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JUNE 16, 1999, WEDNESDAY

SECTION: CAPITOL HILL HEARING

LENGTH: 46499 words

HEADLINE: HEARING OF THE HOUSE WAYS AND MEANS COMMITTEE

SUBJECT: TAXES, RETIREMENT, AND HEALTH CARE ISSUES

CHAIRED BY: REPRESENTATIVE BILL ARCHER

SCHEDULED

WITNESSES:

REP. PETE STARK (D-CA)

REP. BILL THOMAS (R-CA)

REP. NANCY L. JOHNSON (R-CT)

REP. EARL POMEROY (D-ND)

JOHN C. GOODMAN, PRESIDENT AND CEO, NATIONAL CENTER FOR POLICY ANALYSIS STUART BUTLER, VICE PRESIDENT, DOMESTIC AND ECONOMIC POLICY STUDIES, HERITAGE FOUNDATION

CHARLES N. KAHN III, PRESIDENT, HEALTH INSURANCE ASSOCIATON OF AMERICA MARY NELL LEHNHARD, VICE PRESIDENT, OFFICE OF GOVERNMENT RELATIONS, BLUE CROSS AND BLUE SHIELD ASSOCIATION

1100 LONGWORTH HOUSE OFFICE BUILDING WASHINGTON, DC

BODY:
REP BILL ARCHER (R-TX): I'd like to call this hearing to order. (This hearing will) include a focus on family tax relief, including reducing marriage penalty and helping families and students pay for the high cost of education, two more areas that have attracted bipartisan support. We'll also look at ways to boost savings and investments, so that more Americans can enjoy and participate in a strong economy.

This morning I'm releasing two new studies by the American Council for Capital Formation that show how the current tax bill discourages savings and punishes families with the confiscatory death tax.

On the death tax, the research shows that 24 major industrial countries, including Japan's top tax rate of 70 percent, is higher than the 55 percent rate in the U.S. Fifty-five percent is way too high, and some states 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. And that's why we should significantly reduce, if not eliminate the death tax; and I ask my Democrat 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 a 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 were going 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 leg of that stool; personal savings and pensions are weak, and are being weakened further by the tax government.

Today I ask that we look for ways to make retirement security more secure if we 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's 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 to give Americans the tax relief they deserve. And I look forward to having the committee to work together to try to accomplish exactly that. And I'm 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 records at this point.

REP. CHARLES RANGEL (D-NY): 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'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 in terms of supporting tax cuts. And next year, I think we'll 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's 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 locked box, but I think it's abundantly clear that the majority party has the key to the locked box to use for whatever funds they have the votes to use it for.

So I think we all would 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 Sure Plan requires general revenues and bills that we're discussing now, causes the reduction of general revenues.

But whatever we do look at, I do hope the Social Security system and the USA Account proposal will be included in our studies, as well as taken in consideration the number of individuals that have no health insurance at all. And if we're talking about shortfalls in revenue, I do hope we'll be able to take a look at the president's proposal for tax exempt bonds, so that we'll be able to rebuild our schools and create an atmosphere where our kids can get a decent education in the public school level.

In any event, I look forward to the meetings that we're going to have in executive session; and I hope as you have invited the private sector to participate, I'm 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's doable that we can 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 as 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 other 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.

REP. ARCHER: Our first panel today is represented by six of our colleagues, and we're pleased to have your input to start off this hearing on enhancing retirement and health security.

Ms. Johnson, would you lead off?

REP. NANCY JOHNSON (R-CT): Thank you very much, Mr. Chairman. I appreciate your holding this hearing on enhancing retirement security and health security for our Americans.

First of all, I think this committee is uniquely positioned to offer the American people a passage of reforms that will radically enhance retirement security. Social Security reform, Medicare reform, pension reforms so more than 50 percent of our people can have access to pensions, and long-term care insurance reform would radically change retirement for Americans in the future. And I hope we will get to that four part agenda.

In starting, I want to talk about health security for all of this. Every year -- at least in 1998 -- our 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 -- cumulative -- insurance cost 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's good business to provide good health benefits to your employees.

So why doesn't everybody? Well, of course, it's expensive, that's why. And only 28 percent of employers with less than 25 workers offer health insurance, because it's 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 could 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 benefits 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 benefits that the individual, uninsured person who's buying his own health insurance on the open market gets with the benefit the employee gets from an employer-provided plan. So it is far richer.

It doesn't just 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's 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; that 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 of those 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're 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 cost of long-term care, which is going to literally explode when the baby boom generation retires.

Already, HCFA is spending $40 billion in 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'll 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.

REP. ARCHER: Thank you, Ms. Johnson.

Our next witness is another member of the committee, a gentlemen from California, Mr. Stark.

Mr. Stark, we'll be pleased to hear your testimony.

REP. PETE STARK (D-CA): Thank you, Mr. Chairman. I was interested to hear Ms. Johnson's testimony. This is an attempt at bipartisanship. Most of what I'm 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 healthcare benefits to all Americans in a bipartisan manner.

We were unable to reach complete closure, but I'll tell you where we agreed and disagreed as I finish. The biggest problem facing America today is the 1 in 6 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 aren't likely to succeed in a conservative or closely divided Congress.

I have just introduced legislation to try another approach, basically the Republican game -- 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 of uninsured workers do nothing for the great number of uninsured in the zero or 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're subject to the whims of the insurance companies, who take 20 or 30 percent off the top, as Ms. 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 your leadership, Mr. Chairman, and I could not come to an agreement.

We both agreed that there has to be some design on the insurance product, so you're 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've 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 bucks 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 manner that they federal employees supposedly buy guaranteed issue, community-rated FEHBP health insurance through the OPM.

A refundable tax credit sounds like an easy idea, but there's some serious problems, and I'll address those in my written statement. There's two I'd 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 would want to continue their current coverage. Still, there's 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 healthcare 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 everyday anyway, and this would find a replacement for those who lose it. The bill I'm introducing does not enforce an overnight revolution, but the current system's 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 I'm 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'd 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'd have to subsidize them.

