[Congressional Record Volume 140, Number 22 (Thursday, March 3, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 3, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                   NATIONAL RETIREMENT INCOME POLICY

                                 ______


                         HON. NANCY L. JOHNSON

                             of connecticut

                    in the house of representatives

                        Thursday, March 3, 1994

  Mrs. JOHNSON of Connecticut. Mr. Speaker, I rise today to call 
attention to a forward-thinking report compiled by my constituent, 
Michael Callahan, and his colleagues at the American Society of Pension 
Actuaries [ASPA], a professional association based in Arlington, VA. 
Given the declining coverage of Americans under qualified pension plans 
during the 1980's, a substantially lower ratio of workers to retirees 
in the 21st century than today, Americans' low rate of personal 
savings, and a host of other factors, our Nation is at risk of being 
financially unprepared to support future generations of retirees. I 
therefore urge my colleagues to consider the provisions recommended in 
this proposed National Retirement Income Policy prepared by ASPA.

            The Need For a National Retirement Income Policy

       Some will argue that the United States already has a 
     national retirement income policy. That policy is to raise 
     current revenue by reducing incentives for qualified plans, 
     IRAs and personal savings. It encourages continuing changes 
     in pension law and regulation without regard to the effect on 
     the formation and continuation of retirement plans. That is 
     the problem!
       A national retirement income policy aimed at solving the 
     growing retirement income crisis is needed. Four elements are 
     converging to create this crisis:
       1. A ``baby boomer'' population bubble that is moving 
     inexorably toward retirement age.
       2. The low savings rate in the U.S. during the 1980s and 
     into the 1990s.
       3. Substantial and continuing decrease in coverage of 
     workers by private pension plans.
       4. The increasing pressure on our Social Security system.
       The post-World War II ``baby boomers'' will retire between 
     2011 and 2030. Because of the reduction in birth rates and 
     the increase in longevity, the ratio of workers to retirees 
     will drop from the present ratio of 3.2-to-1 to a ratio of 
     2.1-to-1, by 2030. This means that there will be far fewer 
     working age people to support many more retirees. This fact 
     alone underscores the need to fund sufficient pension income 
     in order to limit the burden on our younger generations.
       The problem has been exacerbated by the devastation 
     Congress and other regulators have visited upon the private 
     pension system during the 1980s. Coverage of employees has 
     dropped about 4 percent during this decade. Coverage of 
     employees of small businesses (fewer than 100 employees) has 
     dropped even more.
       We must have a coordinated national retirement income 
     policy to meet this crisis. If we do not start now, the task 
     will become impossible.
       Our recommendations require a coordinated overhaul of this 
     nation's entire pension system. The changes that we suggest 
     are mutually dependent upon each other. When all concepts are 
     viewed together, each change falls into its logical position.
       For a quick overview of our recommendations, please refer 
     to the chart on the next page. It shows expected sources of 
     pension income to meet the ``national pension target'' 
     (recommended replacement ratio of final pay in retirement). 
     The chart also illustrates the interdependence of suggested 
     pension income sources in our national retirement income 
     policy proposal.

                                          NATIONAL PENSION TARGET [NPT]                                         
                     [Recommended replacement ratio of final pay in retirement, in percent]                     
----------------------------------------------------------------------------------------------------------------
                                                       Replacement                                              
                                                          ratio                   Social    Mandatory   Private 
                      Final pay                         (based on    Personal  Security\2\   minimum    plan (to
                                                          final      savings                 pension     attain 
                                                         pay)\1\                                       100% NPT)
----------------------------------------------------------------------------------------------------------------
$20,000..............................................        85.0         6.2        34.5        15.0       29.3
$24,000..............................................        82.8         6.8        28.8        15.0       32.2
$29,000..............................................        80.6         7.4        23.8        15.0       34.4
$35,000..............................................        78.8         8.2        19.7        15.0       35.8
$42,000..............................................        77.3         9.1        16.4        15.0       36.8
$50,000..............................................        76.1        10.0        13.8        15.0       37.3
$60,000..............................................        75.1        11.0        11.5        15.0       37.6
$72,000..............................................        74.3        12.1         9.6        15.0       37.6
$86,000..............................................        73.6        13.4         8.0        15.0       37.2
$103,000.............................................        73.0        14.8         6.7        14.6       36.9
----------------------------------------------------------------------------------------------------------------
\1\Replacement ratio derived from algorithm in our Income Replacement research paper and on page 6 of this      
  Executive Summary.                                                                                            
\2\Assuming our recommended Social Security changes have been fully implemented.                                

