber of Commerce
      

                                


    Chairman Archer. Thank you, Mr. McCarthy.
    I don't have any questions, but I do want to explore one 
aspect of where we are in this country and what concerns me and 
that is the dearth of savings.
    We have heard a number of times today, the term ``personal 
savings.'' And is it not true that really what we need to be 
concerned about is total net private savings, not just personal 
savings? Because in the end the benefit of personal savings is 
to invest, to create jobs and productivity, at least according 
to my basic sense of economics. And in that regard all of 
private savings, whether they be personal or whether they be 
held by a business entity, reaches that goal.
    The personal savings, to be productive, must be invested in 
some sort of a productive vehicle. If that productive vehicle 
is able to accumulate additional savings internally, those are 
equal to the personal savings that are invested and become, to 
me, a far better measuring tool as to where we are and where we 
want to go. And, as I understand it, private--not just personal 
but private net savings in this country are at an alltime 
historic low and are negative and not positive. Is that correct 
as you understand the figures right now?
    Mr. McCarthy. I would agree with the Chairman's remarks 
regarding the need to look at the savings in aggregation.
    The personal savings rate as a statistic compiled by the 
Bureau of Economic Analysis is, in fact, negative. I would say 
that it is at best an imperfect measure in the sense that it is 
a residual effect. It doesn't take into account wealth that 
grows outside.
    But I don't think anybody is arguing that savings is 
adequate as it stands now. It clearly needs improvement--both 
ranked with other industrialized nations and to create capital 
formation and thus bring down things like equilibrium interest 
rates and stimulate economic growth, we believe that H.R. 1546 
and a number of other proposals before this Committee right now 
are steps in that direction.
    Chairman Archer. To go back to your analysis, which I 
cannot argue with, because if the accumulation of wealth 
increases, then certainly our savings have gone up, but, on the 
other hand, if the market goes down and, say, personal savings 
rates have gone down, so that works both ways. When the market 
goes up, we do not count that in this standard to determine 
what our personal savings rate is, but when it goes down, we do 
not count it as a negative.
    Mr. McCarthy. The Federal Reserve flow of funds data takes 
into account equity holdings in-household, and it does meter it 
both ways. It catches it up on the upside and catches it on the 
downside, and that becomes the basis for our analysis into 
things like whether people are adequately prepared.
    Chairman Archer. I thank you very much, all of you, for 
your testimony.
    Does any Member wish to inquire?
    Mr. Portman, and then Mr. Weller.
    Mr. Portman. Thank you, Mr. Chairman.
    I want to thank the panelists who are with us now and also 
Jeanne Hoenicke, who spoke earlier regarding the necessity for 
reforms in our pension system, to try to increase that savings 
rate that the Chairman was just talking about, private and 
personal.
    APPWP has been very helpful in putting together this 
proposal over the years, Mr. Stewart, and has been particularly 
helpful in working with us and people in the trenches who every 
day deal with these issues; and I want to ask you a couple of 
quick questions about limits. Can you explain why it is so 
important to raise defined contribution limits?
    Mr. Stewart. First of all, it is not really an increase, it 
is more of a restoration of the limits that H.R. 1102 would 
impose.
    Second, the firm that I work for works with mostly small- 
to medium-sized businesses. In lot of those, the businessowners 
are telling us they have had a tough 5 to 10 years getting 
their business started. They can't afford to start a retirement 
plan. The key decisionmaker may be in their forties or fifties 
at the time they get the business on solid ground. They need to 
make up for the past years that they have not been able to 
contribute to a plan. The restored limits would incent them to 
put enough money away in a qualified tax plan and to get that 
tax-qualified status they need to share some of those benefits 
with the rank and file workers.
    Mr. Portman. That is the point, and we tried to make that 
point this morning. This is a question of getting the 
decisionmakers to make the right decision and get them to have 
the same stake in this plan that the lower-paid workers would 
have. Just in terms of limits, in 1986, the limits on 401(k)s 
and 403(b)s was $30,000. We are proposing raising it from 
$10,000 to $15,000.
    Paula, thank you for your testimony. You are representing 
so many groups I don't know where to start, but all of them 
have been active in the coalition over the last few years and 
you tend to represent, when you look at these three groups 
listed, more of the small business community.
    Can you give us a sense of how important it is to reduce 
setup costs and ongoing PBGC premium costs for small business 
and whether those provisions of the bill are going to make any 
difference in terms of getting more small employers involved in 
establishing pensions?
    Ms. Calimafde. If I can go back to the limits question 
quickly, because from the small business perspective and also I 
think it is the large business perspective, it is important to 
understand that the upper middle income taxpayers and upper 
income earners have, in effect, been disenfranchised from the 
retirement plan system. And if you imagine the Social Security 
system if you took out all of your upper middle income 
taxpayers or your upper income taxpayers or earners and said 
you get no benefits or very reduced benefits, what would happen 
to that system? Many people believe that it would have serious 
consequences to that system being kept energized; and, in a 
sense, that is what has happened in a qualified retirement 
system. These limits have kept out the key employees of the 
companies from having any really meaningful benefits coming 
from the retirement plans; and, consequently, the normal 
pressure to have a plan or increased contributions isn't there.
    Small businesses want to sponsor these plans. As I 
mentioned earlier, it is a cost-benefit analysis. If the costs 
of the plan are too high in relationship to what the benefits 
of the owners and key employees can get, they just simply will 
not sponsor the retirement plan.
    I think what is interesting about H.R. 1102 is that it 
keeps all of the reforms that were put in in the eighties to 
stop abuse and it strips away all of the unnecessary 
complexity, and so it will definitely reduce costs for small 
businesses.
    My estimation is this bill, if passed, would encourage 
small businesses to sponsor retirement plans.
    Mr. Portman. Mr. MacDonald, the Chairman talked about the 
need to look at investments in productive vehicles, that is the 
key, and I could not agree more, and that is why I think the 
pension area is so important.
    You mentioned 28 percent of investments in equities are now 
pension investments. If you can just touch on that, getting 
into the key issues with regard to savings, what will the 
impact be on savings by having an expansion of pensions and 
having more money being invested in these kinds of vehicles?
    Mr. MacDonald. We personally believe, both from a GTE 
perspective and an ERIC perspective, that the expansion of the 
limits is going to encourage employers to stay with their 
plans, particularly defined benefit plans. And what you are 
really talking about here is the ability to have a disciplined, 
secured, guaranteed approach. It is funded. It is there. It is 
in the bank. It creates that savings. It has automatic 
participation. And that is what we are ultimately trying to do 
with all of our people. We are trying to get them to think 
about the retirement security that they need to have when they 
end their career.
    Mr. Portman. Thank you. Thank you, Mr. Chairman.
    Chairman Archer. Thank you, Mr. Portman.
    I am constrained to interject another little bit of an 
issue into this discussion today, very briefly.
    I have long felt that if individual workers realized their 
equity ownership as beneficiaries of a pension plan, they would 
be better citizens. What would it take to create a system where 
every worker would get a statement at the end of each year as 
to what their ownership was in the stocks and bonds held by the 
pension funds?
    Mr. MacDonald. I can only speak for my company, but those 
statements exist today in our company. We go to great pains, 
and I think many large corporations do, to talk about two 
things: What is in the account and what are you accruing as an 
accrued benefit and how that is invested. Each year we go to 
great pains to talk about the investment of those funds and 
provide that information to people. It is a matter of fiduciary 
responsibility. It is there.
    The people who run those investment funds have to report to 
people like myself and tell me. So it is only a matter of 
reproducing and providing it to those same people.
    I also think that it gives them a spirit of ownership. 
Using the ESOP is a good example of that. If they were able to 
reinvest in dividends and have the employer tax deduction, in 
essence what you are really doing is creating further ownership 
in your own company, and that is what we are looking for. We 
are looking for loyalty and commitment. That is what will 
encourage those types of participations in those types of 
plans.
    Chairman Archer. In your report to your workers, do you 
literally give them how much money is in their account and 
identify their beneficial ownership in x number of shares in 
each of the corporations to show what their actual ownership 
is, beneficial equity ownership in each of corporations? Or do 
you simply just list the total number of corporations that the 
entire pension fund is invested in?
    Mr. MacDonald. In fairness, it is the latter. We list the 
total corporations that we are involved in.
    However, to your first point, they don't have to wait until 
the end of year. They can literally call up every day if they 
wanted to and get their pension estimated, their accrued 
benefit to date on an IVR system, put in when they want to 
retire, what the assumptions are that they want to use, so they 
are constantly projecting. That is our way to get them to 
understand the criticality of savings.
    Chairman Archer. If you went one step further, it would be 
even better because if the individual workers saw I have x 
thousands of dollars in my account and that means that I own 10 
shares of IBM and I own 5\1/2\ shares of--whatever, the various 
corporations, it would identify I think more particularly to 
each worker their stake. But I applaud you for what you are 
doing.
    Mr. Neal.
    Mr. Neal. Thank you, Mr. Chairman. I thought the panels 
were very good, Mr. Chairman, and their presentations were 
pretty strong.
    Given the current level of activity with respect to 
conversion of traditional defined benefit plans to cash balance 
plans, in some instances resulting in long-term workers being 
disadvantaged, what notification requirements could you support 
for the workers whose benefits are being changed and would you 
support mandatory individual statements for those employees who 
ask for them?
    Mr. Stewart. There are provisions in H.R. 1102 that APPWP 
supports. As far as disclosure, we feel there needs to be 
adequate disclosure for plan members to know what their 
benefits are going to be--what their benefits are before the 
conversion and what they are going to be after the conversion.
    We don't want to necessarily increase the burdens on the 
plan sponsors, but I might say about cash balance plans that in 
many cases, it is the employees who are asking for cash balance 
plans because they don't necessarily appreciate or know enough 
about the traditional defined benefit plan. They like the idea 
of a cash balance plan because they can see an account building 
up in their name, sort of getting back to what the Chairman was 
talking about.
    But we would support adequate disclosure.
    Mr. Neal. Anyone else?
    Mr. MacDonald. If I may just interject for a second, the 
issue of providing people with information I think most 
companies are very comfortable with, but somehow this cash 
balance thing has gotten completely out of sync. There appears 
to be a feeling that it is all done for savings. That is not 
the issue here.
    The savings issue is really an accounting process that 
people work through the accounting ledger. What is going on is 
that the demographics of the work force are changing. Case in 
point. We just bought a company in 1997, BBN. It is an Internet 
company, 2,000 employees. This year, we will end with 7,000 
employees; and, next year, we will end with 14,000 employees.
    When I talked about our pension plan, rule of 76, age plus 
service for early retirement, they fell asleep. These are 
Internet working people. They are basically looking at 3 to 5 
years, and then they are going somewhere else. Portability is 
becoming the issue. There are a lot of us who would like to 
stay and have the handcuffs and keep people in the jail. We are 
competing for talent. You have to basically look at the needs 
and what the talent is. There is a shortage of labor. We have 
to do what employees are demanding. This is not an issue of 
savings. This is an issue of the war for talent in the 
marketplace.
    Mr. Neal. Any other panelists?
    Ms. Calimafde. In the small business area, there are 
relatively few defined benefit plans, so this is a nonissue for 
small business, unfortunately.
    Mr. Neal. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman.
    I want to thank the panelists for participating today.
    Mr. Stewart, just looking back at statistics, when we talk 
about cash balance conversions, since the eighties, 7 million 
workers have been affected by transition from cash balance 
plans involving 400 companies, including 22 Fortune 100 
companies. When I think about it, for a worker, their pension 
and retirement program is pretty sacred. From the standpoint of 
a company, what is in the interest of a company to convert from 
a traditional pension plan over to a cash balance plan?
    Mr. Stewart. On Friday I was consulting with one of our 
existing customers in Chicago. It is a fairly large nationwide 
company that has locations in several different parts of the 
country. They have a traditional defined benefit plan and a 
traditional 401(k). They have a lot of younger workers, as was 
alluded to earlier. Their formula is a little bit complicated, 
and they want to attract newer, younger workers who are 
probably going to be moving on. The statistics would say that 
the average U.S. worker would have seven to eight jobs before 
they retire.
    So it isn't necessarily a cost savings that they are 
looking at. In fact, the specific instructions that they gave 
us as we went home to prepare a proposal for them, was to keep 
costs the same. We just want a plan that will be more 
understandable to our employees, that they can appreciate a 
little more.
    I think in the traditional DB arena, employees just don't 
know enough about----
    Mr. Weller. Reclaiming my time, the Wall Street Journal 
has, of course, highlighted some of the problems with the 
conversions, and I am sure that you have read those thoroughly. 
And in the Chicago area there have been some conversions 
affecting many of my constituents.
    Senator Moynihan and I have put in legislation two 
companion bills in the House and Senate that would require 
individual statements showing a comparison of the benefits 
under the old plan and the new plan for each of the employees 
because we feel that employees have a right to know the impact 
because we assume that the company knows the impact on the 
company bottom line, but the employees need to know the same.
    What disturbs me, though--and we have an example of where 
one consultant pitched a cash balance plan to a potential 
client. He said, ``One feature which might come in handy is 
that it is difficult for employees to compare prior pension 
benefit formulas to the cash balance approach.'' Don't you feel 
that employees have a right to know the impact of any 
conversion?
    Mr. Stewart. That is an unfortunate comment that the 
consultant had made. I agree that employees should know about 
the change in any benefit plan, whether it is health plan or a 
pension plan.
    Mr. Weller. Do you feel that employees deserve a comparison 
sheet before the conversion showing under their current 
situation their current pension plan and the proposed change, 
what it will mean for them in retirement?
    Mr. Stewart. I think the Association would advocate a 
middle ground approach which is not so burdensome as an 
individualized statement per member. Here is a scenario for a 
30-year-old, 40-year-old, 60-year-old with x number of years of 
service, average compensation being different.
    Mr. Weller. How can the corporation calculate the impact on 
the corporate bottom line without knowing the individual bottom 
line for each individual employee?
    Mr. Stewart. Most of these conversions would involve plans 
with thousands of employees. They wouldn't have it broken down 
one by one. It would be on a bottom-line, plan-level basis.
    Mr. Weller. Senator Moynihan and I believe that we have 
offered some middle ground legislation. We don't prohibit you 
from making a conversion. We just believe that employees have a 
right to know with individual statements. Would you support the 
legislation Senator Moynihan and I have offered?
    Mr. Stewart. We would be willing to work with you to try to 
come up with an acceptable middle ground approach.
    Mr. Weller. I would like to work with you and your 
associates. The corporation certainly knows and whether you are 
a new employee or long-time employee you should know the bottom 
line on the individual impact on your retirement with any 
conversion that might occur.
    Mr. Stewart. I appreciate your comment. I think employees 
do need to be aware, and the more that the employees know about 
the plan the better the plan is going to be.
    Mr. Weller. Thank you, Mr. Chairman.
    Chairman Archer. Mr. Cardin.
    Mr. Cardin. Thank you very much, Mr. Chairman.
    Let me thank all of our witnesses for their participation, 
not just in the hearing today but in helping Mr. Portman and I 
on H.R. 1102 and your other work in pension areas.
    First, following up on the conversation about employee 
education, this morning Ms. Dunn commented on the importance of 
making sure that employees are educated on retirement options 
and what they need to do to make sure that they have secure 
retirement.
    H.R. 1102 clarifies when employers offer retirement 
planning education that it is not taxable to the employee and 
that it clarifies that employers can offer retirement planning 
on a nondiscriminatory basis in a fashion similar to a 
cafeteria benefit plan without the cost being taxable to the 
employee.
    Mr. Chairman, I would like to enter into the record a 
letter of support of these provisions from the Consumer 
Federation of America. CFA points out that education and 
planning increases savings. More specifically, those savers who 
develop an overall financial plan report roughly twice the 
savings of those without a financial plan, but CFA knows that 
most Americans are ill-equipped to develop their own retirement 
planning guide.
    Chairman Archer. Without objection, so ordered.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T0332.001
    
    [GRAPHIC] [TIFF OMITTED] T0332.002
    
      

                                


    Mr. Cardin. I appreciate your response to some of Mr. 
Portman's questions as to the specific provisions in H.R. 1102 
as to what impact it would have.
    The Chairman raises, I think, the initial challenge. We 
need to increase more private savings. Part of what H.R. 1102 
does is, as Mr. Stark points out, is restore some of the 
previous limits. It doesn't really increase in many cases, it 
just restores.
    The question is, will that really increase the amount of 
money that will be put away for savings and retirement if 
Congress were to enact these different limits? I guess that 
would be the first question that I would appreciate your 
response to.
    Mr. Stewart. In our opinion, APPWP, yes, it would lead to 
more plan formation. The money contributed to a plan, as you 
know, is more difficult to get at. It is going to be saved for 
retirement--for long-term retirement needs, yes.
    Ms. Calimafde. Mr. Cardin, I would like to give that a 
shot.
    I think there are sort of two answers or two ways of 
looking at this. One is, at the National Summit on Retirement 
Savings it became clear that education was going to be critical 
to increasing awareness about retirement security. And I don't 
know if you have been hearing these ads on TV, and I don't know 
if they are on the radio now, by ESOP and EBRI where they are 
talking about how important it is to save, to save early and to 
save in a tax-free environment, but they are very effective.
    And my hope is that, as this information gets disseminated, 
young people in their thirties who would probably not put a lot 
of money into a 401(k) plan are going to start thinking twice 
and say maybe I better participate a little bit more now 
because I know what that tax-free growth is going to do when I 
am 60.
    The other answer is, in the small business area, all of the 
employees are carried along with the retirement plan, and a lot 
of these employees really can't save. They are just making 
enough money to live. So the retirement plan sponsored by the 
company is their savings. If they get a 5-percent profit-
sharing contribution or a 7-percent profit-sharing 
contribution, that is real money growing tax-free that they 
wouldn't have saved otherwise.
    To the extent that H.R. 1102 is going to make it easier for 
small businesses to sponsor plans, and one of those factors I 
think is increasing the limits or returning the limits to where 
they were 17 years ago, I think you are going to see greater 
savings occurring even amongst the lowest bands of the income 
levels because those people are employees, they have to get 
retirement benefits, and very often they are very meaningful 
retirement benefits.
    Mr. Cardin. You really anticipated my second question. We 
need to get to younger workers and low-wage workers earlier so 
they start putting money away, and the provisions here would 
really make a difference on younger people, smaller employers 
actually setting up plans.
    Mr. MacDonald.
    Mr. MacDonald. Yes, just looking at it from a defined 
contribution benefit, if you eliminate the 25-percent cap, you 
are really affecting the low-paid worker. The high-paid worker 
is going to get to the $30,000 maximum. But what you are really 
doing is going to the low-paid worker and allowing him or her 
to save more. That is number one.
    Number two, it bothers me that perhaps some of the 
legislation will be driven by Wall Street Journal articles. 
Yesterday's article was completely inaccurate. First of all, it 
described GTE as going to a cash balance plan. That is not the 
case whatsoever. In fact, I looked for the retraction this 
morning in the Wall Street Journal. It will be run tomorrow.
    The bottom line is if we can increase the limits from 160 
to 235, you immediately are securing a benefit, you are 
guaranteeing a benefit for that person. That savings exists. So 
between taking the 25-percent cap off the defined contribution 
as well as securing the defined benefit plan which is a secured 
guaranteed plan, you have ensured savings for people.
    Mr. Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Archer. Perhaps the Members of the Committee would 
benefit from a brief explanation of the difference between a 
defined benefit plan, a cash balance plan and a defined 
contribution plan?
    Ms. Calimafde. Do you want to try that?
    Mr. MacDonald. There is not enough time in the day.
    Chairman Archer. It really would take that long?
    Ms. Calimafde. I will do defined benefit and defined 
contribution. You end up with cash balance plan.
    Chairman Archer. What is the difference between a cash 
balance and a defined contribution?
    Ms. Calimafde. I will try.
    They both have individual account balances. The defined 
contribution plan, whatever is in that plan when the 
participant retires, is what the participant receives. So the 
earnings investments, whether good or bad, follow along with 
that employee.
    As I understand the defined benefit plan, when it converts 
to a cash balance, it looks like a defined contribution plan, 
but it isn't all the way a defined contribution plan. What is 
happening is that there are individual account balances so 
participants can see them, but I believe that the investment 
earnings are still guaranteed, aren't they? So a cash balance 
is really a hybrid type of plan.
    Mr. MacDonald. Let me put it a different way.
    The employer, in a cash balance plan, still assumes the 
risk. It is the employer's responsibility to ensure that the 
accrued benefit is paid so that when--it may be on a fixed 
scale starting from a younger age to an older age--The fixed 
amount is there. The employee has the ability to take it on a 
portable basis elsewhere, but the employer still assumes the 
risk. In a defined contribution plan, in theory, you could be 
putting your money in, and it could be going away.
    Chairman Archer. So under the cash balance concept then, 
the principal amount cannot decline? The employer guarantees 
that that principal amount will not decline?
    Mr. MacDonald. Whatever the accrued benefit obligation is, 
it is there. It is a defined benefit plan. Everyone gravitated 
away from----
    Chairman Archer. So what you are doing is converting the 
defined benefit into a cash balance so that the employee will 
be able to take that with him or with her if they change jobs, 
in effect?
    Mr. MacDonald. That is one example, yes.
    Ms. Calimafde. Another thing, the individual sees their own 
account balance.
    One of the problems of a defined benefit plan, and it is 
unfortunate in a sense, is that it is one big fund and the 
employee knows if they stay with the company until retirement, 
they might get 50 percent of their salary paid for as long as 
they live or their spouse lives, but they have an amorphous 
kind of promise.
    In a defined contribution plan, they have an account 
balance that they see every year. So this is an attempt to try 
to give sort of that individual account balance concept to the 
defined benefit area.
    Mr. MacDonald. Another example, Congressman, the defined 
benefit is like a hockey stick. It limps along, and then all of 
a sudden when I get the right age and the total amount of 
service, in my case age plus service equals 76 points, it jumps 
right up. But I have no idea what that accrued benefit is when 
it jumps up because it is based on final average earnings. The 
accrued benefit in a cash balance plan is an amount of money 
that is set aside each and every year and people can track it. 
They know what they have.
    Ms. Calimafde. It is interesting because the young, more 
transitory employees like the defined contribution plans, the 
401(k) plans. The older employees understand that the defined 
benefit plan will provide a stream of payments following them 
throughout their lifetime, and that is why it is sort of hard 
for companies to put these plans together in a way that the 
employees are appreciating them the most and getting the most 
out of them.
    Chairman Archer. Thank you for that explanation. I don't 
know if I am the only one who needed it.
    Does any other Member wish to inquire?
    Mrs. Johnson.
    Mrs. Johnson of Connecticut. We have mentioned several 
times in this hearing the need to set priorities, and one of 
the great advantages of the Portman-Cardin bill is that through 
its many provisions the hope is that it will bring more people 
into the pension system. People not participating in the 
private pension system will have a chance to come into that 
system.
    That will certainly cost some money, but since the goal is 
to get people in earlier, to have even small holdings held over 
a longer period of time, that seems to me to be of a higher 
priority than raising the amount one can contribute to an IRA. 
Because even though that is very nice, if you talk to any one 
of your kids who is married and raising children, they don't 
have the money--they are lucky if they can get one IRA 
contribution in, and it is tough to try to be saving as much as 
the current law allows.
    So to move from $2,000 to $5,000, that is nice; but my 
understanding is that will not bring new people into the 
system. While it will allow those within the system to retire 
with greater comfort, by the criteria of expanding pension 
savings opportunities, that proposal is not powerful. Would you 
disagree with me on that?
    Mr. McCarthy. I would disagree.
    First of all, the demographics and work patterns in the 
American work force are changing to the point--we talked about 
an Internet company, the transitory nature of the worker. As a 
result, there are many instances now where, even if the 
employer is sponsoring a plan that is an attractive plan and a 
generous plan, because of worker transition from place to place 
and waiting for vesting or waiting for entrance eligibility 
into plans, they are frequently not covered for periods of 
time. That is especially true of people who drop in and out of 
the work force, whether they are attending to child care or any 
other need.
    I agree with you that maximum coverage is the goal. What I 
am asking that you recognize is that there is a number of 
different worker profiles that need to be addressed. One of 
those is the fact that 50 percent of workers are not covered 
whatsoever and, as a result, need to have a simple and portable 
vehicle.
    What we are finding is--and I agree with you also, 
completely, that the issue is critical mass. We find, and EBRI 
(the Employee Benefit Research Institute) will tell you this, 
that there is a critical mass and it varies by person. But once 
you achieve that critical mass, your mindset changes and your 
behavior changes and you go from being a spender and a consumer 
to a saver. The savings becomes a thing to be nurtured.
    As a result, we think that raising the limit, which is 
really where the limit would be if it had been indexed 
originally, will help people get to that critical mass. One 
contribution and then a dormant account is not anybody's goal. 
A contribution of enough size so that you can buy a couple of 
different funds or enough shares of a couple of different 
companies, so that you can see some investment performance and 
at some point you become the owner of a segregated pot of 
assets that doesn't leak away to these ancillary demands. And 
you have gotten enough size that you begin to care about the 
health and well-being of that fund of assets.
    Ms. Calimafde. Mrs. Johnson, I would like to try my hand at 
that one.
    When I think about the marriage penalty--and that would 
affect me and it would affect a great number of taxpayers 
across the country. When you look at the numbers, it appears 
that each family might get $100 or $200. I think the way that 
our economy is today, that $100 or $200 probably would not go 
very far. When you contrast what that might cost compared to 
H.R. 1102 and what this could conceivably do for small business 
employees, I have a very hard time justify spending $100 and 
spreading it to everybody versus giving what could amount to 
real retirement security for many, many Americans. That does 
not quite answer the question.
    I guess if you ask me directly I would say I would rather 
see the money go into H.R. 1102. I think that would ultimately 
help the country. But if I had to compare the marriage penalty 
to increasing the IRA, I would increase the IRA limits. So I 
think there are different steps of priorities.
    Mr. MacDonald. I would argue that we can't lose sight of 
the fact of section 420. The last panel talked about health 
care. The ability to fund retiree health care through pension 
assets is important. This is a package, and many of us look at 
it that way.
    Mrs. Johnson of Connecticut. Thank you.
    Chairman Archer. Let me jump in. We are in an area that 
intrigues and interests me tremendously. We are now speaking of 
personal IRAs as retirement accounts. That is a whole concept 
that we are speaking of here. Yet the pressure has been on the 
Congress and it has built over the years to permit the 
withdrawal of those funds so they are not there for retirement. 
Those political pressures are not going to go away.
    There is one developing today that is very desirable, a new 
widening of the assistance for adoption and a strong push to 
allow IRAs to be withdrawn for adoptions, and on and on and on.
    So we can't simply discuss this in the vacuum that we are 
talking about retirement accounts. We also have to consider the 
fact that these funds can be taken out under certain 
circumstances for first-time home buyers and for medical care, 
and those pressures will continue to mount on the Congress. So 
I just want to say that it is more than just talking about it 
as a retirement account.
    Mr. Cardin. I want to concur in your comments. One of the 
frustrating points is that we try to develop policies to 
encourage more money being put aside for security or 
retirement. On the other hand, we all yield to the easy 
pressure to allow invasion of retirement funds for worthwhile 
purposes but certainly not for retirement. We make it too easy.
    I think as we look to expand the program and do different 
things that we really should be reevaluating those policies. It 
is hard to retract what has already been done, but as we look 
for changes, I would welcome in joining the Chairman to see if 
we can't do something about some of these provisions.
    Mr. McCarthy. I manage a book of business which is about 
$160 billion in IRA accounts. Last year, we paid out slightly 
more than $10 billion in distributions. If you look at our 
distributions, over 80 percent of them go to people over 59\1/
2\, as the law incents that. About 15 percent--between 15 and 
17 percent goes to people under 59 and a half who are 
experiencing some type of dislocation, that they need these 
funds and funds are not available for them for one of the 
enumerated exceptions under the IRS Code 72(t) which is where 
all of the medical expense, adoption expense and all those 
exemptions come in.
    Less than 2 percent in the aggregate of these exception 
reasons--we see in the distribution flow that we have, and it 
is probably the largest in the industry, less than 2 percent in 
the aggregate represents all of these exceptions combined.
    What you see is a phenomenon very akin to 401(k) loans. If 
you create the perception of access, people will deposit money 
because they don't think that they are throwing the money over 
a high brick wall and they can only go visit it until they are 
59\1/2\. What you see when you put a loan provision into a 
401(k) plan is participation jumps up, a multiple of what you 
get in actual loan disbursements. So, as a result, the 
perception of access creates new savings, and that is what 
72(t) and these acknowledgments of other life events do.
    EBRI will tell you that employer plans outstrip in value 
the value of all of the owner-occupied residences in the 
country. And, as a result, since it is such a large portion of 
people's holdings, if you don't acknowledge these other life 
events, as a result people are not going to save. They are 
going to have a zone of paralysis and say I can't afford to 
lock my money up until I am past 60.
    Mr. McCrery. Mr. McCarthy, are you saying that enabling 
people to withdraw their IRA money for purposes other than 
retirement actually encourages savings?
    Mr. McCarthy. I am saying that absolutely and emphatically. 
The perception overweight in people's mind as compared to their 
actual behavior, and you get a lot more savings because people 
can need it. But once you get that critical mass, you don't 
want to take that money out. You are going to find another way 
to meet that need unless you absolutely have to.
    Mr. McCrery. So if we had a different tax system and we had 
an unlimited IRA, you could put in whatever you want tax-free 
and you paid tax on it when you brought it out, that would 
encourage savings?
    Mr. McCarthy. I was wondering when that question was going 
to come. I am all for it. It would make my peers in the other 
tax product areas jealous, but I would be all for it.
    Mr. McCrery. It would be a consumption tax, basically?
    Mr. McCarthy. Essentially.
    Mr. MacDonald. There would be one fundamental difference 
with an IRA, and I am not here to debate my colleague, but in a 
401(k) plan when you take that loan out, indeed you can take 
that loan out, but you have to repay it and you repay it 
through payroll deduction. So you are protecting that savings. 
And when you leave the company, that loan has to be paid down 
as well. So there is a little difference in having the freedom 
of savings in that regard.
    Mr. McCrery. But Mr. McCarthy's point is a good one. The 
more flexible you make these savings vehicles, the more 
attractive the savings vehicles are and the more likely they 
are to, in fact, not spend when they get the money but saving. 
And that is good, not bad.
    Chairman Archer. Well, the gentleman is correct that the 
Chairman--one of the aspects of the Chairman's tax nirvana is a 
zero tax on savings, and I hope that someday this country can 
get there because I believe we will benefit enormously from it 
in the future.
    But there are so many cross currents in this--and you talk 
about human behavior. I know myself that I simply took savings 
out of another vehicle to put into an IRA to take advantage of 
the tax benefit. That was not an increase in net savings. It 
was merely a transfer from one vehicle to another vehicle. An 
awful lot of us who are in a position to do that are definitely 
going to do that. We are going to do all that we can to lighten 
our tax burden within the letter of the law.
    To what degree that impacts on behavior, I am sure we have 
final studies to be able to analyze, but we need more savings 
and we need to do those things that protect existing savings, 
which is just as important as increasing new savings.
    If we dig a hole in an existing savings, that hole has got 
to be filled up before we get an increase in savings. So 
protecting existing savings, which is the death tax and other 
things of that nature, are just as important as the incentive 
for new savings. Then we have to find a way to get new savings, 
too, and try to accomplish both of them in the most effective 
way.
    Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. I appreciate the 
opportunity to respond briefly to a statement made by one of 
the witnesses.
    As I understood it, you said that by eliminating the 
marriage penalty couples would receive $1,400. It is higher for 
some and less for others, but on average it is $1,400. I 
certainly believe that opportunity to eliminate the marriage 
tax penalty and free up $1,400 that otherwise would go to Uncle 
Sam that people could deposit into their IRA or 401(k) or 
whatever they set aside for retirement is a good idea.
    Thank you, Mr. Chairman.
    Ms. Calimafde. Mr. Weller, are you referring to if you 
completely repealed it? Because I was looking at a phase-in.
    Mr. Weller. A complete repeal would be $1,400.
    Ms. Calimafde. I can't remember the number. I was talking 
about if you phased in, what it would be worth.
    Mr. Weller. The Marriage Tax Elimination Act, which has 230 
cosponsors, does entirely eliminate the marriage tax penalty. 
But you may recall last fall the House passed a partial 
elimination of the marriage tax penalty which benefited 28 
million couples. That is about $240. So that is real money for 
people. That is a month of child care or it is 10 percent of 
what you might want to put into your IRA.
    Ms. Calimafde. I am not saying that it is not. Don't get me 
wrong. But if that same amount of money for that bill went 
toward something like H.R. 1102 and you were able to get 
literally millions of employees now being covered and receiving 
a 5-percent contribution to that plan and it was able to stay 
in that plan for a number of years, I don't think that there 
would be any comparison as to if you looked at it 20 years 
later, which person would be better off, the one who got the 
$240 that they would most likely spend versus the person who 
might have gotten $500, $600 in a tax-free account that they 
couldn't touch for a number of years.
    Mr. Weller. As one who desires to eliminate the marriage 
tax penalty and supports retirement savings, I would beg to say 
if you eliminate the bias against married couples they are 
going to have more money to set aside for savings. If you do 
nothing about the marriage tax penalty, it is still there.
    Ms. Calimafde. Ideally, you could do both. That would be 
the ideal world.
    Chairman Archer. Thank you.
    So often we get a little myopic in the Congress. I fear we 
are doing some of that on the floor today as an emotional 
response to Littleton.
    But as much as I want to get to a zero tax on savings, the 
Tax Code is not the real enemy in savings in this country. The 
real enemy of savings is a plastic credit card. We had no 
greater incentives in the Tax Code when this country did save, 
but we didn't have the credit card. So the battle is with 
instant gratification and the ability to realize that instant 
gratification through the credit card. Do you have any 
suggestions as to what, if anything, we might do about that?
    Ms. Calimafde. The only thing I can think of is education.
    I think what the fellow on my far left mentioned, I have 
seen that, too. When someone has an account balance in a 401(k) 
plan and it is relatively small, let us say it is $400, they 
may take it out in a plan loan to buy a prom dress or 
something--things that are not critical. Once that number 
starts getting to a level, and in my mind the level seems to be 
$1,000 in savings, all of a sudden it seems like something that 
they need to protect and they don't want to invade it. If you 
just can acquire enough, then it seems that there is a tendency 
to leave it alone.
    The second is just education. We are all living longer. You 
cannot retire only on Social Security and live in the manner 
you are accustomed to, in most cases, and you are going to have 
to provide for your own retirement; and to do that the 
retirement system is the best method to accrue these funds. So 
I think it is education.
    Chairman Archer. I certainly agree with that. But human 
nature is a very, very powerful force. When you are presented 
with the opportunity to acquire something that you feel like 
you need, you may not need it but you want it desperately 
today. You do not have to be concerned about whether you have 
money in an IRA or whether you have money anywhere because that 
plastic is in your pocket. All you have to do is present it and 
you have got it. Then the bill comes at the end of the month 
and it is hard to see what your total debt is because the only 
thing that is really featured is your minimum monthly payment, 
this is the real enemy today in this country for savings.
    But I am not dismissing the need to do what we need to do 
in the Tax Code, but I think we need to focus some way or other 
on the big picture.
    I recognize Mr. Portman who has been trying to get into 
this discussion.
    Mr. Portman. I restrained myself earlier trying to compare 
IRAs to pensions and the marriage penalty and so on, but I will 
say what Ms. Calimafde just told you is the answer to the 
problems is H.R. 1102.
    Ms. Calimafde. Here, here.
    Mr. Portman. Seriously, I think a key point is education--
what Ms. Dunn raised earlier and then what Ben Cardin followed 
up with, this letter from the Consumer Federation of America. 
We should do a lot more in terms of education, and more should 
be done at the workplace where most Americans are going every 
day by getting folks into saving, whether it is an IRA or a 
pension plan.
    One other point about the distinction--and, as you know, 
there is the IRA $2,000 to $5,000 increase in our bill as well, 
but I do think we need to keep in mind the power of the 
matching contribution and how that generates over time such 
additional savings; and, second, how these are forced savings 
plans.
    When you have this sort of program in place it forces you 
to save, and that is going to help those folks who are not 
saving now who tend to be in a small business where there is 
nothing or they are in a larger business who are low- or 
middle-income folks who think they can't save enough, and the 
education is a critical part of it, and it is a part of the 
legislation.
    Thank you for giving all of this time on the pension front 
and for the witnesses today.
    Chairman Archer. I compliment all of our witnesses and all 
of the Members who have expressed an interest in this issue 
because I believe it is truly vital as we move forward. We have 
got to do everything that we can to increase savings.
    Now, the employer contribution, Mr. Portman, that you 
mentioned is so important because it magnifies the total 
savings, is not counted, as I understand it, in the personal 
savings rate. It is counted in the net private savings, and 
that is the point that I was trying to make. It is very, very 
important that we not just be focused on the personal savings 
rate but that we focused totally on net private savings.
    Thank you very much.
    The Chair invites our final panel of witnesses to take 
their place at the witness table: Ms. Slater, Mr. Sandmeyer, 
Mr. Loop, Mr. Thompson, Mr. Coyne, and Mr. Speranza. The Chair 
invites our guests and staff to take their seats so we can 
conclude the hearing today.
    Welcome to each member of our final panel. Thank you for 
coming and participating today. I am sorry that you perhaps had 
to wait a little longer than you wanted to wait, but, 
hopefully, it was productive for the Committee.
    Ms. Slater, would you lead off. Would you identify yourself 
for the record and then proceed with your testimony?

  STATEMENT OF PHYLLIS HILL SLATER, PRESIDENT AND OWNER, HILL 
    SLATER, INC., GREAT NECK, NEW YORK; AND IMMEDIATE PAST 
   PRESIDENT, NATIONAL ASSOCIATION OF WOMEN BUSINESS OWNERS, 
                    SILVER SPRING, MARYLAND

    Ms. Slater. Thank you, Mr. Chairman.
    My name is Phyllis Hill Slater, and I am president and 
owner of Hill Slater, Inc., a second generation, family-owned 
business that has been serving the engineering and 
architectural community for 3 decades.
    I am also the immediate past president of the National 
Association of Women Business Owners and address you today in 
both capacities.
    I am here today to talk to you about the death tax and its 
destructive effect on me and other small business owners, 
especially the 9 million women-owned businesses in the United 
States.
    As a woman-owned business, I am awarded contracts that will 
stay in force only if my daughter can continue the business 
when I am not here to do so. How can I pass my business with 
its employees and contracts on to my daughter if I must pay a 
55-percent gift tax or estate tax? The 55-percent tax on the 
market value of all of my assets at my death will affect not 
only the future of my business but also will require my family 
to liquidate assets to pay the tax 9 short months after my 
death. And if I want to gift my business or my assets early, I 
must pay the same rate of tax. This is a tax on assets on which 
I have already paid taxes.
    My father started our business, and we have worked hard and 
long hours to grow our business to 22 employees. There are 
those who say that the death tax is paid only by the rich. 
Well, consider this.
    In 1997, 89 percent of the estate tax returns filed were 
from estates of $2.5 million or less, and more than 50 percent 
of the revenue generated is from estates of $5 million or less. 
So the small- and the medium-sized estates are spending the 
time and money to comply with the death tax. And according to 
Alicia Munnell, former member of President Clinton's Council of 
Economic Advisers, the costs of complying with estate tax laws 
are roughly the same amount as the tax revenue collected.
    There are those who say that the tax is needed to 
redistribute the wealth. Well, consider this. Alan Binder, a 
President Clinton appointee, concluded in his book, ``Toward a 
Theory of Income Distribution,'' a radical reform of 
inheritance policies can accomplish comparatively little income 
redistribution. And Joseph Stiglitz, chairman of President 
Clinton's Council of Economic Advisers, in the Journal of 
Political Economy found that the estate tax ultimately might 
cause an increase in income inequality.
    Now some of you may say, but the public views the death tax 
as a good tax and a tax on the rich. Wrong.
    In numerous surveys, national polls and membership 
questionnaires, 75 percent of the respondents concluded that 
the death tax should be eliminated.
    In a national poll conducted last year, the respondents 
concluded that the death tax was more unfair than the payroll 
tax, the income tax, capital gains tax, alternative minimum 
tax, gasoline tax, and property tax. Of all of these taxes they 
are going to pay. Why? Because the death tax, number one, is a 
55-percent tax rate, the highest rate in our tax system; two, a 
tax at the worst time when a death occurs, and three, a tax on 
assets that have been taxed at least two or three times before.
    The reason that the Family Business Estate Tax Coalition 
comprised of over 6 million members and other groups support 
the elimination of the death tax as the right solution is 
because we all realize that increasing the lifetime exemption 
is a short-term solution to a long-term problem. The lifetime 
exemption was raised years ago and it was not enough. It will 
never be enough. With a little bit of inflation and profits in 
our businesses, we will grow past exemption and be back asking 
for more very soon. The families of America need a permanent 
fix to the most unfair tax of all that generates no net revenue 
and the fix is elimination.
    What do NAWBO and I want? We want the death tax, the gift, 
estate and generation-skipping tax to be eliminated. We believe 
that there is a responsible, bipartisan legislation in both the 
House and the Senate to do that now. Congresswoman Dunn and 
Congressman Tanner have introduced H.R. 8 and Senators Kyl and 
Kerrey have introduced S. 1128. Both bills eliminate the death 
tax in a realistic manner. We want families in America to be 
freed from being held hostage to the death tax and allow them 
to use their resources to plan for the growth of their families 
and their businesses. This Congress can do something very 
family friendly. Eliminate the death tax now.
    Thank you.
    [The prepared statement follows:]

Statement of Phyllis Hill Slater, President and Owner, Hill Slater, 
Inc., Great Neck, New York; and Immediate Past President, National 
Association of Women Business Owners, Silver Spring, Maryland

    Good morning, my name is Phyllis Hill Slater and I am the 
President and Owner of Hill Slater, Inc. a second-generation 
family owned business that has been serving the engineering and 
architectural community for nearly three decades. I am also the 
immediate Past President of the National Association of Women 
Business Owners and speak to you here today in both capacities.
    I am here today to talk to you about the ``death tax'' and 
its destructive effect on me and other small business owners, 
especially the 8.5 million women-owned businesses in the U.S. 
today. As a woman-owned business, I am awarded contracts that 
will stay in force only if my daughter can continue the 
business when I am not here to do so. How can I pass my 
business with its employees and contracts on to my daughter if 
I must pay a 55% gift or estate tax? The 55% tax on the market 
value of all of my assets at my death will affect not only the 
future of my business but also will require my family to 
liquidate assets to pay the tax, nine short months after my 
death. And, if I want to gift my business or my assets early, I 
must pay the same rate of tax. This is a tax on assets on which 
I have paid taxes.
    My father started our business and we have worked hard and 
long hours to grow our business to 22 employees. There are 
those who say that the death tax is paid only by the ``rich,'' 
well consider this:
    In 1997, 89% of the estate tax returns filed were from 
estates of $2.5 or less, and more than 50% of the revenue 
generated was from estates of $5 million or less.
    So the small and medium sized estates are spending the time 
and money to comply with the death tax. And, according to 
Alicia Munnell, former member of President Clinton's Council of 
Economic Advisors, the costs of complying with the estate tax 
laws are roughly the same amount as the tax revenue collected.
    There are those who say that the tax is needed to 
redistribute the wealth; well consider this:
    Alan Binder, a President Clinton appointee, concluded in 
his book, Toward a Theory of Income Distribution, ``a radical 
reform of inheritance policies can accomplish comparatively 
little income redistribution.'' And Joseph Stiglitz, Chairman 
of President Clinton's Council of Economic Advisors, in Journal 
of Political Economy, found that the estate tax ultimately 
might cause an increase in the income inequality.
    Now, some of you may be saying, ``but the public views the 
death tax as a good tax and a tax on the rich.'' WRONG!
    In numerous surveys, national polls, and membership 
questionnaires, 75% of the respondents conclude that the death 
tax should be eliminated. In a National Poll conducted last 
year the respondents concluded;
    That the death tax was more unfair than the Payroll Tax, 
Income tax, Capital Gains tax, Alternative Minimum Tax, 
Gasoline Tax, and Property Tax; all of the taxes that they are 
going to pay. WHY Because the death tax is; 1) A 55% TAX RATE, 
(the highest rate in our tax system), 2) A TAX, AT THE WORST 
TIME,WHEN A DEATH HAS OCCURRED, 3) A TAX ON ASSETS THAT HAVE 
BEEN TAXED AT LEAST TWO OR THREE TIMES BEFORE!!
    The reason that the Family Estate Tax Coalition of over 6 
million members and other groups support the elimination of the 
death tax as the right solution is because we all realize that 
increasing the lifetime exemption is a short term solution to a 
long term problem. The lifetime exemption was raised years ago 
and it was not enough. It will never be enough, with a little 
bit of inflation and profits in our businesses we will grow 
past the exemption and be back asking for more very soon. The 
families of America need a permanent fix to the most unfair tax 
of all, that generates no net revenue, and that fix is 
elimination!
    What do I and the NAWBO want. We want the death tax, (the 
gift, estate and generation skipping tax) to be eliminated, and 
we believe that there is responsible, bi-partism legislation, 
in both the House and the Senate, to do that now! Congresswoman 
Dunn and Congressman Tanner have introduced HR 8 and Senator 
Kyl and Senator Kerrey have introduced S1128. Both bills 
eliminate the death tax in a realistic manner. We want families 
in America to be freed from being held hostage to the death tax 
and allow them to use their resources to plan for the growth of 
their families and their businesses.
      