Another approach would be that the next minimum wage would be dedicated to the increase, would be dedicated to the payment of health insurance premiums by those firms that don't offer insurance. In other words, a buck an hour is $2,000 a year. That would cover most of the costs of employees if the company doesn't have health insurance. So the companies that do offer health insurance would have a lower minimum wage, or they'd be a dollar minimum. That could pay for it.

Other sources would be a provider and insurance sur-tax, since those groups would benefit and no longer have to subsidize the uninsured. And finally, a small national sales tax dedicated to healthcare could be the time to do this, if the public was in fact convinced that this would insure them.

I've said that the earlier tax deduction and tax credit proposals have serious structural problems. The biggest problems is not saying how they'll pay for themselves; and until we're ready to agree how to pay for them, the plans that are offered signify nothing.

It's 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.

REP. ARCHER: Thank you, Mr. Stark.

Our next witness is Mr. Rob Portman.

Mr. Portman, we'd be happy to hear your testimony.

REP. ROB PORTMAN (R-OH): Well, thank you, Mr. Chairman. It's a delight to be here. And since this is a hearing in part about retirement security, I'd like to start by commending you and Chairman Shaw for the fine work you've done on the Social Security front, and the sound proposal that you've given this committee to strengthen the Social Security system.

But as you are well aware, Mr. Chairman, I also strongly believe this panel should compliment that by moving this year to significantly increase the availability of retirement and security for all Americans by strengthening our private employer-based pension system. I think it's a great opportunity for us, as Ms. Johnson mentioned earlier.

And of course, this is a critical issue for all Americans, strictly those 76 million baby boomers approaching retirement age. That's why over the past two years we've 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've also worked with many other members of this committee; Ms. Johnson, Mr. Waller, Ms. Dunn, Mr. Tanner, others, even some from -- distinguished committee, like Mr. Pomeroy, who's also here today to talk about retirement security.

We've done it in a comprehensive way, because we believe that's 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 plan for small businesses.

I'm delighted to say, Mr. Chairman, that as of today, it's a bipartisan group of about 26 Ways and Means members who have co- sponsored HR 1102, over 90 members in total, an influential group, Mr. Chairman. And I ask my colleagues, if they would, to take a look at a few charts regarding our retirement system that will outline the problem. And I think Ben's going to have an opportunity to go into some more detail on some of our provisions.

The first simply makes the point that the retirement stool, which is a three-legged stool, so called, is very much supported by employer-based pensions already, employer-based pensions being, along with Social Security and private savings, absolutely essential to the retirement of our constituents.

This includes, of course, not just the traditional defined benefits plans, but when we talk about pensions, we're talking about all retirement plans that are employer-sponsored, including 401(k)s, 457s, 403(b)s, and other arrangements.

The second chart shows that although it's a very important part of our retirement system in this country, we have a crisis in pensions. Only half of American workers are covered. That means about 16 million Americans have no pension whatsoever.

That chart's interesting because it shows that since 1983 we've made virtually no progress; it's been flat. Forty-eight percent of workers were covered in '83. That chart shows '93 at about 50 percent; unfortunately, that's about the number it is today. So it has remained flat, despite the need for more retirement security as a backstop to Social Security. It's even worse than that, though, when you look at what small businesses offer in terms of retirement security to their workers. That chart will show you that 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, the companies that are growing the fastest in terms of adding new workers - only 19 percent offer anything - even a simple plan, even a set plan; even a 401K. So, it is even worse than the fact that only half of American workers are covered. Those who are in small businesses have very little chance of having a pension at all.

The next chart, Mr. Chairman, gets to the point that you made early-on, which is that our personal savings rate in this country is at a dangerously low level. And you have 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 savings rate. Foreigners, frankly, are propping up a lot of our savings today. And there is a concern that some of 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 down to the rates we had during the Great Depression.

The next chart shows that with regard to the distribution of pension benefits, most pension recipients are middle-income Americans.

A pension, in fact, makes a difference between mere subsistence and retirement security for millions of Americans. I wish you could see that chart better, but the bottom line is that 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 pensions plans make less than $50,000 a year. So 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-income or lower-income workers.

Now the Portman-Cardin Plan -- again, and Ben's going to go into more detail -- 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 had to modernize the pension laws to address the needs of the 21st century workforce, and this is where Earl Pomeroy has played a big role in helping us with regard to affordability.

The bottom line, Mr. Chairman, is that we strongly believe that we ought to preserve our public Social Security system -- we're going to work with you toward that end -- but we need to do more. Imagine the impact this panel could have by expanding on the private side, so that every American worker would have access to 401(k), or some kind of a pension proposal. It's a tremendous opportunity, and I urge us to seize it this year.

REP. ARCHER: Thank you, Mr. Portman.

Mr. Cardin, since your name was mentioned, I'd be happy to receive your testimony.

REP. BENJAMIN CARDIN (D-MD): Thank you, Mr. Chairman. Let me ask unanimous consent that my full statement can be included in the record.

REP. ARCHER: Without objection.

REP. CARDIN: And thank you for this opportunity and for holding these hearings. I think they're extremely important, as your opening statement pointed out. I want to thank Mr. Portman for the work that 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 deficit are over. We've 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.

Now 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 plan. That is why Rob Portman and I introduced HR 1102, The Comprehensive Retirement, Security and Pension Reform Act.

It's rebuilding our nation's private pension system. We use it as rebuilding, because we go back and correct some of the mistakes that we've made over the last two decades, and pension changes that we've made that have reduced the opportunity of Americans to put money away, and it 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 increased 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 through portability, recognizing the realities of the current labor market, by allowing portability between 401(k)s, 403(b)s, and 457s.

As Mr. Portman has pointed out, we simplified dramatically our pension laws for both large companies and small companies. We removed many of the restrictions on the multi-employer 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, and we have tried to listen to all of the different interest groups, and respond in a reasonable way. 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.

REP. ARCHER: Thank you, Mr. Cardin.

Our next witness is Mr. William Jefferson. We'd be pleased to hear your testimony.

REP. WILLIAM JEFFERSON (D-LA): Mr. Chairman, Mr. Rangel, and members of the committee, I'm pleased to have the opportunity to testify regarding the Small Savers Act. I want to thank Mr. Lindsey Graham and Mr. Wexler for co-introducing this bill with me, and I thank the chairman for holding this hearing on tax proposals to enhance retirement and health security, and among other things, increasing personal savings by reducing the tax burden on savings.