                    income replacement in retirement

       What should be the goal of a national retirement income 
     policy? The Income Replacement in Retirement paper centers on 
     quantifying the goal; determining how much income retirees 
     are likely to need. In general, other industrialized 
     countries have replacement ratios of from 60 percent to 85 
     percent of final pay. These countries also have a higher 
     replacement ratio for lower paid workers than for highly paid 
     workers.
       Looking at studies done on the subject in the United 
     States, one finds that the Carter administration reported in 
     its 1981 President's Commission on Pension Policy study that 
     retirees need from 85 percent at lower pay levels down to 50 
     percent at higher pay levels of preretirement income in order 
     to maintain a reasonable standard of living. Colin B. 
     England, FSA, published a study (1987) that took the approach 
     of updating the President's Commission on Pension Policy 
     report to reflect the many tax law changes that occurred in 
     the 1980s. More recently, Georgia State University, in 
     conjunction with the consulting firm Alexander and Alexander, 
     produced a comprehensive study on the subject. Their approach 
     was to utilize Department of Labor statistics on geographical 
     preretirement expense patterns to project postretirement 
     income needs patterns. This study produced tables showing 
     retirement income replacement needs as high as 90 percent at 
     a $15,000 per year preretirement income level to a low of 66 
     percent at a $90,000 annual preretirement level.
       The ASPA NRIP Committee believes that statistics from 
     tracking and comparing actual pre- and postretirement 
     spending patterns are needed to more accurately measure 
     appropriate retirement income replacement needs. Also, we 
     need to get reasonably accurate estimates of postretirement 
     medical expense funding requirements to factor them into the 
     retirement income policy.
       A comprehensive retirement replacement ratio study should 
     also include the projected effects of--
       Federal, state and local tax rates (as the Georgia State 
     study does).
       Various levels of taxation on Social Security benefits.
       Offsets in Social Security benefits by postretirement 
     earned income.
       Factors that cause changes in spending patterns 
     postretirement.
       Until the suggested comprehensive study is done and 
     validated statistics are available, we suggest a ``national 
     pension target'' be established based on an algorithm which 
     ties into the recommendations in our Social Security, 
     Personal Savings, Working Beyond Retirement and Private Plans 
     research papers.
       The NRIP Committee's consistent concept is to use poverty 
     level income as a baseline for desired economic need and 
     living pattern change.
       Our suggested national pension target algorithm is as 
     follows:
       85% of final pay not exceeding three times the poverty 
     level, plus 70% of any additional final pay: 1993 poverty 
     level=$6,810.
       Annual updates of the comprehensive retirement income ratio 
     study will be needed to measure the ongoing reasonableness of 
     the NPT formula. It would not be surprising to find the need 
     to periodically adjust the NPT algorithm. We have developed 
     NRIP research papers whose recommendations interrelate in 
     such a way that our NRIP objectives can be met by working 
     Americans.
       Using the above suggested algorithm would result in a 
     comparable table of retirement income replacement ratios as 
     follows:

                                               Replacement Ratios                                               
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                           1981 PCPP   Georgia    Georgia                       
                                                             study      State      State      Colin             
                  Preretirement earnings                    (married    (1987      (1991     England   Algorithm
                                                            couples)    study)     study)     study             
----------------------------------------------------------------------------------------------------------------
$6,500...................................................         86  .........  .........         88         85
$10,000..................................................         78  .........  .........         85         85
$15,000..................................................         71         82         90         78         85
$20,000..................................................         66         75         85         74         85
$25,000..................................................  .........         71         82  .........         82
$30,000..................................................         60  .........  .........         68         80
$40,000..................................................  .........         68         77  .........         78
$50,000..................................................         50         66         73         73         76
$60,000..................................................  .........         66         71  .........         75
$70,000..................................................  .........         66         70  .........         74
$75,000..................................................  .........  .........  .........         74         74
$80,000..................................................  .........         68         68  .........         74
$90,000..................................................  .........         68         66  .........         73
$100,000.................................................  .........  .........  .........         74         73
----------------------------------------------------------------------------------------------------------------