                                


    Chairman Archer. Thank you, Ms. Slater.
    Our second witness is Ronald Sandmeyer. If you will 
identify yourself for the record, you may proceed.

  STATEMENT OF RONALD P. SANDMEYER, JR., PRESIDENT AND CHIEF 
   EXECUTIVE OFFICER, SANDMEYER STEEL COMPANY, PHILADELPHIA, 
      PENNSYLVANIA; ON BEHALF OF NATIONAL ASSOCIATION OF 
                         MANUFACTURERS

    Mr. Sandmeyer. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to appear here today to discuss 
estate taxes. My name is Ron Sandmeyer, Jr. I am here today on 
behalf of the National Association of Manufacturers. The NAM is 
the Nation's largest national broad-based industry trade group. 
Its 14,000 companies and subsidiaries include more than 10,000 
small- and medium-size manufacturers. I am President and chief 
executive officer of Sandmeyer Steel Co., one of more than 
9,000 family-owned or closely held small manufacturers in the 
NAM.
    Every year when NAM surveys small members such as our 
company, repeal of Federal estate and gift taxes emerges as the 
single most important tax policy issue affecting their ability 
to grow. This may surprise some who only see a tax when it is 
collected, but I know, Mr. Chairman, that you were once a small 
manufacturer and that you have seen what I have seen.
    Sandmeyer Steel is a third generation, family-owned 
business in Philadelphia, founded by my grandfather Paul 
Sandmeyer in 1952. We produce stainless steel plate products 
that are sold to fabricators and equipment manufacturers who 
make process equipment used in a variety of different process 
industries. My brother and I have been working with our father 
to try to do what we can to make sure that our company survives 
the difficult transition from second to third generation.
    A good transition includes both a successful management 
succession plan as well as a successful ownership succession 
strategy and, if successful, a transition leaves the company 
independent, strong and capable of continued growth. This is 
important not just to us but also to our 140 employees and 
their families.
    The death tax can be devastating to the ownership 
succession component of the transition between generations in a 
family-owned business. Fewer than one in three family-owned 
companies survive to the next generation. The 55-percent estate 
tax rate does not allow much room to breathe. Very few small- 
and medium-size businesses have that kind of liquidity and 
almost no manufacturer does. The mere threat and uncertainty of 
the death tax is a constant burden to our business. It requires 
costly sacrifices today. Meetings with lawyers, meetings with 
financial planners are expensive and they drain a lot of time 
from the company's key decisionmakers.
    Money spent on things such as attorney fees and life 
insurance premiums could be better invested by us in new pieces 
of equipment or in hiring and training additional employees. 
Time and money spent preparing for the death tax achieves no 
economically useful purpose but a business has to pay this cost 
every year not just at some uncertain date in the future when 
an even bigger bill comes do.
    Uncertainty is unavoidable in estate planning. First of 
all, a businessowner cannot know when the tax will have to be 
paid. It is also hard to anticipate how much tax will 
ultimately be owed because you do not know what the IRS will 
accept as the valuation of your business. Without a fair market 
value sale, valuation is subjective and open to debate and 
possibly even litigation.
    There are no simple tools to solve the liquidity problem. 
Electing an extended payoff can burden a business with an IRS 
lien for more than a decade.
    The family business tax relief available under current law 
is so complicated and so narrowly crafted that it is hard to 
find an attorney willing to advise a client that the family 
business will qualify. Even then there will be times when the 
correct business decision will conflict with what might be the 
optimum tax strategy. For example, trying to make an owner more 
liquid and increase liquidity outside the business so the 
estate tax can be ultimately paid can result in the business 
being ineligible for the limited relief that might have 
existed. Even the increase in the unified credit is of limited 
help to the family businessowner. The credit provides a lump 
sum of money that survives the tax, but once you have built 
that into your plan, all future growth is taxed exactly as 
before. Rate reduction is the only relief short of full repeal 
that reduces your risk on every decision to reinvest and grow 
your company.
    There are several proposed bills that repeal the death tax. 
The NAM supports all of them. Repeal it any way you can. 
Representative Cox has a bill with 200 cosponsors that repeals 
the estate, gift and generation-skipping taxes immediately. 
H.R. 86 would immediately free thousands of small business 
owners to devote more time and attention to growing our 
businesses.
    Representatives Jennifer Dunn and John Tanner of this 
Committee have a different bill, H.R. 8, that phases out the 
tax by reducing rates 5 percent a year until the tax is finally 
eliminated. Dunn-Tanner has found some supporters who have not 
been able to support the Cox bill. Aside from eventually 
eliminating the tax also, the phaseout provides real and 
immediate relief by lowering rates in the short term.
    Repeal unfortunately has not found as firm a footing in the 
Senate. It has not gained the bipartisan support that both Cox 
and Dunn-Tanner enjoy in the House.
    That situation changed recently when Senator Kyl introduced 
the Estate Tax Elimination Act, S.1128. His new bill repeals 
all the death taxes and does away with a step-up in basis. The 
NAM strongly endorses S.1128 with one caveat. We only support 
elimination of the step-up in basis for inherited assets as 
long as it is coupled with immediate and total repeal of the 
death tax. The step-up in basis partially offsets a 
confiscatory estate tax regime. It is critically important to 
keep the current basis rules in place until the death tax is 
totally eliminated. The Kyl bill does permit, however, a 
limited step-up to mirror the existing unified credit so that 
no dollar free from estate tax today would be taxed as capital 
gains under his bill.
    This bill has bipartisan support from several Finance 
Committee Members. It costs less than the Cox proposal and it 
creates a potential revenue stream for the government. But most 
importantly, death would no longer be a taxable event. There is 
all the difference in the world between taxing at death and 
taxing at the time of a voluntary sale. Death, though certain, 
is unpredictable and involuntary. When it occurs the money to 
pay the taxes is still tied up in the business. A voluntary 
sale on the other hand is at a time of one's choosing. The 
taxable value is known and the money from the sale is on the 
table to pay the resulting capital gains tax. That is why 
capital gains taxes don't force companies out of business but 
the death tax usually does.
    It is clear that momentum has been building for death tax 
repeal and I would urge you to eliminate death as a taxable 
event.
    Thank you.
    [The prepared statement follows:]

Statement of Ronald P. Sandmeyer, Jr., President and Chief Executive 
Officer, Sandmeyer Steel Company, Philadelphia, Pennsylvania; on behalf 
of National Association of Manufacturers

    Mr. Chairman and members of the committee, thank you for 
the opportunity to appear before you today to discuss estate 
taxes.
    My name is Ronald P. Sandmeyer, Jr., and I am here today on 
behalf of the National Association of Manufacturers. The NAM is 
the nation's largest national broad-based industry trade group. 
Its 14,000 member companies and subsidiaries, including 
approximately 10,000 small and medium manufacturers, are in 
every state and produce about 85 percent of U.S. manufactured 
goods. The NAM's member companies and affiliated associations 
represent every industrial sector and employ more than 18 
million people.
    I am President and CEO of Sandmeyer Steel, one of the more 
than 9,000 family-owned or closely held small manufacturers in 
the NAM. Every year when the NAM surveys its small members, 
repeal of federal estate and gift taxes emerges as the single 
most important tax policy issue affecting their ability to 
grow.
    This may surprise some who only see a tax when it is 
collected, but I know that you, Mr. Chairman, were once a small 
manufacturer, and that you have seen what I have seen.
    Sandmeyer Steel Company is a third generation family-owned 
business in Philadelphia, Pennsylvania. We produce stainless 
steel plate products that are sold to fabricators and equipment 
manufacturers who make equipment used in a variety of different 
process industries. My grandfather, Paul C. Sandmeyer, founded 
the company in 1952.
    My brother Rodney and I are the third generation at our 
company. We have been working with our father to try to make 
certain that our company survives the difficult transition from 
second to third generation. A good transition includes both a 
successful management succession plan and a successful 
ownership succession strategy. A successful transition is one 
that leaves a company strong and capable of continued growth. 
This is important not just to us, but also to our 140 employees 
and their families.
    The death tax can be devastating to the ownership-
succession component of this transition between generations in 
a family-owned business. A Vermont Life study, which shows that 
fewer than one in three family-owned companies survives to the 
next generation, is not surprising. The 55 percent estate tax 
rate does not allow much room to breathe. Very few businesses 
or business owners have that kind of liquidity, and almost no 
manufacturer does.
    It is a mistake to regard the death tax as a one-time 
burden for a company. The mere threat and uncertainty of the 
death tax looming out there is a constant burden to our 
business. Any business that hopes to survive the death tax must 
make costly sacrifices today. Meetings with lawyers and 
financial planners are expensive and drain a lot of time from a 
company's key decision makers. Money spent on attorney fees and 
life insurance premiums would be better invested in new pieces 
of equipment or in hiring and training additional employees.
    Time and money spent preparing for the death tax simply 
does not help a business in any other way. This diversion of 
valuable human and financial capital achieves absolutely no 
economically useful purpose. It does not increase productivity, 
expand a workforce or put new product on the shelf. A business 
pays this cost every year, not just at some uncertain future 
date when an even bigger bill comes due.
    There is no simple solution in estate planning. Uncertainty 
is unavoidable. To begin with business owners do not know when 
they will have to pay the tax. Then it is hard to anticipate 
how much tax will be owed, because you cannot know in advance 
if the IRS will agree with what you think is a fair valuation 
of your business. Without a fair market value sale, the 
valuation is purely subjective and is open to costly debate and 
dispute.
    There are no simple tools that solve the liquidity problem. 
Electing an extended pay-off under section 6166(b) can burden 
your business with an IRS lien for more than a decade, in 
addition to the debt service payments themselves.
    What about the family business tax relief available under 
current law? Well, it's so complicated and so narrowly crafted 
that it is hard to find a single attorney anywhere who is 
willing to advise a client that the family business will 
qualify. Even then, there will be times when the correct 
business decision will conflict with the optimum tax strategy. 
For example, trying to increase an owner's liquidity outside of 
the business so the tax can be paid ultimately can result in 
the business being ineligible for the limited relief that might 
have existed.
    Even the increase in the unified credit is of limited help 
to a family business owner. The unified credit produces a lump 
sum of money that survives the tax, but once you have built 
that into your plan all future growth is taxed exactly as 
before.
    Rate reduction is the only relief short of full repeal that 
would significantly affect business decisions. Reduce the tax 
rate, and you reduce the risk on every decision to reinvest and 
grow your company.
    There are several proposed bills that repeal the death tax. 
The NAM supports all of them. Repeal it any way you can.
    Representative Cox has a bill that simply repeals the 
estate tax, the gift tax and the generation skipping tax 
immediately. His bill, H.R. 86, would immediately free 
thousands of small-business owners to devote more time and 
attention to growing our businesses. He has attracted 200 
cosponsors to the cause of repeal.
    Representatives Jennifer Dunn and John Tanner, of this 
committee, also have a repeal bill before the House in H.R. 8. 
Their bill phases out the death tax by reducing the rates 5 
percent per year until the tax is finally eliminated. The Dunn-
Tanner approach has found some supporters who have not been 
able to support the Cox bill, particularly those who are 
concerned about the budget impact of outright repeal.
    The phase-out, aside from eventually eliminating the tax, 
also provides real relief in the short term. By lowering 
marginal rates, the Dunn-Tanner bill would improve the ultimate 
rate of return on every investment made in your company.
    Senator Kyl has introduced two bills that repeal the death 
tax. The first was a companion to the Cox bill that gained 30 
cosponsors in the Senate. Despite the enthusiastic support of 
the NAM and numerous other business groups, full and immediate 
repeal has not found a firm footing in the Senate, and in 
particular it has not gained the bipartisan support that both 
the Cox bill and the Dunn-Tanner bill have won in the House.
    That situation changed recently when Senator Kyl introduced 
the Estate Tax Elimination Act, S. 1128. His new bill repeals 
all the death taxes and does away with the step-up in basis. We 
strongly endorse S. 1128 with one caveat: we only support 
elimination of step-up basis for inherited assets as long as it 
is coupled with immediate and total repeal of the death tax. 
Lawmakers added the step-up basis provision to the tax code to 
partially offset a confiscatory estate-tax regime. It is 
critically important to keep the current basis rules in place 
until the death tax is totally eliminated.
    Actually, the Kyl bill does permit a limited step-up in 
basis to mirror the existing unified credit so that no dollar 
free from estate taxes today would be inadvertently taxed under 
his bill.
    This new measure was introduced with bipartisan support 
from several Finance Committee members. The bill costs less 
than the Cox proposal, but it does this by creating a revenue 
stream for the government. Most importantly, however, under the 
bill, death would no longer be a taxable event.
    From my own personal perspective, the new Kyl bill is so 
simple and fundamentally sound that I find it hard to believe 
someone hasn't introduced the concept sooner. Don't tax the 
transfer of a business from one generation to the next. But 
leave the basis unchanged and tax the gain on the sale if and 
when it ever occurs.
    There is all the difference in the world between taxing at 
death and taxing at the time of a voluntary sale. Death, though 
certain, is unpredictable and involuntary. When it occurs, the 
money to pay the taxes is tied up in the business. A voluntary 
sale, on the other hand, is at a time of your choosing, and the 
money from the sale is on the table to pay the resulting 
capital gains taxes. And of course, the taxable value of a sale 
and the amount of the taxes that are payable is certain and 
known prior to the transaction, not months or even years later. 
That is why capital gains taxes don't force companies out of 
business, but the death tax can.
    There are few provisions in the tax code that force 
successful companies out of business. Few provisions tax 
involuntary actions or events. The death tax is one. More often 
than not the death tax actually kills the company soon after 
the owner dies. And I remind you again, don't lose sight of or 
underestimate the costs incurred by people trying to make 
reasonable and prudent preparations just to pay the tax.
    It is clear that momentum has been building for death tax 
repeal. I urge you to eliminate death as a taxable event.
      

                                


    Chairman Archer. Thank you, Mr. Sandmeyer.
    Next witness is Mr. Loop. Mr. Loop, we are happy to have 
you with us. You may proceed.

 STATEMENT OF CARL B. LOOP, JR., PRESIDENT, LOOP'S NURSERY AND 
 GREENHOUSES, INC., JACKSONVILLE, FLORIDA; PRESIDENT, FLORIDA 
   FARM BUREAU FEDERATION; AND VICE PRESIDENT, AMERICAN FARM 
                       BUREAU FEDERATION

    Mr. Loop. Thank you, Mr. Chairman, and Members of the 
Committee. My name is Carl B. Loop, Jr. I come to you today as 
vice president of the American Farm Bureau Federation and as 
president of Loop's Nursery and Greenhouses, Inc., a wholesale 
plant and nursery business in Jacksonville, Florida. It is 
indeed an honor for me to be here today to explain why farmers 
and ranchers feel so strongly that estate taxes should be 
abolished.
    I would like to speak first as Carl Loop, vice president of 
American Farm Bureau Federation. Eliminating the estate tax is 
a top priority for Farm Bureau. We believe that the tax should 
be ended because it can destroy family farms and ranches and 
because the tax penalizes agriculture producers who work hard 
to become successful. When farms are sold to pay estate taxes, 
family businesses are ruined, employees jobs can be lost, open 
spaces can be destroyed, and communities can be damaged. Estate 
tax planning can sometimes help but is a complicated, expensive 
and time consuming endeavor. With about half the farm and ranch 
operators age 55 years or older, the future of American 
agriculture depends on Congress' willingness to eliminate 
estate taxes.
    Now I would like to speak as Carl Loop, president of Loop's 
Nursery and Greenhouses. Eliminating the estate taxes is a top 
priority of the Loop family because the tax threatens to 
destroy our family business. I started my nursery business in 
1949 with a borrowed truck and a $1,500 loan. For 50 years my 
family and I have worked hard to build our business into one of 
the largest wholesale nursery operations in the southeastern 
United States. We now employ between 85 and 100 people year-
round and provide a stable tax base for local government.
    Our business consists of nine acres of greenhouses plus the 
warehouses, cold storage and equipment needed to grow, harvest 
and market our products. Inflation has increased the value of 
both our land and equipment to the point that my family would 
have to sell part of the nursery to pay the death tax. That 
could prove fatal because our assets are single-purpose 
structures that can't be easily liquidated and their forced 
sale would destroy the business.
    My son David and I run the day-to-day operations of Loop's 
Nursery and Greenhouses and it gives me great pleasure to know 
that he and my daughter Jane want to continue the business 
after my death. That may not be possible even though I have 
done everything I can to get ready for the taxes that will be 
due when I die.
    To prepare for my death, I have purchased life insurance. I 
have recapitalized the business. I have issued two classes of 
stock, set up revocable and irrevocable trusts, gifted assets, 
given stock options, and shifted control of the business. After 
hours of worry, years of work, and large attorney fees, I still 
have no assurance that this plan will work and that estate 
taxes will not ruin our business.
    If my family is forced out of business, 85-plus families 
will lose their incomes and Jacksonville will lose a valuable 
part of its business base. My family and I don't understand why 
the government wants to penalize us for being successful 
especially since we have already paid taxes on what we have 
earned. We think our operation is worth a lot more to our 
community and our government as an ongoing business when 
compared to the amount of a one-time estate tax payment.
    Farm Bureau supports passage of H.R. 8, the Death Tax 
Elimination Act, which phases out death taxes through rate 
reduction. This bipartisan bill takes a common sense approach 
to ending the death tax and deserves your support.
    Before closing, I would like to mention several other 
saving and health security tax proposals that would greatly 
benefit farmers and ranchers as outlined in our written 
statement. They are the full deductibility of self-employed 
health insurance premiums, the FARRM, Farm and Ranch Risk 
Management, accounts, capital gains tax cuts, and the fair 
imposition of self-employment taxes.
    Thank you for this opportunity. I would be glad to answer 
any questions.
    [The prepared statement follows:]

Statement of Carl B. Loop, Jr., President, Loop's Nursery and 
Greenhouses, Inc., Jacksonville, Florida; President, Florida Farm 
Bureau Federation; and Vice President, American Farm Bureau Federation

    My name is Carl B. Loop, Jr. I am president of Loop's 
Nursery and Greenhouses, Inc., a wholesale plant nursery 
operation in Jacksonville, Florida. I serve as President of the 
Florida Farm Bureau Federation and as Vice President of the 
American Farm Bureau Federation. Farm Bureau is a general farm 
organization of 4.8 million member families who produce all 
commercially marketed commodities produced in this country.

                              ESTATE TAXES

    Farm Bureau's position on estate taxes is straight forward. 
We recommend their elimination. The issue is so emotionally 
charged that during consideration of the Taxpayer Relief Act of 
1997, Farm Bureau members sent more than 70,000 letters to 
their representatives and senators calling for an end to death 
taxes. I wrote several of those letters because death taxes 
threaten the continuation of my family's livelihood.
    In 1949, after graduating from the University of Florida, I 
started my nursery business with a $1500 loan and a borrowed 
truck. In the early years we got by living on the teacher's 
salary of my wife, Ruth. Everything that I earned was 
reinvested in the business. For 50 years I, along with my wife 
and children, have worked hard to build our business into one 
of the largest wholesale nursery operations in the southeastern 
United States.
    I am proud that my nursery has allowed me to support my 
family and send my three children, Carol, 43, David, 40, and 
Jane, 33, to college. David, earned his degree in ornamental 
horticultural and agriculture economics and now runs the 
business on a daily basis. Without his involvement I wouldn't 
have been able to come here today. My youngest daughter, Jane, 
would also like to come into the business.
    Loop Nursery and Greenhouses, Inc., grows flowering pot 
plants and tropical foliage in 350,000 square feet (nine acres) 
of greenhouses. Also part of the business are warehouses, cold 
storage and the equipment needed to grow, harvest and market 
our products. Between 85 and 100 people are employed year-
round.
    My family feels that our operation not only grows a needed 
product, but also makes a positive contribution to our 
community. In addition to employing 85-plus people, we are a 
community minded business that provides a stable tax base for 
city, county, state and federal government. We do not 
understand why the government wants to penalize us for being 
successful, especially since we already paid taxes on what we 
have earned.
    Inflation has increased the value of both our land and 
equipment to the point that my family would have to sell part 
of the nursery to pay death taxes. This could prove fatal to 
our business because our assets can't be easily liquidated. 
Because greenhouses are single purpose structures, they don't 
have much market value and the only thing a forced partial sale 
would accomplish would be to destroy the viability of our 
business.
    My son and daughter want to continue our family business 
and I would like to pass it on to them. For the last six years, 
I have been working with attorneys to plan for my death. I have 
purchased life insurance, recapitalized the business, issued 
two classes of stock, set up revocable and irrevocable trust 
agreements, gifted assets, given stock options, and shifted 
control of the business. After hours of worry and large 
attorney fees I still don't know if my estate tax plan will 
save our family business.
    It seems to me and my family that Loop's Nursery and 
Greenhouses, Inc., is worth much more to our community and the 
government as an ongoing business when compared to the amount 
of a one-time estate tax payment. If my family is forced out of 
business by death taxes everything that I have worked for will 
be lost, my family will lose its livelihood, 85-plus families 
will lose their incomes and the community will lose a valuable 
part of its business base.
    My situation is not unique. As Vice President of the 
American Farm Bureau, I talk with farmers and ranchers from 
across the country and I can tell you that people everywhere 
are concerned that death taxes will destroy their family 
businesses. Many don't know how severely they will be impacted 
because they don't realize how much their property has 
increased in value due to inflation. Others understand the 
consequences but fail to adequately prepare because the law is 
complicated, because lawyers, accountants and life insurance 
are expensive and because death is a difficult subject.
    It bothers me and my family that while death taxes can cost 
farm and ranch families their businesses and cost them hundreds 
of hours and thousands of dollars for estate planning, 
relatively little revenue is generated for the federal 
government. I am told, that estate tax raise only about 1 
percent of federal tax revenues.
    The potential impact of estate taxes on the future of 
American agriculture is enormous. Individuals, family 
partnerships or family corporations own ninety-nine percent of 
U.S. farms. About half of farm and ranch operators are 55 years 
or older and are approaching the time when they will transfer 
their farms and ranches to their children.
    The situation in my state of Florida is acute. The value of 
farmland there has been inflated far beyond its worth for 
agriculture because developers are willing to pay high prices 
to convert farmland to other uses. It is not uncommon for land 
to be valued at as much as $10,000 an acre. On paper this makes 
a Florida farmer look like a wealthy person, but my farm 
neighbors aren't rich. They simply don't have the money to pay 
a huge estate tax bill without selling part or all of their 
business. While estate tax planning can protect some of the 
farms, it is costly and takes resources that could be better 
used to upgrade and expand their businesses.
    Farm Bureau renews its call for the elimination of estate 
taxes. Action by Congress is needed to preserve our nation's 
family farms and ranches, the jobs they provide and the 
contribution they make to their communities. Farm Bureau stands 
squarely behind the enactment of H.R. 8, the bipartisan Death 
Tax Elimination Act introduced by Reps. Jennifer Dunn and John 
Tanner. This bill takes a common sense approach to ending death 
taxes by reducing the rates 5 percent a year.

                             FARRM ACCOUNTS

    Like other small business persons, farmers and ranchers 
have predictable expenses. Each month they must pay for fuel, 
animal feed, equipment repairs, building maintenance, 
insurance, utilities, and meet a payroll. They must plan for 
seasonal expenses like taxes, seed, heat, and fertilizer. They 
must also budget for major purchases like equipment, land and 
buildings.
    While many expenses can be predicted and to some degree 
controlled, farm income is neither predictable nor 
controllable. The prices that farmers and ranchers receive for 
their commodities are determined by forces that they can't 
control, commodity markets and the weather. Farmers and 
ranchers don't know from one year to the next if their 
businesses will earn a profit, break even, or operate in the 
red. Few other industries must face such a challenge year after 
year after year.
    What all farmers hope for is that the good years will 
outnumber the bad ones. Believing that better times are coming, 
farmers and ranchers get through tough times by spending their 
retirement savings, borrowing money, refinancing debt, putting 
off capital improvements and lowering their standard of living. 
All of these activities damage the financial health of a farm 
or ranch and the well being of the family operating the 
business.
    Unfortunately, 1998 was a very bad year for agriculture and 
many farms and ranches are operating under severe economic 
distress. Last year, in some parts of the country, extreme 
weather or disease destroyed the fall's harvest or made feed 
for livestock scarce. Others were blessed with good crops, but 
faced low prices because of troubled overseas markets. 1999 is 
also shaping up to be a very difficult year for those who 
produce our nation's food and fiber.
    Congress saved many farm and ranch businesses from 
bankruptcy with emergency aid provided by the omnibus 
appropriations bill. Farm Bureau is most appreciative of that 
aid but wants Congress to take steps to break the cycle. If 
emergencies are to be minimized in the future, farmers and 
ranchers must have new and innovative ways to deal with 
uncertain incomes caused by weather and markets. Congress must 
act to give producers the risk management tools they need to 
manage financial jeopardy caused by unpredictable weather and 
markets.
    Farm Bureau supports the creation of Farm and Ranch Risk 
Management (FARRM) Accounts to help farmers and ranchers manage 
risk though savings. Using Farm and Ranch Risk Management 
Accounts, agricultural producers would be encouraged to save 
money in good economic times for the ultimate lean economic 
years. I can't help thinking how different things would be now 
if FARRM accounts had been put on the books five years ago, and 
farmers and ranchers had FARRM savings to use this year.
    FARRM accounts will encourage producers to save up to 20 
percent of their net farm income by the benefit of deferring 
taxes on the income until the funds are withdrawn. The program 
is targeted at real farmers, contains guarantees that the funds 
will not be at risk, and prevents abuse by limiting how long 
savings could be in an account to five years.
    Legislation to create FARRM accounts, H.R. 957, has been 
introduced by Reps. Kenny Hulshof and Karen Thurman. They've 
written their bill so that producers of all commodities, from 
all sizes of operations, who come from all parts of the 
country, can take advantage of FARRM accounts. That's the 
reason over 30 agricultural organizations and more than 150 
representatives support the bill. The organizations are:

Agricultural Retailers Association
Alabama Farmers Federation
American Cotton Shippers Association
American Crop Protection Association
American Farm Bureau Federation
American Mushroom Institute
American Nursery and Landscape Association
American Sheep Industry Association
American Society of Farm Managers & Rural Appraisers
American Soybean Association
American Sugarbeet Growers Association
Black Farmers and Agriculturists Association
Communicating for Agriculture
Farm Credit Council
The Fertilizer Institute
National Association of Wheat Growers
National Barley Growers Association
National Cattlemen's Beef Association
National Corn Growers Association
National Cotton Council of America
National Council of Farmer Cooperatives
National Grain Sorghum Producers
National Grange
National Milk Producers Federation
National Pork Producers Council
National Sunflower Association
North American Export Grain Association
North Carolina Peanut Growers
Peanut Growers Cooperative Marketing Association
Society of American Florists
Southeast Dairy Farmers Association
Southern Peanut Farmers Federation
USA Rice Federation
U.S. Canola Association
U.S. Rice Producers Association
United Egg Producers
United Fresh Fruit and Vegetable Association
Virginia Peanut Growers Association

    My position as Vice President of the American Farm Bureau 
gives me responsibility for the grassroots process that our 
organization uses to develop its policy positions. I listen to 
hours of debate on farm policy and I can't think of another 
idea that has such enthusiastic support as Farm and Ranch Risk 
Management Accounts. FARRM accounts are simple and that's why 
they are so appealing to farmers. Farmers like the idea that 
the government wants to make it easier for them save for a 
``rainy day.'' Congress should enact FARRM accounts into law.

                          CAPITAL GAINS TAXES

    Farm Bureau commends Congress for capital gain tax relief 
passed as part of the Taxpayer Relief Act of 1997. Lower 
capital gains tax rates that took effect two years ago are 
providing real benefit to America's farmers and ranchers.
    Capital gains taxes do however, continue to cause a 
hardship on agricultural producers because farming is capital 
intensive and farming assets are held for long periods of time. 
According to USDA, agricultural assets total $1,140 billion 
with real estate accounting for 79 percent of the assets. 
Studies indicate that farmers and ranchers hold real estate 
assets for an average of 30 years with farmland increasing in 
value 5 to 6 times over that period.
    For farmers and ranchers the capital gains tax is 
especially burdensome because it interferes with the sale of 
farm assets and causes business decisions to be made for tax 
reasons rather than business reasons. The result is the 
inefficient allocation of scarce capital resources, less net 
income for farmers and reduced competitiveness in international 
markets.
    Farmers also need capital gains tax relief in order to 
ensure the cost and availability of investment capital. Most 
farmers and ranchers have limited sources of outside capital. 
It must come from internally generated funds or from borrowing 
from financial institutions. The capital gains tax reduces the 
supply of money available because lenders look closely at 
financial performance, including the impact of the capital 
gains tax on the profit-making ability of a business, when 
deciding loan eligibility.
    In addition, capital gains taxes affect the ability of new 
farmers and ranchers to enter the industry and expand their 
operations. While many think of the capital gains tax as a tax 
on the seller, in reality it is a penalty on the buyer. Older 
farmers and ranchers are often reluctant to sell assets because 
they do not want to pay the capital gains taxes. Buyers must 
pay a premium to acquire assets in order to cover the taxes 
assessed on the seller. This higher cost of land hinders new 
and expanding farmers and ranchers.
    Farm Bureau believes that capital gains taxes should not 
exist. Until repeal is possible, we support cutting the rate of 
taxation to no more than 15 percent. We also recommend passage 
of H.R. 1503 to expand the $500,000 capital gains exclusion for 
homes to include farmland.

                SELF-EMPLOYMENT TAXES AND RENTAL INCOME

    Farmers, ranchers and other self-employed people pay 15.3 
percent self-employment taxes (SE taxes) on net earnings from 
self-employment. Recent Internal Revenue Service (IRS) 
activities have wrongly expanded this tax so that farmers and 
ranchers now have to pay SE taxes on some investment income.
    For 40 years, until 1996, farmers and ranchers paid taxes 
on self-employment earnings as intended by Congress. In that 
year, a Tax Court case and IRS technical advice memorandum 
incorrectly expanded the tax to include income from the cash 
rental of some farmland. The IRS took this position even though 
SE taxes are not generally collected from other property owners 
who have cash rental receipts.
    Farm Bureau supports enactment of H.R. 1044, introduced by 
Reps. Nussle and Tanner, to clarify that farmers and ranchers 
should be treated the same as other property owners and not be 
required to pay SE taxes on cash rental income.

                SELF-EMPLOYED HEALTH INSURANCE DEDUCTION

    The majority of farmers and ranchers are self-employed 
individuals who pay for their own health insurance. Because of 
the high cost of health insurance, many cannot afford high 
quality coverage or must go without health insurance. Even 
though corporations that provided health insurance for their 
employees can deduct premium costs, only 60 percent of the 
self-employed person's health insurance premiums are tax 
deductible in 1999. The deduction is scheduled to increase over 
time until it reaches 100 percent in 2003. Farm Bureau supports 
the immediate full deductibility of health insurance premiums 
paid by the self-employed.
      

                                


    Chairman Archer. Thank you, Mr. Loop.
    Our next witness is Mr. Thompson. If you would identify 
yourself, you may proceed.

  STATEMENT OF SKYLAR THOMPSON, PRESIDENT AND CHIEF OPERATING 
OFFICER, MARKET BASKET FOOD STORES, NEDERLAND, TEXAS; ON BEHALF 
       OF NATIONAL GROCERS ASSOCIATION, RESTON, VIRGINIA

    Mr. Thompson. Thank you. Mr. Chairman and Members of the 
Committee, my name is Skylar Thompson, and I am president of 
Market Basket Food Stores in Nederland, Texas. I would like to 
give you a little background about our family business.
    My father, Bruce Thompson, began his career in the retail 
food business in 1949. He spent 12 years working for large 
chains as department manager, store manager, and later as 
supervisor. In 1962, he decided to go into business for 
himself. He and my mother invested their entire savings along 
with some borrowed capital and bought their first store. They 
worked hard and a lot of hours and were able to buy more 
stores.
    As a young boy I began my career in the business in 1970 
working part-time until graduation from Texas Christian 
University in 1981. Over the years, I worked in a variety of 
positions with the company, gradually working my way up to 
president of the company.
    After 37 years through a lot of hard work and a lot of 
dedicated support from our employees, we very gradually grew 
and expanded the business and now operate 32 stores in the 
Texas and Louisiana marketplaces. As a family business, we are 
committed to serving the needs in the communities where our 
stores are located and our associates live and work.
    One of the biggest threats to our future viability and 
growth is this ominous cloud hanging over our head called the 
Federal estate tax. In the grocery industry, we now compete 
with multibillion dollar megachains with significant financial 
resources. In order to stay competitive, we must continually 
reinvest in our business, remodeling older stores, building new 
stores, adding services and newer technology to better serve 
our customers.
    When the unfortunate death of my mother and father occurs 
in the future, the company will face substantial estate tax 
liability. Having to pay the Federal Government almost 55 
percent of our estate will place a substantial drain on our 
capital base. It will potentially force us to liquidate assets, 
jeopardizing the future growth of our company and the continued 
employment of our loyal associates.
    I am here today on behalf of the National Grocers 
Association to ask for repeal of this unfair and antifamily 
tax. This antifamily, antibusiness tax policy forces many 
families to face the prospect of selling, going out of business 
and denying the next generation of entrepreneurs the 
opportunity to take the risk and reap the rewards that this 
industry has to offer.
    Representatives Jennifer Dunn and John Tanner have 
introduced the Estate and Gift Tax Reduction Act, H.R. 8, which 
would phase out the estate tax by reducing the tax rate 5 
percentage points per year until it reaches zero. 
Representative Chris Cox has introduced the Family Heritage 
Preservation Act, H.R. 86, which calls for the immediate repeal 
of the death tax.
    I want to thank the Chairman for his comments this morning, 
Representatives Dunn and Tanner for sponsoring the legislation, 
and the 22 Members of the Ways and Means Committee who have 
sponsored legislation to eliminate the estate tax and for 
recognizing its importance to every family-owned business 
whether retail or wholesale grocer, farmers, restaurant owners 
or other small businesses.
    The case for eliminating the estate tax has been studied to 
death. Recently the Joint Economic Committee released a 
thorough study. The Economics of the Estate concluded that the 
estate tax generates cost to the taxpayer, the economy and the 
environment that exceed any potential benefits.
    More importantly, NGA's own 1995 study of the family-owned 
members confirmed the real life need for the elimination of the 
Federal estate tax. In the event of the owner's death, 56 
percent of the survey responded that they would have to borrow 
money using at least a portion of the business as collateral 
and 27 percent said they would have to sell all or part of the 
business just to pay the Federal estate tax. Grocers reported 
that this would result in the elimination of jobs, and that 
would surely be a shame.
    Now is the time for Congress to act. The Federal estate tax 
robs privately owned entrepreneurs of the necessary capital 
needed to maintain their competitive position in the 
marketplace against multibillion dollar public companies. 
Failure to act now places the competitive diversity of our free 
enterprise system in serious jeopardy. On behalf of NGA's 
members and family-owned businesses across the country, we 
encourage the Ways and Means Committee to support repeal or 
reduction of the estate tax now.
    Thank you.
    [The prepared statement follows:]

Statement of Skylar Thompson, President and Chief Operating Officer, 
Market Basket Food Stores, Nederland, Texas; on behalf of National 
Grocers Association, Reston, Virginia

    Mr. Chairman and members of the committee, my name is 
Skylar Thompson and I am President and Chief Operating Officer 
of Market Basket Food Stores in Nederland, Texas.
    I'd like to give you a little background about our family-
owned business. My father, Bruce Thompson, began his career in 
the retail food business in July 1949. He spent 12 years 
working for large food chains as department manager, assistant 
store manager and store manager. In February 1962, my father 
decided to strike out on his own and opened his first food 
store. As a young boy, I began my career in the business in 
1970, working part time until graduation from college in 1981. 
Over the years, I have worked in a variety of positions with 
the company, gradually working my way up to becoming president 
and chief operating officer in November 1992. After 37 years, 
through a lot of hard work, long hours and dedicated support 
from our employees, we have gradually grown and expanded our 
company and now operate 32 grocery stores in the Texas and 
Louisiana market-places. As a family business, we are committed 
to serving the needs of the communities where our stores are 
located and associates live and work.
    One of the biggest threats to our future viability and 
growth as a family-owned business is the ominous cloud hanging 
over our heads--the federal estate tax. In the grocery industry 
we now compete with multi-billion dollar mega-chains with 
significant financial resources. To stay competitive, we must 
continue to reinvest in our businesses; remodeling older stores 
and building new ones, adding services and new technology to 
better serve our customers. If we were to experience the 
unfortunate death of my father or mother, the company would 
face substantial estate tax liability. Having to pay the 
federal government almost 55 percent of one of our estates 
would place a substantial drain on our capital base. It would 
potentially force us to liquidate assets, jeopardizing the 
future growth of our company and the continued employment of 
our loyal associates.
    I am here today on behalf of the National Grocers 
Association (N.G.A.) to ask for repeal of this unfair and anti-
family tax.
    The National Grocers Association is the national trade 
association representing retail and wholesale grocers that 
comprise the independently owned and operated sector of the 
food distribution industry. At one time this industry segment 
accounted for half of all food store sales in the United 
States. In recent years, however, a number of successful 
family-run companies have opted to sell because of the economic 
disincentives caused by the estate tax.

                          Summary of Position

    N.G.A.'s retail and wholesale grocers are the backbone of 
their communities, whether they operate a single store or a 
larger community multi-store operation. Repeal of the estate 
tax is N.G.A.'s number one legislative priority. The death tax 
deserves to die. It does substantial harm to family business 
owners, their companies, their employees, their communities and 
to the economy as a whole. On behalf of the nation's 
independent retail grocers and wholesalers, N.G.A. strongly 
urges the Ways and Means Committee and the entire Congress to 
act now to support elimination of the estate tax. Privately-
owned retail grocers are facing unprecedented competition from 
multi-billion dollar mega-chains and supercenter competitors. 
In order to compete, all businesses need capital to reinvest in 
their companies. Keeping up with new technology, remodeling and 
expanding their stores, adding new consumer services, building 
or buying new stores: all of these business decisions are 
predicated on having the necessary capital. The federal estate 
tax of up to 55 percent on the value of their business upon the 
death of an owner places them at a significant competitive 
disadvantage. Instead of using this capital to grow the 
company, it is earmarked to pay taxes.
    This anti-family, anti-business tax policy forces many 
families to face the prospect of selling, going out of 
business, and denying the next generation of entrepreneurs the 
opportunity to take the risks and reap the rewards that this 
industry offers. A week doesn't go by that we don't hear or 
read about a successful family-owned grocer selling the 
business. Successful family-owned businesses are making the 
decision to sell now and pay the capital gains tax, rather than 
the punitive, confiscatory estate tax.

                         Legislative Proposals

    Representatives Jennifer Dunn (R-WA) and John Tanner (D-TN) 
have introduced the Estate and Gift Tax Rate Reduction Act, 
H.R.8, which would phase out the estate tax by reducing tax 
rates by 5 percentage points each year until the rates are 
zero. Representative Chris Cox (R-CA) has introduced the Family 
Heritage Preservation Act, H.R.86, that calls for immediate 
repeal of the death tax. Numerous other estate tax elimination 
proposals have been introduced as well. I want to thank the 22 
members of the Ways and Means Committee who have sponsored 
legislation to eliminate the estate tax and for recognizing its 
importance to every family-owned business--whether retail and 
wholesale grocers, farmers, restaurant owners, or others.
    The important point for the Ways and Means Committee is to 
act now in support of estate tax repeal legislation. Privately-
owned and operated businesses cannot compete competitively when 
the federal government makes small business its indentured 
servant. N.G.A. urges the Ways and Means Committee members to 
act now to preserve the future of privately-owned and operated 
businesses before it is too late.

             Studies Confirm the Need for Estate Tax Repeal

    The case for eliminating the estate tax has been studied to 
death. Recently, the Joint Economic Committee (JEC) released 
its study, The Economics of the Estate Tax, concluding that the 
estate tax generates costs to the taxpayer, the economy and the 
environment that far exceed any potential benefits. 
Specifically, the report found the following:
     The estate tax is a leading cause of dissolution 
for thousands of family-run businesses. Estate tax planning 
further diverts resources available for investment and 
employment.
     The estate tax is extremely punitive, with 
marginal tax rates ranging from 37 percent to nearly 80 percent 
in some instances.
     The existence of the estate tax this century has 
reduced the stock of capital in the economy by approximately 
$497 billion, or 3.2 percent.
     The estate tax violates the basic principles of a 
good tax system: it is complicated, unfair, and inefficient.
     The distortionary incentives in the estate tax 
result in the inefficient allocation of resources, discouraging 
saving and investment, and lowering the after-tax return on 
investments.
     The estate tax raises very little, if any, net 
revenue for the federal government. The distortionary effects 
of the estate tax result in losses under the income tax that 
are roughly the same size as estate tax revenue.
     The enormous compliance costs associated with the 
estate tax are of the same general magnitude as the tax's 
revenue yield, or about $23 billion in 1998.
    ``The Case For Burying the Estate Tax'' by Tax Action 
Analysis, The Tax Policy Arm of the Institute for Policy 
Innovation, reaffirmed the JEC study, and found that:
    ``Estate taxes strike families when they are at their most 
vulnerable: along with the family member, families can lose 
what the family member built. High marginal tax rates often 
force heirs to sell family farms or businesses just to pay the 
estate tax bill. Eliminating the estate tax altogether would 
eliminate all these complexities and injustices with no revenue 
loss to the Treasury. In fact, after ten years, eliminating the 
estate tax would produce sizeable economic gains, actually 
increasing federal revenues above the current baseline.
    Eliminating the federal estate tax in 1999 would cause the 
economy to grow faster than in the current baseline, mainly due 
to a more rapid expansion of the U.S. stock of capital. By the 
year 2010:
     Annual gross domestic product would be $117.3 
billion, or 0.9 percent, above the baseline.
     The stock of U.S. capital would be higher by 
almost $1.5 trillion, or 4.1 percent, above the baseline.
     The economy would have created almost 236,000 more 
jobs than in the baseline.
     Between 1999 and 2008, the economy would have 
produced over $700 billion more in GDP than otherwise.
    The damage that estate taxes do to capital formation 
further magnifies the loss to society. Doing away with estate 
taxes would produce positive economic growth effects large 
enough to offset most of the static revenue loss.
     Between 1999 and 2008, elimination of the estate 
tax would cost the Treasury $191.5 billion.
     But the over $700 billion in additional GDP would 
yield $148.7 billion in higher income, payroll, excise and 
other federal taxes.
     In other words, higher growth would offset 78 
percent of the static revenue loss over the first ten years.
     By 2006, the dynamic revenue gain from eliminating 
the estate tax would be enough to offset the annual static 
revenue loss completely.''
    More importantly, N.G.A.'s own 1995 study of its family-
owned members confirms the real life need for elimination of 
the federal estate tax. In the event of the owner's death, 56 
percent of the survey respondents said they would have to 
borrow money, using at least a portion of the business as 
collateral, and 27 percent said they would have to sell all or 
part of the business to pay federal estate taxes. Grocers 
reported that this would result in the elimination of jobs. 
These findings were similar to those that were conducted as 
part of a broader industry-wide study conducted by the Center 
for the Study of Taxation.
    Here is what other real family-owned grocers have to say 
about the effects of the estate tax:
    From a New Jersey retailer: ``Estate tax has a negative 
impact on what should be positive business decisions. Many 
business owners feel that they cannot expand because they have 
to pay this tax. Also, Americans should be encouraged to save 
and invest to plan for their future. With estate tax, the more 
assets one has with death, the more they have to pay the 
federal government.''
    An Alabama grocer stated: ``As the only son and heir to our 
family owned business, our family lives under the constant fear 
that we will be forced to sell or liquidate our business upon 
the death of my parents in order to pay the estate tax. 
Inasmuch as my father, who is eighty-five years of age, and my 
mother, who is not far behind, have worked hard to develop a 
business that could be passed on not only to their immediate 
family, but as a legacy for their four granddaughters. How 
would we be able to explain to them that all the hard work and 
dedication that has been put into the business for the past 
twenty-seven years was only to pay off the Federal Government 
because their grandparents passed away.''
    A Washington retailer writes: ``I am a small businessman, a 
grocer, running 2 small grocery stores in Naselle and Ocean 
Park Washington. My wife and I have been operating this 
business since 1967. Having recently done extensive & expensive 
financial planning, I know first hand how badly we (our 
country) need to consider repealing our Death Tax. Without 
going into great detail, I will tell you this: Hire a financial 
planner, hire a lawyer, set up trusts and limited partnerships 
and buy a huge insurance policy and you may survive a tax 
burden that is so huge you would have to close your business 
and sell your assets in order to pay it. The cost for all of 
this planning for my small business is ap-proximately $20,000 a 
year. This seams an extreme amount of money. Money that could 
be going to capital improvements, extra labor dollars, etc., 
etc.''
    An Oregon retailer states: ``My grocery business was 
founded by my parents 64 years ago. I am the second generation 
in the family business. My son hopes to carry the business to 
the fourth generation. This is highly questionable with death 
taxes at 55%. If it has to be sold to satisfy the government 
for the unfair and excessive tax, then another small 
independent business is gone, along with the jobs my stores 
offer to this community.''

