Portman-Cardin's route to more
responsive, less mind-numbing employer-sponsored plans
Rep. Rob Portman
US House of Representatives
With Americans living longer and 76 million baby boomers
beginning to retire in 15 short years, solving Social
Security's fiscal problems has properly become a top priority
for the president and the Congress. But the spotlight on
Social Security also has dramatized the need to look more
broadly at the overall issue of retirement security.
Fed Chairman Alan Greenspan said it well in recent
testimony before the House Ways and Means Committee. "We tend
to focus on Social Security as though it is independent of
the overall means of retirement incomes for the population as
a whole," he said. "We are going to have to increase the
aggregate amount of resources for our retirement population
because it is becoming so large, and the presumption that it
can all be figured through the public Social Security system,
I think, is a mistake."
We must take steps to preserve the long-term solvency of
Social Security. But Social Security was never intended to
meet all the financial needs of retirement and, for most
Americans, it does not. Instead, it is just one leg of a
three-legged stool that supports Americans in their
post-working years. The other two are personal savings and
tax-favored, employer retirement plans.
In the past several years, Congress has attempted with
some success to encourage personal savings--e.g., through the
popular Roth IRAs. We also have begun to reverse the trend of
the past two decades by starting to simplify the laws
governing private pension plans. But there is much more that
can and should be done to help the American people meet the
challenge of providing for their own retirement.
A typical senior relies on a pension for almost 20% of her
retirement income. And, these plans make sense for our
diverse and changing workforce. They are flexible enough to
adapt to the needs of employers of all sizes, and workers
like both the flexibility and the security that comes from
having their own accounts.
Pension savings are also good for the economy. Because
they are prefunded, or already paid for, they create a large
pool of savings, making investment possible and enhancing
economic growth. And, in part, because of the automatic
withdrawal from paychecks that is typical of these plans,
they create new sources of savings that would not otherwise
be in the economy.
Economists from across the ideological spectrum agree that
enhancing personal savings is key to long-term economic
growth and prosperity. Yet this vital component of retirement
security needs help. We have all heard that the overall US
savings rate for individuals is now hovering at historically
low levels. The Department of Commerce recently published the
first negative personal savings rate since 1933. Baby
boomers, in particular, are not saving nearly what they will
need for a comfortable retirement. Meanwhile many businesses,
particularly smaller companies where most of the new jobs are
being created, are not offering retirement plans due to the
costs, complexity, and liabilities.
Since 1982, as increasing layers of restrictions and
regulations have been imposed on pensions, defined benefit
plans have practically ceased to exist in the small employer
market, and coverage under pension plans in general has not
expanded. The Department of Labor reports that only half of
all workers have pension coverage, and statistics from the
Employee Benefit Research Institute show that, of businesses
with 25 or fewer employees, only 20% now offer any kind of
pension plan. Today's workers are not saving enough in part
because pension coverage is inadequate.
Congress can act now--on a bipartisan basis--to increase
retirement security by enacting a comprehensive reform of
outdated pension laws. That is why Congressman Ben Cardin
(D-Maryland) and I have proposed legislation that provides
the most significant expansion and reform of pension laws in
a generation(see "Will Congress finally slash the red tape?"
Plan Sponsor, December/January 1999). Among its key
- 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. Portman-Cardin substantially increases the limits
for all types of plans and repeals the current 25% of
compensation limit on contributions to defined contribution
- Catch-up contributions: Portman-Cardin increases the
limits on all employee contributions by $5,000 for workers
50 and older so that they can "catch up" for years when
they were not employed, did not contribute to their plan,
or otherwise weren't able to save. In particular, this will
benefit women who have returned to the workforce after
taking time away to raise families.
- Roth 401(k): Portman-Cardin includes new "Roth" 401(k)s
and 403(b)s, similar to the popular new Roth IRAs. With
these savings plans, workers contributions are not
deductible as they would be normally, but the benefits paid
in retirement would be tax-free.
For small business:
- The bill would simplify the burdensome "top-heavy"
rules in numerous ways, such as permitting an employee's
elective contributions not to be taken into account in
determining whether a plan is top-heavy.
- IRS fees: Today, the IRS charges a business a "user
fee" when the business requests a determination letter that
its retirement plan is qualified under the tax laws.
Portman-Cardin would eliminate this user fee for small
- Salary-reduction-only SIMPLEs: In 1996, under
legislation authored by the two of us, Congress made
available to small businesses the SIMPLE plan, which is
exempt from many of the burdensome requirements applicable
to other plans. The new Portman-Cardin bill would
substantially expand the SIMPLE plan by permitting
salary-reduction-only SIMPLE plans. These plans can be used
particularly by start-up small businesses in order to
enable employees to save for their own retirement.
For a mobile workforce:
- The average worker 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 includes
portability provisions to allow workers who are changing
jobs to roll over retirement savings between different
types of plans, including qualified plans such as 401(k)
plans, Section 403(b) arrangements, and Section 457
- In many situations, the "same desk rule" prevents
workers who move to a new employer from consolidating their
retirement savings in their new employer's plan.
Portman-Cardin would repeal this inappropriate restriction
- Faster vesting: Under current law, many employees do
not become fully vested in a pension plan until they have
been with an employer for five years. Portman-Cardin would
lower the vesting requirement for matching contributions to
To make pensions more secure:
- Repeal the "full-funding" limitation and reform other
pension funding rules: Over the last 15 years, numerous
laws have restricted employers' abilities to contribute
sufficient amounts to defined benefit plans. These
restrictions can undermine the security of employees'
pensions and create significant burdens for employers.
Portman-Cardin would eliminate the unnecessary funding
- Portman-Cardin would also require improved disclosure
when future pension benefits are reduced, including in the
context of a conversion from a traditional defined benefit
pension plan to a cash balance plan.
Cutting red tape:
- Portman-Cardin would remove barriers that discourage
businesses from offering plans by eliminating burdensome
mathematical tests (such as the so-called multiple use
test) and make other tests (such as the separate line of
business test) simpler to administer.
- Under Portman-Cardin, if an employer inadvertently
fails to comply with one of the countless retirement plan
requirements, but later corrects that failure, there would
be no sanction or, in cases where the Internal Revenue
Service can impose a sanction, it would have to be fair and
- Help for ESOPs: Portman-Cardin eliminates the savings
disincentive in present law with respect to ESOPs by
allowing ESOP dividends to be retained in the plan without
the loss of the dividend deduction.
- Clarify tax treatment of 457 plan benefits:
Portman-Cardin contains a number of provisions that would
provide greater clarity and flexibility regarding the
timing and form of benefits under retirement plans in the
public and tax-exempt sectors.
As Congress continues to grapple with ways to preserve
Social Security for the 21st century, we cannot afford to
pass up the opportunity to expand the employer-provided
pension system as well. If enacted, these needed changes will
expand savings and make the difference between retirement
subsistence and retirement security for millions of
US Representative Rob Portman is a Republican representing
Ohio's Second Congressional District, centered on Cincinnati.
He is a member of the House Ways and Means Committee, where
he has worked to expand pension coverage and reform the IRS.