[Congressional Record (Bound Edition), Volume 148 (2002), Part 12]
[Senate]
[Pages 16844-16846]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       CBO COST ESTIMATE--S. 1971

  Mr. BAUCUS. Mr. President, the Committee on Finance filed a report on

[[Page 16845]]

S. 1971 without the Congressional Budget Office cost estimate. I ask 
unanimous consent that the CBO cost estimate be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:


               congressional budget office cost estimate

     S. 1971--National Employee Savings and Trust Equity Guarantee 
         Act
       Summary: S. 1971 would make several changes to both the 
     Internal Revenue Code and the Employee Retirement Income 
     Security Act of 1974 (ERISA) that would affect the operations 
     and taxation of private pension plans. These include changing 
     the requirements for diversification options, providing 
     information to assist participants in making investment 
     decisions, and changing the premiums paid to the Pension 
     Benefit Guaranty Corporation (PBGC). In addition, S. 1971 
     would modify the tax treatment of certain executive 
     compensation and make other changes.
       The Joint Committee on Taxation (JCT) estimates that the 
     bill would increase governmental receipts by $437 million 
     over the 2003-2007 period, and by $221 million over the 2003-
     2012 period. Most of the revenue increase would occur in 2003 
     ($578 million), and the bill would result in a loss of 
     revenue from 2005 through 2010.
       CBO estimates that the bill would increase direct spending 
     by $36 million over the 2003-2007 period and by $89 million 
     over the 2003-2012 period. Discretionary spending would also 
     increase by $4 million over the 2003-2007 period, assuming 
     appropriation of the necessary amounts. Because S. 1971 would 
     affect revenues and direct spending, pay-as-you-go procedures 
     would apply.
       JCT has determined that the revenue provisions of the bill 
     do not contain any mandates. CBO has determined that the 
     other provisions contain no intergovernmental mandates, but 
     they do contain several mandates on sponsors, administrators, 
     and fiduciaries of private pension plans. CBO estimates that 
     the direct cost of those new requirements on private-sector 
     entities would exceed the annual threshold specified in the 
     Unfunded Mandates Reform Act ($115 million in 2002, adjusted 
     annually for inflation).
       Estimated cost to the Federal Government: The estimated 
     budgetary impact of the bill is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                          ------------------------------------------------------
                                                              2003       2004       2005       2006       2007
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES
 
Executive compensation provisions........................        182         95         68         40         19
Change in interest rate for calculating plans' funding           397        -54       -119        -97        -65
 requirement.............................................
Voluntary early retirement incentive plans...............         -1         -4         -7        -10        -10
                                                          ------------------------------------------------------
      Total revenues.....................................        578         37        -57        -66        -55
 
                                           CHANGES IN DIRECT SPENDING
 
Flat-rate PBGC premiums..................................      (\1\)      (\1\)          1          1          1
Variable-rate PBGC premiums..............................          0          3          4          5          6
Interest rate range for funding overpayment..............          9         -3         -3         -2         -1
Payment of interest on overpayments of PBGC premiums.....          3          3          3          3          3
                                                          ------------------------------------------------------
      Total direct spending..............................         12          3          5          7          9
 
                                  TOTAL CHANGES IN DIRECT SPENDING AND REVENUES
 
Net increase or decrease (-) in the budget deficit.......       -566        -34         62         73         64
 
                                       SPENDING SUBJECT TO APPROPRIATIONS
 
Studies by PBGC, Treasury, and Labor:
    Estimated authorization level........................          4          0          0          0          0
    Estimated outlays....................................          3          1          0          0          0
----------------------------------------------------------------------------------------------------------------
\1\less than $500,000.
 
Notes.--Components may not sum to totals because of rounding.
 
Sources: CBO and the Joint Committee on Taxation.