Retirement security is an important issue to all of us. It's important to all Americans, and it's important that we have something that we can do this year on this subject. My 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 rate in our country. It is alarming that over one-third of Americans have no personal savings at all, and most of them 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-class 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 five years. As a result, more low and middle-income tax payers -- actually, more than $7 million more -- will be pushed into the lower 15 percent tax bracket, and therefore pay a lower tax bill. With more money in their pocket, 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 $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 again, indexing for inflation in 2009.

Since our contributions have the attractive feature of being taxed deferred, 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 addressed one of the major problems with our current tax system -- complexity. For most Americans, filling out federal tax income 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 a simpler form 1040EZ, and will no longer have to use the complicated form 1040D or Form 1040 Schedule A, to itemize their interest, dividend, 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 a 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 cost $134 billion through fiscal year 2004 and $345 billion over 10 years. But 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 be prudently invested if the Congress shall so desire, in education, in defense, and any other ways, and 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 the threat to retirement security. However, this a bipartisan compromise from which to start, and I again emphasize, 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 towards a 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 the areas of improving retirement security. Thank you, again, Mr. Chairman, for the opportunity to testify.

REP. ARCHER: Thank you, Mr. Jefferson.

Our last witness is Mr. Earl Pomeroy, and we're delighted to have you before the committee, and thank you for your work that you've done on retirement issues, and we'll be pleased to hear your testimony.

REP. EARL POMEROY (D-ND): Thank you, Mr. Chairman. It's indeed a great delight to be in the Ways and Means Committee, even for a brief time.

I don't think there's 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. Secondly, 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 workforce. Fourth, a tax bill should include provisions that improve the portability of workers' retirement savings.

First, the national priority. Our population is aging; our savings rate's declining. These are ominous trends, and they require our attention if we're 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 healthcare have increased the number of years we can hope to live, and that 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's 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 moderate-income families. We've achieved a great deal through retirement savings in the workplace, but as Mr. Portman mentioned, so many don't have that retiring savings opportunity. In North Dakota, 4 out of 10 workers have retirement savings at work.

Congress needs to enhance incentives for vehicles like individual retirement accounts. In our 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's not surprising that these are the very families that have the most difficulty saving for retirement; discretionary dollars get stretched in 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, and individuals $25,000 and below.

The president has proposed IRA accounts; that's an even more ambitious effort to get savings comprehensively established. This IRA tax credit proposal is another way of approaching the same approach.

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. Of all employer-based retirement savings, it's the pension plan that offers the most predictable stream of income in retirement, but what we're 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 workforce 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've 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, which does basically the same type of regulatory relief for defined benefit plans.

New incentives to save cost money, and the amount of money you'll 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 and the tax code, made it very difficult for someone to move their retirement savings as they move through the workforce. Take for example someone that works for a private for-profit; they'd have a 401(k) defined contribution plan. If they went to work for a nonprofit, they'd have a defined contribution 403(b) plan. If they later went to work for state government, they'd have a defined contribution 457 plan. They are all defined contribution plans, but none of them convertible one to another.

Now 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've 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's 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.

REP. ARCHER: The chair appreciates the testimony by each of you, all which is very constructive. And now the chair asks if any members would like to inquire.

Mr. Thomas.

REP. WILLIAM THOMAS (R-CA): Thank you very much, Mr. Chairman, and I also want to compliment the members. You're dealing with two areas that are absolutely critical, and you suggested a number of very, what I would consider, simple common sense 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 -- and I may have been neglect, but I don't think so -- of long-term care proposals. I tell my friend from North Dakota that Fram (sp) oil filters spent a lot of money on that ad, and you're sorry you referenced a muffler.

The "pay me now, pay me later" is a good example. The pitch is a cheap 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're looking at the very positive suggested changes, if you're 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 healthcare 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'd think about long-term care as part of a comprehensive retirement security package.

Mr. Chairman, just as recently as yesterday, the subcommittee held a hearing on the uninsured, and 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've been told is that, even if you put billions of dollars into a program, the percentage change -- especially if it's 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 is 100 percent paid for, for low-income, Medicaid, and the ICHIP (sp) 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 we look at our attempts to provide assistance to people who do not now have health insurance, that we do it in a way that maximizes the number of people who receive it, but that, too, we're not fooled by the belief that the solution to this problem is a simple one or a single approach to the very complex picture of who is among the uninsured today.

But I want to underscore, the ideas that you're 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'll give you plenty of credit for that.

Ms. Johnson, I know has been wrestling with this question as has Mr. Stark on the healthcare 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'd 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 hook it into some kind of a pension structure.

REP. ARCHER: You have one minute to respond.

REP. JOHNSON: If I may just briefly call your attention to the bill that Karen Thurman and I have introduced that is focused on long- term care. I didn't have time to go into it in much detail, but 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 five years, but it also provides a recognition of the tremendous contribution that in-home care givers provide, and eliminates this arbitrary limit on state partnerships that help people, induce them to buy long-term care insurance, an arbitrary provision of federal law.

And lastly, 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.

REP. THOMAS: Thank you very much. Thank you, Mr. Chairman.

REP. ARCHER: Mr. Rangel.

REP. RANGEL: Thank you. Let me first thank my colleagues for the work that they've put into these very meaningful proposals that are before us.

Ms. Johnson, do you believe that we can handle on this committee Social Security, Medicare, and tax cuts this year?

REP. JOHNSON: Well I think we certainly can do Social Security reform. I think we can and should do Medicare reform. I think we can do pension reform, 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 where when we have a genuine surplus over and above Social Security revenues, next year and the years thereafter.

And I think it's perfectly appropriate for this committee to set economic policies, particularly since we have heard how catastrophically low, for example, our savings rate is. I think it's actually imperative for this committee to set some course for this nation to long-term tax policy, and not leave the members thinking this is all going to be free bucks 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 frankly, I think almost all 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 in retirement security.

REP. RANGEL: And the tax cut would be based on projected surpluses after Social Security?

REP. JOHNSON: Well, we have all agreed, we're not going to use Social Security revenues for anything but Social Security. So that's a bipartisan agreement, and we're going to stick to it.