                            social security

       We recommend significant changes to the existing Social 
     Security system, to be phased in over a 50-year period. The 
     50-year phase-in gives everyone time to adjust. It avoids 
     taking anything away from current and near-term retirees. 
     Benefits already earned will be fully protected. We suggest 
     these changes as part of a comprehensive national retirement 
     income policy, driven by social and need and practical 
     economics. We cannot continue to mortgage future generations 
     by expecting them to financially carry the entire retirement 
     income burden via increasing payroll taxes. Social Security 
     must be returned to its original purpose--to prevent poverty 
     for U.S. citizens during their retirement years.
       Benefits should not be related to the level of 
     preretirement wages. All U.S. citizens must be covered, not 
     just wage earners; and all U.S. citizens should receive the 
     same base level pension income protection. This means spouses 
     who raised children and ran households would have their own 
     full retirement benefit. It will make no difference whether 
     individuals living together are married or not. They each 
     would get full benefits. We suggest that a standard benefit 
     be provided equal to the poverty level ($6,810 in 1993) which 
     is indexed for inflation and reduced proportionally for less 
     than approximately 45 years of citizenship or residency.
       These recommended Social Security system changes cannot 
     occur in a vacuum. They must be accompanied by the rest of 
     our suggestions, in particular:
       Revamp the private plan system and coordinate it with the 
     new Social Security system.
       Provide incentives for elective work after retirement.
       Provide incentives for personal savings.
       Establish a national retirement income policy.
       As the new Social Security system is phased in, funding be 
     gradually transferred from the existing payroll tax to 
     general revenue. The existing separate Social Security trust 
     fund would, upon exhaustion, cease to exist. This eliminates 
     any expectation that taxes paid should equal benefits 
     received. It substitutes a progressive funding arrangement 
     for the existing regressive one.
       A ``standard retirement age'' would be created that would 
     automatically change to reflect current life expectancy. This 
     encourages working longer and controls the retirement benefit 
     liability. It also uncouples the progress of the standard 
     retirement age from political and revenue considerations. 
     Benefits would begin at the standard retirement age 
     regardless of when active work ceases. There should be no 
     gain by deferring retirement and no subsidy for early 
     retirement.
       We suggest retaining the existing tax treatment. Benefits 
     are tax free for individuals with adjusted gross incomes 
     below certain thresholds. They are partially to fully taxable 
     for individuals with higher levels of income. Thus Social 
     Security pension benefits are maximized for those who have 
     the greatest economic need. Also, we suggest Social Security 
     survivor, disability and Medicare benefits remain the same. 
     These are health and welfare benefits that need to be 
     addressed within the context.
       The table shows how our recommended transition will affect 
     benefits provided to citizens born 1930 through 1979. 
     Citizens born after 1979 would be 100 percent under the new 
     system.

                          TRANSITIONAL BENEFITS                         
        [Under current and proposed laws for the average worker]        
------------------------------------------------------------------------
                                                               Proposed 
                                   Current law               (as percent
          Year of birth                           Proposed    of current
                                                                 law)   
------------------------------------------------------------------------
1930.............................      $11,051      $10,981         99.4
1935.............................       14,309       13,692         95.7
1940.............................       18,521       16,901         91.3
1945.............................       25,090       21,579         86.0
1950.............................       32,480       26,053         80.2
1955.............................       42,049       31,051         73.8
1960.............................       57,035       38,068         66.7
1965.............................       73,844       45,863         62.1
1970.............................       95,592       51,499         53.9
1975.............................      123,758       55,991         45.2
1979.............................      153,947       57,940         37.6
------------------------------------------------------------------------
Benefits are stated in current dollars as of each year. Thus, all       
  benefit amounts fully reflect expected inflation at an assumed long-  
  term rate of 4.0 percent. The average worker is a long-term employee  
  assumed to be employed at the economy-wide average wage throughout a  
  working career. Wages are assumed to increase in the future at an     
  average rate of 5.3 percent.                                          

                     working beyond retirement age

       Traditionally, there have been three sources of retirement 
     income: Social Security benefits, personal savings and 
     private retirement plans (qualified plans). The ASPA NRIP 
     Committee suggests working after attaining retirement age as 
     an optional fourth source of retirement income. Adding work 
     after retirement fulfills several objectives. First, it makes 
     sense to encourage and utilize the experience, skills and 
     vitality of our older citizens. This is a valuable national 
     resource. Second, we must recognize that 65 is not ``old 
     age'' anymore. Life expectancy has been significantly 
     advanced due to medical breakthroughs. Moreover, there is 
     hard evidence that continued work improves the quality of 
     life.
       Of critical importance is the practical problem that 
     traditional pension income sources will be insufficient for 
     future generations. The option to continue productive 
     employment can help fill the unfunded income need.
       But, we also suggest a life planning option. Why not leave 
     it up to the individual to choose between saving more before 
     retirement (so continued work won't be needed) or saving less 
     while expecting to work, at least part time, after retirement 
     age?
       We suggest social and legislative changes that will foster 
     these options and will capitalize on the valuable experience 
     of our older population. Such changes include the following:
       Offer income tax credits for expenses incurred for career 
     changing education for older citizens.
       Provide tax credits to businesses that employ older 
     workers.
       Eliminate current law requirements of coverage for workers 
     already beyond retirement age on health and pension plans. 
     The extreme cost to employers is a great disincentive to 
     hiring older workers. Let benefits beyond retirement age be 
     optional so older workers can negotiate their own pay 
     package.
       Repeal the ``excess earnings'' test so that people who are 
     otherwise eligible may draw full Social Security benefits. 
     Reducing Social Security benefits by income earned from 
     employment is a major barrier for retirees to stay in the 
     work force.
       Provide public education on the business value of tapping 
     the knowledge and vitality of our long-lived citizens.