     Basis of estimate
       This estimate assumes that S. 1971 will be enacted around 
     October 1, 2002.
       Revenues
       All estimates of the revenue proposals of the bill were 
     provided by JCT. The provisions relating to executive 
     compensation would tax without deferral certain compensation 
     provided through offshore trusts, and require wage 
     withholding at the top marginal tax rate for certain 
     supplemental wage payments in excess of $1 million. Those 
     provisions would increase revenues by $182 million in 2003, 
     by $402 million over the 2003-2007 period, and by $496 
     million over the 2003-2012 period. The pension-related 
     provision with the largest revenue effect would alter the 
     allowable interest rates used to calculate pension funding 
     requirements (see discussion below). That provision would 
     increase revenues by $62 million over the 2003-2007 period 
     and reduce revenues by $199 million over the 2003-2012 
     period. Other pension provisions would reduce revenues by $1 
     million in 2003, by $32 million over the 2003-2007 period, 
     and by $82 million over the 2003-2012 period.
       Direct spending
       Reduced Flat-Rate Premiums Paid to PBGC--Under current law, 
     defined benefit pension plans operated by a single employer 
     pay two types of annual premiums to the Pension Benefit 
     Guaranty Corporation. All covered plans are subject to a 
     flat-rate premium of $19 per participant. In addition, 
     underfunded plans must also pay a variable-rate premium that 
     depends on the amount by which the plan's liabilities exceed 
     its assets.
       The bill would reduce the flat-rate premium from $19 to $5 
     per participant for plans established by employers with 100 
     or fewer employees during the first five years of the plans' 
     operations. According to information obtained from the PBGC, 
     approximately 7,500 plans would eventually qualify for this 
     reduction. Those plans cover an average of 10 participants 
     each. CBO estimates that the change would reduce the PBGC's 
     premium income by less than $500,000 in 2003 and by $8 
     million over the 2003-2012 period. Since PBGC premiums are 
     offsetting collections to a mandatory spending account, 
     reductions in premium receipts are reflected as increases in 
     direct spending.
       Changes in Variable Premiums Paid to the PBGC.--S. 1971 
     would make several changes affecting the variable-rate 
     premium paid by underfunded plans. CBO estimates, in total, 
     this section will decrease receipts from those premiums by $9 
     million in 2003 and $51 million over the 2003-2012 period.
       First, for all new plans that are underfunded, the bill 
     would phase in the variable-rate premium. In the first year, 
     the plans would pay nothing. In the succeeding four years, 
     they would pay 20 percent, 40 percent, 60 percent, and 80 
     percent, respectively, of the full amount. In the sixth and 
     later years, they would pay the full variable-rate premium 
     determined by their funding status. On the basis of 
     information from the PBGC, CBO estimates that this change 
     would affect the premiums of approximately 250 plans each 
     year. It would reduce the PBGC's total premium receipts by 
     about $2 million in 2004 and by $41 million from 2004 through 
     2012.
       Second, the bill would reduce the variable-rate premium 
     paid by all underfunded plans (not just new plans) 
     established by employers with 25 or fewer employees. Under 
     the bill, the variable-rate premium per participant paid by 
     those plans would not exceed $5 multiplied by the number of 
     participants in the plan. CBO estimates that approximately 
     2,500 plans would have their premium payments to the PBGC 
     reduced by this provision beginning in 2004. As a result, 
     premium receipts would decline by $1 million in 2004 and by 
     $10 million over the 2004-2012 period.
       Finally, the bill would alter the allowable interest rates 
     used to calculate pension funding requirements contained in 
     ERISA and the Internal Revenue Code, which would allow plans 
     to become more underfunded in plan year 2001 without 
     subjecting them to tax and other penalties. Even though most 
     plan-year 2001 accounts will be finalized in September 2002, 
     the new interest rate requirement would give some plans 
     credits that may be used in plan-year 2002, which would 
     affect premiums paid in fiscal year 2003. JCT estimates that 
     this provision initially would cause employers to reduce 
     pension plan contributions, but later increase these 
     contributions until fund returns to baseline levels. Some 
     plans subsequently would have to pay higher premiums because 
     their reduced contributions would further increase their 
     level of underfunding. Other plans, however, would qualify 
     for a special exemption and not be required to pay the 
     variable premium for plan-year 2001. Based on information 
     from the PBGC, CBO estimates the net effect would be a 
     decrease of $9 million in premium receipts in 2003. From 2004 
     through 2007, premium income would then increase, resulting 
     in a net change in