                               Conclusion

    Numerous studies exist that reinforce the need for 
elimination of the estate tax. Now is the time for Congress to 
act. Privately-owned and operated retail grocers, as well as 
other community businesses, face unprecedented competition and 
need capital in order to compete with multi-billion dollar 
mega-chains and supercenters, such as Wal*Mart. The federal 
estate tax robs privately-owned entrepreneurs of the necessary 
capital needed to maintain their competitive position in the 
marketplace with multi-billion dollar public companies. Failure 
to act now places the competitive diversity of our free 
enterprise system in serious jeopardy. On behalf of N.G.A.'s 
members and family-owned companies across the country, we 
encourage the Ways and Means Committee to support repeal of the 
estate tax now.
      

                                


    Chairman Archer. Thank you, Mr. Thompson. Thank you very 
much for staying within the 5-minute limit.
    Our next witness is Mr. Coyne. If you will identify 
yourself for the record, you may proceed.

 STATEMENT OF MICHAEL COYNE, MEMBER, TUCKERTON LUMBER COMPANY, 
  SURF CITY, NEW JERSEY; ON BEHALF OF NATIONAL FEDERATION OF 
                      INDEPENDENT BUSINESS

    Mr. Coyne. Yes. Good afternoon, Mr. Chairman and Members of 
the Committee. On behalf of the 600,000 members of the National 
Federation of Independent Business, the NFIB, I appreciate the 
opportunity to present the views of small business owners on 
the subject of estate taxes. My name is Michael Coyne. My 
family owns and operates Tuckerton Lumber Co., which is 
headquartered in Surf City, New Jersey.
    My grandfather founded Tuckerton Lumber Co. in 1932. The 
company made it through the ravages of the Great Depression and 
the material shortages of World War II. Today Tuckerton Lumber 
Co. is a community institution. We have three locations and a 
separate kitchen and bath business. We have received the Best 
Home Center of Southern Ocean County Award and I might add that 
we have consistently beaten the largest home center chain in 
the country for this distinction.
    Tuckerton Lumber Co. supports various community efforts, 
including funding for four annual scholarships to graduating 
area high school students. We have 75 employees. We truly do 
regard our employees as our best asset and we treat them 
accordingly. We provide for our employees and their dependents 
full health and dental benefits and a 401(k) plan. On average, 
our employee turnover rate is very low. One employee has been 
with our company for 34 years. Truly, we do regard all of our 
employees as family.
    Mr. Chairman, the death tax endangers both my family's 
business and the jobs of our 75 employees. It literally puts 
seven decades of work, planning, blood, sweat, and tears at 
risk.
    My experience with the death tax began just a decade ago 
when my grandfather passed away. The bulk of the estate, 
including the lumberyards, was transferred to my grandmother. 
Although we had good legal representation and had done the 
appropriate planning, it became obvious that the business would 
not survive another transition. We were and are facing an 
estate tax rate of 55 percent should my grandmother pass away 
any time soon.
    After my grandfather's passing, we were put in the awkward 
position of having to worry about increasing the value of the 
business too much. We have always believed in putting any 
profit back into the business to keep it strong and healthy and 
to help it to grow. Now reinvesting profits can actually 
threaten our business.
    For the past 10 years we have worked with estate lawyers 
and accountants to develop a plan for dealing with the estate 
tax and preserving the family business. In that time, we have 
invested over $1 million in life insurance policies, lawyers 
and accountants' fees and other efforts to ensure that the 
family business will remain intact.
    I am not an economist but I am aware of studies that show 
the cost of the death tax to the economy is greater than the 
revenue it raises for the Federal Government. Considering the 
cost this tax has already imposed on my business before we have 
even paid the tax, I sincerely believe that this is the case.
    Mr. Chairman, I have worked for my family's business 6 days 
a week, often late into the night, for the past 18 years. That 
is not as long as our most senior employee and not even as long 
as my brother-in-law, but it still represents a commitment that 
has consumed most of my adult life. The business is our life. 
It puts food on the table for my family and the families of our 
75 employees. It is simply immoral that a tax has the power to 
take all of that away. We have played by the rules, played a 
key role in the development and success of our community and 
paid millions in taxes throughout the years. Despite all of 
that, the death tax would take away all that we have worked so 
hard to accumulate and preserve.
    In closing, Mr. Chairman, I would like to encourage this 
Committee and Congress to bury the death tax. There is no 
reason to continue a tax that costs more than it raises. I 
understand that a majority of House Members have expressed 
support for completely eliminating the death tax, either 
cosponsoring the Cox bill or the Dunn-Tanner bill. I hope that 
this support will translate into action this year and help 
protect thousands of family businesses like Tuckerton Lumber 
Co.
    I thank the Chairman and Members of this Committee for 
holding this hearing and for the opportunity to present my 
views and experience. I would welcome any questions Members 
might have.
    [The prepared statement follows:]

Statement of Michael Coyne, Member, Tuckerton Lumber Company, Surf 
City, New Jersey; on behalf of National Federation of Independent 
Business

    Good morning. On behalf of the 600,000 members of the 
National Federation of Independent Business (NFIB), I 
appreciate the opportunity to present the views of small 
business owners on the subject of estate taxes.
    My name is Michael. My family owns and operates the 
Tuckerton Lumber Company in Surf City, New Jersey.
    My grandfather founded Tuckerton Lumber Company in 1932. 
The company made it through the ravages of the Great Depression 
and the material shortages of World War II. My grandfather 
purchased the company from his father and the business has been 
in the family ever since.
    Today, Tuckerton Lumber is a community institution. We have 
grown over the years to an operation with three locations and a 
separate Kitchen and Bath business. We have received ``The Best 
Home Center of Southern Ocean County'' award, a Reader's Choice 
Award presented by The Times Beacon Newspaper. I might add, 
that we have consistently beaten the largest home center chain 
in the country for this distinction. Tuckerton Lumber Company 
supports various community efforts, including funding four 
annual scholarships to graduating high school students.
    We also have sixty-five employees. We regard our employees 
as our best asset and we treat them accordingly. We fully fund 
and provide for our employees and their dependents full health 
and dental benefits and a 401(k) plan. On average, our employee 
turnover rate is very low. One employee has been with our 
company for thirty four years. Truly, we regard all of our 
employees as family.
    Mr. Chairman, the death tax endangers both my family's 
business and the jobs of our sixty-five employees. It literally 
puts seven decades of work, planning, blood, sweat and tears at 
risk.
    My experience with the death tax began just ten years ago 
when my grandfather-in-law passed away. The bulk of the estate, 
including the lumber yards, was transferred to my grandmother. 
Although we had good legal representation and had done the 
appropriate planning, it became obvious at the time of the 
transfer that the business would not survive another 
transition. We were facing an accelerated estate tax rate of 
55% should my grandmother pass away.
    Since 1980, the business has tripled in size in terms of 
sales. After my grandfather's passing, we were put in the 
awkward position of having to worry about increasing the value 
of the business too much. We have always believed in putting 
any profit back into the business to keep it strong and healthy 
and to help it grow. It also helps to have a cushion in order 
to weather times of economic slowdown.
    Another problem we face concerns the land on which our main 
office and a fully stocked lumber yard is located. It is 
situated right in the heart of Long Beach Island, a beautiful 
barrier island that is a highly desired location for summer 
homes. Real estate values have remained very high for the last 
twenty-five years, yet moving our main office is out of the 
question. In order to prepare, we have worked with estate 
lawyers and accountants to develop a plan for dealing with the 
estate tax and preserving the family business. In the ten years 
that have passed, we have invested over $1 million in life 
insurance policies, lawyers, accountants and other efforts to 
ensure that when my grandmother passes away, the family 
business will remain intact.
    Mr. Chairman, I have worked for my family's business six 
days a week often late into the night for the past eighteen 
years. That's not as long as our most senior employee, and not 
even as long as my brother-in-law, but it still represents a 
commitment that has consumed most of my adult life.
    That is my story and the story of one family lumber company 
in New Jersey. My membership with NFIB has exposed me to the 
experiences of other family businesses. Jack Faris, President 
of NFIB, recently penned a column that highlighted the efforts 
of another family lumberyard in Missouri. That family was 
paying premiums of thirty thousand dollars a year for a life 
insurance policy against the death tax. I sympathize with that 
family, but I would point out our premiums were three times as 
high.
    In preparation for this hearing, I was also exposed to 
several studies, one by the Joint Economic Committee here in 
Congress, that show the costs of the death tax to families, 
communities, and the economy far outweigh the revenues the tax 
raises for the Treasury. That's not news to me. The million 
dollars my family has invested to prepare for this tax has 
drained resources that could have been used to expand our 
business opportunities and create new jobs. Instead of planning 
for a better business, we're just working to keep what we have.
    In 1997, the Taxpayer Relief Act initiated a series of 
reforms designed to reduce the burden on the death tax on 
family businesses. I welcome those changes and thank Congress 
for taking action, but for my business the relief might be 
described as too little, too late. My grandmother is 91 years 
old, and though we expect her to outlive us all, increasing the 
unified credit to $1 million will still leave her estate 
subject to a tax of millions of dollars.
    This business is our life. It puts food on the table of my 
family and the families of our sixty-five employees. It is 
simply immoral that a tax, applied at the future death of my 
grandmother, has the power to take all of that away. We have 
played by the rules and paid millions in taxes through the 
years. The death tax would take away in after tax dollars all 
we have accumulated through the years. Although I represent the 
third generation involved in the business, we have not 
squandered what has been passed on to us. Quite the contrary, 
we have made the business grow through a lot of hard work, 
discipline and dedication.
    In closing, Mr. Chairman, I would like to encourage this 
Committee and Congress to bury the death tax. There is no 
reason to continue a tax that costs more than it raises. I 
understand a majority of House members have expressed support 
for completely eliminating the death tax--either cosponsoring 
the Cox bill or the Dunn/Tanner bill. I hope this support will 
translate into action this year to help protect family 
businesses like Tuckerton Lumber.
    I thank the Chairman and members of this committee for 
holding this hearing and for the opportunity to present my 
experience.
      

                                


    Chairman Archer. Thank you, Mr. Coyne.
    Our final witness is Mr. Speranza. If you will identify 
yourself, you may proceed.

   STATEMENT OF PAUL S. SPERANZA, JR., CHAIR, TAX COMMITTEE, 
 GREATER ROCHESTER NEW YORK METRO CHAMBER OF COMMERCE; MEMBER, 
  BOARD OF DIRECTORS, AND CHAIRMAN, TAXATION COMMITTEE, U.S. 
CHAMBER OF COMMERCE; ON BEHALF OF BUSINESS COUNCIL OF NEW YORK 
           STATE, INC., AND FOOD MARKETING INSTITUTE

    Mr. Speranza. Good afternoon, Mr. Chairman, and Members of 
the Committee. My name is Paul Speranza and I am pleased to 
appear today before you in my capacity as a member of the board 
of directors and chairman of the Tax Committee of the Chamber 
of Commerce of the United States. The Chamber represents over 3 
million businesses in the United States and is the largest 
business federation in the world. I also represent the Business 
Council of New York State, which is the largest business 
federation in New York State. I am a member of the board of 
directors of that organization as well and that organization's 
representative on the Chamber of Commerce of the United States 
Board of Directors. I also represent the Greater Rochester New 
York Metro Chamber of Commerce and, last, I am representing the 
Food Marketing Institute, which represents the overwhelming 
majority of the Nation's neighborhood supermarkets.
    I appreciate the opportunity to be here today and share 
with you my experiences with respect to estate and gift tax and 
also to share with you the views of the organizations that I 
represent.
    I would request that my formal written statement be 
incorporated into the record and that of Food Marketing 
Institute also be included in the record.
    The Federal estate and gift tax is complex, unfair, and 
inefficient. Number one, it raises approximately 1.5 percent of 
the revenue in this country, and coincidentally that is about 
the amount that it costs for planning, compliance, and 
collection in this economy.
    Number two, the 55-percent estate tax rate is by far the 
highest in the world. As a matter of fact, the lowest effective 
estate and gift tax rate is about the same as the highest 
income tax rate, which shows a great disparity.
    Number three, people are penalized who have saved, risked 
more, and worked hard, many of whom you have heard today. This 
estate and gift tax is a tax on the virtue of working hard and 
saving.
    And last, when this onerous tax applies, workers can be 
laid off, businesses have to borrow funds, reduce capital 
investment, and liquidate or sell their businesses. This 
negatively impacts the owners of those businesses, their 
employees, their families, and many others.
    Here is just one example of how this tax works. The tax 
court decided a case called the Estate of Chenoweth. In that 
case the asset in question was the stock of a privately held 
company. The stock was valued one way for the adjusted gross 
estate purposes for which the tax was applied. That very same 
block of stock was valued in a totally different way resulting 
in a substantially lower value for marital deduction purposes. 
What then happened is an unsuspecting surviving spouse had to 
pay a major amount of tax because of this convoluted 
interpretation using two different valuations. Now the 
interpretation may or may not be right as it relates to the 
law, but it is clearly wrong on the issue of logic and 
fairness.
    I am a retail food industry executive. I work for a closely 
held, privately owned business and I am also a tax attorney. I 
have worked in the estate and gift tax field for approximately 
30 years. When I was in law school, I took every course I could 
in the field and wrote a law review article in that area under 
the supervision of Professor Steven Lind. After law school, I 
went on to get a postgraduate degree in tax law at New York 
University School of Law which consistently has the number one 
tax program in the United States. There I studied under 
professors Guy Maxfield and Richard Stevens. Professors 
Stevens, Maxfield, and Lind are the foremost authorities on the 
estate and gift tax in the United States. Their treatise is the 
definitive work in this field.
    Over the course of my career, I have worked with 
individuals, families, and their businesses to assist them in 
this very difficult and complex field which gets more complex 
as time goes by. At this point in time the law is 
incomprehensible, it is unfair, it is confiscatory and 
downright un-American.
    Now, why do I share all of this with you? The reason I 
share this with you, is because it is time for Congress to put 
estate tax attorneys like me out of business and I am not the 
only one who thinks this way. We can do more productive things 
with our time. We really can. As a matter of fact, a survey was 
recently conducted in upstate New York which is where I live. I 
will describe this survey in more detail in a moment. This 
survey shows many innocent people are losing their jobs as a 
result of this tax.
    Over the last 3 months, I have worked closely with the 
Public Policy Institute of New York State, it is a research and 
educational organization affiliated with the Business Council 
of New York State, to complete a survey on the impact of the 
Federal estate and gift tax on family-owned businesses in 
upstate New York. I have to tell you the economy in upstate New 
York is not doing well. This survey has not yet been formally 
published but the data submitted by 365 family businesses show 
that at least 15,000 jobs are at risk over the next 5 years 
just from those 365 companies as a result of the estate and 
gift tax.
    Now, logic dictates that the number of jobs at risk is 
substantially larger in New York State when you consider all of 
the businesses in New York State and you then consider all the 
businesses in the Nation. I look forward to sharing the details 
of this survey when it is complete.
    We have worked on this survey with Professor Douglas Holtz-
Eakin, who is the chairman of the economics department at the 
Maxwell School of Citizenship and Public Affairs, Syracuse 
University, and I note in the Joint Committee's report for 
today's hearing that his work is mentioned. Syracuse University 
has the number one public administration graduate program in 
the United States. One of the most telling points that 
Professor Holtz-Eakin makes in this report is that the true 
cost of this tax falls upon those individuals who lose their 
jobs and their families.
    Now, we want to thank you, Congresswoman Dunn and 
Congressman Tanner, for supporting and taking the leadership 
role on H.R. 8, which obviously phases out the estate tax over 
a 10- to 11-year period of time at 5 percent a year. Thank you 
very much for your support. Above and beyond that, the U.S. 
Chamber and the other organizations that I represent support in 
principle S. 1128, the Kyl-Kerrey bill. That bill has been 
described earlier so I won't go into great detail. It 
eliminates the estate and gift tax immediately. It eliminates 
the step-up in basis, provides a carryover basis, and in most 
cases provides a tax rate on the disposition of assets at 20 
percent. It also eliminates death as a taxable event. If that 
approach were to be used, I might add one additional point, 
that the Internal Revenue Code section 302 would need to be 
modified because family-owned businesses could end up paying a 
39.6-percent rate versus a much lower capital gain rate.
    So in conclusion, the estate and gift tax depletes the 
estates of taxpayers who have saved their entire lives but let 
us not forget the most important people. Those are the people 
who will lose their jobs as a result of the estate and gift 
tax.
    Thank you for the opportunity for allowing me to testify 
before you today.
    [The prepared statement follows:]

Statement of Paul S. Speranza, Jr., Chair, Tax Committee, Greater 
Rochester New York Metro Chamber of Commerce; Member, Board of 
Directors, and Chairman, Taxation Committee, U.S. Chamber of Commerce; 
on behalf of Business Council of New York State, Inc., and Food 
Marketing Institute

    Mr. Chairman and members of the Committee, my name is Paul 
Speranza and I am pleased to appear before you today in my 
capacity as a member of the Board of Directors of the U.S 
Chamber of Commerce and as Chairman of the Chamber's Taxation 
Committee. The U.S. Chamber is the world's largest business 
federation representing more than three million business 
organizations of every size, sector and region. I also 
represent the Business Council of New York State, Inc., which 
is the largest business federation in New York. In addition, I 
represent the Greater Rochester New York Metro Chamber of 
Commerce, where I chair its tax committee. Lastly, I represent 
the Food Marketing Institute, which represents more than half 
of the food stores in the United States. I appreciate this 
opportunity to relate to the Committee my experiences with the 
impact of the federal estate and gift tax, and to express the 
views of the U. S. Chamber and the other organizations that I 
represent on pending legislative proposals providing relief 
from the federal estate and gift tax.

             BACKGROUND OF THE FEDERAL ESTATE AND GIFT TAX

    The federal estate tax was enacted in 1916 principally to 
finance this country's involvement in World War I. After 1916, 
and despite some early efforts to repeal taxes on wealth 
transfers during peacetime, the federal estate tax has remained 
a consistent feature of the federal tax system. The history of 
the federal estate tax for the years following World War I to 
present day essentially involves a gradual expansion of the 
estate tax base, coupled with increases in the rates of estate 
tax imposed. In 1976, the federal estate tax and gift tax 
structures were combined and a single, unified, graduated 
estate and gift tax system was created.
    Under the current federal estate and gift tax, the rates 
are steeply graduated and begin at 18 percent on the first 
$10,000 of cumulative transfers and reach 55 percent on 
transfers that exceed $3 million. A unified tax credit is 
available to offset a specific amount of a decedent's federal 
estate and gift tax liability. Under the Taxpayer Relief Act of 
1997, this exemption amount was increased to its current 
$650,000 level, and will continue to be increased incrementally 
until it reaches $1 million by the year 2006. The exemption 
amount, however, will not be indexed for inflation after 2006.
    In addition, the Taxpayer Relief Act of 1997 created a new 
exemption for ``qualified family-owned business interests.'' 
However, this exemption, plus the amount effectively exempted 
by the applicable unified credit, cannot exceed $1,300,000. 
Whether a decedent's estate can qualify for the maximum 
$1,300,000 exemption amount depends, among other things, on the 
mix of personal and qualified business assets in the estate at 
the death of the decedent, and satisfaction of an exceedingly 
complex array of conditions relating to the structure of the 
family business and the conduct of the heirs after the 
decedent's death. Indeed, after only two-year's of experience, 
it is clear that many family businesses will not qualify for 
this exemption.

   THE FEDERAL ESTATE AND GIFT TAX IS COMPLEX, UNFAIR AND INEFFICIENT

    When the government in a free society uses its power to 
tax, it has an obligation to do so in the least intrusive 
manner. Taxes imposed should meet the basic criteria of 
simplicity, efficiency, neutrality and fairness. The federal 
estate and gift tax, even with the credits and exemptions 
available under current law, fails miserably to meet any of 
these requisites.
    Today's federal estate and gift is a multi-layered taxing 
mechanism so complex that it literally encourages attempts by 
professional advisers to avoid estate tax liability through a 
variety of transactions and techniques, many of which would not 
(and should not) be undertaken but for the desire to preserve a 
family's savings and capital. This in turn has lead to the 
allocation of billions of dollars of precious business 
resources towards estate tax planning and compliance costs, 
despite the fact that the actual revenue generated accounts for 
less than 1.5 percent of all federal tax collections. 
Coincidentally, the cost of planning, compliance and collection 
of this tax equals the amount of the tax collected.
    Nor can the estate and gift tax be considered either 
neutral or fair to individuals or businesses. The tax is 
progressive in the extreme, with the lowest effective tax rate 
almost equal to the highest income tax rate. This penalizes 
those who have saved more, risked more, and worked harder than 
others. In this way, the estate and gift tax is actually a tax 
on the virtues of industry and thrift.
    Moreover, the estate and gift tax is far more likely to 
affect small and medium-sized businesses today than it was 
sixty years ago. In fact, in 1995, over half of the estate and 
gift tax revenue generated was derived from estates valued at 
less than $5 million. Unfortunately, many small and family-
owned business owners are either unaware of the need for estate 
tax planning or unable to afford it, which later results in an 
estate and gift tax liability that often threatens the 
continued viability of the business. In order to pay such 
liabilities, these businesses are forced to either lay off 
workers, borrow funds, reduce capital investments, liquidate, 
or sell to an outside buyer. These actions harm everyone 
connected with these businesses, including its owners, 
employees, customers, vendors, and families.
    I am a retail food industry executive and a tax attorney; I 
have been involved with the federal estate and gift tax law for 
the last 30 years. While in law school, I wrote a law review 
article on this subject under the supervision of Professor 
Steven Lind. After law school, I received an advanced tax law 
degree from the New York University of Law, where I studied the 
Estate and Gift Tax Law with Professor Richard Stevens and Guy 
Maxfield. Professors Lind, Stevens and Maxfield are the 
nation's foremost authorities in this field and have written 
the definitive textbook on the estate and gift tax law. 
Throughout my career, I have assisted individuals, families, 
and businesses in the estate and gift tax field. The law in 
this field has become substantially more complex over the 
years. It has also become incomprehensible, unfair, 
confiscatory and downright un-American.
    I would like to give you one example to make this point, 
although there are many. The Estate of Chenoweth, 88 T. C. 1577 
(1987), and related cases in certain circumstances value the 
same stock in a closely held family business for gross estate 
purposes higher than it values the very same asset for marital 
deduction purposes. This difference in the valuations of the 
very same asset can leave an unsuspecting surviving spouse with 
a major estate tax liability. Chenoweth may or may not be a 
correct interpretation of the law, but it is definitely wrong 
on logic and fairness. Why do I share all of this? Because the 
time has come for Congress to put estate tax attorneys like me 
out of business. We can find more productive things to do. I 
know that there are other estate tax attorneys who agree with 
me on this matter. As I will explain in more detail below, a 
recent survey conducted in upstate New York shows that innocent 
people are losing their jobs as a result of this cruel tax.
    Over the last three months, I have worked closely with the 
Public Policy Institute of New York State, a research and 
educational organization affiliated with The New York Business 
Council, to complete a survey on the impact of the federal 
estate and gift tax on family business employment levels in 
Upstate New York. While the survey has not yet been formally 
published, the data submitted by the 365 family businesses 
respondents reveals that for these respondents alone, at least 
15,000 jobs in Upstate New York are at risk over the next five 
years as a direct result of the estate and gift tax. This 
figure includes jobs that would not be created because of the 
allocation of resources away from business expansion and 
towards planning for the estate and gift tax, as well as jobs 
that would have to be terminated upon the death of the 
patriarch or matriarch of the business. In fact, over one-third 
of the respondents indicated that they would be compelled to 
take the dramatic and clearly undesirable step of selling or 
completely liquidating the business in order to meet the estate 
and gift tax burden.
    While I look forward to sharing the detailed results of 
this survey with the Committee upon its publication, the 
evidence we have gathered supports overwhelmingly the 
conclusion that the estate and gift tax has a crippling effect 
on job growth, job creation and business expansion in Upstate 
New York's family-business community, which is one of the most 
vital components of the region's economy. I feel almost certain 
that these conclusions would not be substantially different if 
the survey were conducted in other states. Professor Douglas 
Holtz-Eakin, the Chairman of the Economics Department at the 
Maxwell School at Syracuse University, has worked with us on 
this. According to U.S. News and World Report, the Maxwell 
School has been rated as the number one graduate public policy 
school in the United States. Professor Holtz-Eakin's analysis 
points out that the ultimate cost of this tax is borne by those 
who lose their jobs as a result of it.

            PENDING FEDERAL ESTATE AND GIFT TAX LEGISLATION

    As noted above, The Taxpayer Relief Act of 1997 provided a 
narrow class of family businesses with modest relief from the 
estate and gift tax. While virtually any form of relief is 
welcome, the U.S. Chamber and the other organizations that I 
represent feel strongly that any future estate and gift tax 
reform legislation should provide relief to all estates, 
regardless of the size, financial structure or composition of 
the estate's assets.
    The U.S. Chamber and the other organizations that I 
represent continue to support legislation that provides for 
immediate repeal of the estate and gift tax. The case for 
immediate repeal is compelling: the estate and gift tax 
penalizes savings, results in direct and substantial harm to 
family-owned businesses and farms, reduces the rate of job 
creation, is complex, costly and inefficient to comply with 
(and collect) and does not produce substantial federal revenue. 
While outright repeal of the estate and gift tax should thus 
remain the ultimate goal, the U.S. Chamber and the other 
organizations that I represent realize that current budget 
limitations may prevent this Congress from taking that step. If 
so, additional interim estate and gift tax relief should be 
enacted, and should be geared toward what is the most harmful 
aspect of the regime: the outrageously high rates of tax 
imposed.
    Both family business owners and estate tax practitioners 
agree that Congress should avoid any attempts to define what 
does, and what does not, constitute a ``family business'' for 
purposes of targeting estate and gift tax relief. The 
competitive marketplace requires that family businesses 
structure their assets and operations in ways that are as 
varied as the industries in which they engage. It follows that 
conditioning the benefits on the way that a family business may 
chose to structure itself simply cannot achieve an equitable 
distribution of estate and gift tax relief.
    In addition, Congress should avoid merely accelerating the 
increase in the estate and gift tax exemption that already is 
scheduled to be fully phased-in to the $1 million level by the 
year 2006. This would provide additional relief to only those 
estates at the lowest end of the taxable range and would not 
provide any meaningful relief to the medium and larger-sized 
businesses that make more substantial contributions to 
employment levels and local economies. For these businesses, 
merely accelerating the increase in the exemption level is 
insufficient to mitigate the impact of estate and gift tax 
rates that can result in more than half of the value of the 
family business going directly to the U.S. Treasury.
    Currently, the United States has the highest estate and 
gift tax rates of any country, followed by France at 40 
percent, Spain at 38 percent, Germany at 35 percent, and 
Belgium at 30 percent. For estates with a value that equals or 
exceeds $3 million, a maximum rate of 55 percent is imposed, 
even if the majority of the value of the estate is comprised of 
non-liquid assets. With such high rates of tax, it is common 
for the estate and gift tax liability of a business or 
individual to exceed the monetizable value of the estate's 
assets. Thus, even if one were to embrace the dubious notion 
that a tax at death is needed to insure progressivity within 
the tax code and ``backstop'' the income and capital gains tax 
systems, the 55 percent maximum rate is, by any reasonable 
definition, confiscatory.
    There is simply no legitimate rationale for a maximum 
income tax rate of 39.6 percent, a long-term capital gains tax 
rate of 20 percent and a maximum estate and gift tax rate of 55 
percent, which not surprisingly is the highest stated rate of 
tax in the Internal Revenue Code. Only recently has there been 
such a marked disparity between the maximum income tax rate and 
the maximum estate and gift tax rate.
    The U.S. Chamber and the other organizations that I 
represent are thus fully supportive of H.R. 8, the bi-partisan 
legislation introduced by Representatives Jennifer Dunn (R-WA) 
and John Tanner (D-TN) that addresses directly the confiscatory 
estate and gift tax rate structure. The Dunn-Tanner legislation 
provides for a ``phase-out'' of the estate and gift tax over a 
ten-year period, accomplished by a five percentage point, 
across-the-board rate reduction in each of the ten intermediate 
years. The Dunn-Tanner legislation represents a fiscally 
responsible approach to repeal because it mitigates the revenue 
impact with a ten-year phase-in period. Moreover, the Dunn-
Tanner legislation provides immediate rate relief over the 
interim period without introducing any additional complexity 
into the Code.
    The U.S. Chamber and the other organizations that I 
represent also support S.1128, the bi-partisan legislation 
introduced recently by Senators Jon Kyl (R-AZ) and Bob Kerrey 
(D-Neb), and co-sponsored by a coalition of Republican and 
Democrat members of the Senate Finance Committee. Under the 
Kyl-Kerrey bill, estate and gift taxes would be repealed in 
their entirety (and immediately) and the ``step-up'' in basis 
rules applicable to property acquired from a decedent would 
likewise be eliminated. The Kyl-Kerrey bill would thus make 
death a non-taxable event, provide for the ``carry-over'' of 
tax basis with respect to property received from a decedent, 
impose a tax only when the heir decides voluntarily to dispose 
of the asset, and provide that the rate of tax imposed on the 
subsequent sale of such property by the heir will in no case 
exceed the top effective income tax rate of 39.6 percent (and 
in most cases, will be the lower applicable capital gains tax 
rate of 20 percent). Of course, no estate or gift tax will be 
payable in the case of a family-owned business that simply 
continues to pass the business property from generation to 
generation. It also should be noted that in the context of this 
proposal, Section 302 of the Internal Revenue Code should be 
modified to allow all such transactions at the 20 percent 
capital gains rate so long as the appropriate holding period 
requirement is met.
    The U.S. Chamber and the other organizations that I 
represent urge this Committee to consider seriously proposals 
that address the punitive levels of estate and gift tax rates 
and provide for an equitable distribution of relief for the 
varying types of estates and businesses affected by the tax.

                               CONCLUSION

    In conclusion, the estate and gift tax depletes the estates 
of taxpayers who have saved their entire lives, often forcing 
successful family businesses to liquidate or take on burdensome 
debt to pay the tax. Taxpayers should be motivated to make 
financial decisions for business and investment reasons, and 
not be punished for individual initiative, hard work, and 
capital accumulation. Let us also not forget the thousands of 
employees of family-owned businesses who will lose their jobs 
as a result of this unfair tax. They bear the heaviest cost of 
all. The U.S. Chamber and the other organizations that I 
represent believe that the estate and gift tax should be 
repealed immediately. However, short of immediate repeal, the 
estate and gift tax should be reformed in a manner that 
eliminates the well documented negative effects of this tax on 
individuals and the owners of family businesses.
    Thank you for the allowing me the opportunity to testify 
here today.
      

                                


    Chairman Archer. Thank you, Mr. Speranza. The Chair is 
going to go slightly out of order because one of our Members, 
Mr. Tanner, needs to go to another meeting and he is very, very 
interested in this issue. So the Chair recognizes Mr. Tanner 
for any brief comments.
    Mr. Tanner. Mr. Chairman, thank you very much, and I want 
to particularly thank you for this panel. I want to thank you 
all and of course thank Ms. Dunn for her interest in this as 
well.
    What is striking, Mr. Chairman, you all have done a far 
better job than I think any of us could do but what is striking 
here is two things. One, it has been said that small businesses 
are the real economic engines in this country and create the 
vast amount of jobs that are created from time to time therein 
and also that all of you on this panel are not chief executive 
officers of the Fortune 500 or Fortune 100 companies but they 
are family-owned businesses and agriculture enterprises which I 
believe is the fabric of this Nation that must be maintained 
and preserved.
    You all have been eloquent in your presentation and I hope 
that as we go forward, H.R. 8 can receive a place of high 
priority, Mr. Chairman, in your consideration of this entire 
matter. Thank you.
    Chairman Archer. I share the gentleman's comments that this 
panel has done an outstanding job in presentation today. When I 
came to the Congress in 1971, one of my goals was to completely 
eliminate what we used to call estate tax. We are getting 
closer all the time and I am proud of the fact that the new 
Majority that came in in 1995 turned the direction of 
consideration around. The previous Majority wanted to move 
toward a greater taxation under the death tax by reducing the 
exclusion from 600,000 to 200,000. Our new Majority said it is 
totally wrong and we started moving the balance in the other 
direction down the field. Hopefully we will one day achieve the 
ultimate goal of complete elimination.
    I have a lot of other desired goals. You mentioned the 
compliance costs and administrative costs of the death tax, and 
we have a similar situation with the income tax, where we have 
got the brightest and best minds of this country spending full-
time figuring out how to make end runs around the income tax, 
and that is wasted effort.
    Mr. Speranza, I compliment you. One of your colleagues sat 
at the witness table not too long ago, a gentleman from 
Alabama, for whom I have the highest respect, a man named 
Harold Apelinski, who makes his living off of advising people 
how to reduce their death tax liabilities. He said his goal was 
to put himself out of business and that is a truly laudable 
position that you have taken because you have a mind that can 
produce wealth instead of destroying wealth or trying to 
prevent the destruction of wealth. So I do thank you.
    I am curious and I do not want to intrude into your 
personal financial holdings, but I think it is important to 
note that if any one of you has an estate which is likely to be 
valued at over $10 million, that the marginal tax will not be 
55 percent. It will be 60 percent. So the confiscation goes up 
and we should not forget that. Many people don't realize that, 
but I know Mr. Speranza does and all you have got to do is look 
at the Code and you will find out that that is the case.
    I would like to ask Mr. Coyne a question since you 
represent the NFIB and as a former small business person 
myself, I have great sympathy with what that organization 
stands for. Is your presentation which supports the complete 
repeal of the death tax, is that the number one tax priority 
for tax relief of the NFIB this year?
    Mr. Coyne. I believe that is true. I know certainly for our 
business that is the case and has been for 10 years.
    Chairman Archer. I can understand where it would be for 
your business, but I am curious as to whether it is also the 
number one priority for tax relief for the NFIB.
    Mr. Coyne. The complete elimination of the death tax, yes.
    Chairman Archer. Let me also make all of you aware that we 
are going to have no money for tax relief in the year 2000. 
Under the budget that was adopted by the Congress, there will 
be no surplus for tax relief in the year 2000. There will be a 
very nominal amount in the projections for the year 2001, but 
the projected surpluses wedge out over the 10-year period ahead 
of us so that over 10 years we will be able to give slightly 
under $800 billion in the way of tax relief and live within the 
allowable surpluses. So any bill that would immediately repeal 
the death tax is way beyond anything that we can do within the 
budget resolution and the scored revenue losses which we have 
to live with irrespective of the comparison to the 
administrative costs and compliance costs. I am very 
sympathetic to that but we have to live with the official 
estimates and the estimates are that over a 5-year period, 
immediate repeal would lose 170 billion dollars' worth of 
revenue. Over 10 years it would be roughly double that. So you 
can see the revenue constraints that we have to operate under 
and that is just a reality that we all need to be aware of as 
we pursue this ultimate goal. But I do compliment each of you 
and I wish more Members of the Committee were here to listen to 
you.
    Ms. Slater, you made, I thought, an extremely compelling 
presentation, but I thank each of you for coming to be with us 
and I know there are Members here who do wish to inquire. I 
know Ms. Dunn wants to say something. So Ms. Dunn, you are 
recognized.
    Ms. Dunn. Thank you very much, Mr. Chairman, and I 
appreciate your allowing six members of the business community 
who have had great experience with the onerous burden of the 
death tax to come before us. It means a lot for us to be able 
to hear their stories and I will just tell you that only in the 
United States are we given a certificate at birth and a license 
at marriage and a bill at death, and I think those of us here 
today would certainly like to see that bill at death removed.
    A couple of points and then I have a couple of questions I 
would like to direct to the panel. We are looking at a tax that 
brings in 1.4 percent of government revenues. Last year that 
would have been about $23 billion and you have heard the 
panelists talk about the costs of compliance in the private 
sector alone being a similar amount, $23 billion. So that is a 
total of $46 billion that are being brought out of a 
potentially productive market.
    The Chairman talked about the total elimination of the 
death tax and that it is difficult to do considering lots of 
other demands and not as many dollars as we would wish to put 
into tax relief. But I do want to say that H.R. 8, which many 
of you have mentioned in your testimony, would score at $44 
billion over 5 years and it would score at under $200 billion 
over 10 years and that is a comparison to the $780 billion we 
are looking at for tax relief compared to $200 billion.
    As the Chairman says, we have to live within those numbers 
and I think it is a tragedy because when you figure how much 
death tax really does take out of production and you assume 
that you would leave a great deal of that money with your 
companies as they move from family to family, I believe the 
scoring is way off and I think productivity would be huge and 
would offset any of this loss of income. That is my personal 
and other people's personal thought about this whole thing.
    We are constrained by the scoring of the Federal 
Government, which is not a dynamic scoring and therefore does 
not take into consideration the behavior of people when they 
can keep those dollars and not invest those in compliance or 
have them taken by the government that itself spends probably 
60 cents out of each dollar that comes from death tax.
    We are the highest nation in the world with the exception 
of Japan when it comes to rates on inheritance. Japan is the 
only nation that supersedes the United States. We are at top 
rate 55 percent. As we know, the President in his proposal has 
tried to increase that by 5 percent this year. In Japan the 
highest marginal rate is 70 percent and certainly exorbitant.
    I would also make one more point, and that is that the 
unified exemption that we have discussed that stands today at 
650,000 is not a true exemption and that families who leave 
their property, their business, their farm to their children 
actually begin paying after they exempt 650,000 at a 37-percent 
rate, not an 18-percent rate and this is a terrible shame and 
certainly as we look at what we can do on death tax, I think we 
ought to make that unified exemption a true exemption and begin 
paying a tax at 18 percent above and beyond that.
    I wanted to ask Phyllis Hill Slater a question. Ms. Slater, 
you have worked with many, many people, women-owned businesses, 
the minority community in your work as head of NAWBO and 
involvement in the community and I wanted to ask you if you 
would tell us a bit more about the effect of the death tax on 
the minority community and on women.
    Ms. Slater. Well, it is devastating because of the fact 
that this is free enterprise, part of the American dream, to 
own your own business, to move up, to be able to leave 
something to your family, to obtain wealth that you can pass on 
to keep the family strong, and we were told this was--these are 
the rules and this is what you do in order to be part of this 
great country of ours and now, you know, as soon as someone 
dies, they have to sell it, which loses a lot of jobs and also 
devastates the family.
    When I look back and think about my father who served in 
World War II and, by the way, my family has served in every war 
that this country has ever been in, but my father did serve in 
World War II and he had graduated from Stuyvesant High School 
in New York City at the age of 16, so you know he was a smart 
guy. And he graduated from CCNY in 1949 after the war 
interrupted his education, and he worked very, very hard to 
become an engineer and to be a licensed engineer, and there was 
only 13 in his class at the time. He worked very hard. It is a 
slap in his face to say that now his family, his children, his 
grandchildren cannot, cannot live the dream that he worked so 
hard to realize.
    We know now also that women businessowners are starting 
businesses even at a faster rate and one of the things that 
women businessowners are bringing to the business culture is a 
new way of doing business, changing the way we know business, 
more family oriented, bringing great, great practices, best 
practices to the business community and they want to pass it on 
also to their families. This is also a slap in their face 
because we do have to work a little harder and we have to be a 
little better in order to compete.
    Ms. Dunn. Thank you very much, Mrs. Slater. I would like to 
ask unanimous consent to enter into the record an editorial by 
Harry C. Alford, Jr. He is the president and chief executive 
officer of the National Black Chamber of Commerce and he has 
written an op-ed that I think is very revealing that has to do 
with the quest for economic empowerment that gets you, quote-
unquote, freedom and authority. Freedom and authority are the 
keys to Earthly happiness. Getting rid of the death tax will 
start to create a needed legacy and begin a cycle of wealth 
building for blacks in this country. He says we cannot begin to 
build wealth until we start to recycle our precious dollars. We 
cannot recycle our precious dollars until we have businesses 
and ventures to invest in. The death tax is in our way.
    Mr. Chairman, if I may request unanimous consent to enter 
this op-ed into the record, please.
    Mr. Herger [presiding]. Without objection.
    [The information follows:]

BLACKS SHOULD HELP IN DOING AWAY WITH THE ``DEATH TAX,'' an Editorial 
by Harry C. Alford, Jr., President & CEO, National Black Chamber of 
Commerce, Inc.

    We, as a people, have been freed from physical slavery for 
over 134 years and we have yet to begin building wealth. We 
cannot begin utilizing all of the advantages of this free 
economy until we have gained enough wealth to actively 
participate. It's just not civil rights; civil rights can get 
you dignity and respect but we need more. It's just not 
political empowerment; look at Zimbabwe or South Africa where 
we now have enormous political empowerment but, yet, no power 
due to lack of Black wealth. Civil rights and political clout 
are nice but economic empowerment will get you freedom and 
authority. Freedom and authority are the keys to earthly 
happiness.
    The total net worth of African Americans is only 1.2 
percent of the total--versus 14 percent of the population. We 
have been stuck at that number since the end of the Civil War 
in 1865. Getting rid of the ``death tax'' will start to create 
a needed legacy and begin a cycle of wealth building for Blacks 
in this country. That would be a great start to breaking the 
economic chains that bind us.
    What is the death tax? The ``death tax'' is levied against 
the government--assessed value of the deceased's estate. The 
rates can start at 37 percent and can climb to 55 percent. In 
essence, your last remaining parent dies and the estate they 
leave to you and your siblings will be reduced by the IRS by an 
amount equivalent to 37-55 percent of the total worth.
Thus, the legacy left by your elders or left by you to your 
children can be significantly reduced or even wiped out.
    An example: The Chicago Daily Defender--the oldest Black--
owned daily newspaper in the United States--was forced into 
bankruptcy due to financial burdens imposed by the estate tax. 
We all remember what happened when the great Sammy Davis Jr. 
died--his wife was in bankruptcy within six months due to the 
vicious ``death tax.''
    Store owner Leonard L. Harris, a first generation owner of 
Chatham Food Center on the South Side of Chicago, can envision 
all the work and value he has put into his business 
disappearing from his two sons. Says Mr. Harris; ``My focus has 
been putting my earnings back in to grow the business. For this 
reason, cash resources to pay federal estate taxes, based on 
the way valuation is made, would force my family to sell the 
store in order to pay the IRS within 9 months of my death. Our 
yearly earnings would not cover the payment of such a high tax. 
I should know, I started my career as a CPA.''
    We cannot begin to build wealth until we start to recycle 
our precious dollars. We cannot recycle our precious dollars 
until we have businesses and ventures to invest in. The ``death 
tax'' is in our way!
    Fortunately, we now have an opportunity to get the ``legacy 
killer'' out of our lives and future. There are two bills in 
the House and Senate as I write this editorial. HR 86 and S 56 
will repeal the ``death tax.'' HR 8 and S 38 will phase it out 
over a specified period of time. Please keep in mind that this 
estate tax only contributes about 1 percent of the total 
federal revenue, and of each dollar collected, 65 cents is 
spent on collecting the tax. The tax promotes virtually nothing 
but financial hardship and a serious insult to the hard work of 
our parents.
    These bills are making progress on Capitol Hill. However, 
we need to provide a needed boost, especially to members of the 
Congressional Black Caucus who, many times, aren't where they 
should be on financial gain issues. Please call your applicable 
congressperson or senator and tell them you support these bills 
to end the ``death tax.'' Tell them it is all right for Black 
folks to begin building wealth in this country. It is not 
against the law and it certainly is more enjoyable than 
poverty.
    Building wealth will lead to better education, better 
health care, safer streets and sustainable communities. Poverty 
and the lack of economic empowerment will get you frustration 
and hopelessness. The only way to fight poverty is good 
government and laws that do not penalize hard work, success and 
savings. Let's put to death the ``death tax''!
      