REP. RANGEL: And Medicare?

REP. JOHNSON: We did set aside 62 percent for Social Security, and then 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.

REP. RANGEL: And if we did have a tax cut, what year would you think it would become effective?

REP. JOHNSON: First of all, I would hope that part of, at least, would become effective almost immediately. Because remember, the research and development, tax credits expire. The work opportunity tax credit, which is critical to the employment of welfare recipients, expires. So just like we have to budget every year, we have to also pass some kind of tax legislation every year. As to bigger provisions, they will depend on the estimates -- at least in my opinion, they'll depend on the estimates as to when the surpluses exceed the Social Security tax revenues.

The other provisions in my personal list -- I'm not speaking for anyone but myself. I think the extension of the R&D, the extension of the work opportunity tax credit command the same attention as the appropriations proposals that we have on the floor, because losing continuity or breaks in that tax law are very costly to both the people in the businesses that we count on to make our economy strong. So I think we need to make sure that they go ahead immediately.

REP. RANGEL: Would you agree that we ought to enact a revenue neutral -- extend the tax bill to make certain that we don't do what happened the last time, and have this included in the appropriations bill?

REP. JOHNSON: I think this Congress, under both Republican and Democratic leadership, have used the reconciliation very effectively to make sure that the key interests of the nation are addressed across the board, whether they're in the tax area or the appropriations area. And 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 we've raised today about retirement security, pension reform, and savings rates.

REP. RANGEL: What size tax cuts are you think we're talking about?

REP. JOHNSON: Well, we have a large surplus predicted in the out-years, 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. And we are at the threshold of seeing our major retirement security plans collapse, not that social security, but pensions too.

I would say most of that surplus ought to be in that tax bill, and not be available for new programs.

REP. RANGEL: What size?

REP. JOHNSON: The new programs should be met by making government far more efficient that it has been in the past.

REP. RANGEL: But what size tax cut do you think we're talking about?

REP. JOHNSON: I don't know what the surpluses will be, Mr. Rangel. I can't answer that.

REP. RANGEL: You have no idea what we're looking for in the tax bill?

REP. JOHNSON: Well, the projections are several hundred billion in 5 years and many more hundred billions in 10 years.

REP. RANGEL: Would $800 billion over 10 years sound like --

REP. JOHNSON: What they're talking about? I mean, that's 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 it 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.

REP. ARCHER: Does any other member wish to inquire?

Mr. Kleczka?

REP. GERALD KLECZKA (D-WI): A quick question to Ms. Johnson. You just indicated that you think the Congress should stakeout -- and I'm paraphrasing -- the majority of that money for the programs that this panel is talking about, or for what type of tax cuts?

REP. JOHNSON: This is not a hearing on the tax bill, and so there's no sense of my going into the detail.

REP. KLECZKA: Well, everything that's been said at this panel would be in the tax bill or pretty close to the tax bill.

REP. JOHNSON: Right. And that's why I think the chairman is very wise to have a hearing on retirement security, because retirement security and tax policy --

REP. KLECZKA: It's not my intention to put you on the spot, but I was hoping you were saying that we should stake out a majority of that surplus for the things that we're talking about today.

Otherwise, what this committee is doing is just raising some false hopes with the public by having an all day hearing on retirement security and health security.

And I say to you and then those of the panel, that if we were to pick up a small portion of all your good ideas -- a small portion -- 10 percent of the Jefferson and 10 percent of the Pomeroy, and 2 percent of the Stark because of the cost -- that would more than eat up this surplus, and we'd have no room for estate tax changes, capital gains, tax elimination.

So I think we have to as a committee and as a Congress make some priorities.

Now is this our priority, this all day hearing on something that is so important, not only to the economy, but to so many Americans? And my answer to that is yes.

We're all talking about all sorts of new savings instruments; USA, accounts coming from the administration. The chairman has a new Social Security account which has a mix of stocks and bonds. And I'm saying -- we have the savings instruments in place today. Let's make them meaningful.

Let's take our IRAs and boost them to $10,000. Let's increase the 401 caps. Let's provide for portability and some type of interweaving of the current pension plans like Mr. Pomeroy says.

One of the issues I've been working on -- and it's just been briefly touched on today -- is healthcare for retirees. I had a GAO study a short time ago which indicated more and more employers are willying-nillying just canceling their retiree healthcare.

I had a situation in my district with Paps brewing company, where the retirees woke up one day and found out the employer just canceled it. And I'm talking regular retirees and early retirees.

I had a situation with a constituent -- an early retiree -- who had a wife with MS at home. And with the early retiree package offered him at age 55, and with the coverage for healthcare because of his wife's condition, he thought he could make it, and go home and take care of his wife. The day they canceled it, he found out that his health insurance premium, with a private insurance plan, cost more per month than his retirement benefit.

So what we're talking about today is important, but my friends, it would take the entire surplus that is projected -- non-Social Security surplus -- to address a piece of those needs.

Mr. Portland, what is the CBO estimate or an estimate of your pension bill and Mr. Cardin's pension bill, which I happen to be a co- author of?

REP. PORTLAND: And I appreciate that. You sound a little bit like a chairman up there talking about how we have to work on some priorities.

We don't have a Joint Tax Committee estimate yet for this year. We're 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, as I recall, over a 5-year period.

REP. KLECZKA: Billion?

REP. PORTLAND: $9 billion. But remember, we're talking about a substantial surplus, and a possibility of a substantial tax relief bill. Over the next few days, we hope to get an estimate in. And it may be higher than that, because we do get into the IRAs, as you suggest, which we raised the limit from $2,000 to $5,000 in IRAs. If you take that out, we hope to be back close to where we were last year.

REP. KLECZKA: Well, the point I'm trying to make is, if we're serious about the dialogue that we're having today in the committee; most of all, my friends, if we're going to even put a dent into the problems -- and we're talking about regular Americans now having these problems -- that is the entire surplus.

So as the chairman talks about the estate tax, and others talk around Capitol Hill about totally eliminating capital gains tax, there's not going to be any room for that, plus the extenders which is a little expensive piece of pie.

