In a speech in early March (See Official: Administration has “Serious Concerns” about Pension Reform Bills ), Warshawsky expressed the Administration’s concerns about industry-specific relief that he said will weaken the funding regime. In his current remarks , he points to what he calls “rifle shot” provisions in both the House and Senate reform measures that provide targeted benefits to one firm or class of firms and workers. Warshawsky says exceptions from the rules reduce both the fairness and effectiveness of the system.
The provisions he says trouble the administration include:
- Provisions in the Senate bill that would allow airlines and airline catering companies a special lower measure of liability and a 20-year period to fund that liability. The Administration opposes these provisions believing that allowing some underfunded plan sponsors to have a separate regime of weaker funding rules will weaken the incentives for all plan sponsors to fund their pension promises adequately.
- Another provision in the Senate bill has an increase in PBGC guarantees for benefits for airline pilots. This provision is likely to cost PBGC hundreds of millions if not billions of dollars, and of course, will lead to calls to equal treatments for other professions and industries. This will significantly weaken PBGC finances and undermine the incentive to fund promised benefits, Warshawsky said.
- Another Senate provision that would delay the effective date until 2017 for rural electric cooperatives.
- A Senate provision that would delay the effective date until 2014 for a certain employer that has “rescued” another terminated plan with liability of $100-$150 million that was settled via assumption of the plan by another employer before July 26, 2005. The New York Times describes the rescuing plan as Smithfield Farms.
- Both House and Senate include special provisions to allow smaller contributions for interstate bus companies.
- The Senate bill also has three different expansions of the ability to transfer “surplus” pension assets to be used to provide retiree health benefits. Warshawsky says the Administration understands these provisions are designed to apply to three specific firms.
- The Senate bill has an exemption from the new multiemployer funding rules for a plan subject to PBGC agreement prior to June 30, 2005. This benefits a dockworkers union plan, according to Warshawsky.
- The Senate bill has provision treating a defined benefit plan sponsored by a certain nonprofit organization as a governmental plan. The Administration has been told this was designed for an individual hospital.
“Put bluntly, these provisions have no place in a bill that should strengthen pension protections,” Warshawsky said.
The official’s comments included a reminder that the Administration issued veto threats against both the House and Senate bills (See White House Warns of Possible Veto of Pension Bill ). Warshawsky reiterated, “We continue to have serious concerns and will insist on a bill that reduces the risk to workers.”
In his latest statement, Warshawsky dealt more with the defined contribution provisions of the reform measures. Specifically, he said that encouraging firms to adopt automatic enrollment is a beneficial goal because academic research suggests it significantly increases 401(k) participation. He mentions that one potential concern related to automatic enrollment is that the overall contribution rate is also affected, saying that research suggests that the introduction of automatic enrollment actually induces some workers to choose a lower contribution rate than they otherwise would have chosen if automatic enrollment had not been implemented. However, Warshawsky says, this concern can be addressed through escalator provisions that automatically increase employee contributions periodically over time.
He points out that broader adoption of AE seems to have been hindered primarily by three barriers: cost, state laws, and concerns about investment choices. He says the Administration applauds efforts by the House and Senate to include provisions addressing these barriers, and would like to see a conference report in which automatic enrollment provisions apply to all workers and escalator provisions are included and applied broadly to the worker population, but with a minimum of complexity.
Warshawsky suggests that, in return for adoption of automatic enrollment features, there can be a reasonable reduction in the non-discrimination safe harbor required matching contributions, a reasonable reduction in non-elective matching, and some increases in the vesting period, but less than the two years proposed in the House and Senate.
Other DC provisions he says the administration approves include:
- Provisions in the House pension bill that would allow fiduciary advisors to provide investment advice to plans, participants, and beneficiaries, subject to certain disclosure requirements and other safeguards.
- The Senate bill provision that allows participants to diversify their investments by selling their company stock after three years.
- A provision in the Senate bill that requires companies to provide participants with quarterly benefit statements with information about their individual accounts, including the value of their assets, their rights to diversify, and the importance of maintaining a diversified portfolio.
- The House bill language would permanently extend EGTRRA’s retirement savings provisions (See PSCA Pushes for DC Provisions in House Pension Reform ).
In his recent remarks, Warshawsky devoted some time to health care reforms. He said that another important element of retirement security that the House pension reform bill addresses is the financing of long-term care expenses. “Currently, Medicare and Medicaid pay for over half of nursing home and home health services for the Medicare population. With the impending Baby Boom retirement, this burden on federal and state governments is unsustainable. Encouraging innovation in the private long-term care insurance market would not only relieve the government of the burden of financing a majority of the long-term care expenses of the retiree population, but it would also save people from the risk of having to wipe out all their assets and go on Medicaid in the event of severe disability,” Warshawsky pointed out.
He said the House pension bill encourages long-term care planning by clarifying the tax treatment of combined long-term care insurance policies and other insurance products, including annuities.
Aside from the pension bill provisions addressing health care needs, the Administration is proposing a set of incremental reforms concerning health savings accounts (HSAs) that will help restrain health care spending and help people get and maintain insurance coverage despite income, health, or employment shocks (See White House Gives Details of Bush HSA Proposals ). The reason Warshawsky says the Administration believes HSAs should be encouraged is to correct the distortions created by the tax code that encourage an inefficiently large amount of sometimes wasteful health care consumption, and to help people better plan for future health care needs.
HSAs reduce the incentive to purchase overly generous health insurance by equalizing the tax treatment of out-of-pocket expenses and covered care, Warshawsky says. If routine or non-emergency expenses purchased out-of-pocket are taxed the same way routine expenses are under health insurance, then the demand for insurance coverage for those goods and services falls, and people will consume those services in a way that takes into account the price they pay and benefit they receive. HSAs still encourage insurance take-up, but they also discourage over-insurance that effectively removes market signals from the health care sector and inefficiently drives up the price of health care.
He also points out that HSAs encourage savings for future health care needs. While the funds in an HSA can be used to pay for health care consumed while enrolled in a health plan to meet the deductible or to pay for coinsurance, after accumulating, they can serve as savings that may insulate an individual from the shock of losing employer-sponsored health insurance.