[[Page 16846]]

     receipts of less than $500,000 over the 2003-2007 period.
       Authorization for the PBGC to Pay Interest on Refunds of 
     Premium Overpayments.--The legislation would authorize the 
     PBGC to pay interest to plan sponsors on premium 
     overpayments. Interest paid on overpayments would be 
     calculated at the same rate as interest charged on premium 
     underpayments. On average, the PBGC receives $19 million per 
     year in premium overpayments, charges an interest rate of 8 
     percent on underpayments, and experiences a two-year lag 
     between the receipt of payments and the issuance of refunds. 
     Based on this information, CBO estimates that direct spending 
     would increase by $3 million annually.
       Substantial Owner Benefits in Terminated Plans.--S. 1971 
     would simplify the rules by which the PBGC pays benefits to 
     substantial owners (those with an ownership interest of at 
     least 10 percent) of terminated pensions plans. Only about 
     one-third of the plans taken over by the PBGC involve 
     substantial owners, and the change in benefits paid to 
     owners-employees under this provision would be less than 
     $500,000 annually.
       Discretionary spending
       Studies. S. 1971 would direct the PBGC, the Department of 
     Labor, and the Department of the Treasury to undertake four 
     studies: one regarding establishing an insurance system for 
     individual retirement plans, one on the fees charged by 
     individual retirement plans, one on ways to revitalize 
     defined benefits pension plans, and one on floor-offset 
     employee stock ownership plans. Based on the costs of studies 
     with comparable requirements, CBO estimates these studies 
     would cost about $4 million over the 2003-2012 period, 
     assuming the availability of appropriated funds.
       Pay-as-you-go considerations: The Balanced Budget and 
     Emergency Deficit Control Act sets up pay-as-you-go 
     procedures for legislation affecting direct spending or 
     receipts. The net changes in governmental receipts that are 
     subject to pay-as-you-go procedures are shown in the 
     following table. For the purpose of enforcing pay-as-you-go 
     procedures, only the effects through 2006 are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              By fiscal year, in millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                               2003       2004       2005       2006       2007       2008       2009       2010       2011       2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in receipts.......................        578         37        -57        -66        -55        -97        -94        -50          4         21
Changes in outlays........................         12          3          5          7          9         10         10         11         11         11
--------------------------------------------------------------------------------------------------------------------------------------------------------