                                


    Ms. Dunn. Thank you.
    Mr. Herger. Thank you very much, Ms. Dunn. And thank you, 
Ms. Slater, for that very moving testimony. So many of those of 
us who are supporting this type of legislation hear that it is 
only the ``fat cats,'' the very wealthy that we are helping and 
it is very interesting and very informative to hear your 
testimony that really we are helping some of the very groups 
and minorities that we most want to help in this Nation.
    So thank you very much. Mr. Hulshof to inquire.
    Mr. Hulshof. Thank you, Mr. Chairman. Mr. Darden, I know 
you are pinch hitting now for Mr. Sandmeyer. I assume he had a 
plane to catch, had to get home or something of that nature, 
but what I wanted to point out and I assume you are also 
representing the National Association of Manufacturers?
    Mr. Darden. Yes, sir.
    Mr. Hulshof. Please communicate to him that certainly he 
and his brother are in a distinct minority. By that I mean the 
fact that their family business is now in the third generation 
and when you consider nine out of ten family businesses don't 
make it through a third generation, I think--and while we can't 
lay the entirety of the blame at the feet of the death tax, I 
think the significant part of it needs to rely on the death 
tax. And so please communicate to him just how much of the 
minority he is, he and his family.
    We are making progress, ladies and gentlemen, and the fact 
that you are here, the fact that, as Mr. Tanner pointed out I 
think earlier, that today the Americans Against Unfair Family 
Taxation announced a campaign to help us raise public awareness 
about the impact of death taxes on family-owned businesses and 
I look forward to, hoping some of those television sponsored 
radio ads will run in my home State of Missouri.
    Today as the Chairman pointed out in his opening statement, 
the American Council for Capital Formation released its 24-
country survey. Interestingly, just as a quick perusal of it, 
that many industrialized countries, including Australia, 
Argentina, Canada, India, Mexico, even the People's Republic of 
China do not have any death or inheritance tax and I think as 
was pointed out by Ms. Dunn, other than the country of Japan, 
our highest rate on family-owned businesses is the highest on 
the face of the planet. So I think we are making some progress 
in raising the profile.
    My last count, ladies and gentlemen, is that of the 435 
Members in this body and the House of Representatives, 184 have 
signed on to or cosponsored some sort of death tax relief, 
which is a significant number, and I am hopeful that your 
presence here will help us continue that momentum and yet we 
still have challenges in front of us.
    I note that in today's National Journal of Congress Daily, 
it talks about next week's schedule in the Senate and I noticed 
that the Treasury Secretary designee Mr. Summers is up for 
confirmation hearings and if you weren't aware, and I would 
like your comment, perhaps as those hearings will commence 
soon, Mr. Summers reportedly stated back in 1997 that those of 
you that appear here today and those of us who want to see some 
relief from the Federal death tax are, quote, selfish.
    I would like to have any one of you who chooses to to 
respond to that assertion. Does anybody care to make a comment 
to Mr. Summer's comment?
    Mr. Speranza. I would like to. I would like to make two 
comments as it relates to that. Number one, I firmly believe 
that people have a right to understand where their estate goes. 
People generally do not understand tax gimmicks such as grits, 
grats, cruts, Q-tips, and the like. People work hard all their 
lives, such as the people you heard from today. They can't 
understand where their money is going and why it is tied up in 
the way that it is. I firmly believe that people who work hard 
to accumulate wealth ought to be able to understand their 
estate plans. I don't think that is being greedy to be able to 
know how your assets are going to be handled.
    Number two is that the rates are confiscatory. The State of 
New York is an example. The law is going to change but if you 
were to make a gift today, there is a 21-percent gift tax rate. 
So if you add the 55- and the 21-percent New York State tax 
rate, you get 76 percent. To oppose the requirement that 76 
percent of a gift goes to government, I don't think is greedy. 
I would like to make one last point. When you consider how you 
score these kinds of bills, and I understand you have to employ 
static scoring but logic shouldn't be lost. Whether you are 
greedy or not, just think of somebody considering making a gift 
at a 76-percent gift tax rate versus ratcheting down these 
rates over time or eliminating the estate and gift tax 
completely either under a Dunn-Tanner or Kyl-Kerrey approach. 
People will not transfer assets at such high tax rates. 
However, people will dispose of assets at a 20-percent tax 
rate. We see that right now with the capital gains rates in 
this country. People are not going to dispose of assets at the 
level of    55-, 61-, or 76-percent tax rates.
    Mr. Hulshof. I appreciate that comment. I notice my time is 
about to expire. At town meetings back in the Ninth 
Congressional District of Missouri, the guaranteed applause 
line is as follows. The death of a family member should not be 
a taxable event. And immediately those in attendance will erupt 
in applause. So I appreciate your being here and especially, 
Mr. Loop, appreciate your kind words regarding the farm and 
ranchers management account that you included in your written 
testimony.
    I see my time is up so I will yield back. Thank you.
    Mr. Loop, did you have a further comment if the Chairman 
will indulge you?
    Mr. Loop. I would like to comment because I certainly don't 
see this as greedy. These people are not wealthy people and 
this is particularly true when it comes to farm people. 
Farmland has appreciated in value. Most farm people don't have 
liquid assets. They don't realize they have an estate tax 
problem. Certainly these are not greedy people and they need 
relief from estate taxes.
    Mr. Hulshof. Thank you. Mr. Chairman, I yield back.
    Mr. Herger. Thank you, Mr. Hulshof.
    Mr. McInnis will inquire.
    Mr. McInnis. Thank you, Mr. Chairman. First of all, to my 
colleague, Mr. Hulshof, my response to your question with 
regard to Mr. Summers, if I was a Senator I would vote no on 
his confirmation based entirely on that particular remark. I 
think that is one of the least educated comments I have heard 
in my political career.
    In regards to the gentleman, Mr. Loop, Mr. Loop, my family, 
my wife's side have been ranchers. They realize they have an 
estate tax problem. They have lived poor all their life. They 
are going to die rich because they have a lot of landholdings. 
The fact is there is nothing they can do about it. They can't 
afford counsel. People say go buy life insurance. They barely 
make enough every year. In fact, 3 out of 4 years they lose 
money. And in my particular district, I have a unique district 
in that I represent one of the wealthier districts in the 
country.
    I have got the Rocky Mountains in Colorado. I have got 
resorts like Aspen and places like that that are forcing these 
prices up. And the only choice that these families have of 
course, as you know, is to sell parts of this land and once you 
sell the land, you can't sustain the size of the herd you have. 
Once you can't sustain the size of the herd, you can't sustain 
the family and it goes on down. Unfortunately it also hurts 
open space because of course the highest use of that land is to 
put in 2-acre lots or 35-acre lots and so on.
    I want to mention a couple of things. One, all of you, I 
would like you to take a look at my bill. I have got a bill out 
there that increases the annual gift exclusion from $10,000 to 
$20,000. That has not been changed since the early seventies. 
One way that you can over some time do some type of planning is 
begin to transfer to the next generation and at $20,000 you can 
move some property over a period of time, some substantial 
property.
    One other thing I might note, I had a good friend--Mr. 
Speranza, your comments were excellent. I had a very close 
friend of mine who sold an asset that he had, got hit with 
capital gains tax, and then unfortunately got terminal cancer 
and he died 4 or 5 months later so the effective tax rate on 
the estate was somewhere around 72 percent. When I was talking 
about the family, I said so all the family got was 28 percent. 
The 72-percent tax. So all it left the family was 28 percent. 
That was very interesting because the family member said, no, 
no, we didn't get 28 percent because in order for us to pay the 
72 percent, we had to go to a fire sale. The assets that we had 
to sell, we didn't get to sit and sell them at their real 
value. We had to move them and we had to move them quickly to 
pay the Federal Government. So they figure after the fire sale 
discount that their actual--what they got out of that estate 
was 21 or--20 or 21 percent.
    Now, another thing I might point out is kind of interesting 
in this particular family, they lived in a very small town. 
Seventy percent of the local Episcopal church, their budget, 
their annual budget was provided by this family and a number of 
other things, community, all of the money that that family made 
was banked in that community, was invested in that community, 
and was spent in that community. After that, after the death, 
the family could no longer contribute to the episcopal church 
more--a few dollars every week but certainly not of the same 
kind. It went on down. There is clearly a trickle down effect. 
What has happened is that money was removed almost instantly 
within the time limit, 3 months, whatever it is, from the local 
community there in Colorado to the State and to the Federal 
Government.
    So I think that--and when you look at the estate tax, I 
want to point this out too. I can--and I have got--my studies 
are in business and tax and law and so on. In all of my studies 
and research, I cannot find one tax that is as unequitable, as 
unjustified as the death tax.
    So I appreciate all of your comments today, Ms. Slater, 
what it does to business in the minority community. This is 
nothing but thievery by the Federal Government. So I don't 
think I have overstated my position. It is accurate. I feel 
very strongly.
    Thank you, Mr. Chairman.
    Mr. Herger. Thank you, Mr. McInnis. I also represent a 
rural, agricultural, small business district and the type of 
horror stories that Mr. McInnis is relating is one that each of 
us who have lived in this kind area very long can relate to. So 
it really emphasizes how crucially important the work we have 
before us is.
    With that, Mr. McCrery will inquire.
    Mr. McCrery. Thank you, Mr. Chairman. Mr. Coyne, you said 
that you had spent a lot of time with your tax attorneys, and 
so forth, trying to prepare your grandparents' estate and your 
parents' estate, I guess. In all of those discussions, have you 
talked about the change that the Congress made in the estate 
tax law a couple of years ago with respect to closely held 
family businesses increasing the exemption in effect to I think 
it was $1.3 or $1.5 million per spouse?
    Mr. Coyne. Certainly we have, and it was welcomed but my 
grandfather did pass away 10 years ago, and although grateful 
for all and any relief, we did get the sense that it was in our 
situation too little, too late, I guess.
    Mr. McCrery. Well, Mr. Sandmeyer commented earlier that 
that provision, that liberalization, if you will, of the law 
was of little help because the rules were so complex that I 
think he said no good tax lawyer would recommend that a family 
held business even try to do that because of all of the 
conditions attached.
    Mr. Darden, is that a fair recap of what he said?
    Mr. Darden. Yes. The issue is whether or not the tax 
attorney is worried about being hit with a malpractice suit 
afterward if it turns out that the family does not qualify at 
the later date. The key objection to that provision is that it 
is uncertain whether or not--you can't base your business plans 
on the knowledge that you are going to qualify for that because 
there are so many different factors that may work in there. It 
does represent a tax savings to certain small businesses. But 
as far as a company or a family that has diverse assets and 
they are trying to grow the business, there is the concern that 
if you rely on getting that and you buy less insurance because 
you are counting on qualifying, then you are leaving the door 
open if you don't qualify.
    Mr. McCrery. I see Mr. Speranza nodding his head that this 
is a problem.
    Mr. Speranza. There is no question about it. It is not only 
me, but other tax advisors are very reluctant to use it. It is 
very complicated, number one.
    Number two, people structure their businesses in a 
particular way for many, many purposes. To force family 
businesses to do things in a certain way to try to save taxes 
when there is no guarantee just doesn't work in most cases. It 
was a good attempt, but unfortunately it just didn't work.
    One additional comment on the suggestion of raising the 
$10,000 annual exclusion amount to $20,000, I would 
respectfully report that in the tax community we chuckle over 
how many decades it is going to be before there is another 
change in these exclusion amounts. It was $3,000 for decades. 
It has been $10,000 for decades. That is not a way to plan.
    What we really need is an overall approach that all of us 
have talked about today. With all due respect, we will take 
what we can get, but that is not the way to solve the problem, 
not in that area, not by raising the exemption. The bottom line 
is that businesses, family-owned businesses create jobs and a 
significant number of those businesses that create those jobs 
are worth more than the lifetime exemption amount. We just need 
estate tax relief for this country.
    Mr. McCrery. I want to ask you in just a second what kind 
of relief, but let me hammer this point. Mr. Coyne, the reason 
that I asked you first, you have been in the midst of trying to 
plan, and I was just curious if you had discussed this 
provision of closely held family businesses. If you haven't 
that is OK. If you have and you are knowledgeable on this and 
you might be able to use this, tell me. I was the author of the 
bill that was included in the omnibus tax bill that made this 
change in the estate tax. I thought it was the best thing that 
we could do with the limited amount of money that we had to 
work with. Now what I am hearing is that I was wrong, that 
wasn't the best thing that we can do. I am not a tax lawyer, I 
am just a poor country lawyer with no particular knowledge of 
the Tax Code, and I admit I probably wasn't the best one to 
craft this provision. However, it was with good intent to try 
to help family businesses. But if you are telling me now that 
it is money wasted, maybe we can recoup that money and repeal 
that change and use that money to lower the rates, or whatever 
we can do.
    So, Mr. Coyne, are you telling me that you don't care if we 
repeal that position?
    Mr. Coyne. Well, you asked me if I was involved with the 
discussions of that. We, of course, hired tax attorneys and our 
accountants to discuss that. I was more involved with the day-
to-day operation in trying to figure out--it was basically just 
tell us what is the best course to go so we can survive this 
because at the time my grandmother was 82 years old and married 
for 55 years and I guess the statistics on spouses surviving 
after that--fortunately, she is still strong and kicking but at 
the time it was really very daunting. I am not familiar with 
the intricacies of that.
    Mr. McCrery. If you could ask if they would mind if we 
repealed that change in the Tax Code and apply that money to 
Jennifer Dunn's bill or somebody else's approach. And then Mr. 
Speranza, I will give you a chance to answer my question.
    If it is no good to do what we did with the family business 
and no good to do what we did increasing the gift allowance and 
if it is no good increasing the unified credit, what should we 
do?
    Mr. Speranza. One of two things. Number one, the Dunn-
Tanner approach is excellent. If you repealed the provision you 
just talked about, you then have some funds for perhaps the 
first 5- or 10- or 15-percent reduction in the estate tax 
rates.
    Number two, is is important to take death out of the mix as 
a taxable event. If you consider the Kyl-Kerrey approach, an 
approach that all the organizations I represent support in 
principle, that would be an excellent way to proceed as well. A 
20-percent tax rate in the view of the organizations I 
represent, is going to actually release capital that is now 
tied up. It will actually generate additional tax revenue. 
People will not make gifts now. They just won't do it. So I 
would suggest either Dunn-Tanner or Kyl-Kerrey as the approach 
to use.
    Mr. McCrery. Thank you.
    Mr. Herger. I want to thank the members of this panel for 
your taking the time to appear before us and give your 
testimony and share with us your personal experiences as well 
as all of the members of the other panel.
    With that this hearing of the Ways and Means Committee on 
reducing the tax burden stands adjourned. Thank you very much.
    [Whereupon, at 3:10 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Thomas McInerney, President, Aetna Retirement Services, 
Hartford, Connecticut

                            I. INTRODUCTION

    We appreciate this opportunity to present our views on ways 
to improve the retirement security of Americans. The tax code 
can be an important tool in advancing the retirement security 
of American workers. The private pension system in this country 
is doing a relatively good job at providing retirement benefits 
to a large portion of the American workforce. This is in part 
due to the tax-preferred treatment accorded contributions to 
qualified retirement plans under the tax code.
     We support the improvements to these tax code provisions 
that are included in H.R. 1102, the comprehensive pension 
reform legislation sponsored by Mr. Portman and Mr. Cardin. 
Many of these changes have been sorely needed for many years, 
and we believe if enacted they will have a beneficial effect on 
plans and plan participants, enabling them to better provide a 
secure retirement through their employer-sponsored plans.
    There continues to be a significant gap in coverage, 
however, among workers of smaller businesses. Less than 20 
percent of businesses with fewer than 25 employees sponsored a 
retirement plan. This means that only 13 percent of these 23 
million working Americans has the opportunity to participate in 
an employer-sponsored retirement plan. This is despite 
Congress's recent efforts, most notably in 1996, to create 
plans that small businesses will utilize, for instance, the 
SIMPLE IRA and 401(k) plan, which were authored by Mr. Portman 
in the House.

               II. RETIREMENT PLANS FOR SMALL BUSINESSES

A. Why don't more small businesses offer a retirement plan?

    A survey done by the Employee Benefits Research Institute 
(EBRI) in 1998 found that small businesses had several reasons 
why they decide not to offer a retirement plan. First, 
employees often prefer today's wages to tomorrow's benefits. 
This is likely to be especially true of lower-income workers. 
Second, administrative costs are too high. Third, small 
employers are concerned about fiduciary responsibilities and 
potential liability. Finally, employers are often uncertain 
about their future revenue stream and find it difficult to 
commit to sponsoring a plan.
    On the other hand, the EBRI survey found that small 
businesses might consider starting a retirement plan if certain 
things were to occur. The availability of a business tax credit 
could make a difference in the small business starting a plan. 
Also, reduced administrative requirements, allowing owners to 
save more in the plan, or easing of the vesting requirements 
were amongst other factors cited by small businesses as 
influencing their decision to start a plan.

B. The SIMPLE 401(k)

    Congress in 1996 attempted to respond to the needs of small 
business by enacting the SIMPLE IRA and the SIMPLE 401(k). 
Initial evidence seems to indicate that the SIMPLE IRA has 
proven attractive to some small businesses, primarily, we 
believe, those with one- or two-employees. One of the 
retirement policy concerns with relying on an IRA for 
retirement security is that the participant-owner has easier 
access to the funds than to the funds in an employer-sponsored 
plan (``leakage'').
    On the other hand, the SIMPLE 401(k) has not been much 
utilized by the small employer community. The small employer 
market has not found it attractive thus far, we believe for 
several reasons. The SIMPLE 401(k) requires the employer to 
make a 100 percent matching contribution up to 3 percent of pay 
for those deferring, or a 2 percent contribution for all those 
eligible. The marketplace has deemed this requirement too 
costly. Moreover, while it is expensive for the owner, the 
owner cannot get the full benefit that a regular 401(k) plan 
permits because the maximum deferral permitted is $6,000 rather 
than $10,000.
    Second, small employers continue to be concerned by the 
start-up costs and the related administrative costs of the 
plan. A full plan document is still required as well as a 
summary plan description, spousal notices, loan documents and 
annual plan reporting.

                    III. IMPROVING THE SIMPLE 401(K)

    All of these current concerns/issues can be addressed to 
expand coverage for employees working in small businesses. We 
believe that the SIMPLE 401(k) was the right path for Congress 
to take in attempting to provide small businesses with options 
for creating retirement plans. Much like the other changes 
proposed in H.R. 1102, there are a number of refinements that 
we would suggest be made to the current SIMPLE 401(k) to enable 
it to have the impact with the small business community that 
Congress intended. We hope these can be included with H.R. 1102 
as it moves forward in the legislative process.

A. Reducing employer cost

    First, Congress should act to address the problem of 
employer cost. There are several ways this could be done. Small 
businesses have judged the current match requirements to be too 
expensive. We would propose a somewhat lower match, but also 
some flexibility in the match requirements over a period of 
years recognizing some of the financial challenges small 
businesses often face. For instance, you could require a match 
of 50 percent of the deferral amount up to 4 percent of pay 
with an option for a 100 percent match. To provide flexibility, 
you could permit no match for the first two plan years or grant 
a tax credit to the employer for a match in the first 2 years. 
In addition, you could allow an employer to skip a match in one 
out of five years after the first five years, provided notice 
is given to employees.
    In addition, the employer's administrative costs of running 
a plan could be reduced. For instance, the plan document should 
be simplified to consist of no more than one page, which the 
IRS could put on its website and which the accountant for the 
small business could easily access. Another simplification 
would be to combine the filing of the annual plan return (Form 
5500) with the employer's tax return, for instance, using a 
one-page schedule.
    Employers should not have to worry about setting up another 
plan once they begin to outgrow the SIMPLE 401(k) plan, at 
least for some reasonable period of growth. We would suggest 
that the employer be able to maintain this new SIMPLE 401(k) 
plan until its workforce reaches 100, the cut-off for the 
current SIMPLE 401(k) plan.

B. Making the plan more valuable

    We fully support the change included in H.R. 1102 to raise 
the maximum deferral for both forms of 401(k) plans. This 
should give owners a better incentive to set up these plans. In 
addition, we applaud the catch-up provisions for workers over 
50 and would suggest adding a catch-up provision for workers 
that have been out of the workforce for some specified period 
of time. Finally, we support the provision in the Portman-
Cardin bill permitting business owners to borrow from the plan 
under the same terms as their other employees.

C. Balancing the employee's need for security with the 
employer's fear of liability

    As mentioned above, one of the reasons small businesses do 
not set up retirement plans is their fear of ERISA liability as 
fiduciary of the plan assets. We suggest the creation of a safe 
harbor from ERISA liability along the lines of the current 
404(c) safe harbor. To take advantage of this new safe harbor, 
a SIMPLE 401(k) sponsor would have to place the plan assets in 
an established bank, insurance company, mutual fund or other 
entity regulated by the Federal or State government. This 
entity must publish an annual internal control audit. All 
participants must have toll-free telephone or internet access 
to the entity to verify balances independent of their employer. 
The plan sponsor would have to meet all existing requirements 
for remitting contributions to the entity on a timely basis. If 
these and other 404(c) requirements are met, the plan sponsor 
would enjoy fiduciary protection.

                             IV. CONCLUSION

    Our experience tells us that there is no single solution 
for the pension coverage gap in the small business sector of 
our economy. This sector is highly segmented by demographic and 
market forces, such as age of the owner and the business, the 
type of business, the size of the workforce, the age of the 
workforce and other factors. The existing SIMPLE 401(k) should 
remain in place for the ``bigger'' small businesses. Creative 
thinking on a defined benefit plan for small businesses should 
be encouraged as well.
    We believe, however, with these changes for businesses of 
25 employees or less, the SIMPLE 401(k) could become a popular 
tool for providing retirement security for workers in these 
particularly small businesses. We urge the Committee to give 
consideration to these changes as it contemplates the many 
excellent reforms included in the Portman-Cardin legislation 
and other pension reform bills.
      

                                


Statement of America's Community Bankers

    Mr. Chairman and Members of the Committee:
    America's Community Bankers appreciates this opportunity to 
submit testimony for the record of the hearing on retirement 
and health security. America's Community Bankers (ACB) is the 
national trade association for progressive community bankers 
across the nation. ACB members have diverse business strategies 
based on consumer financial services, housing finance, small 
business lending, and community development, and operate under 
several charter types and holding company structures.
    ACB members are actively involved in offering prototype 
IRAs and qualified plans and recognize the critical need to 
increase the current rate of retirement saving. It has been 
widely reported that the ``baby-boom'' generation is not saving 
out of income at anywhere near the rate needed to provide 
adequate retirement income. ACB recognizes that many households 
are currently reaping the benefit of stellar returns on equity 
holdings in 401(k) and other accounts but these sources do not 
represent truly new savings, merely higher, and potentially 
temporary though of course welcome, returns on existing 
retirement assets. At the same time, despite your best efforts, 
Mister Chairman, Congress seems unable to act to eliminate the 
looming insolvency of the current Social Security system. ACB 
believes that it is imperative that Congress do more to enhance 
the attractiveness of individual retirement plans and employer-
sponsored plans. Inducing a higher level of retirement savings 
through sound tax policy is one way to eliminate some of the 
unavoidable pressure on Social Security. H.R. 1546, the 
Retirement Savings Opportunity Act of 1999, introduced by Rep. 
Thomas and H.R. 1102, the Comprehensive Retirement Security and 
Pension reform Act, introduced by Reps. Portman and Cardin are 
excellent vehicles for accomplishing much needed reform of the 
pension provisions in the tax code and ACB is strongly 
supportive of their enactment.
    Under current law in order for an individual to make the 
maximum IRA contribution for a year he or she is required to 
work through a daunting maze of eligibility and income 
limitations that apply to the interaction of traditional IRAs, 
Roth IRAs, and spousal IRAs. This interaction does not even 
consider the separate eligibility and contribution rules that 
apply for the so-called Education IRA, which cause additional 
confusion for IRA participants. (The mind-boggling complexity 
of the relationships of the various IRA eligibility rules, as 
well as the internal complexity of the Roth IRA rules, are set 
out in Attachment A, Complexities to Consider in the Roth IRA.) 
The confusion caused in the minds of investors by the 
inconsistent and complex eligibility rules may be inhibiting 
participation, particularly among middle class individuals who 
participate in employer plans and who are in the phase-out 
ranges of income. This includes plan participants who marry and 
lose eligibility to make traditional IRA contributions and plan 
participants who quit work and are unaware that they have 
become eligible for a spousal IRA.
    The income limits on the eligibility of participants in 
employer plans was imposed by the Tax Reform Act of 1986. H.R. 
1546 would eliminate the eligibility rules and restore 
universal eligible for traditional IRAs. In addition, H.R. 1546 
would eliminate the income limit (based on ``modified adjusted 
gross income'') on eligibility to contribute to a Roth IRA and 
would change the $100,000 modified AGI limit on Roth IRA 
conversions to $1 million.
    It should be noted that the current $2,000 overall limit on 
IRA contribution has remained unchanged since 1981. IRAs are 
alone among tax-advantaged retirement plans with a contribution 
limit that is not indexed for inflation. In fact, if the 
original $1,500 IRA contribution limit had been indexed for 
inflation since 1974, it would currently be approximately 
$5,000. H.R. 1546 and H.R. 1102, in effect, recognize this fact 
by increasing the overall IRA contribution limit to $5,000 and 
H.R. 1546 would index this amount for future inflation.
    H.R. 1546 would permit IRA owners who are 50 years of age 
and older to make additional annual IRA contributions of 
$3,000. H.R. 1102 would increase the elective deferrals 
permitted under 401(k), SEP, Simple Retirement Accounts, and 
457 plans permitted to be made by 50 year-olds by $5,000. These 
``catch-up'' contributions would create fairer treatment for 
middle class IRA participants who are often unable to make the 
full IRA contribution in their younger years because of family 
obligations.
    Both H.R. 1546 and H.R. 1102 would make an incremental 
expansion of the Roth IRA concept that, given the popularity of 
the Roth IRA, is simply a matter of common sense. Both bills 
would permit 401(k) plans to offer an option whereby employees 
may treat elective deferrals as after-tax contributions and the 
earnings, which will accumulate tax-free, will be tax-free upon 
distribution. Providing the Roth IRA option in a 401(k) is 
likely to substantially increase the employee's retirement nest 
egg, not only because of the inherent advantage of the Roth IRA 
concept for younger participants, but because of the discipline 
that would be imposed by contributions being made under a 
payroll deduction plan.
    Another basic idea that should be considered is the 
redefinition of participation in a defined benefit plan. 
Because of the imposition of vesting periods, an employee who 
changes every three years or so might never gain any vested 
retirement benefits but be debarred from contributing fully to 
a regular IRA account.
    In many cases the Tax Reform Act of 1986 imposed limits on 
the benefits and compensation that could be taken into account 
in funding ERISA benefits. The Omnibus Budget Reconciliation 
Act of 1993 reduced limits still further and the Retirement 
Protection Act of 1994 made reductions in the rates of cost-of-
living indexing. H.R. 1102 would restore these benefit and 
compensation limits and indexing rates schedules that were 
reduced. Similar increases in benefits and indexation rates 
would be made for other plans. For example, the annual benefit 
limit of section 415(b)(1) for defined benefit plans would be 
increased from $90,000 to $180,000. The compensation limit 
under section 401(a)(17) would be increased from $150,000 to 
$235,000. With respect to defined contribution plans, the 
dollar amount of the annual addition would be increased from 
$30,000 to $45,000 and corresponding 25% limitation would be 
eliminated altogether. The limit on elective contributions 
under 401(k), SEP, and 403(b) would be increased from $7,000 to 
$15,000. In the case of 457 Similar increases would be made for 
457 plans, Simple Retirement Plans, and plans maintained by 
local governments and tax-exempt organizations.
    The dollar limits have become unrealistic over time so that 
the increases will benefit primarily middle class employees. 
Senior management will still largely rely on nonqualified 
deferred compensation plans and incentive stock options. Even 
the increase in the section 401(a)(17) limit will benefit all 
employees in a defined benefit plan by accelerating the full 
funding of the plan. In the case of defined contribution plans, 
eliminating the 25% limit will provide middle class workers 
with additional flexibility to make catch-up contributions to 
offset participation lapses during their younger years or when 
they had interrupted employment to raise families.
    Several other provisions in H.R. 1102 would encourage 
employers to create new retirement plans. For example, the 
complex top-heavy rules that often inhibit plan creation by 
smaller employees would be modified and simplified. PBGC 
premiums would be reduced for new plans of small employers and 
phased in for other new single-employer plans. In addition, 
small employers will be eligible for a section 38 credit for a 
portion of the costs of starting up a retirement plan.
    H.R. 1102 will increase pension portability by permitting 
rollovers among section 457, 403(b), qualified plans, and IRAs. 
The bill would also permit rollovers of employee after-tax 
contributions to an IRA. Unaccountably, employee after-tax 
contributions are not permitted to be rolled over to another 
qualified plan--this shortcoming serves no sound policy purpose 
and should be eliminated. In addition, H.R. 1102 would 
eliminate two other rules that inhibit portability in the 
context of a merge or acquisition. Optional forms of benefit 
distribution would no longer be required to be preserved where 
plan benefits are being transferred directly to another plan. 
The requirement in current Treasury regulations that such 
optional benefits be preserved in a transfer of benefits to 
another plan inhibited the consolidation of the acquired 
employees' benefits after a merger or acquisition. Similarly, 
the so-called ``same desk'' rule of section 401(h) would be 
eliminated. This rule prevents an employee from rolling over a 
section 401(k) plan to a new employer's plan or an IRA, where 
the employee continues to perform the same job for the new 
employer after an acquisition. The employee is required to 
remain in the seller's plan because, as a technical matter, he 
or she has not incurred a ``separation from service.''
    Although, strictly speaking, the minimum distribution rules 
of section may not impact an employer's decision to set up a 
retirement plan or an employee's decision to participate or 
establish an IRA, they no longer reflect the realities of the 
workforce and do not serve a valid policy purpose. (It should 
be noted that they do not apply to the Roth IRA.) H.R. 1102 
would substantially simplify the minimum distribution rules.
    Mr. Chairman the need to encourage retirement saving and 
enhance retirement security is critical and you are to be 
applauded for holding this hearing to explore ways to achieve 
this goal. Enactment of H.R. 1546 and H.R. 1102 would 
contribute substantially to achieving it and ACB strongly urges 
the Committee to pass them. Once again, Mr. Chairman, ACB is 
grateful to you and the other members of the Committee for the 
opportunity you have provided to make our views known on this 
very important issue. If you have any questions or require 
additional information, please contact James E. O'Connor, Tax 
Counsel of ACB, at 202-857-3125.
      

                                


ATTACHMENT A

The Considerable Complexities Of The Roth IRA

    Section 408A of the Internal Revenue Act of 1986 (the 
Code), which was added by the Taxpayer Relief Act of 1997 \1\ 
(the 1997 Act) and is effective for tax years beginning after 
December 31, 1997, created the Roth IRA, a new individual 
retirement plan with great potential to encourage new 
retirement savings and take some pressure off Social Security. 
Section 408A was amended by the Internal Revenue Service 
Restructuring and Reform Act of 1998 \2\ (the 1998 Act) and on 
February 3, 1999, final regulations from the Internal Revenue 
Service (TD 8816) were published under section 408A. The 
potential of the Roth IRA has been constrained in several ways. 
The combined annual limit on IRA contributions has remained 
stuck at $2,000 since 1981 because of budgetary constraints and 
misplaced social fairness concerns. In addition, the 
proliferation of individual saving arrangements is confusing. A 
more immediate constraint, however, because it reflects, in 
many instances, specific judgments and reactive decisions of 
Congress and the IRS, is the complexity of the Roth IRA 
provisions and the complexity of their interaction with 
traditional (deductible) IRA provisions. This complexity makes 
the Roth IRA confusing for trustees and participants, has added 
significant overhead costs, and may have discouraged 
competition among potential plan sponsors.
---------------------------------------------------------------------------
    \1\ Public Law 105-34 (111 Stat. 788).
    \2\ Public Law 105-206 (112 Stat. 685).
---------------------------------------------------------------------------

                             Contributions

    Contributions may be made to a Roth IRA beginning on 
January 1, 1998. Like the traditional IRA, contributions may be 
made to a Roth IRA for a particular year until the unextended 
due date (i.e., April 15th for calendar year taxpayers) of the 
income tax return for that year.\3\ Unlike a traditional IRA, 
contributions to a Roth IRA are not deductible,\4\ but the 
entire amount of any ``qualified distribution'' will be tax-
free. (See Qualified Distributions, below.) Note that, by 
comparison with the permanent exclusion from taxation for Roth 
IRA earnings, the tax advantage conferred on nondeductible 
contributions to a traditional IRA is limited to the deferral 
of taxation of their earnings until distribution. Deductible 
contributions cannot be made to a traditional IRA during and 
after the year in which an individual (or spouse, in the case 
of a spousal IRA) reaches age 70\1/2\, but contributions may be 
made to a Roth IRA at any age \5\--to the extent that the 
individual has compensation at that age.
---------------------------------------------------------------------------
    \3\ See section 219(f)(3) of the Internal Revenue Code.
    \4\ See section 408A(c)(1) of the Code. 
    \5\ See section 408A(c)(4) of the Code.
---------------------------------------------------------------------------
    Individuals are permitted to maintain a traditional IRA 
(making deductible and/or nondeductible contributions) and a 
Roth IRA simultaneously, but the maximum annual combination of 
contributions is still limited to the lesser of $2,000 or the 
individual's compensation for the year,\6\ excluding rollover 
contributions to the Roth IRA. (It should be noted that an 
``education IRA'' is not included in the definition of an 
``individual retirement plan'' under section 7701(a)(37) and, 
thus, contributions to an education IRA do not count against 
this annual contribution limit.) The final regulations provide 
that, as is permitted for traditional IRAs under section 
408(c), an employer or employee association may establish and 
even administer a trust set up to hold contributions made to 
separate employee accounts, each of which is treated as a 
separate Roth IRA.\7\ In fact, it seems apparent that the 
regulations are clarifying that section 408(c) is just one of 
the traditional IRA provisions applicable to Roth IRAs under 
the general overlay rule of section 408A(a). Thus, the employer 
intending to create a Roth IRA trust for its employees should 
do so by specific reference to the provisions of section 408(c) 
in order to avoid taking on ERISA duties and liabilities. 
Likewise, a parent or guardian may make contributions to a Roth 
IRA on behalf of a minor, provided the minor has compensation 
in the amount of the contribution.\8\ As with traditional IRAs, 
a 6% penalty on excess contributions applies to the Roth 
IRA,\9\ but the penalty can be avoided by distributing the 
excess before the extended due date of the return for the year 
of contribution.\10\ (See Corrective Distributions, below.
---------------------------------------------------------------------------
    \6\ See section 408A(c)(2) of the Code.
    \7\ See Treasury regulation section 1.408A-2 A-3.
    \8\ See the preamble to the final regulations, General Provisions 
and Establishment of Roth IRAs.
    \9\ See section 4973(f) of the Code.
    \10\ See sections 408A(d)(2)(C) of the Code.
---------------------------------------------------------------------------

         Active Participation in an Employer's Retirement Plan

Traditional IRAs

    Individuals are permitted to deduct the full $2,000 
contribution to a traditional IRA regardless of how high their 
adjusted gross income level may be \11\--provided they are not 
participants in an employer's retirement plan.\12\ Where an 
individual is an ``active participant'' in an employer's 
retirement plan, the portion of an IRA contribution that is 
deductible will decline from the full $2,000 to zero as his or 
her adjusted gross income \13\ increases above a certain dollar 
amount.\14\
---------------------------------------------------------------------------
    \11\ See section 219(b)(1) of the Code.
    \12\ The IRS provides guidance for determining whether an 
individual is an active participant in Notice 87-16, 1987-1 CB 446. If 
an individual's employer maintains a defined benefit plan, he or she is 
treated as an active participant merely on the basis of being eligible 
to participate for any part of the plan year ending with or within the 
individual's tax year, even where he or she elects not to participate 
or ultimately fails to perform the minimum service required to accrue a 
benefit. If the employer maintains a defined contribution plan (a money 
purchase, profit-sharing, which includes a 401(k), or stock bonus 
plan), an individual is an active participant where employer or 
employee contributions or forfeitures are allocated to his or her 
account for a plan year ending on or within the individual's tax year.
    \13\ Three terms applicable to the IRA contribution limits should 
be understood: ``compensation''; ``adjusted gross income''; and 
``modified adjusted gross income.'' IRA contributions must be made from 
compensation and the definition becomes important because Roth IRA 
contributions may be made well into an individual's retirement.
    (1) Compensation may be defined simply as the amount reported on 
the Form W-2 of an employee or the ``earned income'' of a self-employed 
individual. The term compensation includes alimony, but it does not 
include: (1) gifts; (2) distributions from pension plans (including 
401(k) plans and IRAs), commercial annuities, and deferred compensation 
arrangements; and (3) Social Security benefits. See section 219(f)(1) 
of the Code.
    (2) Adjusted gross income, as used to limit contributions by active 
participants in employer plans, includes the taxable portion of social 
security and railroad retirement and passive activity losses and 
credits, but U.S. Savings bond proceeds paid for higher education, 
adoption assistance paid by employers, and the foreign income of U.S. 
citizens to the extent otherwise excluded are added back. The amount of 
any deductible IRA contribution is also added back to AGI. See section 
219(g)(3)(A) of the Code.
    (3) Modified adjusted gross income, which limits the ability of all 
individuals to make Roth IRA contributions, excludes amounts otherwise 
included in AGI resulting from the conversion of a traditional IRA to a 
Roth IRA. See section 408A(c)(3)(C)(i)(I) of the Code and Treasury 
regulation sections 1.408A-3 A-5 and A-6. For taxable years beginning 
after 2004, required minimum distributions from IRAs are also not 
included in modified adjusted gross income for the purpose of 
determining eligibility to convert a traditional IRA to a Roth IRA 
(i.e., the $100,000 modified AGI limitation). See section 
408A(c)(3)(C)(i)(II) of the Code.
    \14\ See section 219(g) of the Code.

---------------------------------------------------------------------------
Roth IRAs

    Unlike traditional IRAs, no limitation is imposed on Roth 
IRA contributions because the owner is an active participant in 
an employer's plan.\15\ The 1998 Act also conferred a benefit 
by clarifying that the amount of the Roth IRA contribution that 
self-employed individuals are permitted to make for a given 
year will not be reduced by any contributions that they make on 
their own behalf to SEP IRAs or SIMPLE IRAs,\16\ as well as 
corporate or Keogh plans. But individuals are not permitted to 
make contributions to a Roth IRA above certain levels of 
``modified adjusted gross income'' \17\--regardless of whether 
they participate in an employer's plan.
---------------------------------------------------------------------------
    \15\ See section 408A(c)(3) of the Code.
    \16\ See section 408A(f)(2) of the Code and Treasury regulation 
section 1.408A-3 A-3(c)(2).
    \17\ See section 408A(c)((3)(A) of the Code.
---------------------------------------------------------------------------

Modified Adjusted Gross Income Limitations on Regular (Annual) Roth IRA 
                             Contributions

    The limitations on regular Roth IRA contributions are as 
follows:
    (1) For a married couple filing a joint return, eligibility 
to make regular Roth IRA contributions is phased out between 
``modified AGI'' of $150,000 and $160,000 (regardless of 
whether or not either spouse is a participant in an employer-
sponsored plan). The statutory calculation of the annual 
contribution a joint return filer is permitted to make is 
$2,000 (or, if less, compensation) reduced by an amount that 
bears the same ratio to $2,000 (or, if less, compensation) that 
the excess of modified AGI over $150,000 bears to $10,000.\18\
---------------------------------------------------------------------------
    \18\ See sections 408A(c)(3)(A) and (C)(ii)(I) of the Code.
---------------------------------------------------------------------------
    (2) For a single individual, eligibility is phased out 
between modified AGI of $95,000 and $110,000. The contribution 
calculation for the single filer is $2,000 (or, if less, 
compensation) reduced by an amount that bears the same ratio to 
$2,000 (or, if less, compensation) that the excess of modified 
AGI over $95,000 bears to $15,000.\19\
---------------------------------------------------------------------------
    \19\ See sections 408A(c)(3)(A) and (C)(ii)(II) of the Code.
---------------------------------------------------------------------------
    (3) For a married individual who files a separate return, 
eligibility is phased out between modified AGI of $0 and 
$10,000. The contribution calculation for the separate filer is 
$2,000 (or, if less, compensation) reduced by an amount that 
bears the same ratio to $2,000 (or, if less, compensation) that 
the excess of modified AGI over $0 bears to $10,000.\20\
---------------------------------------------------------------------------
    \20\ See sections 408A(c)(3)(A) and (C)(ii)(III) of the Code.
---------------------------------------------------------------------------

                     Rounding and De Minimis Rules

    The rounding and de minimis rules applicable to traditional 
IRAs do apply to Roth IRAs. If the contribution under the 
calculation formula is not a multiple of 10, it is rounded to 
the next lowest multiple of 10. If the calculation yields a 
deductible amount of less than $200, but more than zero, the 
owner may deduct a $200 IRA contribution.\21\
---------------------------------------------------------------------------
    \21\ See section 408A(c)(3)(A) of the Code.
---------------------------------------------------------------------------

                            Spousal Roth IRA

    As with a traditional IRA, a working spouse may make a Roth 
IRA contribution on behalf of a spouse who has insufficient 
compensation to make his or her own Roth IRA contribution, 
providing they file a joint return.\22\ After the husband or 
wife makes a regular contribution of up to $2,000 to his or her 
Roth IRA and/or deductible IRA, he or she is then permitted to 
contribute to the other spouse's Roth IRA and/or deductible IRA 
an additional $2,000 or, if it is less, the amount of both 
spouses' combined compensation reduced by the first Roth and/or 
traditional IRA contribution.
---------------------------------------------------------------------------
    \22\ See section 219(c) of the Code.
---------------------------------------------------------------------------
    In other words, the ``excess'' compensation of the higher 
paid spouse is used to boost the eligibility of the other 
spouse to make a Roth IRA contribution, although the actual 
contribution to the spousal Roth IRA may come from the funds of 
either spouse. In the most common set of facts where a working 
spouse has at least $4,000 of compensation, he or she may 
contribute $2,000 to the spousal Roth IRA of a nonworking 
spouse, as well as $2,000 to his or her own IRA. The issue of 
insufficient compensation will more likely arise for Roth IRA 
owners than for owners of traditional IRAs because, as 
mentioned, contributions may be made to a Roth IRA after age 
70\1/2\.