Mr. Chairman, I thank you for the time, and I thank the panel for sharing their thoughts. But let's not forget our retirees and their healthcare. I'll be introducing legislation to help that group, which is aged between 55 and 64. It's one huge crop, and you can offer them all the tax deductions for the healthcare premium, but if they don't have the income to offset it from, what's the sense? What do we have?

So we will have a proposal, and hopefully you folks on the panel will co-sponsor when I introduce it. Thank you, Mr. Chairman.

REP. 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 ?), etc., bill, simply raising the limit on ours from $2,000 to $5,000 a year cost $38 billion over 10 years. That number I do know. And in the end, we're going to have to really examine priorities.

I'm always fascinated as chairman that I can't simply go out and co-sponsor every bill for all of the good things that we want to see done in tax relief and the tax code. But as an individual member, members can do that. And so when a good idea comes along, it's easy to jump on board, and then we've got bills that have 100-200 co- sponsors. But 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 co-sponsored, 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've 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, and we're going to have to sort through that as we go along.

Mr. Portman?

REP. PORTMAN: If I could 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 and your Social Security proposal. With regard to the pension side, this is going to increase our savings rate in this country, meaning that there will be more money invested in the markets. There will be more capital formation. There will be 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 I think result in higher savings, and more general revenue's coming in as a result of better economic conditions than others. And I would hope with regard to retirement security we look at it in that context, and also in the context of how cost effective it is.

In the retirement area, as you know, with regard to pensions, you're leveraging a lot of private dollars, and non-discrimination rules ensure that. And so it's actually, I think, an awfully good bargain for the Treasury, and you will have a much more cost-effective way I think of handling retirement needs by making some of these common-sense changes on the retirement side.

REP. 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 the hearing on how we tax -- or SINCOM (ph), 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're not going to have the resources to do all the things that we need to do in the next century. So I hope every member will try to attend that hearing, as well as all of these hearings on the various aspects of tax relief.

I think Ms. Dunn wants to be recognized, and Mr. Waller, and then hopefully we can move onto the next panel.

REP. JENNIFER DUNN (R-WA): Thank you very much, Mr. Chairman. Before this panel leaves, I do 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 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, and it is not calculated as part of income, and therefore it's much more easily given by employers and received by employees.

REP. PORTMAN: I thank the gentlelady. And let me just thank her also for her help with regard to the catch-up provisions in this legislation, which we didn't have a chance to get into. I mentioned Ms. Dunn earlier in terms of her contributions. She helped us to focus on that issue, which allows for every individual coming into the workforce at age 50 or above, to add an additional $5,000 to what they contribute to a defined contribution plan, for instance, the 401(k).

Who is this going to benefit? All baby boomers, who are primarily working moms, who are coming back into the workforce and want to be able to set aside enough of an nest egg to have something for retirement. When you're coming in late in the game, because -- as Mr. Thomas said earlier -- the power of the time value of money and compounding interest, you want to give these people an additional incentive. So I want to thank her for that.

On the education side, it is a very important provision of the bill -- I think the impact of having these increased contribution limits of encouraging decisionmakers and companies -- particularly small companies -- to get into these plans, is going to result in two things. And this is based on a lot of evidence from a lot of folks around the country and a lot of experts.

One is more education, because, again, the way the non- discrimination rules work, they're going to have to get the lower paid and middle-income workers involved in these plans in order for the plans to meet the non-discrimination and top heavy rules. So education will be a more and more important component of this, which is great for this country and great for workers.

Second is bigger matches, to encourage, again, these workers who are perhaps now not as interested in thinking about their retirement to have some financial incentive. And again, those matches is private money going into the system that might not otherwise be there that will help us with regard to our savings rate.

So I thank the gentlelady for all of her support and contributions.

REP. ARCHER: Mr. Weller.

REP. JERRY WELLER (R-DE): Thank you, Mr. Chairman. I have a pension related question, and I'll direct my question to Mr. Portman.

I too want to salute you for a couple of issues, but I want to mention the catch-up issue which you've already just discussed in the previous question with Ms. Dunn, giving an opportunity, particularly to working moms, who are trying to make up for miscontributions when they were out of the workforce, while they were at home taking care of the kids.

I think of my own sister, Pat, who was out of the workforce for seven years, and of course I believe deserves the opportunity to make up that miscontribution. I look forward to continuing to work with you on that.

I wanted to direct my questions specifically, Mr. Portman, to the 415 pension issue. Of course, I've been working with you, and you've got a provision in your legislation. And I have HR 1297, which addresses the 414 issue, which I personally believe is an issue of fairness, and Mr. Johnson is also co-sponsoring our legislation.

415 pension limits are arbitrary limits that really limit the ability of construction workers, in particular, those who work for several employers. Many times a construction worker during the same week can work for two or three different contractors, and that's why they're in multi-employer pension funds.

These limitations unfortunately have really penalized folks who get up early and work hard, sweat and toil, get their hands dirty, and have calluses on their hands. In many cases, they work so hard at a younger age, they're burned out and worn out.

The 415 issue, I think when it was first brought to my attention, usually it was by a group of spouses who saw their husbands get up early -- laborers, carpenters, iron workers, operating engineers, who have gone to work early, and then, of course, they come home late and tired. And they found out that their pension that they were promised wasn't quite what they thought -- didn't turn out quite as it should be because of the 415 limits.

I have a letter here from Laurie Quor (sp), wife of Larry Quor, construction worker from Peru, Illinois. Mr. Chairman, I'd like to, with your permission, insert this into the record.

REP. ARCHER: Without objection, so ordered.

REP. WELLER: Thank you, Mr. Chairman.

Laurie really points out that her husband, Larry, because of the 415 limits -- he's retired after 20 years as a construction worker. As I pointed out earlier, construction is a pretty physically demanding trade, a tremendous amount of physical activity.

He recently retired, and when he was working, he anticipated that under his multi-employer pension plan, that he'd receive almost $40,000 per year, or 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's only receiving about $19,178 a year, or about $1,500 a month. That's less than one-half of what he's entitled to.

So it's clear, I believe, that these 415 limits are costing real families like Larry and Laurie Quor real money, and they're being unfairly punished.

The question I want to address to Mr. Portman -- you and I have worked together on this, and there's been a lot of research done on this issue.