       Estimated impact on state, local, and tribal governments: 
     JCT has determined that the revenue provisions of S. 1971 
     contain no intergovernmental mandates as defined in the 
     Unfunded Mandates Reform Act (UMRA).
       CBO reviewed the non-revenue provisions of S. 1971 and has 
     determined that they contain no intergovernmental mandates as 
     defined in UMRA and would impose no costs on state, local, or 
     tribal governments.
       Estimated impact on the private sector: With only limited 
     exceptions, private employers who provide pension plans for 
     their workers must follow rules specified in ERISA. 
     Therefore, CBO considers changes in ERISA that expand those 
     rules to be private-sector mandates under UMRA. The 
     nonrevenue provisions of S. 1971 would make several such 
     changes to ERISA that would affect sponsors, administrators, 
     and fiduciaries of pension plans. CBO estimates that the 
     direct cost to affected entities of the new requirements in 
     the bill would exceed the annual threshold specified in UMRA 
     ($115 million in 2002, adjusted annually for inflation). JCT 
     has determined that the revenue provisions of S. 1971 do not 
     contain any private-sector mandates.
       Title I of the bill would impose restrictions on 
     individual-account (that is, defined contribution) plans 
     regarding assets held in the plans in the form of securities 
     issued by the plan's sponsor. The bill would require affected 
     plans to allow participants to immediately sell those 
     securities that have been acquired through the employee's 
     contributions, and to allow participants to sell certain 
     securities acquired through the employer's contributions 
     after three years of service with the firm. The latter 
     requirement would be phased in over three years. CBO 
     estimates that the added administrative and record-keeping 
     costs of this provision would be approximately $20 million 
     annually, with larger amounts in the first year.
       Title I also would require plans to offer a range of 
     investment options. This requirements would add little to 
     plans' costs because many plans now abide by a safe harbor 
     provision in ERISA that has similar requirements.
       Title II of the bill would impose restrictions on plan 
     administrators during transaction suspension periods. 
     (Transaction suspension periods are periods of time when 
     participants are unable to direct the investment of assets in 
     their accounts--for example, when a plan is changing 
     recordkeepers.) To avoid financial liability during those 
     time periods, fiduciaries would be required to abide by 
     certain conditions. The bill also would increase the maximum 
     bond required to be held by fiduciaries from $500,000 to $1 
     million. CBO estimates that the direct cost of these 
     provisions to plan sponsors and fiduciaries would be small.
       Title III of the bill would impose a number of requirements 
     on plans regarding information they must provide to their 
     participants. Administrators of defined contribution plans 
     would be required to provide quarterly statements to 
     participants. Those statements would have to contain several 
     items, including the amount of accrued benefits and bested 
     accrued benefits, the value of investments held in the form 
     of securities of the employing firm, and an explanation of 
     any limitations or restrictions on the right of the 
     individual to direct the investments. Currently, plans must 
     provide more limited statements to participants upon request. 
     CBO estimates that, while many plans now provide pension 
     statements on a quarterly basis, about 30 million 
     participants would begin to receive quarterly statements as a 
     result of this bill. The added cost of this requirement would 
     be about $100 million annually.
       Title III also would require administrators of private 
     defined-benefit pension plans to provide vested participants 
     currently employed by the sponsor with a benefit statement at 
     least once every three years, or to provide notice to 
     participants of the availability of benefit statements on an 
     annual basis. CBO estimates that the cost of this provision 
     would be less than $5 million annually.
       In addition, Title III would require plans to provide 
     participants with basic investment guidelines and information 
     on option forms of benefits, as well as information that plan 
     sponsors must provide to other investors under securities 
     laws. Plans also would have to make available on a web site 
     any disclosures required of officers and directors of the 
     plan's sponsor by the Securities and Exchange Commission. CBO 
     estimates that the cost of these provisions would exceed $25 
     million annually.
       Previous CBO estimates: CBO has prepared cost estimates for 
     three other bills that contain provisions similar to those in 
     S. 1971. These are:
       H.R. 3669, the Employee Retirement Savings Bill of Rights, 
     as reported by the House Committee on Ways and Means on March 
     14, 2002 (CBO estimate dated March 20, 2002),
       H.R. 3762, the Pension Security Act of 2002, as ordered 
     reported by the House Committee on Education and the 
     Workforce on March 20, 2002 (CBO estimate dated April 4, 
     2002), and
       S. 1992, the Protecting America's Pensions Act of 2002, as 
     ordered reported by the Senate Committee on Health, 
     Education, Labor, and Pensions on March 21, 2002 (CBO 
     estimate dated May 7, 2002).
       The major budgetary effects of H.R. 3669, like S. 1971, 
     pertain to revenue provisions that relate to pension plan 
     funding. (H.R. 3669 also included a provision excluding 
     certain stock options from wages.) H.R. 3669's provisions 
     affecting pension would produce an estimated revenue loss of 
     $1.2 billion over the 2002-2012 period, compared with the 
     $277 million revenue loss projected for the pension 
     provisions of S. 1971 over the 2003-2012 period.
       Like S. 1971, both H.R. 3669 and H.R. 3762 would make 
     several changes to ERISA affecting premiums collected by the 
     PBGC. CBO estimated that H.R. 3669 would increase direct 
     spending by $104 million over from 2003-2012 and H.R. 3762 
     would increase direct spending by $185 million over the same 
     period. Unlike S. 1971, H.R. 3762 included a provision 
     amending the underlying formula used to determine variable 
     rate-premiums for plan-year 2003. Also, one of the changes 
     made by H.R. 3762 would first apply to plan-year 2002, while 
     that provision in S. 1971 would start with plan-year 2003. 
     Both bills also contained somewhat different language than S. 
     1971 affecting the interest rates used to calculate variable-
     rate premiums in the plan-year 2001.
       S. 1992 did not have any estimated impact on either 
     revenues or direct spending.
       Estimate prepared by: Federal revenues: Annie Bartsch; 
     Federal spending: Geoff Gerhardt; impact on state, local and 
     tribal governments: Leo Lex; impact on the private sector: 
     Bruce Vavrichek.
       Estimate approved by: Robert A. Sunshine, Assistant 
     Director for Budget Analysis; G. Thomas Woodward, Assistant 
     Director for Tax Analysis.

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