       Interplay of Roth and Traditional IRA Contribution Limits

    Taxpayers should be mindful of the interplay of the Roth 
IRA and the traditional IRA rules so they may maximize the 
benefits of the $2,000 total IRA contribution they are 
permitted to make (if only as a nondeductible IRA contribution) 
while avoiding the 6% penalty on excess contributions that is 
applicable to Roth IRAs, as well as traditional IRAs. The 
distinction between AGI and modified AGI should be borne in 
mind in those years where additional AGI is created by the 
conversion of a traditional IRA to a Roth IRA. 
    A. In the case of the 1998 return of a single individual: 
    (1) Where he or she is an active participant with AGI under 
$30,000, his or her entire $2,000 contribution may be deducted 
as a contribution to a traditional IRA or the entire $2,000 may 
be contributed to a Roth IRA.
    (2) Where the AGI of an active participant is between 
$30,000 and $40,000, the deductibility of a $2,000 IRA 
contribution would be gradually eliminated, but he or she could 
choose between contributing the remainder, or the full amount, 
of the $2,000 to a Roth IRA.\23\
---------------------------------------------------------------------------
    \23\ The deductibility of traditional IRA contributions is phased 
out for single individuals who are active participants in employer 
plans according to the following schedules:

------------------------------------------------------------------------

------------------------------------------------------------------------
1998...........................................           $30,000-$40,00
1999...........................................           $31,000-$41,00
2000...........................................           $32,000-$42,00
2001...........................................           $33,000-$43,00
2002...........................................           $34,000-$43,00
2003...........................................           $40,000-$50,00
2004...........................................           $45,000-$55,00
2005 and thereafter............................           $50,000-$60,00
------------------------------------------------------------------------


    For example, if a single individual, who participates in an 
employer's pension plan, reports $36,000 of AGI on his 1998 
return, he could make a deductible IRA contribution of no more 
than $800 [$2,000 minus $2,000 ($6,000/$10,000)]. See section 
219)(g)(3)(B)(ii) of the Code.
    (3) Where the single active participant's modified AGI is 
between $95,000 and $110,000, the amount of the $2,000 
contribution that can be contributed to a Roth IRA will be 
phased down to zero. Nevertheless, within, or above, this 
modified AGI range, the single filer may contribute the 
remainder of his or her $2,000 contribution to a traditional 
IRA, but only as an after-tax (nondeductible) contribution.\24\
---------------------------------------------------------------------------
    \24\ See section 408(o) of the Code for the rules on nondeductible 
contributions to traditional IRAs.
---------------------------------------------------------------------------
    B. Where the single individual is not an active participant 
in an employer plan, he or she may contribute the entire $2,000 
as a deductible IRA contribution--regardless of how high his or 
her AGI may be.\24\ On the other hand, the ability of a single 
(or married) individual to make a Roth IRA contribution is not 
affected by whether or not he or she is an active participant, 
but the ability of a single individual to contribute to a Roth 
IRA will still phase out between modified AGI of $95,000 and 
$110,000.
---------------------------------------------------------------------------
    \24\ See the general rule of section 219(b)(1), as modified by 
section 219(g)(1) of the Code.
---------------------------------------------------------------------------
    C. With respect to a spouse who joins in a joint return for 
1998 and is an active participant:
    (1) If joint return AGI is less than $50,000, his or her 
$2,000 may be used to make a fully deductible contribution to a 
traditional IRA or the full $2,000 may be contributed to a Roth 
IRA. 
    (2) Where joint AGI is between $50,000 and $60,000, the 
active participant spouse may still contribute the full $2,000 
to a Roth IRA, but within this joint return AGI range the 
deductibility of the active spouse's traditional IRA 
contribution will be phased out for 1998. The active 
participant spouse could split the $2,000 between the portion 
that may be deducted as a traditional IRA contribution and a 
Roth IRA contribution. The deductibility of traditional IRA 
contributions is phased out for married individuals who file 
jointly and are active participants in employer plans according 
to the following schedules:

------------------------------------------------------------------------

------------------------------------------------------------------------
1998...........................................           $50,000-$60,00
1999...........................................           $51,000-$61,00
2000...........................................           $52,000-$62,00
2001...........................................           $53,000-$63,00
2002...........................................           $54,000-$64,00
2003...........................................           $60,000-$70,00
2004...........................................           $65,000-$75,00
2005...........................................           $70,000-$80,00
2006...........................................           $75,000-$85,00
2007 and thereafter............................         $80,000-$100,00
------------------------------------------------------------------------
Note that the ratio of the statutory formula will change for tax years
  after 2006. For example, if a married couple, one of whom participates
  in an employer's pension plan, reports $84,000 of AGI on their 2008
  joint return, the active participant could make a deductible IRA
  contribution of no more than $1,600 [$2,000 minus $2,000 ($4,000/
  $20,000)]. See section 219)g)(3)(B)(i) of the Code. The contribution
  of the other spouse would not be reduced.

    (3) Between joint AGI of $60,000 and joint modified AGI of 
$150,000, the active participant spouse could not make a 
deductible IRA contribution for 1998, but could still 
contribute the full $2,000 to a Roth IRA. 
    (4) Between $150,000 and $160,000 of joint modified AGI, as 
the ability to contribute to a Roth IRA is phased down to zero, 
the remainder of the $2,000 contribution may only be used to 
make a nondeductible IRA contribution.
    D. Where a couple files a joint return and neither spouse 
is an active participant, each can make a $2,000 deductible IRA 
contribution, no matter how high their AGI is for 1998 or a 
subsequent year. Alternatively, all or part of the $2,000 may 
be contributed to a Roth IRA--subject to the phase-out of Roth 
IRA contributions between joint return modified AGI of $150,000 
and $160,000.
    E. For tax years beginning after 1997, where a couple files 
a joint return and only one spouse is an active participant in 
an employer's plan, the deductibility of traditional IRA 
contributions made by or on behalf of the spouse who does not 
participate in an employer's retirement plan will, for most 
couples, no longer be affected by the other spouse's active 
participation. The deductibility of the traditional IRA 
contribution made by or for the spouse who is not an active 
participant will be phased out only as the couple's joint 
return AGI increases from $150,000 to $160,000. The statutory 
calculation of the deductible contribution is $2,000 reduced by 
an amount that bears the same ratio to $2,000 that the excess 
of AGI over $150,000 bears to $10,000.\25\ The couple must file 
a joint return and the spouse who is an active participant in 
the employer's plan will still be subject to a deductibility 
phase-out that begins at AGI of $50,000 for 1998.
---------------------------------------------------------------------------
    \25\ See section 219)(g)(7) of the Code, as amended by a technical 
correction in the 1998 Act.
---------------------------------------------------------------------------
    (1) Below $150,000 of joint return AGI, the entire $2,000 
maximum contribution made by, or on behalf of, a spouse who is 
not an active participant (where the other spouse is) may be 
deducted as a traditional IRA contribution or allocated 
entirely to a Roth IRA. 
    (2) IRA deductibility and Roth eligibility phase out 
between $150,000 and $160,000 of joint return AGI and modified 
AGI, respectively, for the nonparticipant spouse of an active 
participant, but he or she should be mindful of the fact that 
for a year where a traditional IRA is converted to a Roth IRA, 
the amount converted to the Roth will be included in AGI, but 
will not be included in modified AGI. Thus, even though AGI for 
the year may exceed $160,000 because of the conversion, the 
$100,000 modified AGI limit on the ``conversion'' of a 
traditional IRA to a Roth IRA (see ``Conversion to a Roth 
IRA,'' below) makes it highly likely that both spouses will be 
able to make the full $2,000 Roth contribution. 
    (3) Where the joint return modified AGI of a couple, one of 
whom is an active participant and the other is not, is above 
$150,000, all or a portion of each spouse's $2,000 total IRA 
contribution can only be made as a nondeductible traditional 
IRA contribution.
    F. In the case of a married individual who files a separate 
return:
    (1) Regardless of whether the individual or his or her 
spouse is an active participant in an employer's plan, a 
married individual's permitted Roth IRA contribution phases 
down to zero as separate return modified AGI increases from 
zero to $10,000. \26\
---------------------------------------------------------------------------
    \26\ See section 408A(c)(3)(A)(ii) and (C)(ii)(III) of the Code, as 
amended by the 1998 Act.
---------------------------------------------------------------------------
    (2) Where the married individual filing a separate return 
is an active participant, or where his or her spouse is an 
active participant, the ability of either spouse to make a 
deductible IRA contribution will phase out between separate 
return AGI of zero and $10,000.\27\ Any difference between 
$2,000 and the deductible and the Roth IRA contributions that 
are permitted may be contributed as a nondeductible IRA 
contribution.
---------------------------------------------------------------------------
    \27\ See section 219(g)(3)(B)(iii) of the Code.
---------------------------------------------------------------------------
    (3) On the other hand, if neither the individual nor his or 
her spouse is an active participant, there will be no AGI 
limitation on the ability of a married individual filing 
separately to make deductible IRA contributions. \28\
---------------------------------------------------------------------------
    \28\ See section 219(b)(1) of the Code.
---------------------------------------------------------------------------
    The regulations interpret section 408A(c)(2) as providing 
that, where the total contributions for a year to a Roth IRA 
and a traditional IRA exceed the lesser of $2,000 or 
compensation, the excess contribution is deemed to have been 
made to the Roth IRA.\29\ It would seem, however, that should 
an individual's contributions to a Roth IRA and a traditional 
IRA--after age 70\1/2\--exceed the lesser of $2,000 or 
compensation, the excess contribution should be deemed to have 
been made to the traditional IRA (to which contributions cannot 
be made after age 70\1/2\), but the regulations do not address 
this situation.\30\
---------------------------------------------------------------------------
    \29\ See Treasury regulation section 1.408A-3 A-3(d), Example 2..
    \30\ The excess contributed to the traditional IRA cannot be 
treated as a nondeductible contribution for purposes of section 
408A(c)(2)(B) because under section 408(o) nondeductible contributions 
are limited to the amount allowed as a deductible IRA contribution, 
which would be zero after age 70\1/2\. Section 408A(c)(2)(A), however, 
uses the deductible IRA amount without reference to the age 70\1/2\ 
limitation.
---------------------------------------------------------------------------

                        Conversion to a Roth IRA

    In addition to making the regular contributions of up to 
$2,000, owners may roll over or ``convert'' amounts in other 
IRAs to their Roth IRAs. The entire amount converted to a Roth 
IRA will be included in gross income, except that nondeductible 
contributions to a traditional IRA may be converted to a Roth 
IRA tax-free as a return of basis.\31\ The chief benefit 
conferred by a valid Roth conversion is that a contribution, 
far in excess of the regular contribution limit, can begin 
generating tax-free earnings. The 10% premature distribution 
penalty will not apply to a valid conversion distribution, 
despite the fact that the distribution from the traditional IRA 
would fail to qualify for one of the exceptions under section 
72(t)(3)(A).\32\
---------------------------------------------------------------------------
    \31\ See section 408A(d)(3)(A)(i) of the Code.
    \32\ See section 408A(d)(3)(A)(ii) of the Code.
---------------------------------------------------------------------------
    When considering a Roth IRA conversion, the distinction 
between AGI and ``modified AGI'' must be borne in mind. While 
the amount distributed from a traditional IRA in a conversion 
transaction is included in gross income and is, thus, included 
in the calculation of AGI, it is excluded from the calculation 
of a modified AGI amount used to determine eligibility to make 
the conversion.\33\ Only those taxpayers whose modified AGI for 
the distribution year does not exceed $100,000 will be able to 
make a valid Roth IRA conversion.\34\
---------------------------------------------------------------------------
    \33\ See section 408A(c)(3)(C)(i) of the Code.
    \34\ See section 408A(c)(3)(B)(i) of the Code.
---------------------------------------------------------------------------
    It is clear under the statute that a single taxpayer whose 
modified AGI exceeds $100,000 is ineligible to make a 
conversion. It is not entirely clear, based solely on the 
statute, whether the $100,000 modified AGI limit could apply 
individually to joint return filers. (It should be noted that a 
married individual filing separately is not eligible for a Roth 
IRA conversion.\35\) The regulations, however, interpret the 
somewhat ambiguous term ``taxpayer's adjusted gross income'' in 
the statute as requiring that modified AGI be based on joint 
return AGI.\36\ The use of the term ``taxpayer'' arguably gave 
the IRS sufficient interpretive flexibility that the $100,000 
modified AGI limit could have been applied individually to the 
husband and wife who file a joint return. In any case, the 
application of such a severe marriage penalty to Roth IRA 
conversions is indefensible as a matter of sound tax 
policy.\37\ In defense of the IRS interpretation, however, The 
term ``taxpayer'' is also used to refer to the husband and wife 
filing a joint return in sections 408A(c)(3)(A)(i) and 
219(g)(2)(A)(i) of the Code.
---------------------------------------------------------------------------
    \35\ See section 408A(c)(3)(B)(ii) of the Code.
    \36\ See Treasury regulation section 1.408A-4 A-2(b).
    \37\ Nevertheless, a slight bias toward the single return filer 
also exists in the $15,000 phase-out period for regular Roth IRA 
contributions, as opposed to a $10,000 phase-out for joint return 
filers, under section 408A(c)(3)(A)(ii). With respect to traditional 
IRAs, the active participant phase-out periods of section 
219(g)(2)(A)(ii) will be $10,000 for single filers and $20,000 for 
joint return filers for years after 2006.
---------------------------------------------------------------------------
    The only exception to the rule that a married individual 
who files a separate return is ineligible to convert an IRA to 
a Roth IRA applies for a married person who has lived apart 
from his or her spouse for the entire year in which the 
distribution is made. Such a separated spouse may convert a 
Roth IRA, despite filing a separate return, provided the 
$100,000 modified AGI limit is not exceeded on the separate 
return he or she files.\38\
---------------------------------------------------------------------------
    \38\ See section 408A(c)(3)(D) of the Code.
---------------------------------------------------------------------------
    A traditional IRA may be converted to a Roth IRA in any 
year, but if the conversion is made after December 31, 1998, 
the entire amount distributed from the traditional IRA will be 
included in the gross income of the year of the conversion. If 
the conversion is made before January 1, 1999, a special tax 
break is available--the inclusion in gross income will be 
spread ratably over four years--25% will be included in 1998 
gross income and 25% will be included in each of the next three 
years.\39\ The 1998 Act, however, added a provision permitting 
an individual to file an election to include the entire amount 
converted in 1998 gross income.\40\. The election to forego 
four-year spreading must be made on Form 8606 and cannot be 
made or changed after the extended due date of the 1998 
return.\41\ The final regulations clarify that a Roth IRA owner 
who was married at the time of the conversion may continue 
spreading the conversion amount over four years, even though he 
or she becomes divorced or separated during that period.\42\ 
(For the applicable rules where the Roth IRA owner dies during 
the four-year spread period, see Death of the Owner, below.)
---------------------------------------------------------------------------
    \39\ See section 408A(d)(3)(A)(iii) of the Code
    \40\ Ibid.
    \41\ See Treasury regulation section 1.408A-4 A-10.
    \42\ Treasury regulation section 1.408A-4 A-11(c).
---------------------------------------------------------------------------
    The actual conversion to a Roth IRA may be structured as a 
rollover distribution from the traditional IRA followed by a 
contribution to the Roth IRA within the normal 60 day period, a 
trustee-to-trustee transfer, or a transfer between a 
traditional and a Roth IRA maintained by the same trustee 
(which the final regulations clarify includes a simple 
redesignation of the same account.\43\) Whatever form the 
conversion actually takes, it must qualify as a rollover under 
section 408(d)(3), except that, unlike rollovers from one 
traditional IRA to another, rollovers to Roth IRAs are not 
limited to one per year.\44\ Section 408A(e) provides that 
conversion contributions to a Roth IRA may be made only from 
another IRA. In other words, no distributions from corporate, 
section 401(k), section 403(b), section 457, or Keogh plans may 
be converted to Roth IRAs.\45\ In fact, however, it appears 
that amounts may be converted to Roth IRAs from corporate and 
other qualified pension and profit-sharing plans--it just 
requires a two-step process. The amount in the qualified plan 
must first be rolled over to a traditional IRA in the normal 
way \46\ and then converted to a Roth IRA.
---------------------------------------------------------------------------
    \43\ See Treasury regulation section 1.408A-4 A-1(b)(3).
    \44\ See section 408A(e) of the Code, which provides that the 
annual rollover limitation of section 408(d)(3)(B) does not apply.
    \45\ See also section 408A(d)(3)(B) of the Code and Treasury 
regulation section 1.408A-4 A-5.
    \46\ See sections 402(c)(1) and (8)(B)(i) and (ii) of the Code.
---------------------------------------------------------------------------
    Amounts in both SEP \47\ and SIMPLE IRAs \48\ may be rolled 
over to Roth IRAs, but distributions to a participant from a 
SIMPLE IRA cannot be rolled over to a Roth IRA (as well as a 
traditional IRA or a SEP IRA) until he or she has been a 
participant for two years.\49\ The 1998 Act added section 
408A(f)(1) to the Code which provides that a SEP or SIMPLE IRAs 
may not be ``designated'' as a Roth IRA. Although amounts in a 
SEP or SIMPLE IRA may be converted, the plan itself cannot be 
converted (using the term in a non-technical sense), such that 
future contributions under the SEP or SIMPLE IRA agreement can 
treated as made directly to a Roth IRA.\50\ This amendment is 
evidently intended to remove any uncertainty about whether 
contributions could be made to a Roth IRA under the higher SEP 
and SIMPLE IRA limits and whether deductible employer 
contributions and contributions under salary reduction 
arrangements may be made directly to a Roth IRA, with the 
result that employer deductions from, and employee reductions 
in, income created by the SEP and SIMPLE IRA contributions will 
never be recovered by the Treasury.
---------------------------------------------------------------------------
    \47\ See section 408(d)(3)(A)(i) of the Code, as made applicable by 
the general rule of section 408A(a) of the Code.
    \48\ See 408(d)(3)(G) of the Code, as made applicable by the 
general rule of section 408A(a) of the Code.
    \49\ See sections 408(d)(3)(G) and 72(t)(6) of the Code and 
Treasury regulation section 1.408A-4 A-4(a) and (b).
    \50\ See Treasury regulation section 1.408A-4 A-4(c).
---------------------------------------------------------------------------
    Where a Roth IRA conversion straddles two years--i.e., the 
rollover contribution takes place within the 60-day window,\51\ 
but in the year following the rollover distribution--some 
special rules apply. The regulations interpret the requirement 
that a husband and wife must file a joint return to be eligible 
to make a conversion as requiring that the joint return be 
filed for the year that the rollover distribution is paid from 
the traditional IRA, but apparently not for the subsequent year 
when the conversion contribution is made.\52\ Even though the 
rollover contribution occurs in 1999, so long as the rollover 
distribution is made within 1998, the regulations provide that 
the conversion qualifies for the four-year spread period.\53\ 
This provision is logical and fair. It is the distribution from 
the traditional IRA that creates the tax liability and the 
income should be recognized in the year in which the 
distribution occurs.
---------------------------------------------------------------------------
    \51\ See section 408(d)(3)(A)(i) and (ii) of the Code.
    \52\ See Treasury regulation section 1.408A-4 A-2(b).
    \53\ See Treasury regulation section 1.408A-4 A-8.
---------------------------------------------------------------------------
    The regulations also provide that, where a Roth conversion 
is accomplished over two years, the $100,000 modified AGI limit 
that determines eligibility to make the conversion is required 
to be satisfied for the year of distribution.\54\ This 
provisions is not logical--eligibility to make the conversion 
should be determined in the year of the conversion--but it is 
sensible because eligibility to make the conversion is easier 
to determine at the end of the year. Nevertheless, the 
inconsistencies in the rules applicable to two-year conversions 
create complexities to bog down administrators. (See Reversing 
a Roth Conversion and Qualified Distributions, below.)
---------------------------------------------------------------------------
    \54\ See Treasury regulation section 1.408A-4 A-2(a).
---------------------------------------------------------------------------
    No exception has been created from the withholding 
requirements of the Code for conversion amounts included in 
gross income. Regardless, it is likely that most individuals 
who convert IRAs will not have to file estimated tax returns to 
avoid the section 6654(a) penalty for underwithholding, even 
those who convert large dollar amounts, because most 
individuals receive refunds from their 1040s. Even where the 
conversion causes a large increase in 1998 tax liability, a 
taxpayer who received a refund in the previous year will be 
covered under section 6654(d)(1)(B)(ii), which provides that, 
if 100% of last year's tax liability (105% if last year's AGI 
exceeded $150,000) is withheld in the current year, the penalty 
for underwithholding will not be applied. Taxpayers who sent a 
check with last year's return, however, must have 90% of the 
current year's tax withheld to avoid the penalty.\55\ Such 
taxpayers may have a problem if they made a large conversion 
and did not adjust their W-2 withholding or file estimated 
returns. It is in 1999, the second year of the four-year spread 
period, that most taxpayers will have to remember to factor 
into their withholding the tax on 25% of the amount converted.
---------------------------------------------------------------------------
    \55\ See section 6654(d)(1)(B)(i) of the Code.
---------------------------------------------------------------------------

                       Minimum Distribution Rules

    Roth IRAs, unlike traditional IRAs under section 408(a)(6), 
are not subject to the ``minimum distribution rules.'' \56\ The 
minimum distribution rules require distributions to commence by 
April 1st of the calendar year following the year in which the 
owner attains age 70\1/2\ \57\ and the entire interest in the 
plan must be paid over the life or life expectancy of the owner 
or the owner and a designated beneficiary.\58\ The annual 
distributions must at least equal the quotient obtained by 
dividing the individual's account balance by the applicable 
life or joint and survivor life expectancy.\59\ Roth IRA owners 
and administrators must be aware of the minimum distribution 
rule, however, because of the fact that to be valid, a Roth IRA 
conversion must satisfy the requirements for a traditional IRA 
rollover under section 408(d)(3). Section 408(d)(3)(E) provides 
that amounts required to be received as minimum distributions 
are not permitted to be rolled over to an IRA.\60\
---------------------------------------------------------------------------
    \56\ See section 408A(c)(5)(A)(iii) of the Code.
    \57\ See section 401(a)(9)(C)(i)(I) of the Code.
    \58\ See section 401(a)(9)(A)(ii) of the Code and proposed Treasury 
regulation sections 1.401(a)(9)-1 B-1.
    \59\ See proposed Treasury regulation sections 1.401(a)(9)-1 E-1 
through E-8 and F-1 through F-4.
    \60\ See also section 402(c)(4)(B) of the Code.
---------------------------------------------------------------------------
    The regulations make clear that section 408(d)(3)(E) 
applies to any Roth IRA conversion with the following 
consequences: (1) To the extent that the required minimum 
distribution has not been made for the year, the first dollars 
distributed (including a trustee-to-trustee transfer) from the 
traditional IRA in the conversion will be treated as coming 
from the required minimum distribution for that year.\61\ (2) 
To the extent that a required minimum distribution is deemed to 
have been included in a conversion distribution, it will be 
treated as if it were distributed to the owner prior to the 
rollover and then contributed as a regular contribution to the 
Roth IRA.\62\ An owner who does not understand the impact of 
the minimum distribution rules on a Roth IRA conversion may be 
liable for having made an excess contribution and, in 1998, for 
a failure to pay income tax. In this regard, it should be noted 
that, although the required distributions from a traditional 
IRA are permitted to begin as late as the April 1st of the 
calendar year following the calendar year in which the owner 
turns 70\1/2\, such distributions in the subsequent year, as is 
made clear in the preamble to the final regulations, are being 
made for the year in which the owner turned 70\1/2\.\63\ Thus, 
if a conversion distribution is made in the year the 
traditional IRA owner turns 70\1/2\, it will be treated as 
including the required minimum distribution.
---------------------------------------------------------------------------
    \61\ See Treasury regulation section 1.408A-4 A-6(a), which is 
consistent with Treasury regulation section 1.402(c)-2 A-7(a).
    \62\ See Treasury regulation section 1.408A-4 A-6(c).
    \63\ See also section 1.408A-4 A-6(b) of the regulations, which 
refers to ``a year for which a minimum distribution is required 
(including the calendar year in which the individual attains age 70\1/
2\).''
---------------------------------------------------------------------------
    Although up to $2,000 of the minimum distribution that is 
inadvertently included in the conversion may qualify as a 
regular contribution to the Roth IRA, any excess of the 
included minimum distribution amount over $2,000 will be 
treated as an excess contribution subject to the 6% annual 
excess contribution penalty.\64\ A second penalty trap may be 
sprung on 1998 conversions. The amount of any minimum 
distribution that is mistakenly converted in 1998 will still 
have to be included in gross income for 1998, but it is not 
eligible for the four-year spread period because it is not part 
of the 1998 conversion. The Roth IRA owner will, thus, 
underreport taxable income if he or she applies the four-year 
spread period to the minimum distribution amount mistakenly 
treated as part of a 1998 conversion.
---------------------------------------------------------------------------
    \64\ See section 4973(f) of the Code and proposed Treasury 
regulation section 1.401(a)(9)-1 G-1B(a).
---------------------------------------------------------------------------
    The impact of this rule is surreptitious and difficult to 
justify on a policy basis--the minimum distribution amount 
would not escape being included in gross income because it is 
included in the conversion. The Congress can be faulted for 
creating this trap. Taxpayers may be misled by the language of 
section 408A(c)(5) stating that minimum distribution rules 
``shall not apply to any Roth IRA.'' The minimum distribution 
rules should have been made statutorily inapplicable to 
conversions as a simplification measure. The IRS may feel bound 
to their interpretation by the overlay rule of section 408A(a), 
but more detail about the application of the traditional IRA 
rules where gaps exist in the Roth statute would be helpful (on 
this issue and in general).
    In addition, required minimum distributions are currently 
included in modified AGI.\65\ Assuming an IRA owner is even 
aware of this treatment, the owner may still fail to separately 
account for the minimum distribution as an item of modified AGI 
because, based on the misapprehension that the minimum 
distribution amount can be included in a rollover, he or she 
believes that the rollover eliminated any funds in the 
traditional IRA that could be used for a minimum distribution. 
Where the inclusion of the minimum distribution causes modified 
AGI to exceed $100,000, such a misapprehension could cause an 
owner who has attained age 70\1/2\ to make a ``failed 
conversion'' \66\--with the consequences that the deferral in 
his or her traditional IRA would be lost for nothing and, if 
the conversion is made in 1998, that taxable income would also 
be understated by an improper use of the four-year spread 
period. For taxable years beginning after December 31, 2004, 
however, Congress has sensibly eliminated minimum distributions 
from modified AGI.\67\
---------------------------------------------------------------------------
    \65\ See section 408A(c)(3)(C)(i) of the Code.
    \66\ Treasury regulation section 1.408A-8 A-1(b)(4) defines a 
``failed conversion as ``a transaction in which an individual 
contributes to a Roth IRA an amount transferred or distributed from a 
traditional IRA or SIMPLE IRA (including a transfer by redesignation) 
in a transaction that does not constitute a conversion under section 
1.408A-4 A-1.''
    \67\ See section 408A(c)(3)(C)(i)(II) of the Code, as amended by 
the 1998 Act.
---------------------------------------------------------------------------
    The regulations discuss the consequences of a full or 
partial conversion of a traditional IRA that is distributing 
substantially equal annual payments for the life or life 
expectancy of the owner or for the life or life expectancy of 
the owner and a designated beneficiary under section 
72(t)(2(iv) of the Code. Not only will the amount of the 
conversion distribution will not be a premature distribution 
from the traditional IRA subject to the 10% penalty tax of 
section 72(t)(3)(A), but the conversion will not modify the 
annuity schedule, such that the special penalty under section 
72(t)(4)(A) of the Code will apply, nor will the subsequent 
annuity payments from the Roth IRA be subject to the 10% 
penalty--despite being nonqualified distributions. The 
regulations note, however, that, if the 10% penalty is not to 
apply, the ``original series of substantially equal periodic 
payments'' must continue from the Roth IRA (except for the 
owner's death or disability) until five years from the first 
payment and until the owner has attained age 59\1/2\.\68\ The 
final regulations also clarify that where the conversion 
occurred in 1998 and the income inclusion is being spread over 
four years, the ``income acceleration rule'' of section 
408A(d)(3)(E)(i) will be triggered by the annuity payments 
during the spread period. Thus, in addition to the inclusion of 
the amount of the annuity payment for each year, a dollar of 
the deferred income from the 1998 conversion will be 
accelerated into current income for each dollar of annuity 
payment made in 1998, 1999, and 2000 up to the amount of the 
1998 conversion.\69\ (See Conversion Anti-Abuse Rule, below.)
---------------------------------------------------------------------------
    \68\ See Treasury regulation section 1.408A-4 A-12.
    \69\ Ibid.
---------------------------------------------------------------------------

                      Reversing a Roth Conversion

    A failed conversion of a traditional IRA to a Roth IRA may 
subject the distribution to the 10% premature distribution 
penalty \70\ and, to the extent the rollover amount exceeds the 
regular contribution permitted to be made to the Roth IRA, it 
will be subject to the excess contribution penalty.\71\ After 
enactment of the Roth IRA provisions, Congress realized that 
taxpayers may not discover, until they are preparing their tax 
returns for a year, that they were ineligible to make a Roth 
IRA conversion in that year (typically because modified AGI 
exceeded $100,000). Section 408A(d)(6) of the Code, added by 
the 1998 Act, makes it possible to effectively reverse (or 
``recharacterize,'' as the term is used in the regulations 
\72\) a Roth IRA conversion by transferring the contribution, 
together with its earnings from the Roth IRA, back to a 
traditional IRA and, thus, avoid the imposition of penalties. 
It is also possible, under the same provision, to 
recharacterize a contribution that was initially made to a 
traditional IRA, as if it had been made initially to a Roth 
IRA.\73\ In either case, the recharacterization must occur by 
the extended due date of the tax return for the year of the 
failed conversion.\74\
---------------------------------------------------------------------------
    \70\ See section 72(t)(3)(A) of the Code.
    \71\ See section 4973(f) of the Code.
    \72\ See Treasury regulation section 1.408A-5 A-1.
    \73\ See section 408A(d)(6) of the Code.
    \74\ See section 408A(d)(7) of the Code. Particularly with respect 
to 1998 conversions, in order not to lose the benefit of the four-year 
spread period by missing the deadline, owners should be mindful of the 
distinction between the deadline for conversions--the end of the 1998 
calendar year for 1998 conversions--and the recharacterization 
deadline--the extended return due date (August 15th for automatic 
extensions and October 15th for requested extensions).
---------------------------------------------------------------------------
    The recharacterization provision is a means to avoid being 
penalized for a contribution or conversion that proves, in 
hindsight, to have been a mistake. A recharacterization 
transfer is not, however, an alternative to a Roth conversion. 
A conversion is necessarily a taxable event because amounts are 
being transferred to a Roth IRA that were deducted when they 
were contributed previously to the traditional IRA. If 
traditional IRAs could be converted to Roth IRAs without these 
deductions being brought back into income, the Roth IRA 
conversion would amount to the Treasury paying citizens (by 
forgiving a tax indebtedness) to save on a tax-free basis.
    A recharacterization is not a taxable event because the 
contribution made to a Roth (or traditional) IRA--referred to 
by the regulations as the ``FIRST IRA''--is withdrawn and 
contributed to a traditional (or Roth) IRA--the ``SECOND 
IRA''--within the period covered by a single tax return. No 
deductions can be taken for the contribution to the FIRST IRA 
and no deductions taken in previous years will go unrecovered 
by the contribution to the SECOND IRA.
    For example, assume a calendar year taxpayer makes a 
regular contribution to a traditional IRA on January 1, 1998, 
and then recharacterizes the contribution by transferring it 
(together with its earnings from the traditional IRA) to a Roth 
IRA on August 15, 1999 (filing the return under an automatic 
extension). No deduction could be taken on the tax return for 
the traditional IRA contribution because it was canceled within 
the span of the same tax return. On the other hand, if the 
first contribution in 1998 was made to the traditional IRA by 
means of a rollover from a qualified plan, the rollover 
contribution could not then be transferred from the traditional 
IRA to the Roth IRA and labeled a recharacterization. This is 
because the recharacterization transfer is not available for 
contributions for which deductions have been taken that should 
be brought back into income upon being transferred to a Roth 
IRA.\75\
---------------------------------------------------------------------------
    \75\ See section 408A(d)(6)(B)(ii) of the Code.
---------------------------------------------------------------------------
    As a technical matter, the recharacterization provisions 
permit all or a portion of a regular or conversion contribution 
made during the year to the FIRST IRA to be transferred to the 
a SECOND IRA before the extended due date of the return for the 
year, with the transaction being treated as if the contribution 
to the FIRST IRA had actually been made to the SECOND IRA. (The 
transfer to the SECOND IRA is treated as being made on the same 
date that the initial contribution was made to the FIRST IRA.) 
As mentioned, the earnings on the contribution or portion of 
the contribution being transferred from the FIRST IRA to the 
SECOND IRA must also be included in the recharacterization 
transfer.
    The preamble to the final regulations makes clear that an 
excess contribution from a prior year, which would otherwise be 
treated as a contribution for the current year under section 
4973(f) (to the extent that actual contributions for the 
current year are less than the contribution limit for the 
current year), cannot be recharacterized, unless the extended 
due date of the return for the year of the excess contribution 
has not passed. Although such excess contributions are 
otherwise treated as having been made in the year for which 
actual contributions are less than the contribution limit,\76\ 
according to the preamble, only actual contributions may be 
recharacterized and the excess contribution was actually made 
in the prior year.
---------------------------------------------------------------------------
    \76\ See e.g., proposed Treasury regulation section 1.219(a)-2(d).
---------------------------------------------------------------------------
    Where a portion of a contribution is being recharacterized 
or where there have been other contributions to the account, 
the regulations provide that the amount of earnings that must 
also be recharacterized will be determined by reference to a 
relatively simple ratio in section 1.408-4(c)(2)(ii) of the 
regulations.\77\ The fact that the regulations appear to gloss 
over the difficulty of adapting this ratio to a partial 
recharacterization of specific securities makes it seem likely 
that the ratio is intended to be used on a conceptual basis. In 
other words, it makes sense to assume that a trustee will be 
able to exercise judgment in allocating earnings in a partial 
recharacterization to come up with a sensible result where the 
section 1.408-4(c)(2)(ii) regulations would not provide it. It 
should be noted that the final regulation, by eliminating the 
parenthetical phrase ``(but not below zero)'' from section 
1.408-4(c)(2)(iii), as incorporated by reference, make it 
possible to recharacterize a portion of an account or a mixed 
account where either has declined in value.
---------------------------------------------------------------------------
    \77\ See Treasury regulation section 1.408A-5 A-2(c).
---------------------------------------------------------------------------
    The form of the recharacterization transfer is explicitly 
limited by the statute to a trustee-to-trustee transfer. 
(apparently to promote accurate recordkeeping \78\). The final 
regulations clarify that where the owner who made the 
contribution dies within the time for recharacterizing it, the 
executor, administrator, or other person with the 
responsibility for filing the decedent's final income tax 
return may make the recharacterization election.\79\ The final 
regulations also clarify that where there is only one trustee 
involved in a recharacterization, an actual transfer from the 
FIRST IRA to a newly created SECOND IRA is not required--the 
trustee may simply redesignate the FIRST IRA as the SECOND 
IRA.\80\
---------------------------------------------------------------------------
    \78\ See Treasury regulation section 1.408A-5 A-6(a).
    \79\ See Treasury regulation section 1.408A-5 A-6(c).
    \80\ See Treasury regulation section 1.408A-5 A-1.
---------------------------------------------------------------------------
    The regulations provide that employer contributions and 
elective deferrals to SEP and SIMPLE IRAs cannot be 
recharacterized as IRA contributions.\81\ This provision is 
only being consistent with the rule that contributions for 
which deductions were taken cannot be recharacterized--the 
deductions would have been taken on the employer's return in 
the case of the SEP and the elective employee contributions to 
the SIMPLE IRA would not have been included in gross income to 
begin with. The proposed (and now the final) regulations 
provided that an erroneous rollover contribution from a 
traditional IRA to a SIMPLE IRA (which are only permitted to 
accept contributions under salary reduction agreements) may be 
recharacterized.\82\. In addition, it seemed apparent, based on 
the fact that SEP and SIMPLE IRAs are IRAs under section 
7701(a)(37) of the Code \83\ and are, thus, covered by the 
literal language of section 408A(d)(6) of the Code, that the 
conversion of a SEP or SIMPLE IRA could be recharacterized. 
Nevertheless, the proposed regulations did not address the 
issue. The final regulations, however, do make it explicit that 
the conversion of an amount from a SEP or SIMPLE IRA to a Roth 
IRA may be recontributed to the same or a different SEP or 
SIMPLE IRA.\84\
---------------------------------------------------------------------------
    \81\ See Treasury regulation section 1.408A-5 A-5.
    \82\ See Treasury regulation section 1.408A-5 A-4.
    \83\ See sections 408(k) and (p) of the Code.
    \84\ See Treasury regulation section 1.408A-5 A-5.
---------------------------------------------------------------------------
    So-called ``conduit IRAs'' represent an exception to the 
prohibition on rollovers from IRAs to section 401(a) or 403(a) 
qualified plans or section 403(b) annuities. Amounts may be 
rolled over from a qualified plan to an IRA and subsequently 
back to a qualified plan, provided the only amounts in the 
intervening IRA are attributable to rollovers from qualified 
plans. The same rule applies to section 403(b) plans.\85\ The 
preamble to the regulations clarifies that a conduit IRA that 
is converted to a Roth, but then converted back to a 
traditional IRA will redeem its status as a conduit IRA because 
the effect of the recharacterization is that of a transfer 
directly from one conduit IRA to another conduit IRA.
---------------------------------------------------------------------------
    \85\ See section 408(d)(3)(A) of the Code.
---------------------------------------------------------------------------
    Although individuals should generally elect out of 10% 
withholding under section 3405(b) of the Code upon a conversion 
to move more money into the Roth IRA, it is also advisable to 
do so in anticipation of a possible recharacterization. In the 
event of a recharacterization, the 10% withheld on the 
conversion is likely to be recoverable only against other taxes 
owed on the individual's return. The custodian will be 
unwilling to recontribute the 10% withheld to the traditional 
IRA if it has been forwarded to the Treasury. If, however, the 
custodian is willing to return the 10% withheld, the policy 
behind section 408A(d)(6) of the Code supports recontributing 
it to the traditional IRA as part of the recharacterization--
even though technically the 10% withheld was not converted. 
Nevertheless, whether the 10% is contributed by the custodian 
or by the individual from fresh funds, no earnings will have 
accrued on the 10% withheld from the time of the conversion to 
the recontribution to the traditional IRA.
    The regulations provide that the recharacterization must be 
made, as mentioned, by the extended due date of the return 
``for the taxable year for which the contribution was made to 
the FIRST IRA,'' e.g., the Roth conversion. The same provision 
of the regulations also provides that where a rollover 
contribution to a Roth IRA occurs in the year following the 
rollover distribution, the conversion will be treated as 
occurring in the year of the rollover distribution.\86\ For 
other purposes in the regulations, however, where a rollover 
conversion straddles two years, the conversion is deemed to 
occur in the year of the rollover contribution.\87\ At least 
for 1998 conversions, treating the rollover distribution date 
as the conversion date coordinates the recharacterization 
provision with the generous one-time exception provided under 
the regulations that qualifies rollover distributions that 
occur in 1998 for the four-year spread--even though the 
rollover contribution to the Roth IRA occurs within the 60-day 
window in 1999.\88\
---------------------------------------------------------------------------
    \86\ See Treasury regulation section 1.408A-5 A-1(b).
    \87\ See, e.g., Treasury regulation section 1.408A-6 A-2 and A-
5(c).
    \88\ See Treasury regulation section 1.408A-4 A-8.
---------------------------------------------------------------------------
    Admittedly, the bulk of conversions are likely to have 
occurred in 1998 to take advantage of the four-year spread and 
a minority of the conversions in any year are likely to be two-
year rollovers, but, where two-year conversions do occur 
subsequent to 1998, the recharacterization provision could 
cause confusion. For example, if a rollover distribution occurs 
in 1999 and the rollover contribution occurs 60 days later 
during 2000, the owner would be justified in believing that, 
because the conversion is treated as occurring in 2000 for 
other purposes, he or she has until the extended due date of 
the 2000 return to reverse a failed conversion. In fact, the 
conversion must be reversed by the extended due date of the 
1999 return. It should be recalled that the modified AGI limit 
and the joint return requirement apply for the year of the 
rollover distribution where the conversion straddles two 
years,\89\ but the existence of other provisions that are 
consistent with this exception adds to the potential for 
confusion. A helpful simplicity would have been created had the 
IRS been able to treat two-year conversions consistently. 
Treating the year of the rollover distribution as determinative 
would not only have been helpful in making the four year-spread 
available for 1998 distributions, but it would have eliminated 
a trap that has been created in the measurement of the five-
year holding periods for qualified distributions and conversion 
contributions (see Qualified Distributions, below).
---------------------------------------------------------------------------
    \89\ See Treasury regulation section 1.408A-4 A-2(a) and (b).
---------------------------------------------------------------------------
    If, after the initial regular or conversion contribution is 
made to a Roth IRA (traditional IRA)--the FIRST IRA--there are 
one or more intervening transfers to other Roth IRAs 
(traditional IRAs) before the recharacterization or reversal 
transfer is made to the traditional IRA (Roth IRA)--the SECOND 
IRA--then the intervening transfers will be ignored. The 
individual may elect to treat the recharacterization transfer 
to the SECOND IRA as occurring on the date that the initial 
contribution to the FIRST IRA occurred and all the earnings 
from the date of the initial transfer would be credited to the 
SECOND IRA.\90\
---------------------------------------------------------------------------
    \90\ See Treasury regulation section 1.408A-5 A-7.
---------------------------------------------------------------------------
    Recharacterizations, even where limited to one a year, will 
create significant complexity for plan trustees. They must 
remember for information reporting purposes that the income or 
losses of the FIRST IRA will be treated as earned or incurred 
in the SECOND IRA, which is the IRA recharacterized as having 
received the contribution originally. If the first transfer was 
not kept entirely separate, then the earnings must be 
apportioned--an exercise for which the IRS has provided minimal 
guidance. Where two trustees are involved, the need for 
information sharing adds to the complexity.
    [Due to the length of the attachment, it is being partially 
printed and the full attachment is being retained in the 
Committee files. If anyone wants a copy of the statement with 
the full attachment, please contact James O'Connor, America's 
Community Bankers, 202/857-3100.]
      

                                


Statement of American Bankers Association

    The American Bankers Association (ABA) is pleased to have 
an opportunity to submit this statement for the record on 
reducing the tax burden including pension reforms, health care 
incentives, long-term care incentives, estate and gift tax 
relief, and savings incentives.
    The ABA brings together all elements of the banking 
community to best represent the interests of this rapidly 
changing industry. Its membership--which includes community, 
regional, and money center banks and holding companies, as well 
as savings associations, trust companies, savings banks and 
thrifts--makes ABA the largest banking trade association in the 
country.
    There are several proposals to reduce the tax burden on 
individuals and businesses that are of interest to banking 
institutions. The most significant proposals are set out more 
fully below.

                     INDIVIDUAL RETIREMENT ACCOUNTS

    Inadequate personal savings is one of the most important 
long-term issues facing taxpayers in the coming years. Savings 
promote capital formation, which is essential for job creation, 
opportunity and economic growth. The banking industry fully 
supports continued efforts to encourage retirement savings and 
to strengthen IRAs. The primary appeal of the IRA concept to 
individuals is based upon its tax advantages, which are often 
viewed as a supplement to savings, making the IRA an appealing 
product for an individual's long-term savings growth. 
Individuals concerned about the availability of retirement 
funds can appropriately complement social security and other 
retirement savings vehicles with IRAs. Also, the tax penalties 
that accompany early withdrawals operate as an additional 
incentive to save for the long-term.
    We commend Representatives Phil Crane (R-IL) [H.R. 1311, 
the ``IRA Charitable Rollover Incentive Act of 1999'']; Bill 
Thomas (R-CA) [H.R. 1546, ``the Retirement Savings Opportunity 
Act of 1999'']; Richard Neal (D-MA) [H.R. 1311, the ``IRA 
Charitable Rollover Incentive Act of 1999''] and Jennifer Dunn 
(R-WA) [H.R. 1084, the ``Lifetime Tax Relief Act of 1999''] for 
introduction of legislation that would enhance IRAs and 
encourage retirement savings.
    We urge you to include provisions enhancing IRAs in the 
next tax legislation enacted.

                           ESTATE TAX REFORM

    The financial services industry has been involved in estate 
administration for many years. As a consequence, bankers have 
seen many times how families struggle to pay the taxes due when 
a death occurs, particularly when such death is unexpected. 
Some families encounter more than their fair share of obstacles 
when confronted with the required payment of a large death tax 
bill after the death of a loved one. The payment of death taxes 
with respect to a small business owner or farmer may be 
particularly difficult due to a lack of liquid assets in the 
estate. Indeed, the death tax will impact more taxpayers in the 
future as the value of estates increase as a result the 
continued strong growth of the equities market and the increase 
in the proportion of senior citizens to the general population.
    The ABA strongly supports broad-based estate tax relief in 
order to allow small family business owners and family farmers 
to keep their businesses in the family. Any proposed tax law 
change should not increase complexity nor the time and effort 
expended by taxpayers in compliance. In this regard, we urge 
you to increase the unified credit or, in the alternative, to 
significantly reduce the current estate tax rates. However, we 
would oppose any proposal to eliminate both the estate and gift 
tax system and eliminate the step-up in basis rules for 
inherited property, as provided in certain Senate legislation 
(S. 1128, ``the Estate Tax Elimination Act of 1999,'' 
introduced by Senator Jon Kyl (R-AZ)).
    Bank trust departments, which often serve as executors to 
estates, are concerned that S. 1128 would place the burden of 
establishing the carryover basis on the executor. Determining 
the carryover basis would be extremely difficult if not 
virtually impossible in that, unlike property transferred in 
connection with a divorce or gift, the original owner would not 
be available for consultation. Also, records establishing the 
original purchase price of inherited property might not be 
available.
    We urge you to include broad-based death tax relief in the 
next tax legislation enacted.