When it comes down to it, would lifting these 415 limits, would they affect the solvency or jeopardize in any way the integrity of these multi-employer pension funds?

REP. PORTMAN: No, it would affect the solvency of the plans or the funding of the plans. And you're exactly right. The focus of this is not on the higher paid workers; it's actually on the workers like the example you used. The higher paid workers are not going to worry about the 100 percent 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, really the focus is multi-employer plans, and the person who is the construction worker, who is laying the carpet, who is doing the carpentry, because this is a person, who based on his years of service and the formula contributions end, would get a certain amount, but then this arbitrary limit comes in and knocks it down.

REP. WELLER: I think that's important notice, and I think in the last few years -- these 415 limits were established almost 20 years ago essentially to go after some corporate executives who had some golden parachutes they were trying to create for themselves. But over the years these limits have been changed, and there's been some various groups that have been taken out.

Are you aware of some of the groups that have been taken out? It's 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 underneath the 415 limits.

REP. PORTMAN: That's correct. There are school teachers and others who were taken out.

REP. WELLER: School teachers, that's right.

I know Mr. Johnson played a role in that, and I know they appreciate it.

I can consider this really a fairness issue for the little guy and the little gal, those who work hard. I'm interested in working with you and the chairman, and others on this committee to ensure that we address this fairness issue, and lift those who work hard and play by the rules, those who work in construction trades out from under these 415 limits. And I appreciate the cooperation and partnership with you.

REP. PORTMAN: I thank Jim for all the work he's put into the multi-employer, generally, and his own bill that I've co-sponsored.

REP. ARCHER: The chair, again, thanks the members of the panel for their presentation. It's been very, very helpful.

The next panel is now invited to come sit at the witness table; Dr. Goodman, Dr. Butler, Mr. Kahn, Ms. Lehnard, Mr. Wilford, and Ms. Hoenicke.

The chair welcomes each of you, and looks forward to your presentations.

Dr. Goodman, would you lead off, please? Would you also, for the record, identify yourself before you begin your testimony.

DR. JOHN GOODMAN: My name is John Goodman. I'm 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 all time lows. We're spending an enormous amount of money on this problem, but the more we spend, the worse the problem seems to get.

We're spending more than $100 billion on tax subsidies for private insurance. Yet, while some families 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 that have insurance, those in the top fifth of the income distribution get six times as much help as those in the bottom fifth.

We're also spending an enormous amount of money on healthcare for the uninsured, by our count, more than $1,000 per year for every uninsured person on a hodgepodge of programs. Yet, there's no overriding mechanism that ensures that resources are matched with needs. And there's no way for an uninsured person to take his $1,000 and spend his own private insurance instead.

There's 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 the people who have health insurance see their taxes reduced, and when they cease having health insurance, their taxes will be increased.

An important part of this proposal is the idea of the local healthcare 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. In fact, by our count, the uninsured pay is much an extra tax each year, as the amount of free care they get at the nation's hospitals.

The problem is that these extra taxes go to the Treasury and fold in to general revenues, while the local hospitals must find the resources to pay for the free care.

As an alternative, I proposed 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 healthcare.

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 this 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 not longer be subsidizing wasteful health insurance plans. The federal government would subsidize only core coverage, and people would buy additional coverage for their own after-tax dollars.

We would put employer-provided insurance and individually purchased insurance on a level playing field, 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 playing field. 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, 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, PPO, fee-for-service, etc.

This plan, Mr. Chairman, also addresses to characteristics of the uninsured that have been ignored by previous plans, and that is that 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 can be paid for with money that's already in the system. The $40 billion we now spend on the uninsured is one source; the $100 billion we're spending on tax subsidies is another source. And we can also carve out existing tax preferences.

I see no reason why a middle-income family should get the $500 tax credit for a child if the child is uninsured. I see no reason why a middle-income family 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 refund for a child, if that child is uninsured.

Now clearly, these choices are political, and they're yours to make, but I think the goal is one which the vast majority of Americans would support. Thank you.

REP. ARCHER: Thank you, Dr. Goodman.

The next witness is Dr. Stuart Butler. If you would identify yourself for the record.

The chair would, number one, thank you, Dr. Goodman, for keeping your oral presentation to less than five minutes. Your entire printed statements, without objection, will be entered into the record.

Dr. Butler, if you'll identify yourself, you may proceed.

DR. STUART BUTLER: Thank you, Mr. Chairman. My name is Stuart Butler. I'm the vice president of Domestic and Economic Research of Heritage Foundation.

Mr. Chairman, as Ms. Johnson and Dr. Goodman have noted, there's 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, family gets 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 after-tax dollars.

For the more, there's a growing concern that many Americans who've 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 will 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's 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, as they do, but I believe we should move on the tax side now while we have the opportunity.

Second, while it's true that most of the benefit of a new tax credit would go to working people who are already buying insurance with after-tax 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've 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, we would certainly have more impact. But a $1,000 credit for a family in Connecticut, or Texas, or California, means that we're $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, 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 uninsurance.

Moreover, to the extent that some smaller employers and their employees would find it sensible to cash out an inefficient health plan, and let their workers use the credit to buy insurance elsewhere, that would improve the coverage for these families. I agree with Mr. Stark, that it would 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 the 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 could consider incorporating Senator Daschle's proposal to allow families to assign their credit to an insurance plan in return for reduced premiums. That's not unlike, across the way, 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 lowest income workers. On the other hand, a 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 economical 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 Ms. Johnson proposes.

Finally, a health credit would be reasonably compatible with long-term tax reform, assuming that some tax preference for healthcare were retained in a reformed tax code. For instance, a health credit could be folded into the personal exemption amount in a flat income tax, or into an exempt or reduced tax rate feature of a sales tax.

Mr. Chairman, it's 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.

REP. ARCHER: Thank you, Dr. Butler.

Our next witness is no stranger to the committee. We're happy to have you back before us Chip Kahn. We'll be pleased to receive your testimony.

MR. CHARLES KAHN, III: Thank you, Mr. Chairman.

I am Chip Kahn, president of the Health Insurance Association of America. I'm very pleased to be here today.

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 priorities 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 incentive to increase the number of Americans protected by health and long-term care insurance.