                            personal savings

       A SPA's National Retirement Income Policy Committee 
     suggests that pension income be provided by four sources--
     Social Security, personal savings, work after retirement and 
     private plans. This paper addresses changes needed to aid and 
     encourage personal savings so people can attain accumulation 
     levels described in the Targets for Personal Savings research 
     paper.
       We must begin with the recognition that savings in the U.S. 
     generally has been declining. There are many ways to measure 
     savings. It makes no difference which approach you choose, 
     savings on a relative basis has declined and lags many other 
     industrialized nations. A critical fact is that without the 
     savings created by qualified retirement plans. IRAs and tax 
     sheltered annuities, the rate at which U.S. citizens save has 
     been negative for many years. Of even more concern, because 
     of the avalanche of adverse legislation and regulations, 
     pension plan funding and coverage have been declining since 
     the mid-1980s.
       What do we do to increase savings? How can we aid and 
     provide incentive to individuals to reach reasonable 
     retirement savings levels and, thus, fulfill the personal 
     savings portion of the national pension target? We suggest 
     the following:
       Legislate universal 401(k) plans which are available to all 
     employees who want them. All nonhighly compensated workers 
     should have access to tax deductible retirement savings via 
     payroll deduction.
       Simplify 401(k) plan rules, so highly compensated employees 
     can easily participate at reasonable levels. Our suggested 
     personal savings goals requirements are greater for higher 
     paid people. Our suggested changes in the Social Security 
     system reduced benefits for higher paid people.
       Educate the public on retirement savings and income 
     sources, such as annuities and reverse mortgages.
       Require standard information disclosures for annuities to 
     help the public understand and effectively utilize them.
       Develop guarantees for home equity conversions to avoid the 
     risks of value depreciation, outliving the arrangement, or 
     experiencing adverse taxation.
       Permit tax deferred transfers from 401(k)s and IRAs to 
     purchase homes. And, permit tax deferred transfers of home 
     sale proceeds into 401(k)s or IRAs.
       Personal savings is a vital element in meeting the national 
     pension target goal and provides needed capital to fund 
     national economic growth. It makes good sense to include 
     personal savings in our national retirement income policy.


                      targets for personal savings

       We introduced the concept of work after reaching retirement 
     age as a fourth source of retirement income in the Work After 
     Retirement paper. This concept encompasses various 
     alternatives including:
       Gradual reduction in work.
       Cliff retirement.
       New careers.
       Personal savings to eliminate the need to work after 
     retirement.
       People should be able to decide on their own retirement 
     scenario. But they need to be able to appropriately plan to 
     carry it off successfully. The preretirement personal savings 
     or postretirement work trade-off can be viewed in terms of 
     how much savings is needed to reduce or avoid postretirement 
     work.
       The Targets for Personal Savings research paper includes 
     calculations that relate to the amount of preretirement 
     savings that would be needed to offset income available from 
     various postretirement work patterns. A general conclusion is 
     that the postretirement work leg can be avoided or fully 
     funded by preretirement savings of 4 percent of pay per year 
     from ages 40 through 49, followed by a 5 percent per year 
     increase in the savings rate from age 50 through age 64. For 
     example, the savings rate at age 50 would be 4.2 percent of 
     pay (4 percent x 1.05).
       This certainly raises the question of whether the 
     underlying 4 percent of pay savings rate assumption is 
     reasonable. Our committee felt the need to present a 
     beginning point for discussion. Our reasoning behind the 4 
     percent assumption is as follows:
       Citizens under age 40 are forming families, buying homes 
     and beginning their careers and have a very low propensity to 
     save. They are primarily driven by the need to attain a 
     reasonable standard of living.
       Most people ages 40 through 49 are supporting families, 
     expanding careers and planning for their future. If they know 
     what a 4 percent savings rate will accomplish, they will be 
     encouraged to save at that level.
       Beginning at age 50, most citizens have founded their 
     children's education, have easily manageable mortgage 
     payments and have an increasing savings capacity.
       In no way do we believe these assumptions are absolute or 
     applicable to every citizen. They are a base point from which 
     to work. With this information, citizens can plan their own 
     savings or work after retirement pattern. They can adjust the 
     pattern over time to meet their own personal goals and 
     abilities to save. This knowledge gives people the 
     opportunity to provide their part in the national retirement 
     income policy goals.