          REDUCTION OF INCOME TAX RATES FOR TRUSTS AND ESTATES

    The current rate structure complicates the decision-making 
process of fiduciaries to trusts and estates such as bank trust 
departments. A fiduciary may face possible criticism and 
subsequent litigation whenever a decision is made to accumulate 
funds within the estate or trust rather than distribute them. 
There are many legitimate reasons to accumulate assets within 
the estate or trust, such as payment of debts (including estate 
and inheritance taxes); provision of future education benefits 
to minor children; or care of surviving spouses, orphans, 
elderly parents, the mentally or physically disabled, or 
accident victims. High income tax rates for trusts and estates 
may also have an impact on investment decisions. One of the 
factors a prudent fiduciary takes into consideration when 
choosing a particular investment portfolio is the income tax 
consequence. Due to the compressed tax rates, a fiduciary may 
choose to invest trust or estate assets in tax-exempt income 
generating investments. This excludes investment choices such 
as equity mutual funds. Whatever decision the bank trust 
department makes may subject them to potential second-guessing 
by beneficiaries.
    The ABA supports legislation that would provide that trusts 
and estates should be taxed at the same rates as individual 
taxpayers.

          SHORT-TERM CAPITAL GAINS DISTRIBUTED BY MUTUAL FUNDS

    The use of mutual funds as investment options for trust 
accounts is increasing every year. When a trust is invested in 
a mutual fund, it is not clear how dividends payable out of the 
short-term capital gains of a mutual fund are to be treated for 
tax purposes. The Internal Revenue Code requires the mutual 
fund to classify such sums as ordinary dividends. However, the 
short-term capital gains nature of such sums have caused banks 
in certain states to allocate them to principal by direction of 
the trust instrument or state law. Further questions arise as 
to whether this income, when allocated to principal, should be 
excluded from distributable net income (DNI) under Internal 
Revenue Code Section 643(a)(3) as gains from the sale of 
capital assets allocated to principal, and not paid or required 
to be distributed to beneficiaries. Another way to treat these 
sums is to include them in DNI as ordinary dividend income and 
make them potentially taxable to the trust income beneficiary 
under the rules of Section 652 for simple trusts and Section 
662 for complex trusts.
    Due to the lack of certainty in the law and regulations, 
the banking industry differs with respect to its handling of 
the treatment of such dividends and their includability in DNI. 
A similar issue obtains with respect to market value discount 
and currency gains, both of which are allocated to principal 
but taxable as ordinary income. These items are the result of 
bifurcating capital gains between income that is taxed as 
capital gain and income that is taxable as ordinary income.
    We believe that Section 643 should be modified to 
specifically exclude such gains, taxable as ordinary income, 
from DNI. Such action would simplify the Code and reduce 
confusion.

            MODIFICATION OF GENERATION SKIPPING TRANSFER TAX

    Under current law, missed allocations of generation 
skipping transfer (GST) exemption create significant potential 
GST tax liability and no relief is available. The ABA supports 
legislation that would allow the IRS to grant relief to 
taxpayers who inadvertently fail to allocate GST exemption; 
allow validation of certain technically flawed exemption 
allocations; allow retroactive allocation of GST exemption in 
cases of unnatural order of death; automatically allocate a GST 
exemption to certain transfers; and permit division of trusts 
to allow taxpayers to maximize the benefit of the exemption 
without overly complex planning and drafting.
    In this connection, we commend Rep. Jim McCrery (R-LA) for 
the introduction of H.R. 2158, the ``Generation-Skipping 
Transfer Tax Amendments Act of 1999'' and urge its inclusion in 
the next tax legislation enacted.

                           EMPLOYEE BENEFITS

    The American Bankers Association supports long-term savings 
for retirement. Providing pension coverage to a greater number 
of workers will substantially enhance the retirement security 
of American families. The ABA supports initiatives that focus 
specifically on the need to make it easier and less expensive 
for small businesses to start retirement plans. We also support 
increased pension portability. Current law rules should be 
modified to facilitate transfer of employee retirement savings 
from job to job.
    Finally, the overly complex rules governing retirement 
plans should be simplified to reduce costs and administrative 
barriers that keep employers out of the system, interfere with 
business transactions necessary to stay competitive in today's 
economic environment, and inhibit the efficient operation of 
plans sponsored voluntarily by employers for their employees.
    We urge you to include such provisions in the next tax 
legislation enacted.

    ELIMINATION OF 2% FLOOR ON MISCELLANEOUS ITEMIZED DEDUCTIONS IN 
                   CONNECTION WITH IRREVOCABLE TRUSTS

    The ABA supports enactment of legislation that would 
Internal Revenue Code Section 67(e) to exclude irrevocable 
trusts from the 2% rule calculations. This would aid in 
administration of trusts and estates, as well as continue the 
efforts to further simplify the Code.

                               CONCLUSION

    We appreciate having this opportunity to present our views 
on these issues. We look forward to working with you in the 
further development of solutions to our above-mentioned 
concerns.
      

                                


        American Federation of State, County and Municipal 
                                  Employees (AFSCME) et al.
                                                      June 16, 1999

The Honorable Bill Archer
Chairman, House Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Re: Support for Public Pension Provisions in HR 1102

    Dear Mr. Chairman:

    The national organizations listed, representing state and local 
governments, public employee unions, public retirement systems, and 
millions of public employees, retirees, and beneficiaries, support 
public pension provisions contained in the bipartisan Comprehensive 
Retirement Security and Pension Reform Act (H.R. 1102) sponsored by 
Representatives Rob Portman, Ben Cardin, and many other members of 
Congress. This proposal would strengthen the retirement savings 
programs of public employers and their employees throughout the 
country. We are writing to urge your support for this important 
legislation.
    The Comprehensive Retirement Security and Pension Reform Act would 
remove existing barriers between various types of retirement savings 
plans so that employees may have a better opportunity to manage and 
preserve their retirement savings when they switch jobs. The 
legislation would enhance existing portability in public sector defined 
benefit plans, and would allow workers to take all their deferred 
compensation and defined contribution savings with them when they 
change jobs. H.R. 1102 would additionally provide greater clarity, 
flexibility and equity to the tax treatment of benefits and 
contributions under governmental deferred compensation plans. Finally, 
it would simplify the administration of and stimulate increased savings 
in retirement plans by restoring benefit and compensation limits that 
have not been adjusted for inflation and are generally lower than they 
were fifteen years ago; repealing compensation-based limits that 
unfairly curtail the retirement savings of relatively non-highly paid 
workers; and allowing those approaching retirement to increase their 
retirement savings.
    All of these provisions would help employees build their retirement 
savings, especially those who have worked among various public, non-
profit and private institutions. Our organizations appreciate the 
support that you have shown on past public pension issues and are 
hopeful you will have similar interest in this comprehensive, 
bipartisan legislation. We ask that you please include these proposals 
in pending tax legislation before your Committee.
    If you have any questions or need additional information, 
please contact the following members of our organizations:

Ed Jayne, American Federation of State, County and Municipal Employees
Ned Gans, College and University Personnel Association
Tim Richardson, Fraternal Order of Police
Tom Owens, Government Finance Officers Association
Chris Donnellan, International Brotherhood of Police Oganizations/
National Association of Government Employees
Barry Kasinitz, International Association of Fire Fighters
Michael Lawson, International City/County Management Association
Tina Ott, International Personnel Management Association
Kimberly Nolf, International Union of Police Associations
Neil Bomberg, National Association of Counties
Susan White, National Association of Government Deferred Compensation 
Administrators
Bob Scully, National Association of Police Organizations
Jeannine Markoe Raymond, National Association of State Retirement 
Administrators
Jennifer Balsam, National Association of Towns and Townships
  
  
Ed Braman, National Conference on Public Employee Retirement Systems
Gerri Madrid, National Conference of State Legislatures
Cindie Moore, National Council on Teacher Retirement
David Bryant, National Education Association
Frank Shafroth, National League of Cities
Roger Dahl, National Public Employer Labor Relations Association
Clint Highfill, Service Employees International Union
Larry Jones, United States Conference of Mayors
      

                                


Statement of AMR Corporation, Fort Worth, Texas

                       Introduction and Overview 

    Employer-sponsored defined benefit retirement plans play an 
integral role in guaranteeing retirement security. Yet 
arbitrary and onerous regulations can encourage certain 
employers to abandon such plans. This testimony outlines the 
comments of AMR Corporation on one aspect of how the Internal 
Revenue Code of 1986 (the ``Code''), as amended, has been 
interpreted to impose unfair rules on the sponsors of defined 
benefit retirement plans permitting lump sum payments for 
retiring employees.
    Under the Code, ``qualified'' pension plans must offer a 
lifetime stream of monthly payments to plan participants, 
commencing upon retirement. Many pension plans permit 
participants to receive the value of this lifetime income 
stream in a single lump sum payment. In determining the 
``present value'' of the lifetime income stream that is being 
cashed out, the period over which payments are expected to be 
made (the period ending with the assumed date of death) and the 
rate at which funds are expected to grow (the assumed interest 
rate) are necessary assumptions. The interest rate and 
mortality assumptions are therefore critical in calculating the 
lump sum value of lifetime benefits.
    The Retirement Protection Act of 1994 (the ``RPA'') amended 
section 417(e) of the Internal Revenue Code to specify an 
interest rate that must be used to convert a pension to a 
single lump sum. The RPA also authorizes the Secretary of the 
Treasury to prescribe a mortality table for use in calculating 
lump sums under section 417(e) of the Code. We perceive no 
problem with the current statutory language itself, only with 
its implementation by the Internal Revenue Service.
    The Internal Revenue Service has prescribed a mortality 
table for use by retirement plans. We have no objection to the 
table itself. However, we are concerned with the requirement 
that the table is to be used together with the mandatory 
assumption that half of the participants covered by the plan 
are male and half are female.
    The requirement that a plan must assume that half its 
participants are male and half are female is highly 
questionable. The participation in many plans is dominated by 
one gender. It is an accepted scientific fact that females, as 
a class, have a longer life expectancy than males, as a class. 
Prescribing an artificial ``gender mix,'' therefore, 
artificially and inaccurately enlarges or contracts the true 
average life expectancy of the work force covered by the 
pension plan unless the plan's gender mix is actually in 
balance. Assumed life expectancy is a major factor in 
calculating the amount of a lump sum distribution and in 
funding plans, regardless of whether a lump sum distribution 
benefit is offered.
    These regulations, which appear at Treas. Reg. Section 
1.417(e)-1(d)(2) (the regulations) (effective April 3, 1998), 
do twist actuarial reality by arbitrarily imposing a mandatory 
gender neutral mortality table on pension plans that permit 
lump sum payments. A directly relevant revenue ruling, Rev. 
Rul. 95-6, 1995-1 C.B. 80, 95 TNT 2-1, contains provisions that 
operate in tandem with the regulations. Under these rules, 
regardless of whether the participants in a qualified defined 
benefit pension plan are 90 percent female or 1 percent female, 
all lump sum payments must be calculated using a mortality 
table that assumes the plan population is 50 percent female and 
50 percent male. The IRS has essentially imposed a requirement 
that a pension plan comprised almost entirely of men must 
pretend that half its covered participants are women when it 
calculates its pension payments. These regulations give 
employers of work forces that are gender-imbalanced one more 
reason to abandon their defined benefit plans, or not to adopt 
them. We anticipate that this issue will raise more concern 
when companies with such plans realize that by 2000 all their 
lump sum distributions will have to be calculated based on this 
arbitrary gender assumption.
    The legislative history accompanying the 1993 law mandating 
that Treasury create appropriate mortality tables gives no 
indication whatsoever that Treasury should issue such an 
arbitrary rule. If Treasury and the IRS are unwilling to change 
their rules to reflect actuarial reality, we hope that Congress 
will amend this law to mandate that Treasury utilize gender 
factors reflecting reality in those benefit plans where 
participant gender ratios are particularly unbalanced.

                              The Problem

    A lump sum distribution from a qualified defined benefit 
pension plan to a participant is designed to be the ``actuarial 
equivalent'' of the payments that would otherwise be made 
during that participant's lifetime following retirement (or 
over the joint lifetime of the participant and the 
participant's spouse or other designated annuitant). To fund 
this lifetime income, a plan can use assumptions based on the 
expected lifetimes of its participants and can recognize, for 
example, that the covered participant population is 80 percent 
female and 20 percent male. The assumed mortality rates of 
participants is obviously a major factor in funding pension 
benefits, and it is a universally-accepted and well-documented 
fact that females will on average out-live males of the same 
age.
    In contrast, if lifetime benefits are paid out in a lump 
sum, actuarial reality as described above for funding plans is 
ignored under current Internal Revenue Service rules. To 
determine the amount of lump sum payments, the regulations and 
Rev. Rul. 95-6 require plans to use a mortality table that 
assumes half the covered participant population is male and 
half is female. In the example given above (80 percent female 
and 20 percent male), the mandated 50/50 assumption 
artificially shortens the expected lifetimes of plan 
participants who are female, at least in comparison with the 
actual gender factors that can be used in the plan's funding. 
Nothing in the statute, which simply requires a ``realistic'' 
mortality table without reference to gender, mandates this 
arbitrary result.
    Looking at this result from another perspective, the 
greater the gender disparity in favor of males, the more likely 
the plan will be underfunded if benefits are regularly paid in 
the form of a lump sum. Conversely, the greater the disparity 
in favor of females, the more the plan will become overfunded 
because expected lifetimes are artificially reduced.

                              Current Law

    The Retirement Protection Act of 1994, enacted as part of 
the General Agreement on Trade and Tariffs, amended section 
417(e) of the Code, as well as other sections of the Code and 
the Employee Retirement Income Security Act of 1974, as 
amended. GATT made two significant changes affecting the 
calculation of minimum lump sum payments. First, the statute 
redefined the applicable interest rate. Second, the legislation 
authorized the Treasury Secretary to prescribe a mortality 
table for use in calculating the present value of qualified 
plan benefits. Nothing in the legislative history of GATT 
indicates that Congress intended to preset a particular gender 
blend version of GAM 83.
    Less than two months after passage of GATT, the Internal 
Revenue Service quickly published a mortality table in Rev. 
Rul. 95-6 for use under section 417(e). As provided in the 
statute, the Service's table uses the current prevailing 
commissioner's standard table for group annuities, or the 1983 
GAM Table, which is a sex-distinct table (GAM 83). However, the 
ruling requires a 50/50 mandatory gender split assumption.
    As mentioned above, the Secretary issued final regulations 
on both the new interest rate mortality table assumptions, in 
April of 1998. The regulations provide specific guidance on how 
the interest rate provisions are to be implemented. In 
contrast, for the applicable mortality table, the regulations 
provide only that the table is to be ``prescribed by the 
Commissioner in revenue rulings, notices, or other guidance 
published in the Internal Revenue Bulletin.'' Treas. Reg. 
Section 1.417(e)-I(d)(2). Treasury's approach of publishing the 
table required by the statute in a revenue ruling, instead of 
in the regulations, effectively precluded needed public comment 
on the 50/50 mandatory gender split that would have otherwise 
been required under the Administrative Procedures Act.
    The adverse impact of the regulations will be felt 
particularly in industries where plans are collectively 
bargained. These plans, presumably for historical reasons, 
cover work forces that are frequently heavily skewed by gender. 
Collectively bargained workforces that are dominated by females 
include flight attendants and skilled nurses. Conversely, such 
workforces dominated by males consist of, for example, heavy 
construction, road building, pilots, long-haul trucking, movers 
of household goods, oil and gas, mining, and forestry workers. 
Accordingly, this arbitrary regulatory fiat will work to 
overfund pensions in industries where rates of female plan 
participation are particularly high and will work to underfund 
pensions where rates of male participation are high.
    Rev. Rul. 95-6 hardly levels the playing field between 
annuities and lump sums. Male employees in male-dominated plan 
populations will be strongly encouraged to take their benefits 
in a lump sum in order to take advantage of the windfall, 
possibly exposing their retirement security to the increased 
risk of dissipation of their retirement ``nest egg.'' Female 
employees in female dominated plans will receive less than they 
would if the plan assumptions reflected reality of workforce 
participation by gender.

                   Effect of a 50/50 Mortality Table

    The Service's 50/50-gender blend table has an unintended 
and inequitable effect on the level of funding and on the 
calculation of the present value of lump sum payments. As 
previously discussed, the primary focus of GATT was on reducing 
underfunding of pension plans. Accordingly, GATT's applicable 
mortality table was designed to prevent plan sponsors from 
making assumptions that placed plans at risk by minimized 
funding obligations. The 50/50 mortality table assumptions 
negate that goal by reducing a plan's ability to provide an 
accurate and adequate funding level. The 50/50 assumption, 
which can be objectively inaccurate, requires plan 
administrators to calculate actuarially inaccurate present 
values of lump sum payments, at least where plan population by 
gender is unbalanced.
    For example, if an individual would receive a $1,000 lump 
sum payment at retirement based on GAM 83 using gender specific 
mortality, the following table presents the adjusted lump sum 
amount that would be paid to that individual using the 50/50 
blended table:


                       Discount Rate: 7.0 percent
------------------------------------------------------------------------
                Age                        Male              Female
------------------------------------------------------------------------
55................................              1,042                955
60................................              1,053                944
65................................              1,068                929
------------------------------------------------------------------------

    This table shows that an age 60 male retiree receives a $53 
windfall under the 50/50-blended table and an age 60 female 
retiree receives a $56 shortfall.

                           Proposed Amendment

    Congress should rectify this inaccurate treatment by 
amending the Code to include a rule addressing use of the 
required mortality table for those plans which contain a lump 
sum distribution option and which cover populations that are 
primarily male or primarily female. For example, the Code could 
be amended to include a proposal that would provide an 
alternative rule for determining the present value of a 
permitted lump sum payment if 80 percent or more of a plan's 
covered participant population is comprised of a single gender. 
In such cases, the plan would be permitted an election to 
utilize Treasury's applicable mortality table with the 
assumption that the dominant gender comprises 80 percent, and 
the minority gender comprises 20 percent, of the plan's covered 
participant population. In order to keep the proposal simple, 
the rule could provide that, if in any subsequent plan year the 
plan did not satisfy the 80 percent test then, in that and all 
successive plan years, the plan sponsor could not make such an 
election.
      

                                


Statement of Associated General Contractors of America

    Thank you Chairman Bill Archer for holding a hearing this 
morning on the effect of the death (estate) tax on family-owned 
construction companies. AGC is pleased to submit testimony 
today because elimination of the death tax is our top 
legislative priority for the 106th Congress. 94% of AGC members 
are closely-held businesses--often family-owned--and planning 
for and paying death taxes is an onerous burden our members 
will have to face at some point in the life of their company.
    You'll notice throughout this testimony that we 
consistently refer to the estate tax as the ``death tax.'' We 
prefer to call it the ``death tax'' for two reasons: 1) death 
of the owner of a company is the event that triggers the tax; 
and 2) at a rate of 37% to 55% on all company assets, this tax 
kills small businesses and kills jobs!
    AGC is the nation's largest and oldest construction trade 
organization, founded in 1918. AGC represents more than 33,000 
firms, including 7,200 of America's leading general 
contractors, and 12,000 specialty-contracting firms. They are 
engaged in the construction of the nation's commercial 
buildings, shopping centers, factories, warehouses, highways, 
bridges, tunnels, airports, waterworks facilities, waste 
treatment facilities, dams, water conservation projects, 
defense facilities, multi-family housing projects, and site 
preparation/utilities installation for housing developments.

            EFFECT of DEATH TAXES on CONSTRUCTION COMPANIES

    Business continuity--the passing of years of hard work to 
the next generation--is a great concern to family-owned 
construction companies. Succession planning is long and 
difficult. Owners are forced to answer difficult questions 
about the future of the company they have often worked all 
their life to grow. Who will run the business when I'm gone? 
What does my family think should happen? How will ownership be 
transferred? These are just a few of the questions a contractor 
must address when undertaking succession planning.
    As difficult as succession planning can be, it gets even 
worse when the owner realizes that up to 55% of his or her 
company can be lost to death taxes. When the owner of a 
construction company dies, his or her estate is subject to 
federal and state death taxes. The total value of the estate 
includes the value of the family business along with other 
assets such as homes, cash, stocks, and bonds. At a minimum, an 
estate over $650,000 (gradually increased to $1 million by 
2006) will be subject to a federal death tax rate of 37% and an 
estate over $3 million will be taxed at an astronomical federal 
rate of 55%. This tax is on top of not only the state death tax 
but also the income, business, and capital gains taxes that 
have been paid over an individual's lifetime. It is not 
surprising, then, that more than 70% of family businesses do 
not succeed to the second generation and 87% do not survive to 
the third generation.
    The construction industry is capital intensive, requiring 
large investments in heavy equipment. One single critical 
company asset can cost more than the amount ($650,000) of the 
unified credit. For instance, a 150-ton crane used in bridge 
construction can cost more than $1 million. A scraper can cost 
$700,000 and a large bulldozer can cost more than $800,000.
    Most family-owned construction firms invest a significant 
portion of their after-tax profits in equipment, facilities and 
working capital. This is necessary for these firms to increase 
their net worth, create jobs and continue to be bonded for 
larger projects. Because of these assets, the construction 
industry is especially vulnerable to the devastating effect of 
the death tax.
    Those family-owned construction companies that do survive 
after death taxes have spent thousands, sometimes millions, of 
dollars to plan for and pay death taxes. Of AGC firms involved 
in estate planning, 63% purchase life insurance, 44% have buy/
sell agreements and 29% provide lifetime gifts of stock.
    Last year, Richard Forrestel, a CPA and Treasurer for Cold 
Spring Construction in Akron, New York, testified succinctly 
before this Committee on what death tax planning has cost his 
company:

          ``We spend in excess of $100,000 a year in insurance costs 
        and accounting fees to ensure that we have the capital to pay 
        the death tax and transfer our business from one generation to 
        the next. We have diverted enormous amounts of capital and 
        management time to this process. We ought to be buying 
        bulldozers and backhoes built in Peoria, Illinois rather than 
        wasting capital on intangible life insurance policies.''

    In sum, AGC believes that all the resources spent planning 
for and paying the death tax should be used more productively 
to grow businesses and create jobs.

                        CONSTRUCTION JOB LOSSES

    The death tax not only affects the business owner, but also 
his or her employees. While the death tax rate on a company is 
37% to 55%, for the worker who loses a job because of death 
taxes the rate is in effect an agonizing 100%! AGC's family-
owned firms employ on average 40 persons and have created on 
average 12 new jobs each in the last five years. The death tax, 
however, can destroy these jobs because firms are often forced 
to sell, downsize or liquidate to pay this onerous tax. On 
average, 46 workers lose their jobs every time a family-owned 
business closes. And every time an owner foregoes the purchase 
of new equipment because resources have been diverted to pay 
death taxes, the workers who use and build that equipment are 
impacted.
    Also, remember the effect these family-owned businesses 
have on their immediate community. Family-owned businesses not 
only offer jobs, but they are a vital part of every community 
providing specialized services, supporting local charities, and 
returning earnings back to the local economy.

                   ECONOMIC EFFECTS of the DEATH TAX

    A most frustrating aspect of death taxation is that after 
all the countless hours and financial resources spent preparing 
for and paying the tax, it raises almost no revenue for the 
federal government! Annual death tax receipts total 
approximately $23 billion, less than 1.4% of total tax revenue.
    Furthermore, the Congressional Joint Economic Committee 
released a report last year on the death tax that found that 
this tax ``raises very little, if any, net revenue for the 
federal government.'' The JEC also concluded that the tax 
results in losses under the income tax that are roughly the 
same size as the death tax revenue.

                      LEGISLATION SUPPORTED BY AGC

    AGC appreciates the efforts made by Congress in lowering 
the death tax as part of the Taxpayer Relief Act of 1997. 
However, Congress needs to do much more than simply increase 
the unified credit to help the growing number of family-owned 
businesses facing the death tax. The construction industry 
urges Congress to focus on eliminating death tax rates. As 
stated earlier, the construction industry is capital intensive 
and even the smallest contractors have lifetime assets that 
easily exceed the unified credit amount.
    In the House, we strongly support H.R. 8, introduced by 
Reps. Jennifer Dunn and John Tanner, that calls for gradual 
elimination of the death tax by 5% per year over a period of 
ten years. We also support H.R. 86, introduced by Rep. Chris 
Cox, that calls for full and immediate repeal of this tax. We 
urge you to include legislation eliminating the death tax in 
any upcoming tax legislation.

                                SUMMARY

    The death tax has become an American nightmare at the end 
of the American dream for family-owned construction companies. 
Construction company owners work hard to grow their business. 
They create jobs for people in their community. They pay 
federal and state taxes throughout the life of their company. 
But then, when they die, the federal government steps in and 
takes over half of their company. It is unthinkable in a time 
of surplus that our government imposes a tax that raises so 
little revenue while it devastates businesses and kills jobs. 
AGC urges you to pass legislation to eliminate this terrible 
tax.
    Thank you for the opportunity to present testimony this 
morning.
      

                                


Statement of Certified Financial Planner Board of Standards, Denver, 
Colorado

    The Certified Financial Planner Board of Standards, Inc. is 
submitting this testimony to the United States House of 
Representatives Committee on Ways and Means for inclusion in 
the written record of the June 16, 1999 hearing before the 
Committee on Enhancing Retirement and Health Security.
    The Certified Financial Planner Board of Standards, Inc., 
known as the CFP Board, is pleased to provide information 
concerning Americans' financial futures for the United States 
House of Representatives, Committee on Ways and Means. The CFP 
Board is the professional regulatory organization for over 
34,000 CFP marks holders or licensees. The CFP Board was formed 
in 1985 to benefit the public by fostering professional 
standards in personal financial planning.
    The CFP Board wants the Committee to be aware of a very 
serious problem in this country. Americans are not saving 
nearly enough for retirement. They are not investing properly, 
most of them do not have any kind of financial plan for their 
retirement years, they do not understand the differences 
between managing money before and after retirement, and they 
are very uncomfortable with making the plans for their 
financial futures. So far, the solutions Congress has created 
have not addressed the situation.
    One can not read a paper or magazine, hear the radio, or 
watch the television news without seeing something about the 
retirement crisis facing this country. A 1997 Consumer 
Federation of American and NationsBank survey found only one in 
three savers has a comprehensive retirement plan. In many ways, 
it is fair to say financially, this is a nation at risk. Many 
Americans are finally starting to realize their future is in 
their own hands. In a self-directed, defined contribution plan 
world, they need to be able to properly plan for their 
financial futures since government sources are not nearly going 
to cover all of our expenses in retirement.
    The CFP Board's September 1998 testimony before the 
Department of Labor's ERISA Advisory Council Working Group on 
Small Business provided the results of a 1998 survey of CFP 
marks licensees. The survey revealed 67% of CFP licensees' 
prospective clients consider their employer's retirement plans 
as their primary source for funding retirement goals. However, 
CFP licensees report only a quarter of their prospective 
clients are contributing the maximum amount to their pension 
plans. These figures are even more disturbing when we realize 
that those seeking financial planning advice are more aware of 
the need for retirement than the general population.
    The state of Americans' financial planning is not 
surprising. Over the past 20 years, this country has undertaken 
a massive transfer of financial responsibility from 
professional pension plan managers to everyday workers. 
Retirement planning has moved away from the old defined benefit 
pension plans that required absolutely no input from 
participants, provided a guaranteed monthly income for life and 
were managed by highly trained professionals. Now, those plans 
are largely a variety of self-directed defined contribution 
plans, such as the 401(k), that require participants to manage 
their own accounts. Essentially, American workers have become 
their own pension plan managers.
    The problem is that very few American workers have ever had 
any education or training in retirement or financial planning. 
Securities and Exchange Commission Chairman Arthur Levitt in an 
April 1999 speech stated, ``The plain truth is that we are in 
the midst of a financial literacy crisis. Too many people don't 
know how to determine saving and investment objectives or their 
tolerance for risk. Too many people don't know how to choose an 
investment, or an investment professional, or where to turn for 
help.''
    As an educational resource to the American Institute of 
Certified Public Accountant's (AICPA) Retirement Security 
through Financial Planning Coalition, the CFP Board strongly 
believes the retirement education proposals contained in 
section 520 of H.R. 1102 (Portman-Cardin) and Section 503 of S. 
741 (Graham-Grassley) will encourage American workers to plan 
and save for their financial futures. However, a greater 
service could be done for American workers if the provisions 
went beyond simply retirement and included financial planning.
    Financial planning is the process of meeting life goals 
through the proper management of personal finances. Life goals 
can include buying a home, funding a child's education, passing 
along a family business, or planning for the years after 
retirement. Financial planning provides direction and meaning 
for financial decisions. It allows one to understand how each 
financial decision affects other areas of personal finances. 
For example, buying a particular investment product might help 
pay off a mortgage faster, or it may delay retirement 
significantly. By reviewing each financial decision as part of 
a whole, one can consider short and long-term effects on life 
goals. One can also adapt more easily to life changes and feel 
more secure about reaching life goals.
    In their 1997 9th Annual Retirement Planning Survey, 
Merrill Lynch, Inc. found people with financial plans feel more 
confident about their investment skills and ability to achieve 
their financial goals. Those with a written plan prepared by a 
professional are most confident. Half of people who have 
professionally prepared financial plans and 44% of those with 
self-prepared plans are ``very confident'' they will realize 
their financial goals. Less than a third of the people with no 
plans feel this confident, and 20% are not very or not at all 
confident they will realize their goals. People who have 
financial plans are significantly more likely to have a written 
budget and to put money into savings before paying other 
expenses (41% of planners put money in savings first then pay 
bills while only 14% of people who have no plans did). These 
figures demonstrate the urgent need for Americans to have the 
opportunities and incentives to develop plans for their 
financial futures.
    The CFP Board believes if the proposals contained in 
section 520 of H.R. 1102 and Section 503 of S. 741 become law, 
the nation will be making an investment in the retirement 
security of the American worker. These two proposals are a step 
though in achieving retirement security through financial 
planning. There are many other steps and reaching them all will 
require commitment. As Peter Druker said,

        ``Unless commitment is made, there are only promises and 
        hopes... but no plans.''

    If Congress wants to help Americans reach their financial 
goals and not simply make promises to them and raise their 
hopes, it must commit to helping them plan for the future.
      

                                


Statement of Committee To Preserve Private Employee Ownership

                              Introduction

    This statement is submitted on behalf of the Committee to 
Preserve Private Employee Ownership (``CPPEO''), which is a 
separately funded and chartered committee of the S Corporation 
Association. To date, 34 employers have joined CPPEO and more 
than 45,000 employees across the country are represented by 
CPPEO companies.
    CPPEO welcomes the opportunity to submit a statement to the 
Ways and Means Committee for the written record regarding the 
goal of enhancing Americans' retirement security. CPPEO wishes 
to bring to the Committee's attention the proposal in the 
Administration's Fiscal Year 2000 Budget that would subject the 
income of S corporation ESOPs to the unrelated business income 
tax (``UBIT''). This proposal is inconsistent with the goal of 
enhancing Americans' retirement savings and cannot be 
reconciled with the Administration's own stated goal of 
enhancing retirement savings, as reflected in the 17 revenue 
proposals included by the Administration in its Fiscal Year 
2000 Budget to promote expanded retirement savings, security, 
and portability. The Administration's proposal would 
effectively repeal key provisions in the Taxpayer Relief Act of 
1997 (the ``1997 Act'') \1\ that allowed S corporations to 
create ESOPs in order to promote employee stock ownership and 
employee retirement savings for S corporation employees. CPPEO 
urges the Committee to reject the Administration's S 
corporation ESOP proposal and other proposals which would 
inhibit the creation or the viability of S corporation ESOPs, 
and continue to allow S corporations to have ESOP shareholders 
as contemplated in the 1997 Act. Only by retaining the 
fundamental policies of the 1997 Act can the Committee continue 
to preserve and promote retirement savings for the hundreds of 
thousands of S corporation employees in the United States.
---------------------------------------------------------------------------
    \1\ P.L. 105-34.
---------------------------------------------------------------------------

               Legislative History of S Corporation ESOPs

    In the early 1990s, efforts began to enact legislation that 
would allow S corporation employees to enjoy the benefits of 
employee stock ownership that were already conferred on C 
corporation employees. Finally, in 1996, Congress included a 
provision in the Small Business Jobs Protection Act of 1996 
(the ``1996 Act,'') \2\ that allowed S corporations to have 
ESOP shareholders, effective for taxable years beginning after 
December 31, 1997. This provision, which was added just prior 
to enactment, established Congress' desire to see S corporation 
ESOPs established, but did not result in a viable method to 
allow S corporation ESOPs to be created or sustained.
---------------------------------------------------------------------------
    \2\ P.L. 104-188.
---------------------------------------------------------------------------
    Specifically, a 39.6 percent tax (the unrelated business 
income tax of Internal Revenue Code section 511,\3\ or 
``UBIT'') was imposed on employees' retirement accounts with 
respect to the ESOP's share of the income of the sponsoring S 
corporation and any gain realized by the ESOP when it sold the 
stock of the sponsoring S corporation. The imposition of UBIT 
on S corporation ESOPs meant that the same income was being 
taxed twice, once to employees' ESOP accounts and a second time 
to the employees' distributions from the ESOP. Accordingly, 
owning S corporation stock through an ESOP would subject 
employees to double tax on their benefits, while individuals 
holding S corporation stock directly would be subject to only a 
single level of tax.
---------------------------------------------------------------------------
    \3\ All ``section'' references are to the Internal Revenue Code of 
1986, as amended.
---------------------------------------------------------------------------
    The 1996 Act had another defect that made ESOPs an 
impractical choice for providing employee retirement benefits 
to S corporation employees--the right of ESOP participants to 
demand their distributions in the form of employer securities. 
By law, S corporations cannot have more than 75 shareholders 
and cannot have IRAs or certain other qualified retirement 
plans as shareholders. Therefore, S corporations generally 
could not adopt ESOPs without taking the risk that the future 
actions of an ESOP participant--such as rolling over his or her 
stock into an IRA--could nullify the corporation's election of 
S corporation status.
    Moreover, the 1996 Act did not provide S corporation ESOPs 
with the incentives that are provided to encourage C 
corporation ESOPs. For example, under section 1042, 
shareholders that sell employer stock to a C corporation ESOP 
are allowed to defer the recognition of gain from such sale, 
while S corporation shareholders cannot do so. In addition, 
under section 404(a)(9), C corporations are allowed to make 
additional deductible contributions that are used by an ESOP to 
repay the principal and interest on loans incurred by the ESOP 
to purchase employer stock, though this is also not permissible 
for S corporations. C corporations are also allowed deductions 
under section 404(k)--deductions for which S corporations are 
ineligible--for dividends paid to an ESOP that are used either 
to make distributions to participants or to repay loans 
incurred by the ESOP to purchase employer stock. In addition, 
as a practical matter, S corporation ESOP participants are 
unable to use the ``net unrealized appreciation'' exclusion in 
section 402(e)(4) because this benefit applies only to the 
distributing of employer stock, which S corporations cannot do.
    In the 1997 Act, Congress reaffirmed its policy goal of 
making viable ESOPs available to the employees of S 
corporations and addressed the problems with the ESOP 
provisions in the 1996 Act. Recognizing that S and C 
corporations are fundamentally different entities, Congress did 
not provide S corporation ESOPs with all the advantages and 
incentives provided to C corporation ESOPs (such as the 
favorable tax treatment for shareholders selling stock to the 
ESOP and increased deductions and contribution limits for the 
sponsoring employer discussed above), but it did fix the 
critical problems. The double tax on S corporation stock held 
by an ESOP was eliminated by exempting income attributable to S 
corporation stock held by the ESOP from UBIT. Thus, only one 
level of tax was to be imposed, and it would be on the ESOP 
participant when he or she received a distribution from the 
ESOP. S corporation ESOPs also were given the right to 
distribute cash to participants in lieu of S corporation stock 
in order to avoid the problems of potentially ineligible S 
corporation shareholders and the numerical limit on S 
corporation shareholders.
    While in 1997 it was clear that a key feature of the 
legislation was that S corporation ESOPs would not have the 
same incentives afforded to C corporation ESOPs, Congress 
provided different, but comparable benefits to S corporation 
ESOPs.
    First, the income of S corporation ESOPs under the 1997 Act 
is subject to only a single level of tax. This is a fundamental 
characteristic of the taxation of S corporations and their 
shareholders. As Assistant Secretary of Treasury Donald Lubick 
commented in testimony to this Committee in March of this year, 
no one, including the Administration, disputes that only one 
level of tax should be imposed on S corporations and their 
shareholders.
    The second benefit provided to S corporation ESOPs is that 
the one level of tax is deferred until benefits are distributed 
to ESOP participants. Considerable thought was given in 1997 
relating to whether this deferral tax was appropriate. Various 
ways of taxing S corporation ESOPs and their participants were 
considered in 1997, including ways essentially the same as the 
Administration's proposal, and were rejected by Congress as 
being too complex, burdensome, and unworkable. In order to 
achieve a workable S corporation ESOP tax regime with 
incentives that were roughly commensurate with those available 
to C corporation ESOPs, Congress determined that the deferral 
of the one level of tax, in lieu of the special incentives 
afforded to C corporation ESOPs, was appropriate. The 
Administration's proposal and others which have followed simply 
reject this determination just 18 months after Congress acted.

The Administration's S Corporation ESOP Proposal Would 
Undermine Congressional Retirement Savings Policy

    The Administration's S corporation ESOP proposal would 
undermine the Congressional policy of allowing S corporations 
to establish ESOPs for their employees principally because it 
will not only end deferral, but also will reinstate double 
taxation. The Administration's proposal to allow a deduction to 
the ESOP for distributions to participants would effectively 
create double taxation.
    S corporation ESOPs would be required to pay UBIT for all 
the years that they hold S corporation stock, but would not be 
allowed any way to recover those taxes until distributions are 
made to participants. The rules limiting the timing of 
distributions by an ESOP to its employee participants, like the 
rules for all qualified retirement plans, are designed to 
encourage long-term retirement savings and are intended to 
produce the result that distributions to an employee will occur 
many years, even decades, after the employee first becomes a 
participant in the ESOP. A 2-year carryback and a 20-year 
carryforward of excess deductions, as is suggested by the 
Administration's proposal, will not ensure that the taxes paid 
by the ESOP over many years, even decades, will be recovered. 
Thus, there is no assurance that a future deduction will 
prevent double taxation of employee benefits. Moreover, it 
would encourage ESOP's to make distributions earlier, rather 
than later--a practice that is wholly inconsistent with 
Congress' intent to create ESOPs as long-term vehicles for 
earnings and retirement security. Most telling though, is that 
the estimated revenue to be raised by the Administration's 
proposal is the same as the revenue cost of the 1997 Act, 
demonstrating that the Administration's proposal is simply an 
attempt to repeal the provisions of the 1997 Act and is not 
aimed at preventing what it claims are unintended uses of 
current law.
    The Administration's proposed scheme and other similar 
proposals for eliminating tax deferral have another substantial 
defect. That is, any tax refunds to the ESOP for the tax 
deductions allowed to the ESOP cannot be fairly allocated and 
paid to the employee participants. Assume, for the sake of 
illustration, that employees A and B are the participants in an 
S corporation ESOP, each owning an equal number of shares of S 
corporation stock through the ESOP. A and B work for the next 
20 years and the ESOP pays tax on the income of the S 
corporation attributable to their shares of stock. Then A 
decides to retire and the ESOP sells the shares of stock in A's 
account to the S corporation and pays A the proceeds. The ESOP 
receives a deduction for the distribution to A and is able to 
reduce its UBIT liability for the year it makes a distribution 
to A. In this example, there would be no way the ESOP could use 
the full amount of the deduction for the year it makes a 
distribution to A, nor would it be able to fully use the excess 
amount when it carries the excess deduction back two years. 
Thus, the ESOP would not be able to realize the full benefit of 
the deduction, which was intended to allow the ESOP to recoup 
the taxes it paid over the past 20 years with respect to the 
stock in A's account and, presumably, give A that benefit to 
offset the second level of taxes A will pay. By the time the 
ESOP realizes all the benefits of the deduction, A will have 
long ceased to be a participant in the ESOP and those benefits 
will be allocated to the remaining participant, B.
    In addition, it is not clear how the ESOP could properly 
allocate the benefits that it can immediately realize. The 
deduction is allowed for distributions to participants. After 
the proceeds from the sale of the stock in A's account are 
distributed to A, A ceases to be a participant. The ESOP cannot 
make any additional allocations or distributions to A. As the 
sole remaining participant, B will receive the benefit of those 
deductions.
    The Administration's proposal also resurrects a problem 
under ERISA that the 1997 Act eliminated. The imposition of 
UBIT on S corporation ESOPs raises concerns about fiduciary 
obligations under ERISA for potential ESOP plan sponsors and 
trustees. The potential for double taxation and the inequitable 
allocation of benefits among plan participants will make the 
establishment of S corporation ESOPs unpalatable to anyone who 
would be subject to ERISA. In addition, qualified plan trustees 
typically avoid investments that give rise to UBIT because it 
obligates the trustee to file a federal income tax return for 
the plan's UBIT liability. Under the Administration's proposal, 
the establishment of an S corporation ESOP would necessarily 
involve making investments that give rise to UBIT liability 
because ESOPs are required to invest primarily in employer 
securities. By making S corporation stock an unviable 
investment for ESOPs, the Administration's proposal and others 
like it would prevail against the establishment of many of 
these retirement savings programs. This clearly contradicts 
Congress' intent.
    The Administration's proposal and others attempt to 
characterize the treatment of S corporation ESOPs as a 
corporate tax shelter. These proposals, however, fail to note 
that the beneficiaries of S corporation ESOPs are the 
employees, not the S corporation. Moreover, in testimony before 
this Committee, Assistant Secretary Lubick made it clear that 
the Administration's only concern is that there may be attempts 
by some persons to use the S corporation ESOP provisions as a 
device to gain tax deferral rather than to provide retirement 
savings benefits to employees. Current law was enacted to do 
just what it is doing--encouraging employee ownership of S 
corporations. Indeed, advocating the repeal of a successful 
retirement program--just 18 months after its enactment directly 
contradicts the Administration's stated objective of increasing 
retirement savings, as reflected in the 17 retirement savings 
proposals included in its Fiscal Year 2000 budget.

CPPEO's S Corporation ESOP Anti-Abuse Proposal

    CPPEO and other organizations have, in response to a 
request from Ways and Means Committee staff, developed an anti-
abuse rule that addresses the issue of potential misuses of S 
corporation ESOPs while preserving the ability of S corporation 
employees to be owners of their companies through ESOPs and 
accrue long-term retirement savings. The joint proposal is 
narrowly targeted to penalize only the persons who might 
otherwise misuse the ESOP for their own advantage, or the 
advantage of members of their families, rather than for the 
benefit of S corporation employees. To this end, CPPEO proposes 
that such an anti-abuse rule apply to persons who control an S 
corporation which has misused its ESOP and who are consequently 
responsible  for the misuse of the ESOP to defer tax on their 
income from the S corporation.\4\ Accordingly, persons who 
individually benefit from the deferral of a substantial portion 
of the S corporation's income and who collectively have control 
of the S corporation would be denied the retirement benefits of 
an S corporation ESOP. The penalty for such persons' misuse of 
an S corporation ESOP to gain deferral of tax on S corporation 
income would be the loss of tax deferral for such persons and 
not the disqualification of or tax on, the ESOP. 
Disqualification of, or tax on, the ESOP would unfairly harm 
the retirement savings of non-controlling S corporation 
employees, the intended beneficiaries of the S corporation ESOP 
provisions, whose interests in the ESOP reflect the allocation 
of retirement benefits in accordance with the requirements that 
apply to qualified retirement plans.
---------------------------------------------------------------------------
    \4\ To implement this approach, CPPEO urges that Congress enact an 
amendment to section 1361 to provide that controlling 20-percent 
employee-owners would be taxed currently on S corporation income 
attributable to S corporation stock held by them through the ESOP, and 
on S corporation income attributable to their holdings of ``synthetic 
equity'' (such as options, restricted shares, stock appreciation 
rights, or similar instruments) in the S corporation. In this manner, 
the benefit of tax deferral on S corporation income attributable to the 
use of an ESOP would be denied to the controlling shareholders who 
improperly employ the ESOP (alone or in combination with synthetic 
equity) to gain such tax deferral for themselves or their families, but 
would not be denied to non-controlling employees who participate in the 
ESOP.
---------------------------------------------------------------------------
    The anti-abuse provision described above preserves the use 
of S corporation ESOPs to provide retirement benefits to S 
corporation employees as Congress intended, and explicitly 
prevents the misuse of S corporation ESOPs by those persons 
who, through their control of the S corporation, might 
otherwise seek to use an ESOP simply to defer tax on the S 
corporation income of themselves and their families rather than 
provide retirement savings benefits to their S corporation 
employees.

                               Conclusion

    Current law is working to encourage employee ownership of S 
corporations and promote employee retirement savings, exactly 
as it was intended to work when Congress amended the ESOP rules 
for S corporations in the 1997 Act. Accordingly, CPPEO urges 
the Committee to reject the Administration's S corporation ESOP 
tax proposal because of the great danger it poses to the 
retirement security of S corporation owners who do or can now 
rely on ESOPs as a major (or only) source of retirement 
savings. The tax and retirement policies reflected in the 1997 
Act, resolved just a few months ago, should not now be undone. 
The targeted anti-abuse legislation supported by CPPEO is the 
appropriate response to any concerns that S corporation ESOPs 
could be used for unintended purposes.
      