In response to double-digit inflation in the 1980s, employers became more cost conscious purchasers of healthcare. As a result, premium increases dropped dramatically in the late '90s. These changes not only kept up 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 healthcare 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 in the next 10 years if nothing's done. If the economy sours, 1 in 4 working age Americans could find themselves without healthcare coverage.

HIAA has developed a proposal to increase healthcare coverage; Insure USA. This plan combines targeted subsidies, tax relief, and tax equity. Through its implementation, HIA believes coverage can be expanded to reduce the number of this nation's uninsured by two- thirds, and we can provide tax relief to ensure that all Americans are treated equitably by the tax code regarding their expenses for health premiums.

The tax policies provided in Insure USA 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 outline the details of HIA's Insure USA, but today I will comment briefly on the core principles underlying the Insure USA 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 multi-faceted problem that requires a series of targeted approaches. While affordability is the primary reason people lack insurance, the uninsured have many faces. There's no single, silver bullet solution to covering more Americans.

Third, the current private healthcare markets should remain a cornerstone of our healthcare system. The public policy debates over healthcare have taught that expanded coverage could only be achieved with policy that does not threaten the private coverage that the vast majority of Americans already enjoy.

And 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's 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 needed. 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 state and federal expenditures for long-term care over time. Tax policy clarifications, including in the Health Insurance Portability and Accountability Act of 1996, were an important first step. However, because HIPA provided the tax deduction only for a coverage purchased in the employer-based market, additional measures are needed.

Individuals purchased 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.

HIA 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 towards increasing the number of Americans who seek protection against future long-term care expense.

Thank you, Mr. Chairman, for the opportunity to testify today.

REP. ARCHER: Thank you, Mr. Kahn.

Our next witness is Mary Nell Lehnard. We're happy to have you before us, and if you'll identify for yourself for the record. You may proceed.

MS. MARY NELL LEHNARD: Mr. Chairman, Mr. Rangel, members of the committee, I'm Mary Nell Lehnard, senior vice president of the Blue Cross and Blue Shield Association, and we very much appreciate the opportunity to testify today.

Blue Cross and Blue Shield plans across the country have long supported the public, and they've been very 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 healthcare priority. We're 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 very quickly to our recommendation. We think the single, most effective thing Congress could do this year would to be to target low-wage workers in 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. Thirty-five percent of workers in firms of less than 10 employees are uninsured. And if you look at the problem of small firms of low-wage workers, it's worse. Only 38 percent of small businesses with low-wage workers offer coverage, compared to 78 percent of small businesses with higher wage workers.

We believe that 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 in businesses of fewer than 10 employees, and expand the program as resources permit.

In addition to the 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're pleased that Congress is now considering a number of tax proposals to expand coverage. The most comprehensive of these would de-link health insurance from employment, and move to an individual coverage-based system.

These proposals embody the very powerful notion of individual empowerment and merit full consideration. However, a fundamental altering 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 longer 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're 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 employment-based plan, these proposals would undermine the tremendous advantages of a 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 in the employer plan 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 or non-group market only if an individual doesn't have access to employer coverage.

For example, eligibility could be limited for those employees whose employers haven't offered coverage for some period of time, such as you, Ms. Johnson, have done in your 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 regulations, benefit mandates, and anti-trust exemptions that would increase premiums, and consequently the number of uninsured.

In summary, Blue Cross and Blue Shield Association and its member plan believe expanding coverage should be Congress' top priority, and we urge Congress to enact targeted tax proposals this year.

REP. JOHNSON: Thank you very much.

Mr. Wilford.

MR. DAN WILFORD: Thank you, Madam Chairman. I'm Dan Wilford, president of the Memorial Harman Healthcare System in Houston Texas.

I'm testifying today on behalf of 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. Healthcare 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 healthcare coverage and access for America's uninsured and underinsured.

AHA has supported incremental steps that can at least move our nation closer to healthcare coverage for all. Examples being, the Health Insurance Portability and Accountability Act for 1996, the Children's Health Insurance Program 1997, and the AHA's own Campaign for Coverage, which enlisted 1,500 hospitals and health systems in an effort to extend coverage in their communities.

It's 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's 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 find ways to increase healthcare 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's a growing consensus that the changes of the tax code can make healthcare 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 employers' coverage or whose employers don't offer coverage, to get insurance coverage from another source. This could take the form of a refundable tax credit. Low income taxpayers could qualify for a credit against their income tax for all or part of what they spend for health insurance. The tax credit could be varied by income and family status.

We can offer tax credits to small employers that purchase group coverage. This would 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 Year 2003.

In addition to tax code changes, other reforms can make coverage more accessible and affordable to the working uninsured. These include creating and purchasing cooperatives and grants for state high-risk pools. In addition, states and federal government could 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 illnesses and injury, that had they had proper insurance could have been a minor problem instead of an expensive condition. Our emergency department sees this everyday.

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 healthcare coverage.

We look forward to working with you on specific legislation that will do that job properly. Thank you.

REP. JOHNSON: Thank you very much, Mr. Wilford. Ms. Hoenicke.

MS. JEANNE HOENICKE: Thank you, Ms. Johnson. I am Jean 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 generation. 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, HR 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 workforce. 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 responsibly 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 retirement 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'd be happy to answer questions.

REP. JOHNSON: I think the panel for their thoughtful presentations. 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 the things that we've talked about here today, we really won't have retirees that are secure and capable at a strong part of the economy and decades ahead.

I wanted to ask you, Ms. Hoenicke, because the concept of annuities has not been not 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: Sure. The annuity product we believe is very important, and we're 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're considering today, is that it's the only product that can provide an individual 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 they have used to purchase that annuity, provide such a stream of income. And that's very important, because we all do not know how long we're going to live, and we may live a very long time happily.

REP. JOHNSON: Thank you.

On the subject on 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 representing and posing a really new threat to hospital services.

Hospitals are uniquely impacted by the rise in the uninsured, both in terms of your emergency room cost, and in terms of hospital stays that are uncompensated by virtue of lack of insured coverage. So it is of an enormous importance, I think, 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, early intervention, but also in maintaining the strength of the institutional capability 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. And 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're beginning to see some change. I'm beginning in my district to see a very exciting pairing of medical savings accounts with the traditional employer-provider accounts, giving people the option of a medical savings account, and then the retirement savings that offers end-years of low healthcare costs.