                             private plans

       Private retirement plans have evolved since the early 1900s 
     as voluntary employer sponsored programs. Tax incentives, 
     labor negotiations and good business practices fostered rapid 
     growth of IRS qualified pension plans, whose own success 
     created the need for regulation in the 1970s. Unfortunately, 
     this was followed by unbridled, piecemeal legislation and 
     regulation during the 1980s which, in turn, stopped private 
     plan growth entirely.
       We need to start anew and discard almost all of the 
     existing framework governing the private plan system. The 
     sole purpose of private plans should be to attain the 
     national pension target (NPT). Instead of dwelling on 
     preventing discrimination in favor of the highly compensated, 
     we should focus on preventing discrimination against lower 
     paid people. Our major concern should be providing coverage 
     for all employees.
       The responsibility of private plans should be to fill the 
     gap between the national pension target and pension income 
     provided by Social Security, personal savings and work after 
     retirement. Regulation of private plans should become need 
     driven and benefit design driven. There should be a 
     requirement for all employers to provide a base level of 
     benefits. Incentives for employers to go beyond the base 
     level and fill in the gap to reach the full NPT should be 
     included. There should be no incentive to exceed the NPT. 
     Here are our specific suggestions:
       Do away with all existing qualified plan rules and 
     regulations except valuable nonplan design rules, such as 
     fiduciary responsibility, asset management responsibility and 
     participant protection.
       Require all employers to provide base level pension 
     benefits. (Remember that Social Security taxes will be phased 
     out for employers and employees). These minimum benefits can 
     be funded via simplified defined benefit or defined 
     contribution plans. Flexibility must be built in to 
     accommodate inherent differences in the needs and resources 
     of employers.
       Remove all existing benefit and contribution limits in 
     favor of limitations which relate to obtaining the NPT.
       Eliminate Social Security integration rules; NPT goals will 
     dictate benefit structures.
       Change multiple government agency regulatory control over 
     private pension plans to a single government agency 
     responsible for attaining NPT goals.
       Inflation-protect all private pension benefits.
       Keep private pension funding reserves in the private sector 
     as a vital source of national savings and investment capital.
       Simplify and coordinate rules regarding funding and plan 
     solvency. Actuarial factors for the Pension Benefit Guaranty 
     Corporation, minimum funding, termination liability and full 
     funding limits must be consistent.
       The Private Plans paper fully develops how to establish and 
     manage private plans under NPT concepts. It includes 
     simplification to make retirement plans ``user friendly'' and 
     provides credit for the value of existing retirement plans. 
     Suggestions on vesting and full portability are included.
       There are innovative incentives for employers to provide 
     greater-than-minimum benefits that include built in design-
     directed controls over benefits for higher paid employees. 
     For instance, the benefit levels available to higher paid 
     individuals increase as rank and file benefits increase. But, 
     there are tax benefit losses if benefits exceed the NPT. 
     Overfunding and excess benefits become a business judgment 
     decision, because any excess tax benefits (including use of 
     money) are measurable and are required to be returned to the 
     government. A ``make sense'' formula is suggested to 
     calculate such excess tax benefits.
       Models for various approaches to provide the minimum 
     required benefits are provided. Employers can use defined 
     benefit or defined contribution approaches, whichever works 
     best.


                               conclusion

       By weaving together gradual change in Social Security, 
     incentives for personal savings, facilitation of optional 
     work after retirement and a new needs and design driven 
     approach to private plans, attainment of the suggested NPT 
     can be accomplished. If we begin now, the rapidly emerging 
     retirement bubble of post-World War II baby boomers can look 
     forward to their retirement years. Retirement funding can 
     provide vital capital for our economy. Our younger 
     generations can look forward to investing and saving for 
     their own retirement, instead of having to sacrifice for 
     those already retired ahead of them.

                          ____________________