                                


Statement of J. Michael Keeling, President, ESOP Association

    Chair Archer, ranking member Rangel, and members of the 
Committee, I am Michael Keeling, President of The ESOP 
Association, a national trade association based in Washington, 
D.C., with over 2,100 members nationwide, two-thirds of which 
are corporate sponsors of Employee Stock Ownership Plans, or 
ESOPs, and other members are either providing services to ESOP 
company sponsors, considering installing an ESOP, or affiliated 
with an educational, or non-profit institution.
    We come today because the press release announcement for 
today's hearings set forth that the subject matter for review 
is ``Enhancing Retirement and Health Security.''
    I come with this statement to you on behalf of The ESOP 
Association to urge the Committee, at its very first 
opportunity, which will hopefully be during your consideration 
of a 1999 tax relief bill pursuant to the Congressional FY 2000 
budget resolution, to adopt an expansion of the current law 
pertaining to the deduction of dividends paid on ESOP stock.
    Before describing what the change is that we want, and why 
it is good retirement savings, and good employee ownership 
policy, permit me to indicate to you the widespread support for 
the proposal among members of this Committee, members of the 
House, members of the Senate, and private sector employers and 
groups that represent those employers.
    To note, the proposal we urge you to adopt is Section 510 
of H.R. 1102, ``The Comprehensive Retirement Security and 
Pension Reform Act of 1999,'' introduced primarily by 
Congressmen Portman, and Cardin of your Committee. Although 
their list of co-sponsors grows daily, the latest from the 
world wide web indicates 23 members of Ways and Means are 
sponsors, along with 81 members of the House. Just last 
Thursday, June 10th, your colleague and senior member of the 
House Committee on Education and the Workforce, Cass Ballenger 
introduced H.R. 2124, ``The ESOP Promotion Act of 1999,'' and 
Section 2 is the same as Section 510. Your colleagues 
Congresswomen Nancy Johnson and Karen Thurman, and Congressmen 
Levin and Ramstad joined as original co-sponsors of Mr. 
Ballenger's pro-ESOP bill. (The provision we are discussing 
will be referred to as Section 510, as a shorthand reference.)
    Section 510 is included in Senate bills S.1132, ``The ESOP 
Dividend Reinvestment and Participant Security Act,'' by 
Senators Breaux and Hatch, and S. 741, ``The Pension Coverage 
and Portability Act,'' primarily by Senators Grassley and 
Graham of Florida. Both have attracted bi-partisan Senate 
support.
    But the proposal contained in Section 510 did not crop up 
at the last minute for inclusion in these bills promoting 
either retirement savings or employee ownership--this proposal 
was born in 1997, with the introduction by Breaux and Hatch of 
the 1997 ESOP Promotion Act, and was duplicated by Congressman 
Ballenger in H.R. 1592, which had 8 members of Ways and Means 
as co-sponsors. These two ESOP promotion bills, introduced in 
the second quarter of 1997, soon had their provision on 
dividend reinvestment included in the 1998 version of the 
Portman-Cardin, and Grassley-Gramm.
    The history gets even better Chair Archer, because the 
Oversight Subcommittee of Ways and Means focused on this 
provision at its May 5, 1998, hearings, when Mrs Johnson was 
chair of the Subcommittee, as it reviewed our pension laws, and 
how to make them more palatable to increasing retirement 
savings.
    At that hearing, members of the Subcommittee heard 
testimony from the private sector, from Mr. Ballenger, and from 
trade groups endorsing the expansion of the deduction for 
dividends paid on ESOP stock.
    In fact, on October 20, 1998, then Chair of the Oversight 
Congresswoman Johnson wrote to you an interim report from the 
Subcommittee based on its series of hearings and said, among 
other things, as an interim recommendation that ``The rules 
applicable to the deductibility of the dividends which an 
employer pays with respect to ESOP stock should be addressed 
and an expansion of the ESOP option should be explored.''
    Now, the next few weeks before your final decision on the 
provisions of the 1999 tax relief bill for provisions to 
enhance retirement savings is the time to make last year's 
interim recommendation a permanent pro-savings, pro-employee 
ownership recommendation.
    Now you should explore the questions, ``What is Section 510 
and how will enactment of section 510, as so many have 
recommended enhance retirement savings?''
    The ESOP Association strongly believes that the answer to 
these questions will persuade this Committee to adopt Section 
510 as part of a 1999 tax relief bill.
    So, let us answer the questions set forth above:
    What is Section 510? To answer the question, we first have 
to understand current law pertaining to dividends paid on stock 
in an ESOP. (Note, an ESOP is a tax-qualified defined 
contribution plan that must be primarily invested in employer 
securities that may borrow money to acquire employer 
securities. In other words, it is an ERISA plan that is akin to 
a tax-qualified profit sharing plan. An ESOP must comply with 
all the laws, regulations, and regulatory guidance pertaining 
to ERISA plans, plus many unique, Congressionally sanctioned 
incentives and restrictions to ensure ESOPs are both 
``ownership'' plans, and secure ``ERISA'' plans.)
    Internal Revenue Code Section 404(k) provides that 
dividends paid on ESOP stock are tax deductible if they are 
passed through in cash to the employee participants in the 
ESOP, or if they are used to pay the debt incurred by the ESOP 
in acquiring its employer securities, and the employees receive 
stock equal in value to the dividends. This section of the Code 
was added to the tax code in 1984, and modified in 1986, and in 
1989.
    Section 510 provides that if a sponsor of an ESOP pays 
dividends on ESOP stock that may be passed through the ESOP in 
cash to the employee, and the employee in turn has indicated 
that he or she would like the dividends ``reinvested'' in the 
sponsor's dividend reinvestment program, the sponsor can still 
take the Section 404(k) deduction.
    Now, to the second question asked above--Why would Mr. 
Portman, Mr. Cardin, Mr. Ballenger, Mrs. Johnson, et al want to 
have this proposal considered? Well the reason is simple, but 
typical of most of our tax law, we have to be careful to make 
the simple explanation understandable.
    The IRS has taken the position that when the employee 
voluntarily authorizes his or her dividends on his or her ESOP 
stock to be reinvested in the ESOP sponsor's dividend 
reinvestment program, the value of the dividends is not tax 
deductible for the ESOP sponsor.
    Let me repeat what I just said--if the employee wants to 
reinvest his or her dividends on ESOP stock in more stock to be 
held in the ESOP or a co-ordinated 401(k) plan in order to have 
more savings, the IRS says, ``No tax deduction.'' Think about 
it, the IRS is saying, ``spend the money now, do not save it 
for the future,'' or at least that is the impact of the 
position.
    But the situation in the real world gets even worse in the 
view of ESOP advocates, as there is a way for the plan sponsor 
to keep its tax deduction and for the employee to save more by 
keeping his or her dividends in a 401(k) plan. But this way is 
convoluted to a great extent, requiring the creation of some 
legal fictions that serve no purpose except to make life more 
complex and expensive for the sponsor of the ESOP and 401(k) 
plan.
    Again, here is the explanation. There is a technique that 
the IRS has blessed in several letter rulings back in 1993 and 
1994 that is called the 401(k) switchback. Getting a switchback 
program set up involves quite a bit of rigmarole, and I am not 
going to pretend that what follows is a perfect explanation of 
the technique.
    In brief, under a suitable program, an ESOP participant is 
allowed to make an additional pre-tax deferral to the 401(k) 
plan equal to the amount of the ESOP dividends passed through 
to her or him. The plan sponsor then pays the ESOP dividends to 
the company payroll office, and there is a chain of paper that 
has established an agency relationship between the ESOP 
participant and the payroll office. (This is done by signing 
forms, etc. etc.)
    If the ESOP participant elects the additional 401(k) 
deferral equal to her or his ESOP dividends, his or her 
paycheck would reflect the ESOP dividend amount and the 
additional pre-tax deferral to her or his 401(k) account. The 
paycheck has gone neither up or down for his or her personal 
tax situation.
    Now an employee can elect not to make an additional 401(k) 
deferral, and thus have his or her dividend paid, and have 
personal tax liability on the amount.
    As noted the IRS has held that the plan sponsor does not 
lose the ESOP dividend deduction in a switchback scheme as 
broadly outlined above if the dividends are first paid to the 
payroll office, and the employee has entered into a written 
agency agreement with the payroll office.
    One expert in designing these 401(k) Switchback programs 
writes,

        ``Because the dividend pass-through/401(k) switchback feature 
        involves a considerable amount of work to implement with regard 
        to treasury and payroll procedures (including software 
        programming changes), the company will want to carefully assess 
        the anticipated value of the program both in terms of the 
        expected dividend deduction and enhanced employee ownership 
        values.'' Duncan E. Harwood, Arthur Anderson Consulting, LLP, 
        ``Dividend Pass-Through: Providing Flexibility,'' Proceedings 
        Book, The 1995 Two Day ESOP Deal, Las Vegas, Nevada, page 158, 
        The ESOP Association.

    In short, Section 510 is to simplify encouraging people to 
save their dividends paid on ESOP stock in a manner that 
encourages the corporation to pay dividends in an employee 
owner arrangement, compared to accomplishing the same thing in 
a convoluted way.
    Now, lets turn to the third question set forth at the 
beginning of this statement. Please remember the answer to this 
question would go a long way in determining whether the 
Congress will want to make Section 510 law.
    The answer to this question should be self-evident. The 
current IRS position is anti-savings and anti-simple. To 
encourage saving the dividends on ESOPs in a tax-qualified 
ERSIA plan in a manner that is simple and easy to understand, 
Section 510 should become law.
    Otherwise, we can all accept the IRS position that in order 
to encourage the savings of the ESOP dividends the plan sponsor 
should engage in some mumbo-jumbo involving the payroll office 
being an agent for employees who just happen to figure out how 
to increase their 401(k) elective deferrals and who tell their 
``agent'' to put their dividends in the 401(k) plan.
    In conclusion Chair Archer, the ESOP and employee ownership 
community, in allegiance of sponsors of 401(k) plans and 
dividend reinvestment plans, believe that your focus on 
enhancing retirement savings will lead you and your colleagues 
to conclude that Congress should enact Section 510.
    And, let me pledge that the ESOP community will work with 
you, your colleagues, Committee staff, the staff of the Joint 
Tax Committee, and Treasury staff, to ensure that any 
legislative action on Section 510 meets its intent to be a fair 
and reasonable provision of law, both in terms of application 
and revenue impact, that promotes savings, and employee 
ownership.
    Again, I thank you for your leadership in the area of 
retirement savings.
      

                                


Statement of ESOP Coalition, Somerset, New Jersey

    This written statement is submitted on behalf of the ESOP 
Coalition, an informal organization of more than 30 large and 
small corporations doing business in the communications, 
banking, oil and gas, utilities, manufacturing, automobile, 
retail, and insurance industries. Our work is also supported by 
many trade associations, including the Association of Private 
Pension and Welfare Plans (APPWP); the ERISA Industry Committee 
(ERIC); the ESOP Association; the Financial Executives 
Institute (FEI); the National Association of Manufacturers 
(NAM); and the U.S. Chamber of Commerce.
    The ESOP Coalition commends the Committee and its Chair for 
their proactive role in addressing the vital issues now facing 
this country in securing important retirement protections for 
our workers and retirees. With record numbers of workers on the 
verge of retirement, and many young people entering the 
workforce and commencing participation in their employer's 
retirement programs for the first time, it is more important 
than ever before that our nation's employees understand their 
own roles and responsibilities in saving for the years when 
they no longer will be working and that our laws and policies 
encourage this discipline where possible.
    One proposal currently before this Congress would 
accomplish the worthwhile goal of enhancing retirement security 
while at the same time strengthening the very backbone of the 
American economy: a worker's commitment to his or her employer. 
This provision would further these diverse goals by allowing 
employees to retain in the plan dividends paid on employer 
stock held in an employee stock ownership plan (an ``ESOP'') 
without causing the employer to lose the deduction for these 
ESOP dividends.
    Current law affirms the importance of fostering employee 
ownership in the company by permitting an employer to deduct 
the dividends paid on employer stock held in an ESOP. This 
deduction is given (under Sec. 404(k) of the Internal Revenue 
Code), however, only if the dividends are used to pay off the 
loan held by a leveraged ESOP or the dividends are paid in cash 
to the ESOP participants. No deduction is generally available 
for dividends that the employee would wish to retain in the 
ESOP rather than consume immediately. Although one Internal 
Revenue Service ``solution'' exists whereby some workers are 
able to reinvest some dividends in a 401(k)/ESOP, this approach 
is neither practical nor efficient and often is not available 
to all participants in the ESOP. In addition, many employees 
receive no benefit from this approach because the reinvested 
dividends offset the elective deferrals they might otherwise 
make to their 401(k) plan rather than being treated--like all 
other dividends and interest--as earnings under the plan.
    Thus, current law not only discourages the reinvestment of 
ESOP dividends, it also deprives employees of an efficient 
means of steadily accumulating an ever-growing ownership 
interest in the employer and greater retirement income. A 
simple change to Sec. 404(k) of the Code would correct this 
anomaly by giving employees the additional choice of retaining 
their dividends in the ESOP instead of receiving the dividends 
in cash.
    Many in Congress have recognized the desirability of 
amending Sec. 404(k) of the Code to encourage the retention of 
dividends in an ESOP. In particular, we applaud Rep. Rob 
Portman (R-OH) and Rep. Benjamin Cardin (D-MD) and many other 
Members for supporting this provision in H.R. 1102, ``The 
Comprehensive Retirement Security and Pension Reform Act of 
1999,'' as well as Rep. Cass Ballenger (R-NC) for introducing 
the ``ESOP Promotion Act of 1999,'' which also contains this 
change. This provision also has been included in comparable 
bipartisan pension reform bills in the U.S. Senate.
    Employees today appreciate that their retirement years will 
be vastly more comfortable if they systematically set aside the 
money that will sustain them during their post-working years 
and not allow the dissipation of any of their hard-earned 
savings through periodic dividend pay-outs. Promotion of the 
reinvestment of ESOP dividends is sound tax policy--not only 
because it stems the ``leakage'' of retirement savings, but 
also because it furthers one of the primary purposes of an 
ESOP, encouraging employees to participate more fully in their 
employer's growth. Thus, this provision fosters employee 
responsibility and productivity while simultaneously building 
retirement security.\1\
---------------------------------------------------------------------------
    \1\ For a discussion of the evidence supporting the finding that 
employee ownership improves the performance of publicly traded 
corporations, see ``Unleashing the Power of Employee Ownership,'' a 
July 1998 Research Report by Hewitt Associates LLC.
---------------------------------------------------------------------------
    The ESOP Coalition commends the Committee and its Chair for 
their important work in addressing the issues of retirement 
security and urges that this provision to encourage the 
reinvestment of ESOP dividends be accorded a top priority in 
Congressional efforts to secure comprehensive pension reform.
      

                                


Statement of Financial Planning Coalition

    This Statement is being submitted to the Ways and Means 
Committee of the United States House of Representatives by the 
Financial Planning Coalition for inclusion in the written 
record of the June 16, 1999, hearing before the Committee on 
Enhancing Retirement and Health Security. The members of the 
Financial Planning Coalition are the American Institute of 
Certified Public Accountants, the Consumer Federation of 
America, the Institute of Certified Financial Planners, the 
International Association for Financial Planning, the 
Investment Counsel Association of America, and the Society of 
Financial Service Professionals. The Certified Financial 
Planner Board of Standards, Inc. is an educational consultant 
to the Coalition.\1\
---------------------------------------------------------------------------
    \1\ The American Institute of Certified Public Accountants is the 
national professional association of CPAs in the United States with 
more than 330,000 members in public practice, business and industry, 
government and education.
    The Consumer Federation of America is a non-profit association of 
some 260 pro-consumer groups. It was founded in 1968 to advance the 
consumer interest through advocacy and education.
    The Institute of Certified Financial Planners is a professional 
membership association that exclusively serves Certified Financial 
Planner licensees.
    The International Association for Financial Planning is the largest 
and oldest membership association representing the financial planning 
community, with 123 companies as members of the Broker-Dealer Division 
and over 17,000 individual members nationwide.
    The Investment Counsel Association of America is a national not-
for-profit association that exclusively represents SEC-registered 
investment advisors.
    The Society of Financial Service Professionals was formerly known 
as the American Society of CLU & ChFC. Founded in 1928, it is composed 
of 32,000 members who are dedicated to serving the financial needs of 
individuals, families, and businesses.
    The Certified Financial Planner Board of Standards, Inc. is a non-
profit professional regulatory agency that was founded in 1985. It owns 
and sets the standards for using the CFP certification mark and the 
marks CFP and Certified Financial Planner.
---------------------------------------------------------------------------

                               BACKGROUND

    The convergence of the growing complexity in the financial 
marketplace, and the shifting of a significant portion of 
financial and investment decision making from professionals to 
the American public has created a significant need for 
financial planning services to be more easily accessible. 
Financial planning services must include both education and 
individual professional assistance to help lead individuals 
through the financial marketplace. The use of education and 
financial planning assistance will help Americans to 
effectively manage their finances in ways that allow them to 
provide for their families today and have a secure and 
comfortable retirement.

                        THE CHANGING MARKETPLACE

    The financial world that Americans are living in has become 
increasingly complex. Because of dramatic changes in the way 
pensions are funded, as well as a growing reliance on personal 
savings to fund retirement and other major life goals, 
individuals increasingly make retirement and financial planning 
decisions that were once made for them by professionals. Even 
for those who are financially sophisticated, the determination 
of how much money must be saved for each individual's varied 
future needs, especially for retirement, and how that money 
should be invested is difficult. For those who are not 
financially sophisticated, the complexity of the decisions that 
must be made and the myriad choices that are available make 
these decisions truly daunting.
    Perhaps the most important change is the sea change in the 
type of retirement plans of the American worker in the last 20 
years. In 1975, sixty eight percent of pension plans were 
defined benefit plans.\1\ These plans defined the amount of the 
benefit the worker would receive upon retirement very simply--
the worker would get a check for a specific amount every month 
for the rest of his/her life. The worker did not have to make 
any decisions regarding the amount of money that must be saved 
for retirement or how to invest the money.
---------------------------------------------------------------------------
    \1\ Employee Benefit Research Institute Databook on Employee 
Benefits, 4th Edition.
---------------------------------------------------------------------------
    By 1994, fifty percent of pension payments were made from 
defined contribution plans.\2\ These plans generally require 
the worker to determine how much to save for retirement and how 
to invest the money. Cash balance plans are also becoming very 
popular. They give the employee the flexibility of having a 
portable pension--one that goes with the worker when there is a 
change in employers--but they also often require the worker to 
make investment decisions when there is a change in employers.
---------------------------------------------------------------------------
    \2\ Id.
---------------------------------------------------------------------------
    Also, workers today change jobs much more often than in 
previous years, either due to greater opportunities existing in 
a tight labor market, or due to layoffs accompanying 
consolidation and downsizing. Changing jobs potentially dilutes 
a worker's retirement benefits because the worker leaves a 
position before benefits have vested and/or because some 
pension provisions disfavor leaving early in a career (e.g. the 
pension benefit is calculated as a percentage of an employee's 
top three years of salary).
    Another factor has added to the complexity of managing 
investments and retirement funds. The number and type of 
investment options has skyrocketed in the last 20 years. Not 
only have whole new classes of investments been made available, 
such as Roth IRAs and the complex world of derivatives, but 
within each type of investment the number of choices has 
increased exponentially. For example, in 1983, just 15 years 
ago, there were 1,026 mutual funds to choose from. In 1998, 
there were 7,314.\3\
---------------------------------------------------------------------------
    \3\ 1999 Mutual Fund Fact Book, 39th Ed., pub. By the Investment 
Company Institute.
---------------------------------------------------------------------------
    Because of these changes, the ability of each American to 
retire in comfort increasingly depends on his or her 
proficiency in making sound investment decisions. And sound 
investment decisions encompass how much to save for various 
needs and how to invest the money that is saved. Even for the 
relatively sophisticated, making the mathematical calculation 
to determine how much we need to save in order to have a 
specific income at retirement is not an easy calculation. 
Seventy-five percent of American workers do not know how much 
money they will need to reach their retirement goals.\4\
---------------------------------------------------------------------------
    \4\ Yakoboski and Dickemper, Increased Saving but Little Planning: 
Results of 1997 Retirement Confidence Survey, Employee Benefit Research 
Institute Brief (Nov. 1997).
---------------------------------------------------------------------------
    Yet there is a crisis in savings at the very time that 
savings is becoming crucial to the long term well being of the 
American public.\5\ The personal savings rate in this country 
has fallen to a minus 0.7%.\6\ In a 1998 survey taken by the 
Employee Benefit Research Institute, thirty six percent of 
those surveyed had no money saved for retirement (a summary of 
the survey is attached).\7\ These statistics underscore the 
need to educate Americans about the need for retirement 
planning.
---------------------------------------------------------------------------
    \5\ The SAVER Act (P.L. 105-92 (1997)) (passed unanimously by 
Congress) noted that we have a crisis of savings in this country.
    \6\ Advisory from the Committee on Ways and Means of the United 
States House of Representatives, No. FC-10, June 2, 1999.
    \7\ 1998 Retirement Confidence Survey by the Employee Benefit 
Research Institute.
---------------------------------------------------------------------------

                      EFFECT OF FINANCIAL PLANNING

    We believe that the cornerstone of retirement income 
security is proper financial planning and education (attached 
is a copy of a letter sent to all Members of the Ways and Means 
Committee by the Coalition). This was a finding of the 1998 
National Summit on Retirement Savings that was held in 
Washington, D.C. The consensus of the delegates attending the 
Summit was that the overall solution to the savings crisis is 
education, provided from qualified sources, and made available 
to current workers and retirees over an extended period of 
time. This Summit was mandated by the SAVERS Act and co-hosted 
by the Administration and Congressional leadership. A 1997 
survey by the Consumer Federation of America and NationsBank 
(now Bank of America) confirms this finding (a copy of the 
survey is attached). The survey found that savers with 
financial plans report twice as much savings and investment as 
do savers with comparable incomes, but without plans.

THE COMPREHENSIVE RETIREMENT SECURITY AND PENSION REFORM ACT--H.R. 1102

    The Comprehensive Retirement Security and Pension Reform 
Act was introduced this year by Congressmen Rob Portman (R-OH) 
and Benjamin Cardin (D-MD) and had a total of 98 co-sponsors on 
June 28, 1999. Section 520 of the bill contains an important 
first step in making financial planning available to American 
workers.
    Section 520 of this bill does two things. First, it 
clarifies that the provision of retirement planning services by 
an employer to employees is a de minimis fringe benefit under 
Section 132 of the Internal Revenue Code. This is a 
clarification of existing law. It is clear under current law 
that it is a de minimis fringe benefit when an employer 
provides a seminar to a group of employees to provide 
information about the employer's pension plan. However, it 
begins to fall into a gray area when the employer adds the 
availability of a one-on-one meeting for an employee to discuss 
his/her personal situation, especially when the discussion goes 
beyond the application of the employer's pension plan and 
encompasses other aspects of the employee's financial 
situation.
    It is critical that this area be clarified. Retirement 
planning cannot be done in a vacuum. One of the key questions 
to be answered is how much money can and should be saved for 
retirement purposes. Included in this determination must be the 
consideration of what other assets may be available at 
retirement, including from sources such as Social Security and 
a spouse's pension. But that is only the first step. The 
individual must also determine how much money is currently 
available to save for retirement. And this can only be 
determined by looking at the employee's entire financial 
situation, determining what other needs exist and how much 
money can and should be allocated for those needs. Examples of 
some other critical financial needs that must be factored into 
this calculation are education savings for children and 
provision to help care for elderly parents.
    The second part of Section 520 would allow the employer to 
create an employee benefit plan for its employees regarding 
retirement planning that is similar to a ``cafeteria plan.'' 
This would allow the employer to offer retirement planning or, 
in lieu of the planning, additional salary. If the retirement 
planning service is chosen, there would be no income imputed to 
the employee by reason of taking the service instead of the 
salary.
    These retirement planning benefits would have to be offered 
on a non-discriminatory basis. This would ensure that the rank 
and file employee, not just the highly compensated employee, 
would have access to the benefit.
    Enactment of Section 520 will provide a concrete first step 
to help Americans achieve retirement security. This is a first 
step because it will only reach a limited number of people. Not 
all employers will offer these benefits to their employees. 
Large employers will be more likely to offer such benefits than 
will small employers. And self-employed individuals, 
independent contractors, and part time employees who do not 
receive a full range of benefits will not receive these or 
other retirement planning services.

                               CONCLUSION

    Financial planning and education has become a critical 
element of every American's ability to live and retire in 
comfort. Not only do people save more, but they save smarter 
when they have the proper education and tools. Unfortunately, 
the provision of education and financial planning tools is 
trailing the changes in the marketplace that are making them 
necessary.
    Section 520 of H.R. 1102 is a good starting point in the 
move to make financial planning services and education 
available to all Americans. If Section 520 is enacted, a 
substantial number of Americans will have access to financial 
planning services that were previously unavailable. And the 
provision of these retirement planning and education services 
will prove their worth when they cause a substantial number of 
workers begin to save for retirement that have not done so yet, 
and cause workers who are saving for retirement to save more 
and to invest it more wisely. Section 520 offers a foundation 
upon which other efforts to increase American's access to 
financial planning services can be built.
      

                                


                                                       May 24, 1999

The Honorable Bill Archer
U.S. House of Representatives
Longworth House Office Bldg.
Washington, DC 20515-0001

Re: RETIREMENT PLANNING IS CRITICAL TO ENSURE THE FUTURE SECURITY OF 
        THE AMERICAN WORKER

    Dear Representative Archer:

    We are writing to ask you to support legislative endeavors which 
would make retirement planning more available to the American 
workforce. A proposal contained in both H.R. 1102 and S.741 would make 
it clear that the value of employer provided retirement planning 
assistance is not a taxable fringe benefit to an employee.\1\
---------------------------------------------------------------------------
    \1\ Sec. 520 and Sec. 503 respectively of H.R. 1102, the 
Comprehensive Retirement security and pension Reform Act (the Portman-
Cardin bill) and S. 741, Pension Coverage and Portability Act (the 
Grassley-Graham bill).
---------------------------------------------------------------------------
    The ability of each American to retire in comfort increasingly 
depends on his or her proficiency in making sound investment decisions. 
This means that the cornerstone of retirement income security is proper 
financial planning and education.\2\ Recent surveys and studies have 
underscored the critical need for retirement planning education among 
today's workers.
---------------------------------------------------------------------------
    \2\ The SAVER Act (P.L. 105-92 (1997)) (passed unanimously by both 
houses of Congress) noted that we have a crisis of savings in this 
country. A summit was mandated by this law to establish recommendations 
to encourage savings. One of the main findings of the 1998 National 
Summit on Retirement Savings (co-hosted by the Administration and 
Congressional leadership) was that employers must be urged to ``educate 
employees about the importance of retirement savings.''
---------------------------------------------------------------------------
    Only one in three savers has a comprehensive retirement plan.\3\
---------------------------------------------------------------------------
    \3\ 1997 Survey of Consumer Federation of America and NationsBank 
(now Bank of America).
---------------------------------------------------------------------------
    75% of America's workers do not know how much they will need to 
reach their retirement goals.\4\
---------------------------------------------------------------------------
    \4\ Yakoboski and Dickemper, Increased Saving but Little Planning: 
Results of 1997 Retirement Confidence Survey, Employee Benefit Research 
Institute Brief (Nov. 1997). (hereinafter cited as the Yakoboski 
study).
---------------------------------------------------------------------------
    36% of those surveyed have no money saved for retirement.\5\
---------------------------------------------------------------------------
    \5\ 1998 Retirement Confidence Survey by the Employee Benefit 
Research Institute. (Hereinafter cited as the Retirement Confidence 
Survey).
---------------------------------------------------------------------------
    Of all workers, only 39% received employer provided educational 
material about retirement planning.\6\
---------------------------------------------------------------------------
    \6\ Retirement Confidence Survey.
---------------------------------------------------------------------------
    Evidence also exists that retirement education is a key element in 
ensuring retirement security for workers:
    Savers with financial plans report twice as much savings and 
investments as do savers without plans.\7\
---------------------------------------------------------------------------
    \7\ 1997 Survey by Consumer Federation of America.
---------------------------------------------------------------------------
    81% of workers who received retirement education have money 
earmarked for retirement in an account.\8\
---------------------------------------------------------------------------
    \8\ Retirement Confidence Survey.
---------------------------------------------------------------------------
    These findings are both alarming and encouraging. It means that 
many of today's workers will reach and are reaching retirement age with 
too little income for retirement. These findings also provide hope. The 
studies show that those individuals that receive retirement education 
significantly increase their savings and investments. If we are to 
encourage national savings, we must encourage education to empower each 
American to make the most of his or her investment choices. Retirement 
planning services provided by employers to their employees must be 
encouraged and promoted but--should not be taxed!

            Sincerely,
                                   The American Institute of Certified 
                                       Public Accountants
                                   Certified Financial Planner Board of 
                                       Standards, Inc. (as an education 
                                       consultant to the AICPA)
                                   Consumer Federation of America
                                   Institute of Certified Financial 
                                       Planners
                                   Investment Company Institute
                                   Investment Counsel Association of 
                                       America
                                   Securities Industry Association
      

                                


                                                       May 24, 1999
The Honorable Xavier Becerra
U.S. House of Representatives
Longworth House Office Bldg.
Washington, DC 20515-0001

    Dear Representative Becerra:

Re: RETIREMENT PLANNING IS CRITICAL TO ENSURE THE FUTURE SECURITY OF 
        THE AMERICAN WORKER

    We are writing to ask you to support legislative endeavors which 
would make retirement planning more available to the American 
workforce. A proposal contained in both H.R. 1102 and S.741 would make 
it clear that the value of employer provided retirement planning 
assistance is not a taxable fringe benefit to an employee.\1\
---------------------------------------------------------------------------
    \1\ Sec. 520 and Sec. 503 respectively of H.R. 1102, the 
Comprehensive Retirement security and pension Reform Act (the Portman-
Cardin bill) and S. 741, Pension Coverage and Portability Act (the 
Grassley-Graham bill).
---------------------------------------------------------------------------
    The ability of each American to retire in comfort increasingly 
depends on his or her proficiency in making sound investment decisions. 
This means that the cornerstone of retirement income security is proper 
financial planning and education.\2\ Recent surveys and studies have 
underscored the critical need for retirement planning education among 
today's workers.
---------------------------------------------------------------------------
    \2\ The SAVER Act (P.L. 105-92 (1997)) (passed unanimously by both 
houses of Congress) noted that we have a crisis of savings in this 
country. A summit was mandated by this law to establish recommendations 
to encourage savings. One of the main findings of the 1998 National 
Summit on Retirement Savings (co-hosted by the Administration and 
Congressional leadership) was that employers must be urged to ``educate 
employees about the importance of retirement savings.''
---------------------------------------------------------------------------
    Only one in three savers has a comprehensive retirement plan.\3\
---------------------------------------------------------------------------
    \3\ 1997 Survey of Consumer Federation of America and NationsBank 
(now Bank of America).
---------------------------------------------------------------------------
    75% of America's workers do not know how much they will need to 
reach their retirement goals.\4\
---------------------------------------------------------------------------
    \4\ Yakoboski and Dickemper, Increased Saving but Little Planning: 
Results of 1997 Retirement Confidence Survey, Employee Benefit Research 
Institute Brief (Nov. 1997). (hereinafter cited as the Yakoboski 
study).
---------------------------------------------------------------------------
    36% of those surveyed have no money saved for retirement.\5\
---------------------------------------------------------------------------
    \5\ 1998 Retirement Confidence Survey by the Employee Benefit 
Research Institute. (Hereinafter cited as the Retirement Confidence 
Survey).
---------------------------------------------------------------------------
    Of all workers, only 39% received employer provided educational 
material about retirement planning.\6\
---------------------------------------------------------------------------
    \6\ Retirement Confidence Survey.
---------------------------------------------------------------------------
    Evidence also exists that retirement education is a key element in 
ensuring retirement security for workers:
    Savers with financial plans report twice as much savings and 
investments as do savers without plans.\7\
---------------------------------------------------------------------------
    \7\ 1997 Survey by Consumer Federation of America.
---------------------------------------------------------------------------
    81% of workers who received retirement education have money 
earmarked for retirement in an account.\8\
---------------------------------------------------------------------------
    \8\ Retirement Confidence Survey.
---------------------------------------------------------------------------
    These findings are both alarming and encouraging. It means that 
many of today's workers will reach and are reaching retirement age with 
too little income for retirement. These findings also provide hope. The 
studies show that those individuals that receive retirement education 
significantly increase their savings and investments. If we are to 
encourage national savings, we must encourage education to empower each 
American to make the most of his or her investment choices. Retirement 
planning services provided by employers to their employees must be 
encouraged and promoted but--should not be taxed!

            Sincerely,
                                   The American Institute of Certified 
                                       Public Accountants
                                   Certified Financial Planner Board of 
                                       Standards, Inc. (as an education 
                                       consultant to the AICPA)
                                   Consumer Federation of America
                                   Institute of Certified Financial 
                                       Planners
                                   Investment Company Institute
                                   Investment Counsel Association of 
                                       America
                                   Securities Industry Association

    [Additional attachments are being retained in the Committee 
files.]
      

                                


Statement of Food Marketing Institute

    Thank you, Chairman Archer, for holding a hearing on 
proposals to reduce the tax burden on personal savings. We 
particularly wish to focus on the effect of the estate tax on 
family-owned businesses. The Food Marketing Institute (FMI)--
Your Neighborhood Supermarkets is pleased to submit testimony 
today because elimination of the estate and gift tax is our top 
legislative tax priority for the 106th Congress. About 1,000 of 
our members are family-owned supermarket companies. In fact, 
half of our members are one-store operators. Most of their 
money is tied up in assets-costly stores, refrigeration systems 
and thousands upon thousands of products. The burden of 
planning for and paying estate taxes is a critical issue for 
their companies.
    The bricks and mortar to build a supermarket can cost $3 
million alone, so most grocery store owners, even the smallest 
have personal assets taxed at the top marginal rate of 55%. 
This tax kills family businesses and affects local jobs. We 
also have less than 20 minority-owned grocers, most first-
generation business owners-the first in their families to 
accumulate capital--who wonder if their children will be able 
to succeed them and participate in the great American economy. 
Our members are your constituents. Their customers, who visit 
supermarkets on an average of 2.2 times a week, depend on them 
not only for food shopping convenience, but also for local 
support in charity and community events. They are also 
significant employers in their local operating areas.
    A small food retailer with one to three stores may have 
assets worth about $20 million. Rounding figures a bit, that 
creates an estate tax bill of about $10 million. With yearly 
profits of a penny on the dollar--the industry average--the 
owner has very little cash on hand. While some FMI members buy 
life insurance just to prepare for paying the tax, many cannot 
afford the premiums necessary to protect all of their assets.
    The Food Marketing Institute (FMI) is a nonprofit 
association conducting programs in research, education, 
industry relations and public affairs on behalf of its 1,500 
members including their subsidiaries--food retailers and 
wholesalers and their customers in the United States and around 
the world. FMI's domestic member companies operate 
approximately 21,000 retail food stores with a combined annual 
sales volume of $225 billion--more than half of all grocery 
store sales in the United States. FMI's retail membership is 
composed of large multi-store chains, small regional firms and 
independent supermarkets. Its international membership includes 
200 members from 60 countries.
    FMI's President and CEO Tim Hammonds is the co-chairman of 
a unique coalition that was announced yesterday--Americans 
Against Unfair Family Taxation. What makes us unique is that we 
represent family-owned businesses throughout the United States. 
The coalition will give this issue a much higher profile 
through a national television and print advertising initiative 
and a series of local town meetings designed to inform the 
American people. National research already conducted shows that 
Americans believe a top 55% tax rate is too high and simply 
unfair.

         Effect of the Estate Tax when a Supermarket Owner Dies

    Supermarket succession, the passing of years of hard work 
on to the next generation is a top concern of family-owned 
supermarket retailers and wholesalers. Succession planning is 
long and difficult. Owners are forced to answer difficult 
questions about the future of a company they have worked their 
entire lives to create and grow. The transfer of ownership and 
the family dynamics are central questions in the decision to 
plan for the future of the business. The shocking reality is 
when the owner realizes that from 37% up to 55% of his or her 
company can be lost to estate and gift taxes. When the owner of 
a supermarket dies, the individual's estate is subject to 
federal and state death taxes. The tax not only covers the life 
savings of the one who passed away, abut also the home, land, 
pensions, life insurance, stocks and bonds, annuities, IRAs, 
401K plans and the business assets, as well as anything else 
that has any economic value. The deceased has already paid 
income tax on that money. In addition to income taxes, they 
have paid and collected payroll taxes and employment taxes; 
many have paid capital gains taxes as well.
    Food retailers and wholesalers run capital intensive 
businesses, requiring large investments in land, stores or 
shopping centers, refrigeration, point-of-sale equipment, large 
inventories of products, lighting, transportation, such as 
fleets of trucks, etc. One single asset of a company can be 
more than the amount of the $650,000 exemption or threshold for 
the unified credit. Owners of most family owned grocery stores 
plow their after-tax profits back into their stores in 
equipment, new consumer services, associates/jobs, remodeling 
and new store development. As mentioned earlier, the average 
profit of our industry is one penny on the dollar after taxes, 
so you can see why the supermarket industry is particularly 
vulnerable to the devastating effects of this tax.
    Family-owned supermarkets that do survive after the 
principal owner's death have already spent thousands, and even 
more than $3 to $5 million, according to industry members 
surveyed, to simply plan for the eventuality of estate taxes. 
Most grocery stores involved in planning purchase life 
insurance, have buy/sell agreements or provide lifetime gifts 
of stock. FMI strongly believes that the resources spent 
planning for and paying the death tax could be used more 
productively to grow supermarkets, provide customers with value 
and create additional jobs in the economy.
    It is hard to imagine a more onerous or unfair tax. When 
the owner dies, as much as she or he may have wanted to pass 
the business down to the children or cousins, the estate tax 
puts them in a deep financial hole. This is even before they 
get started. Some try to stay in business by taking out a loan 
with the Internal Revenue Service as their silent partner, 
skimming off a large portion of the profits every year, 
stifling job growth and business expansion. This option is 
extremely risky. The supermarket industry has never been more 
competitive than it is today. To survive, owners must use all 
available capital to upgrade their stores with new services and 
invest in technology to stay as efficient as possible. They 
need all of their slim profits, along with loans from banks and 
other sources, to remain competitive.
    All too often, however, the estate tax forces them to close 
or sell the store. And the community loses an institution that 
may have supported the local economy for years. And the 
industry loses another independent operator, historically the 
source of greatest innovation in our business. The whole idea 
of the self-service supermarket, an American innovation, 
started with independent entrepreneurs in the 1930s.

               Economic Effects of the Federal Estate Tax

    The icing on the cake for FMI members is that after 
involved planning, which takes assets away from their business 
while they are alive; they are shocked to learn that the tax 
raises almost no revenue for the federal government.
    The Joint Economic Committee of Congress released a 
``dynamic'' report in December 1998, which found that this tax 
``raises very little, if any, net revenue for the federal 
government.'' The JEC also concluded that the estate tax 
results in losses under the income tax that are roughly the 
same size as the revenue brought in by the estate tax. Annual 
death tax receipts total approximately $23 billion, less than 
1.4% of total tax revenue.
    FMI believes Congress needs to do much more than simply 
increase the unified credit to help the growing number of 
family owned businesses facing high estate tax rates upon their 
deaths. The supermarket industry urges Congress to focus on 
eliminating these high tax rates. As mentioned earlier, raising 
the unified credit does little to ameliorate the ravaging 
effect of this tax. Closely held supermarkets and their 
wholesalers are capital intensive businesses, whose owners 
invest profits back into their business, but pay taxes at the 
personal rate. Lifetime assets easily exceed the unified credit 
amount of $650,000 (under current law, up to $1 million by 
2006).
    In the House of Representatives, we strongly support the 
bipartisan, leadership legislation, H.R. 8, introduced by Reps. 
Jennifer Dunn and John Tanner that calls for gradual 
elimination of the death tax by 5% per year over a period of 11 
years. We also support H.R. 86, introduced by Rep. Chris Cox, 
which calls for full and immediate repeal of this tax. Versions 
of H.R. 8 have also been introduced in other tax packages, 
sponsored by Rep. Sam Johnson and Reps. Jennifer Dunn and Jerry 
Weller. We urge Congress to include legislation eliminating the 
estate and gift tax in any upcoming tax legislation.

                                Summary

    The federal estate tax has become a huge disincentive to 
continuing small family owned businesses. Take for instance, 
the two-store operator in the nation's heartland, who has built 
his business so he now employs 500 people, with 200 jobs added 
in just the last five years. The fair market value of his 
business is $10 to $20 million. He has spent between $600,000 
and $1 million in succession planning, but he will have to sell 
all or part of the business when he dies to satisfy the estate 
tax. He believes his business will grow and expects to employ 
700 people in his community in the next five years. All would 
lose their positions working for this small, but important 
market innovator, if he died.
    Another supermarket operator has already spent just under 
$10 million in estate taxes, and the second generation has 
managed to hang on, by taking out a loan. This delayed the 
opening of a third store for almost five years and added a 
large debt payment. These funds otherwise could have been used 
to fund parts of his expansion instead of borrowing and adding 
cost to his operations. A few million dollars of the federal 
tax payment was deferred and debt taken on to pay back the 
federal tax over an allotted time period, so most of his 
profits are applied to the federal tax payments.
    Supermarket owners pay federal and state taxes throughout 
the life of their company. When they die, the federal 
government steps in and takes up to half of the worth of the 
their company assets. It is unjust for our government to impose 
a tax that raises so little revenue while it devastates 
businesses and kills jobs. FMI urges you to pass legislation to 
eliminate this tax.
    Thank you for the opportunity to present testimony this 
morning.
      

                                


Statement of Investment Company Institute

    The Investment Company Institute \1\ is pleased to submit 
this statement to the House Committee on Ways and Means 
regarding retirement savings issues raised at its June 16 
hearing. Most importantly, we would like to take this 
opportunity to indicate our strong support for many of the 
provisions of H.R. 1102, the ``Comprehensive Retirement 
Security and Pension Reform Act of 1999'' and H.R. 1546, the 
``Retirement Savings Opportunity Act of 1999.'' Both bills 
would make the nation's retirement plan system significantly 
more responsive to the retirement savings needs of Americans. 
Both bills would encourage retirement savings by providing 
appropriate tax incentives to employers and individuals; and 
both would eliminate many of the unnecessary limitations that 
discourage small employers from establishing retirement plans 
and individuals from trying to save for retirement. The 
Institute commends the sponsors of H.R. 1102 and H.R. 1546 and 
other members of this committee for their interest in 
retirement savings policy.
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    \1\ The Investment Company Institute is the national association of 
the American investment company industry. Its membership includes 7,576 
open-end investment companies (``mutual funds''), 479 closed-end 
investment companies and 8 sponsors of unit investment trusts. Its 
mutual fund members have assets of about $5.860 trillion, accounting 
for approximately 95% of total industry assets, and have over 73 
million individual shareholders.
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    Retirement savings are of vital importance to our nation's 
future. Although members of the ``Baby Boom'' generation are 
rapidly approaching their retirement years, studies strongly 
suggest that as a generation, they have not adequately saved 
for their retirement.\2\ Additionally, Americans today are 
living longer. Taken together, these trends will place an 
enormous strain on the Social Security program in the near 
future.\3\ In order to ensure that individuals have sufficient 
savings to support themselves in their retirement years, much 
of this savings will need to come from individual savings and 
employer-sponsored plans.
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    \2\ For instance, one study concluded that the typical Baby Boomer 
household will need to save at a rate 3 times greater than current 
savings to meet its financial needs in retirement. Bernheim, Dr. 
Douglas B., ``The Merrill Lynch Baby Boom Retirement Index'' (1996).
    \3\ Social Security payroll tax revenues are expected to be 
exceeded by program expenditures beginning in 2014. By 2034, the Social 
Security trust funds will be depleted. 1999 Annual Report of the Board 
of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds.
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    The Institute and mutual fund industry have long supported 
efforts to enhance the ability of individual Americans to save 
for retirement in individual-based programs, such as the 
Individual Retirement Account or IRA, and employer-sponsored 
plans, such as the popular 401(k) plan. In particular, we have 
urged that Congress: (1) establish appropriate and effective 
retirement savings incentives; (2) enact saving proposals that 
reflect workforce trends and saving patterns; (3) reduce 
unnecessary and cumbersome regulatory burdens that deter 
employers--especially small employers--from offering retirement 
plans; and (4) keep the rules simple and easy to understand.
    It is our view that together H.R. 1102 and H.R. 1546 
achieve these objectives.

     I. Establish Appropriate and Effective Incentives to Save for 
                               Retirement

A. Raise Low Caps That Unnecessarily Limit Retirement Savings.

    In order to increase retirement savings, Congress must 
provide working Americans with the incentive to save and the 
means to achieve adequate retirement security. Current tax law, 
however, imposes numerous limitations on the amounts that 
individuals can save in retirement plans. Indeed, under current 
retirement plan caps, many individuals cannot save as much as 
they need to. One way to ease these limitations is for Congress 
to update the rules governing contribution limits to employer-
sponsored plans and IRAs. Increasing these limits will 
facilitate greater retirement savings and help ensure that 
Americans will have adequate retirement income.
    H.R. 1102 contains several provisions that would address 
this issue, which the Institute strongly supports. Section 101 
of the bill would increase 401(k) plan and 403(b) arrangement 
contribution limits to $15,000 from the current level of 
$10,000; government-sponsored 457 plan contribution limits 
would increase to $15,000 from the current level of $8,000. 
Another important provision of H.R. 1102 would repeal the ``25% 
of compensation'' limitation on contributions to defined 
contribution plans. These limitations can prevent low and 
moderate-income individuals from saving sufficiently for 
retirement. (As is noted below, the repeal of these limitations 
is also necessary in order to enable many individuals to take 
advantage of the ``catch-up'' proposal in the bill.) H.R. 1546 
contains similar provisions.
    H.R. 1546 also contains an additional proposal that the 
Institute urges Congress to enact. Specifically, Section 101 of 
H.R. 1546 would increase the annual IRA contribution limit to 
$5,000 and permit future adjustments to account for 
inflation.\4\ Today's $2,000 contribution limit was set in 
1981--almost 20 years ago. If adjusted for inflation, this 
limit would be at about $5,000 today. IRAs are a critical 
component of the personal savings tier of the nation's three-
tiered approach to retirement savings. But at the current 
$2,000 contribution limit IRAs no longer provide sufficient 
savings opportunities for many Americans in light of its loss 
of real value to inflation over time, longer anticipated life 
expectancies and continuing increases in medical costs for our 
elderly population. Only the IRA is available to all working 
individuals, including those without access to an employer-
sponsored plan. Raising the IRA contribution limit will provide 
all individuals with expanded retirement savings opportunities.
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    \4\ H.R. 1102 proposes such an increase, but limits its 
availability only to individuals able to make a fully deductible 
contribution under current income-based eligibility rules. This 
targeted approach complicates these rules, which, as we explain below, 
already are too confusing. Confusing eligibility rules deter individual 
participation in the IRA program.

B. Simplify IRA Eligibility Rules And Bring Back The Universal 
---------------------------------------------------------------------------
Deductible IRA.

    H.R. 1546 would simplify IRA eligibility criteria. Current 
eligibility rules are so complicated that even individuals 
eligible to make a deductible IRA contribution are deterred 
from doing so. When Congress imposed the current income-based 
eligibility criteria in 1986, IRA participation declined 
dramatically--even among those who remained eligible for the 
program. At the IRA's peak in 1986, contributions totaled 
approximately $38 billion and about 29% of all families with a 
head of household under age 65 had IRA accounts. Moreover, 75% 
of all IRA contributions were from families with annual incomes 
less than $50,000.\5\ However, when Congress restricted the 
deductibility of IRA contributions in the Tax Reform Act of 
1986, the level of IRA contributions fell sharply and never 
recovered--to $15 billion in 1987 and $8.4 billion in 1995.\6\ 
Among families retaining eligibility to fully deduct IRA 
contributions, IRA participation declined on average by 40% 
between 1986 and 1987, despite the fact that the change in law 
did not affect them.\7\ The number of IRA contributors with 
income of less than $25,000 dropped by 30% in that one year.\8\ 
Fund group surveys show that even more than a decade later, 
individuals did not understand the eligibility criteria.\9\
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    \5\ Venti, Steven F., ``Promoting Savings for Retirement 
Security,'' Testimony prepared for the Senate Finance Subcommittee on 
Deficits, Debt Management and Long-Term Growth (December 7, 1994).
    \6\ Internal Revenue Service, Statistics of Income.
    \7\ Venti, supra at note 4.
    \8\ Internal Revenue Service, Statistics of Income.
    \9\ For example, American Century Investments asked 534 survey 
participants, who were self-described ``savers,'' ten general questions 
regarding IRAs. One-half of them did not understand the current income 
limitation rules or the interplay of other retirement vehicles with IRA 
eligibility. Based on survey results, it was concluded that ``changes 
in eligibility, contribution levels and tax deductibility have left a 
majority of retirement investors confused.'' ``American Century 
Discovers IRA Confusion,'' Investor Business Daily (March 17, 1997). 
Similarly, even expansive changes in IRA eligibility rules, when 
approached in piecemeal fashion, require a threshold public education 
effort and often generate confusion. See, e.g., Crenshaw, Albert B., 
``A Taxing Set of New Rules Covers IRA Contributions,'' The Washington 
Post (March 16, 1997) (describing 1996 legislation enabling non-working 
spouses to contribute $2,000 to an IRA beginning in tax year 1997).
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    Based on these data, the Institute recommends the repeal of 
the IRA's complex eligibility rules, as proposed in H.R. 1546. 
These rules deter lower and moderate income individuals from 
participating in the program. A return to a ``universal'' IRA 
would result in increased savings by middle and lower-income 
Americans.

 II. Enact Savings Proposals That Reflect Workforce Trends and Savings 
                                Patterns

A. Make Retirement Account Balances Portable.

    On average, individuals change jobs once every five years. 
Current rules restrict the ability of workers to roll over 
their retirement account from their old employer to their new 
employer. For example, an employee in a 401(k) plan who changes 
jobs to work for a state or local government may not currently 
take his or her 401(k) balance and deposit it into the state or 
local government's pension plan. Thus, the Institute strongly 
supports Sections 301 and 302 of H.R. 1102, which would enhance 
the ability of American workers to take their retirement plan 
assets to their new employer when they change jobs by 
facilitating the portability of benefits among 401(k) plans, 
403(b) arrangements, 457 state and local government plans and 
IRAs. This change in the law would make it easier for 
individuals to consolidate and manage their retirement savings. 
A related proposal in H.R. 1546 would clarify the ability of 
individuals to open an IRA ``on-line.'' Such clarification of 
the law would facilitate individuals seeking to directly 
rollover retirement plan assets in a computer-based environment 
and thus encourage the preservation of retirement savings.\10\
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    \10\ Increasingly, individuals are able to access plan account 
balances on-line. According to one 1998 study, approximately 26 percent 
of mid-size companies currently provide Internet access to plan 
accounts. This number is expected to increase. Indeed, one mutual fund 
complex has reported that more 401(k) plan participants access plan 
information on-line than contact the company's phone representatives to 
do so.

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B. Allow Individuals To ``Catch-Up'' When Able.

    The laws governing pension plans also must be flexible 
enough to permit working Americans to make additional 
retirement contributions when they can afford to do so. 
Individuals, particularly women, may leave the workforce for 
extended periods to raise children. In addition, many Americans 
are able to save for retirement only after they have purchased 
their home, raised children and paid for their own and their 
children's college education. Section 201 of H.R. 1102 and 
Section 401 of H.R. 1546 would address these concerns by 
permitting additional salary reduction ``catch-up'' 
contributions. The catch-up proposal in H.R. 1102 would permit 
individuals at age 50 to save an additional $5,000 annually on 
a tax-deferred basis. Similarly, H.R. 1546 would permit the 
same individuals to increase their contributions by 50% over 
the otherwise permitted amounts. The idea is to let individuals 
who may have been unable to save aggressively during their 
early working years to ``catch up'' for lost time during their 
remaining working years. H.R. 1546 takes the additional step of 
exempting the catch-up contributions from nondiscrimination 
testing. We believe this is necessary to maximize the 
provision's effectiveness. Repeal of the ``25% of 
compensation'' limit, which is proposed in both bills, could 
further enhance the ability of Americans to ``catch-up'' on 
their retirement savings.
    The ``catch-up'' is an excellent idea and is a sorely 
needed, practical response to the work and savings patterns of 
Americans today. We urge Congress to act on this proposal.

       III. Expand Retirement Plan Coverage Among Small Employers

A. Eliminate Unnecessary Regulatory Disincentives To Plan 
Formation.

    The current regulatory structure applied to retirement 
plans contains many complicated and overlapping administrative 
and testing requirements that serve as a disincentive to 
employers, especially small employers, to sponsor retirement 
plans for their workers. Easing these burdens will promote 
greater retirement plan coverage and result in increased 
retirement savings.
    Meaningful pension reform legislation must focus on the 
need to increase pension plan coverage among small businesses. 
Although these businesses employ millions of Americans, less 
than 20 percent of them provide a retirement plan for their 
employees. By comparison, about 84 percent of employers with 
100 or more employees provide pension plans for their 
workforce.\11\
---------------------------------------------------------------------------
    \11\ EBRI Databook on Employee Benefits (4th edition), Employee 
Benefit Research Institute (1997).
---------------------------------------------------------------------------
    Unnecessarily complex and burdensome regulation continues 
to deter many small businesses from establishing and 
maintaining retirement plans. The ``top-heavy rule'' is one 
example of such unnecessary rules.\12\ A 1996 U.S. Chamber of 
Commerce survey found that the top-heavy rule is the most 
significant regulatory impediment to small businesses 
establishing a retirement plan.\13\ The rule imposes 
significant compliance costs and is particularly costly to 
small employers, which are more likely to be subject to the 
rule. It is also unnecessary because other tax code provisions 
address the same concerns and provide similar protections. 
While the Institute believes the top-heavy rule should be 
repealed, Section 104 of H.R. 1102 would make significant 
changes to the rule, which would diminish its unfair impact on 
small employers.
---------------------------------------------------------------------------
    \12\ The top-heavy rule is set forth at Section 416 of the Internal 
Revenue Code. The top-heavy rule looks at the total pool of assets in a 
plan to determine if too high a percentage (more than 60 percent) of 
those assets represent benefits for ``key'' employees. If so, the 
employer is required to (1) increase the benefits paid to non-key 
employees, and (2) accelerate the plan's vesting schedule. Small 
businesses are more likely to have individuals with ownership interests 
working at the company and in supervisory or officer positions, each of 
which are considered ``key'' employees, thereby exacerbating the impact 
of the rule.
    \13\ Federal Regulation and Its Effect on Business--A Survey of 
Business by the U.S. Chamber of Commerce About Federal Labor, Employee 
Benefits, Environmental and Natural Resource Regulations, U.S. Chamber 
of Commerce, June 25, 1996.
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B. Provide Incentives To Encourage Small Employers To Establish 
Plans.

    In addition to eliminating rules that deter small 
businesses from establishing retirement plans, such employers 
also need appropriate tax incentives to encourage plan 
formation and address their unique economic concerns. There are 
two tax incentives, which are proposed, that we believe would 
effectively encourage small employers.
    First, Congress should provide a tax benefit that would 
reduce the start-up costs associated with establishing a 
pension plan. Both H.R. 1102 and H.R. 1546 propose a tax credit 
for small employers of up to 50% of the start-up costs of 
establishing a plan up to $1,000 for the first credit year and 
$500 for each of the second and third year after the plan is 
established. This modest tax credit would encourage more small 
employers to establish retirement plans by diminishing initial 
costs.
    Second, Congress should provide assistance to small 
employers who would like to contribute to a retirement plan for 
their employees in addition to offering them a salary deferral 
plan. Because many small employers have cash flow constraints, 
they are often reluctant to make a commitment to contribute to 
a retirement plan for their employees. H.R. 1546 would grant 
small employers a tax credit for 50 percent of their 
contributions (up to 3% of employee compensation) to a plan for 
non-highly compensated employees during the first 5 years of a 
plan's operation. This proposal is effectively designed to 
assure it helps those who need assistance the most--smaller 
employers and lower-paid individual employees--and would be an 
excellent way to help small employers deliver a meaningful 
retirement benefits to lower-paid employees.

C. Expand The Effective SIMPLE Plan Program.

    The Institute also strongly supports expanding current 
retirement plans targeted at small employers. Specifically, the 
Institute supports expansion of the SIMPLE plan program, which 
was instituted in 1997 and offers small employers a truly 
simple, easy-to-administer retirement plan.
    The SIMPLE program has been very successful. The Institute 
has found a continued pattern of strong small employer interest 
in SIMPLE plans over the program's two-year history. Indeed, 
new SIMPLE plan formation has continued unabated in the second 
year of its availability. Based on Institute estimates, mutual 
funds held in SIMPLE IRAs experienced tremendous growth in 
1998, increasing from $0.3 billion to $2 billion.
    Additionally, information gathered in informal Institute 
surveys of its members demonstrates just how popular this 
program is. For instance, one firm alone reported almost 10,000 
SIMPLE plans and 47,000 SIMPLE accounts as of December 31, 
1997. This increased by about 50 percent over the next quarter 
to about 14,000 plans and 72,000 accounts. By year-end 1998, 
the firm had an estimated 23,000 SIMPLE plans and 219,000 
accounts. Thus, over one year the number of SIMPLE plans had 
more than doubled and the number of SIMPLE accounts had more 
than quadrupled. Other firms for which such data are available 
demonstrate similar growth rates. An Employee Benefit Research 
Institute study published in October 1998 similarly 
demonstrates the effectiveness of the SIMPLE, finding that 12% 
of small employers with a defined contribution plan report 
having established a SIMPLE plan over a period of less than 2 
years. By comparison, only 9% of small employers surveyed 
sponsored a SEP, a program that has been available since 
1979.\14\
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    \14\ Paul Yakoboski and Pamela Ostuw, ``Small Employers and the 
Challenge of Sponsoring a Retirement Plan: Results of the 1998 Small 
Employer Retirement Survey,'' EBRI Issue Brief No. 202 (Employee 
Benefit Research Institute, October 1998).
---------------------------------------------------------------------------
    Moreover, the SIMPLE plan has been especially popular with 
the nation's smallest employers. Institute surveys indicate 
that about 90% of those employers establishing SIMPLE plans had 
10 or fewer employees. Employers with 25 or fewer employees 
constitute nearly the entire market.\15\
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    \15\ Institute informal survey results suggest that SIMPLE plan 
formation is negligible for employers of more than 25 employees.
---------------------------------------------------------------------------
    The success of the SIMPLE program is extremely significant, 
because the lack of retirement plan coverage in the small 
employer population has been stubbornly nonresponsive to 
previous policy initiatives and industry efforts. As noted 
above, under 20 percent of employers with less than 100 
employees provide a retirement plan for their employees, as 
compared to about 84 percent of employers with 100 or more 
employees.
    Despite these successes, Congress can strengthen the SIMPLE 
program in two ways, each of which the Institute strongly 
supports. First, both H.R. 1102 and H.R. 1546 would raise the 
SIMPLE plan contribution limits from $6,000 to $10,000. This 
increase would assure that individuals who work for small 
employers will have opportunities to accumulate sufficient 
retirement savings. (As noted above, other provisions of the 
bills would increase the contribution limits for 401(k), 403(b) 
and 457 plans.) Second, H.R. 1102 would provide for a salary-
reduction-only SIMPLE plan. We believe that this would make the 
program much more effective for employers of 25-100 employees.

              IV. Simplify Unnecessarily Complicated Rules

    Simplicity is the key to successful retirement savings 
programs. This is the lesson of the SIMPLE and IRA programs. 
H.R. 1102 recognizes the need to keep the rules simple in the 
case of employer-sponsored plans. As we have noted above, 
complex and confusing rules diminish retirement plan formation 
and significantly reduce individual participation in retirement 
savings programs. We strongly support numerous provisions in 
H.R. 1102 that would simplify rules. We discuss several of 
these provisions below.
    First, H.R. 1102 would provide a new automatic contribution 
trust nondiscrimination safe harbor. This safe harbor would 
simplify plan administration for employers electing to use it, 
enabling them to avoid costly, complex and burdensome testing 
procedures.\16\ This provision is also an effective way to 
increase participation rates in 401(k) plans, especially the 
participation rates of non-highly compensated employees.
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    \16\ To qualify for the safe harbor, employers would need to make 
automatic elective contributions on behalf of at least 70% of non-
highly compensated employees and match non-highly compensated employee 
contributions at a rate of 50% of contributions up to 5% or make a 2% 
contribution on behalf of each eligible employee.
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    Second, the bill also would modify the anticutback rules 
under section 411(d)(6) of the Internal Revenue Code in order 
to permit plan sponsors to change the forms of distributions 
offered in their retirement plans. Specifically, the bill would 
permit employers to eliminate forms of distribution in a 
defined contribution plan if a single sum payment is available 
for the same or greater portion of the account balance as the 
form of distribution being eliminated. This proposed 
modification of the anticutback rule would make plan 
distributions easier to understand, reduce plan administrative 
costs and continue to adequately protect plan participants. In 
addition, H.R. 1102 would permit account transfers between 
defined contribution plans where forms of distributions differ 
between the plans; this modification of the anticutback rule 
also would simplify plan administration. It also would enhance 
benefit portability, which, as noted above, is an important 
public policy objective.
    Finally, H.R. 1102 contains other provisions that would 
simplify currently burdensome rules and which the Institute 
supports. These proposals include repeal of the multiple use 
test and simplification of the separate line of business rules.

                             V. Conclusion

    Improving incentives to save by increasing contribution 
limits to retirement plans and IRAs will provide more 
opportunities for Americans to save effectively for retirement. 
Similarly, rules that accommodate the work and savings patterns 
of today will enable millions of Americans to save toward a 
secure future in their retirement years. Additionally, 
providing appropriately structured tax incentives, such as 
start-up and contribution tax credits for small employers, 
would increase plan formation. And finally, simplifying the 
rules applicable to employer-sponsored plans and IRAs would 
result in a greater number of employer-sponsored plans, a 
higher rate of worker coverage and increased individual 
savings. The Institute strongly supports the provisions 
described above and commends the sponsors of H.R. 1102 and H.R. 
1546 for supporting reforms of the pension system that will 
increase plan coverage and encourage Americans to save for 
their retirement. We encourage members of this Committee and 
Congress to enact this legislation this year.
      

                                


Statement of National Association of Manufacturers

    Mr. Chairman, we are pleased to submit the following 
statement for the record in support of Section 510 of H.R. 
1102, the ``ESOP Dividends May Be Reinvested Without Loss of 
Dividend Deduction'' provision. We are submitting this 
statement on behalf of the National Association of 
Manufacturers--``18 million people who make things in 
America''--the nation's largest and oldest multi-industry trade 
association. The NAM represents 14,000 members (including 
10,000 small and mid-sized companies) and 350 member 
associations serving manufacturers and employees in every 
industrial sector and all 50 states. Headquartered in 
Washington, DC., the NAM also has 11 additional offices across 
the country.
    The Comprehensive Retirement Security and Pension Reform 
Act of 1999 (H.R. 1102), cosponsored by Reps. Rob Portman (R-
OH) and Ben Cardin (D-MD), has attracted over 101 bipartisan 
cosponsors to date. The NAM strongly supports this legislation 
that would make pensions more secure and cut red tape, thereby 
encouraging greater pension coverage. Given the impending 
retirement of the baby boom generation, the passage of pension 
reform legislation is especially critical.
    Among the many provisions of H.R. 1102 is Section 510 
(``ESOP Dividends May Be Reinvested Without Loss of Dividend 
Deduction''), which would promote two critical and intertwined 
goals: to encourage workers to save for retirement and to 
promote employee ownership in their companies in which they 
work. Under current law, employers are able to deduct dividends 
on employer stock held in the employee stock ownership plan 
(ESOP), provided the dividends are paid out in cash to 
participants. The deduction is also permitted in the case of a 
leveraged ESOP, provided the dividends are used to make 
payments on a loan that was made for purposes of acquiring 
company stock for the ESOP.
    While current law encourages employee ownership, it fails 
to fulfill another important goal. It prohibits employees from 
reinvesting those dividends in the plan. This is especially 
unfortunate given the low rate of national savings and the need 
for baby boomers, in particular, to prepare for their 
retirement. Although it is currently possible for some workers 
to reinvest some dividends in the ESOP through an IRS special 
letter ruling, the process is cumbersome, and the dividends 
count toward the employee's 401(k) limits, diminishing what can 
be saved in the plan. Codification of ESOP dividend 
reinvestment would solve this problem.
    There are approximately 10,000 ESOPs in the United States 
with 10 million employee owners. This is almost 10 percent of 
the American workforce. Both large and small firms participate. 
Of the NAM's membership, over 7 percent of small firms have 
ESOPs and in the large firm category the percentage is much 
greater. ESOPs promote employee ownership and a stake in 
America's future. Legislative means to promote their growth 
should be encouraged. Section 510 is an important step in this 
regard.
    Section 510 has attracted wide support. In addition to the 
growing list of bipartisan cosponsors for H.R. 1102, more than 
15 members of the Ways and Means Committee have written to the 
original cosponsors of H.R. 1102, Reps. Rob Portman and Ben 
Cardin, praising the concept of employee stock ownership and 
urging a change in the law to permit an employer dividend 
deduction so employees can reinvest their dividends and save 
for retirement and for other important purposes.
    On behalf of the NAM's 14,000 members, we urge your support 
for Section 510 as part of H.R. 1102. Taken together, ESOP 
dividend reinvestment and the other important provisions of 
H.R. 1102 would do much to build retirement security for 
America's workers and to encourage continued economic growth 
for America's future.
      

                                


Statement of National Association of Professional Employer 
Organizations, Alexandria, Virginia

                            I. INTRODUCTION

    The National Association of Professional Employer 
Organizations (NAPEO) appreciates the opportunity to submit 
this statement for the record of the Committee's hearing on 
retirement and savings issues. NAPEO is the national trade 
association of the professional employer organization (PEO) 
industry. NAPEO represents nearly 600 member firms from start-
ups to large, publicly traded companies. NAPEO members are 
found in all 50 states and employ the vast majority of worksite 
employees in PEO arrangements.
    We applaud the Committee's interest in these issues and 
willingness to look at the tax code for ways to address our 
savings problem in this country, particularly our pending 
retirement savings crisis. It is our view that only through a 
partnership between the government and the private sector can 
this crisis be averted.
    NAPEO's members would like to participate in that effort 
and in fact, we think that we are already doing so. That is 
because our members are in the business of expanding coverage 
and providing benefits to American workers. The professional 
employer organization or ``PEO'' assists mainly workers of 
small- and medium-size businesses. While the owners of these 
small and med-sized businesses focus on the ``business of their 
business'' PEOs assume the responsibilities and liabilities of 
the ``business of employment.'' The PEO assumes responsibility 
for paying wages and employment taxes generally to all the 
workers of its client companies. It maintains employee records, 
handles employee complaints, and provides employment 
information to workers, such as an employee handbook.
    Most significantly, the PEO provides to the workers of its 
customers retirement (usually a 401(k) plan), health, dental, 
life insurance, dependent care and other benefits, which for 
many of these workers is the first opportunity that they have 
had to obtain these benefits through their employment.
    The average NAPEO member customer is a small business with 
just 18 workers and the average wage of these workers is around 
$20,000. These are truly small businesses with employees 
attempting to provide a working wage for themselves and their 
families. Unfortunately, because these workers are employees of 
small businesses, they are often left without the option of 
needed employee benefits.
    A recent Dun & Bradstreet Corporation survey of businesses 
with fewer than 25 employees revealed that only 39% offered 
health care and just 19% offer retirement savings plans. PEOs, 
on the other hand, can provide benefits to these workers on a 
more affordable basis because they can aggregate the workers of 
all of their customers together into a larger group, thereby 
obtaining economies of scale that enable them to set up a 
qualified plan and purchase group health and other employee 
benefit plans. PEOs have the expertise to operate these plans 
in compliance with a rather complex set of requirements imposed 
by the tax code and ERISA.
    An analyst at Alex. Brown & Sons estimates that 40% of 
companies in a PEO co-employment relationship upgrade their 
total employee benefits package as a result of the PEO 
relationship and further, that 25% of the companies upgrading 
their benefits are offering health care and other benefits to 
their workers for the first time.
    A NAPEO survey of its members revealed that 98% offer 
health and dental insurance, 86% offer disability coverage, 80% 
offer vision care and 82% offer retirement savings plans.
    Moreover, in some cases, workers co-employed by a PEO 
obtain the benefits of COBRA rights and the protection of other 
employment laws and regulations, only because they are included 
in the larger workforce of a PEO. By pooling employees of small 
businesses, PEOs bring workers under the protection of federal 
laws applicable to large employers such as HIPPA and the Family 
and Medical Leave Act. In addition, there is generally a higher 
rate of compliance with COBRA and other laws by a professional 
employer (PEO) than by its various clients. PEOs employ staff 
who are knowledgeable about these laws and regulations, and who 
are responsible for addressing employment concerns of worksite 
employees.

          II. PROBLEMS WITH PRESENT LAW: AN OUTDATED TAX CODE

    PEOs have found a need for these types of skills and 
benefits in the market place, as small- and medium-sized 
businesses have slowly but steadily sought out the services of 
PEOs over the past decade. The industry has expanded to meet 
this demand. At the state level, NAPEO sought recognition for 
PEOs and supported regulation, such as licensing, to ensure 
that the industry could grow.
    At the Federal level, however, PEOs have been confronted 
with a tax code that was written long before the development of 
this industry. Therefore, the current rules for who can collect 
taxes and provide benefits do not neatly fit a PEO, its 
customers and workers. In fact, under some interpretations of 
the tax law, PEOs could not do the very things that small 
businesses want and need: collect employment taxes and provide 
retirement, health and other benefits.
    Last year, Congressman Portman (R-OH) and Congressman 
Cardin (D-MD) attempted to address this problem by introducing 
H.R. 1891, which gained the support of 27 Members of this 
Committee. After its introduction, the sponsors and the 
industry met with other interested parties, including the 
Administration, who raised some specific concerns with the 
original bill. As a result, we went back to the drawing board 
to try to come up with an approach to our problem that was 
narrower, addressing the expressed concerns yet allowing us to 
do what we were already doing for small businesses and 
workers--providing benefits and collecting taxes.

              III. REVISED PROPOSAL: CERTIFIED PEO STATUS

    We are pleased to present to the Committee the fruits of 
those efforts--a revised proposal that continues to enjoy the 
support of our original sponsors, Mr. Portman and Mr.
    Cardin, and addresses the concerns raised by the 
Administration with the original proposal. This new proposal, 
unlike H.R. 1891, applies only to PEOs, not to temporary or 
other staffing firms. Thus, the proposal would not affect the 
litigation pending in the 9th Circuit, or any similar 
litigation. Nor does the proposal make any changes in the 
common law tests for who is an employee. In fact, the proposal 
specifically states this through the inclusion of a no-
inference rule with respect to employment status.
    In brief, what the new proposal does is to provide a safe 
harbor for PEOs who elect to meet certain requirements, which 
permits a PEO to assume liability for employment taxes with 
respect to worksite employees and to offer retirement and other 
benefits to such workers. In order to take advantage of this 
safe harbor, a PEO must be certified by the IRS. The 
certification requirements include a net worth test (if a PEO 
wants to have exclusive liability for employment taxes), and 
the submission of an annual audit by a CPA.
    In order to prevent a customer from obtaining any better 
treatment under the tax code's nondiscrimination or other 
qualification rules under this proposal, a PEO's qualified plan 
would be tested under these rules on a customer-by-customer 
basis. A more detailed summary of the proposal is attached as 
an appendix.

     IV. CONCLUSION: WORKERS GET THE BENEFITS THEY NEED AND DESERVE

    Most importantly, this clarification of a PEOs' ability to 
offer retirement and health benefits permits the industry to 
continue to provide the workers of small and medium businesses 
with the benefits that they need and deserve. Current PEO 
customers can breathe a sigh of relief that the PEO plans in 
which their workers are currently participating will not be 
disqualified. PEOs can establish new plans under clear tax code 
rules. The market place's creative response to the difficulties 
of affording and providing benefits in a small business context 
can flourish without the uncertainty imposed by outdated tax 
rules. We believe this represents an ideal model of the public-
private partnership that is needed to address the impending 
retirement savings crisis as well as the immediate health 
problem presented by our country's uninsured workers, and we 
urge its support by this Committee.
      

                                


Overview of Proposed Certified Professional Employer Organization 
Legislation

                         I. Guiding Principles

     Difficulties in reaching conclusions regarding the 
highly factual determination of an ``employee'' and an 
``employer'' should not limit the ability to provide workers 
with retirement, health, and other employee benefits.
     Clients of the CPEO should generally not get any 
significantly better or worse treatment under the 
nondiscrimination or other qualification rules than they would 
get outside of the CPEO arrangement.
     Employment tax administration should not be 
significantly affected by the use of a CPEO.

                         II. General Structure

    If certain conditions are satisfied, an entity certified by 
the Internal Revenue Service as a Certified Professional 
Employer Organization (a ``CPEO'') will be allowed to elect (1) 
to take responsibility for employment taxes with respect to 
worksite employees and (2) to provide such workers with 
employee benefits under a single employer plan sponsored by the 
CPEO.

     III. No Inference with Respect to Employment Status of Workers

    The legislation will expressly state that it does not 
override the common law determination of an individual's 
employer. The legislation will not affect (and will explicitly 
state that it does not affect) the determination of who is a 
common law employer under federal tax laws or who is an 
employer under other provisions of law (including the 
characterization of an arrangement as a MEWA under ERISA), nor 
will status as a CPEO (or failure to be a CPEO) be a factor in 
determining employment status under current rules.

                        IV. Certification by IRS

    In order to be certified as a CPEO under the legislation, 
an entity must demonstrate to the IRS by written application 
that it meets (or will meet) certain requirements. Generally, 
the requirements for certification will be developed by the IRS 
using requirements similar to the requirements for the ERO 
(electronic return originator) program and to practice before 
the IRS, as described in Circular 230 and will include review 
of the experience of the PEO and audit conducted by a certified 
public accountant. In addition, in order to be certified, a 
CPEO must represent that it (or the client) will maintain a 
qualified retirement plan for the benefit of 95% of worksite 
employees.
    The CPEO must notify the IRS in writing of any change that 
affects the continuing accuracy of any representation made in 
the initial certification request. In addition, after initial 
certification, the CPEO must continue to file copies of its 
audited financial statements with the IRS within 180 days after 
the close of each fiscal year.
    Procedures would be established for suspending or revoking 
CPEO status (similar to those under the ERO program). There 
would be a right to administrative appeal from an IRS denial, 
suspension, or revocation of certification.

       V. Operation As a CPEO With Respect to Particular Workers

    After certification, a CPEO will be allowed (1) to take 
responsibility for employment taxes and (2) to provide employee 
benefits with respect to ``worksite employees.'' A worker is a 
``worksite employee'' if the worker and at least 85% of the 
individuals working at the worksite are subject to written 
service contracts that expressly provide that the CPEO will:
     Assume responsibility for payment of wages to the 
worker, without regard to the receipt or adequacy of payment 
from the client for such services;
     Assume responsibility for employment taxes with 
respect to the worker, without regard to the receipt of 
adequacy of payment from the client for such services;
     Assume responsibility for any worker benefits that 
may be required by the service contract, without regard to the 
receipt or adequacy of payment from the client for such 
services;
     Assume shared responsibility with the client for 
firing the worker and recruiting and hiring any new worker; and
     Maintain employee records.
    For this purpose, a worksite would be defined as a physical 
location at which a worker generally performs service or, if 
there is no such location, the location from which the worker 
receives job assignments. Contiguous locations would be treated 
as a single physical location. Noncontiguous locations would 
generally be treated as separate worksites, except that each 
worksite within a reasonably proximate area would be required 
to satisfy the 85% test for the workers at that worksite.
    The legislative history will indicate that the 85% rule is 
intended to describe the typical, non-abusive PEO arrangement 
whereby a business contracts with a PEO to take over 
substantially all its workers at a particular worksite, and 
that this 85% rule is intended to ensure that the benefits of 
the bill are not available in any situation in which a business 
uses a PEO arrangement to artificially divide its workforce.

                    VI. CPEO Employee Benefit Plans

A. CPEO May Sponsor Employee Benefit Plans

    The CPEO may provide worksite employees with any type of 
retirement plan or welfare benefit plan that the client could 
provide. Worksite employees may not, however, be offered a plan 
that the client would be prohibited from offering on its own. 
For example, government workers may not be offered 
participation in section 401(k) plan. Similarly, a CPEO may not 
sponsor a plan that it would be prohibited from offering on its 
own (e.g., a section 403(b) plan). However, an eligible client 
could maintain such plan as discussed below.
    In general, employee benefit provisions (in the Internal 
Revenue Code and in directly correlative provisions in other 
Federal law) that reference the size of the employer or number 
of employees will generally be applied based on the size or 
number of employees of the CPEO. For example, CPEO workers will 
be entitled to COBRA coverage. Similarly, a CPEO welfare 
benefit plan will be treated as a single employer plan for 
purposes of section 419A(f)(6). Plan reporting requirements are 
met at the CPEO level. However, a client which could meet the 
size requirements for eligibility for an MSA or a SIMPLE plan 
could contribute to such an arrangement maintained by the CPEO.

B. Nondiscrimination testing

    The nondiscrimination rules of the Code relating to 
employee benefit plans (including sections 401(a)(4), 
401(a)(17), 401(a)(26), 401(k), 401(m), 410(b) and 416 and 
similar rules applicable to welfare and fringe benefit plans) 
will generally be applied on a client-by-client basis.
    That portion of the CPEO plan covering worksite employees 
with respect to a client will be tested taking into account the 
worksite employees at a client location and all other 
nonexcludable employees of the client, but worksite employees 
would not be included in applying the nondiscrimination rules 
to portions of the plan including worksite employees of other 
clients, to the portion of the plan including non-worksite 
employees, to other plans maintained by the CPEO or to other 
plans maintained by members of the CPEO's controlled group. 
Consequently, the CPEO workforce (other than worksite 
employees) will be treated as a separate employer for testing 
purposes (and will be included in applying the 
nondiscrimination rules to plans maintained by the CPEO or 
members of its controlled group). Thus, for example, in 
applying nondiscrimination rules to a plan maintained by the 
parent of a CPEO for employees of the parent and for 
nonworksite employees of the CPEO, CPEO worksite employees will 
not be taken into account.
    For purposes of testing a particular client's portion of 
the plan under the rules above, general rules applicable to 
that client would apply as if the client maintained that 
portion of the plan. Thus, if the terms of the benefits 
available to the client's worksite employees satisfied the 
requirements of the section 401(k) testing safe harbor, then 
that client could take advantage of the safe harbor. Similarly, 
a client that meets the eligibility criteria for SIMPLE 401(k), 
testing would be allowed to utilize that safe harbor to 
demonstrate compliance with the applicable nondiscrimination 
rules for that client.
    Application of qualified plan and welfare benefit plan 
rules other than the nondiscrimination rules listed above will 
generally be determined as if the client and the CPEO are a 
single employer (consistent with the principle that the CPEO 
arrangement will not result in better or worse treatment). 
Thus, there would be a single annual limit under section 415. 
Section 415 will provide that any cutbacks required as a result 
of the single annual limit to be made in the client plan. 
Deduction limits and funding requirements would apply at the 
CPEO level. In determining deduction limits and minimum funding 
requirements for the CPEO plan, compensation means compensation 
paid to worksite employees by the CPEO. In addition, if the 
client portion of a plan is part of a top heavy group, any 
required top heavy minimum contribution or benefit will 
generally need to be made by the CPEO plan.
    The legislation will also contain language giving the IRS 
the authority to promulgate rules and regulations that 
streamline, to the extent possible, the application of certain 
requirements, the exchange of information between the client 
and the CPEO, and the reporting and record keeping obligations 
of the CPEO with respect to its employee benefit plans.

C. Service Crediting

    There will be special ``crediting'' of service for all 
benefit purposes. The break in service rules will be applied 
with respect to worksite employees using rules generally based 
on the Code section 413 tracking rules.
    Worksite employees will not generally be entitled to 
receive plan distributions of elective deferrals until the 
worker leaves the CPEO group. In cases where a client 
relationship terminates with a CPEO that sponsors a plan, the 
CPEO will be able to ``spin off'' the former client's portion 
of the plan to a new or existing plan maintained by the client. 
Where the terminated client does not establish or wish to 
maintain the client's portion of the CPEO plan, the CPEO plan 
may distribute elective deferrals of worksite employees 
associated with a terminated client only in a direct rollover 
to an IRA designated by the worker. In the event that no such 
IRA is so designated before the second anniversary of the 
termination of the CPEO/client relationship, the assets 
attributable to a client's worksite employees may be 
distributed under the general plan terms (and law) that applies 
to a distribution upon a separation from service.

D. Plan Qualification

    The legislative history will provide that, similar to IRS 
practice in multiple employer plans, disqualification of the 
entire plan will occur if a nondiscrimination failure occurs 
with respect to worksite employees of a client and either that 
failure is not corrected under one of the IRS correction 
programs or that portion of the plan is not spun off and/or 
terminated. Existing government programs for correcting 
violations would be available to the plan sponsor for the plan 
and, in the case of nondiscrimination failures tested at the 
client level, to the client portion of the plan with the fee to 
be based on the size of the affected client's portion of the 
plan. Moreover, the CPEO plan, as a single employer plan, will 
only be required to obtain a single opinion letter and pay a 
single user fee.

E. Testing of Plans Maintained by Client

    The legislation will treat all worksite employees (who are 
not employees of the client) as ``per se'' leased employees of 
the client, thus requiring clients to include to include all 
worksite employees in plan testing. In accordance with current 
leased employee rules, the client will get credit for CPEO plan 
contributions or benefits made on behalf of worksite employees.
    Consistent with this treatment of worksite employees, the 
client would be permitted to cover worksite employees under any 
employee benefit plan maintained by the client and compensation 
paid by the CPEO to worksite employees would be treated as paid 
by the client for purposes of applying applicable qualification 
tests. Limits such as section 404 will apply to the client's 
plan only to the extent the benefits and contributions, in 
aggregation with those under the CPEO's plan, do not exceed the 
limits.

F. Transition Issues

    The legislation will direct the IRS to accommodate 
transfers of assets in existing plans maintained by a CPEO or 
CPEO clients into a new plan (or amended plan) meeting the 
requirements of the legislation (e.g., client-by-client 
nondiscrimination testing) without regard to whether or not 
such plans might fail the exclusive benefit rule because 
worksite employees might be considered common-law employees of 
the client.

                     VII. Employment Tax Liability

    An entity that has been certified as a CPEO must accept 
liability for employment taxes with respect to wages it pays to 
worksite employees of clients. Such liability will be exclusive 
or primary, as provided below. The PEO would generally be 
required to provide the IRS on an ongoing basis with a list of 
clients for which employment tax liability has been assumed and 
a list of the clients for whom it no longer has employment tax 
liability.
    All reporting and other requirements that apply to an 
employer with respect to employment taxes apply to the CPEO for 
wage payments made by the CPEO. In addition, the remittance 
frequency of employment taxes will be determined with reference 
to collections and the liability of the CPEO.
    Wages paid by the client during the calendar year prior to 
the assumption of employment tax liability would be counted 
towards the applicable FICA or FUTA tax wage base for the year 
in determining the employment tax liability of the CPEO (and 
vice versa). Exceptions to payments as wages or activities as 
employment, and thus to the required payment of employment 
taxes, are determined with respect to the client.
    A CPEO will have exclusive liability for employment taxes 
with respect to wage payments made by the CPEO to worksite 
employees (including owners of the client who are worksite 
employees) if the CPEO meets the net worth requirement. The net 
worth requirement is satisfied if the CPEO's net worth (less 
good will and other intangibles) as certified by an independent 
certified public accountant is, on the last day of the fiscal 
quarter preceding the date on which payment is due and on the 
last day of the fiscal quarter in which the payment is due, at 
least:
    $50,000 if the number of worksite employees is fewer than 
500
    $100,000 if the number of worksite employees is 500 to 
1,499
    $150,000 if the number of worksite employees is 1,500 to 
2,499
    $200,000 if the number of worksite employees is 2,500 to 
3,999
    $250,000 if the number of worksite employees is more than 
3,999.
    In the alternative, the net worth requirement could be 
satisfied through a bond (for employment taxes up to the 
applicable net worth amount) similar to an appeal bond filed 
with the Tax Court by a taxpayer or by an insurance bond 
satisfying similar rules.
    Within 60 days after the end of each fiscal quarter, the 
CPEO will provide the IRS with an attestation from an 
independent certified public accountant that states that the 
accountant has found no material reason to question the CPEO's 
assertions with respect to the adequacy of federal employment 
tax payments for the fiscal quarter. In the event that such 
attestation is not provided on a timely basis, the CPEO will 
prospectively cease to have exclusive liability with respect to 
employment taxes (regardless of the net worth or bonding 
requirement). Exclusive liability will not be restored until a 
subsequent attestation is filed.
    For any tax period for which any of these criteria for 
exclusive liability for employment taxes are not satisfied, or 
to the extent the client has not made adequate payments to the 
CPEO for the payment of wages, taxes, and benefits, the CPEO 
will have primary liability and the client will have secondary 
liability for employment taxes.

                          VIII. Effective Date

    These provisions will be effective on January 1, 2001 or, 
if later, 12 months after the date of enactment. The statute 
will direct the IRS to establish the PEO certification program 
at least three months prior to the effective date.
      

                                


Statement of Kenneth B. Allen, Executive Vice President and Chief 
Executive Officer, National Newspaper Association, Arlington, Virginia

    Thank you for allowing me to submit this testimony on 
behalf of the National Newspaper Association in order to 
comment briefly on the inherent unfairness of the estate tax. 
The National Newspaper Association, established in 1885, 
represents nearly 4,000 daily and weekly newspapers nationwide. 
America's community papers inform, educate and entertain 170 
million readers every week. NNA members are the building blocks 
upon which America's communities are founded. More importantly, 
our members are primarily family-owned businesses. As part of 
the Family Business Estate Tax Coalition, we support the 
reduction and elimination of the estate tax rates, specifically 
the passage H.R. 8, the Death Tax Elimination Act, as 
introduced by Representatives Jennifer Dunn and John Tanner.
    NNA believes the confiscatory nature of the estate tax 
punishes family-owned businesses and entrepreneurs. In fact, 
NNA fully supported the estate tax relief provided by Congress 
in the Taxpayer Relief Act of 1997. That legislation raised the 
exemption from $600,000 to $1 million by 2005. The law also 
created a new $1.3 million exemption from estate taxes for 
small business and farms that qualify as ``family-owned.'' We 
applaud Congress and the President for that key first step. 
However, our goal remains the elimination of the estate tax.
    Many community newspapers are forced to sell when the owner 
dies since their assets are not liquid. The families need to 
sell in order to pay the estate tax. This has a devastating 
impact on the entire community. At minimum, someone from 
outside the community could purchase the paper. In the worst 
cases, the paper is sold and closed. When a newspaper that has 
been covering and reporting local news for several generations 
is either sold or closes its doors, the sense of community is 
lost forever. The newspaper owner's family is not the only one 
paying the tax. The reporter who covers local sports, the 
restaurant owner who feeds the newspaper staff and the 
department store that advertises in the paper all suffer under 
the current system. These are two examples of the impact on 
community papers:
     Everett Bey, Chairman of Feather Publishing 
Company, Inc. is facing this very problem. His company prints 
and publishes six weekly newspapers including the Feather River 
Bulletin, the Indian Valley Record, the Chester Progressive, 
the Westwood Pinepress, the Portola Reporter and the Lassen 
County Times with staff and offices in each location. When Mr. 
Bey's wife passed away two years ago, her shares of the company 
were placed in a trust. When Mr. Bey passes, the entire 
business will be left to his only daughter and her husband. 
Feather Publishing Company, Inc. grosses over $3 million 
annually. Based on these revenues, it is entirely possible that 
the Mr. Bey's daughter will be forced to sell the business--a 
business he has owned for nearly 30 years. Mr. Bey started this 
company with seven employees and today he has almost 100. It is 
fundamentally wrong to punish Mr. Bey's family for their hard 
work and success.
     Another community newspaper publisher, Helen 
Buffington of the Jackson Herald, the Commerce News, the Banks 
County News and the Madison County Journal in Georgia explained 
how she and her husband are preparing to transfer the paper to 
their children. Starting with a struggling Georgia daily paper, 
the Buffingtons built a firm that is now worth more than $2 
million. They have been gifting the business to their sons for 
several years and have spent tens of thousands of dollars on 
legal expenses and insurance premiums in an effort to save 
their children from the