Aetna recently came out with a whole different approach to ensuring health costs.

One of the reasons we can't reach the uninsured individual, is because the costs are high, whether it's for the individual or for the small business. 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 we do do something about helping with the cost. Because if we just help with the cost, and we maintain in a sense the continued rigidity of product in the health market, I'm not sure that we are going to achieve our goal.

So it's kind of a nebulous question, but I'd appreciate your comments on it.

Dr. Goodman.

DR. GOODMAN: I would suggest two changes. One is 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 playing field under the tax law. And as long as we have a level playing field, we're 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 the employee has a policy, which he owns, and in principle can take from job to job.

I think if we can open up that mechanism, we'll get small business more in the role of helping people get into pools, instead of trying to run its own health insurance plan, which a small business is not really able to do.

REP. JOHNSON: Dr. Butler.

DR. BUTLER: Yes, I agree with that. I think that by providing the subsidy or tax credit, you would have in itself stimulate a lot of activities. Interesting, for example, that in the FEHBP, that you see a plethora of employee-sponsored organizations, including unions being very much involved in the 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. And I think if you look at certainly organized labor, 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 that, in conjunction with encouraging, and even working directly with states on a demonstration basis to allow poolings to develop, is a step to go. But the credit, giving the same tax treatment for non-employment-based plans is the key financial step to stimulate this kind of activity.

REP. JOHNSON: Mr. Kahn.

MR. KAHN: I think at the end of the day the kind of subsidization that's being discussed here is critically important. It will make the difference. But I must say, I think there's sort of a countervailing trend.

On the one hand, 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 of 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're going to see these products, whether they're HMOs or very high deductible plans being the only ones you can have that you can keep affordable. Because at the end of the day, whether it's better pooling or whatever, healthcare is expensive, and people are going to want a combination of coverage for various kinds of illnesses and diseases that will be expensive.

REP. JOHNSON: I do think it's sort of a remarkable failure of the American system that we've been unable to create pools for individuals. And I've been working on that for years, and many others in the Congress have. I'm 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 that they're more sort of in a sense public/private, because we have so many Medicaid eligible people who are not in the Medicaid system. But I think only if we begin to really have a more comprehensive approach to coverage can we do that.

So as you develop ideas along that line, I'd appreciate if you would get back to me.

Mr. Rangel.

REP. RANGEL: I have no questions. I want to thank the panel for their excellent testimony.

REP. JOHNSON: Mr. Foley.

REP. MARK FOLEY (R-FL): 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 often times at that level the employees themselves don't have any healthcare coverage whatsoever.

I think if given the option of a dollar and their paycheck per hour or some type of health insurance policy, they'll quickly take the dollar and the paycheck, and go without coverage.

One of the big problems in the insurance industry, and the healthcare industry, and the hospital industry is the fact that there's an immense amount of cost shifting to those who have the ability to pay, who have Medicare, Medicaid, or some other form. And we're now aggressively debating how should we increase minimum wage.

And one of the thoughts I had is, rather than necessarily give a dollar increase, I'd rather figure a way to require health insurance coverage, thereby reducing the burden that's spread among society and getting employees covered.

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're going to elevate everybody's paycheck in order to keep things consistent in America.

Can anybody give me an idea about that?

DR. GOODMAN: Well, I can tell you that I prefer the kind of approach which encourages people to both have a job and have health insurance. And I would be opposed to an approach which artificially raises the cost of labor, and therefore it's going to cost people to be unemployed, especially as we go into an economic downturn.

So I prefer the tax credit approach that's available to people regardless of their wage. And for people at the bottom of the income ladders, since they're fully refundable, it means essentially the federal government is going to be paying for their insurance.

DR. BUTLER: I agree with that. Assuming for the sake of argument, one supports increasing minimum wage, if you go forward with that, linking that to a specific, or earmarking that for a specific kind of insurance coverage I think 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, I think whether or not you have an increase in minimum wage, a tax credit, which offsets the cost of coverage, gives you a lot more flexibility to do it either within the employment-based system, or outside the employment-based 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.

And I think Dr. Goodman's point, that if you offer credit, and people for whatever reason don't take it, and just take the cash, then you can look at a rebate to the state equivalent to that revenue which has not been lost by the federal government as a way of dealing with people who somehow refuse to actually accept the credit, and use it in some way.

MR. KAHN: I guess I would have a little concern about critical mass of dollars; that if someone is actually at minimum wage, and you say only a dollar, or some small portion of that has to go to health insurance. I'm not sure there's enough critical mass. And if the employer is not already providing them coverage, then I think it's problematic; I'm 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 Insure USA proposal, or something to get them enough bucks to get a policy that has substance to it, and we give them the kind of coverage that would sort of move them down the field towards decent healthcare.

MR. WILFORD: Mr. Foley, I believe the people I've experienced in our emergency department that come in with no coverage that are minimum wage people, probably would put their money in their pocket, like you're proposing.

And 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 in public clinics or other provisions of services.

REP. FOLEY: Well, 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 because there are so many things that are added on into a required policy.

If anybody else wants to comment on it, you know, again it was just an idea and I know the complications are in fact very real. And I'm not suggesting I'm 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 and that's a 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's the hospital. It's Blue Cross. But somebody is going to absorb that cost to society. And I just sense that that is a real, real problem in insurance coverage.

Because the fewer become uninsured, the more the burden goes to the insured, the higher the premiums, the fewer continue to maintain coverage and the spiral continues. And I've got to vote in three minutes. Thank you.

REP. JOHNSON: Yes, some of us do have to vote and I am going to recognize Mr. Cardin for questioning while we're gone. Others wanted to come back to questions so we'll see how that develops. Otherwise we'll recess until the next panel after Mr. Cardin is complete --

MR. CARDIN: Madam Chair, I'll 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.

REP. JOHNSON: I can't let you do that, Mr. Cardin, but before I leave I did want to mention two things. First of all, I think Mr. Wilford's comment about -- and 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 lastly, I would like to ask your help once my bill gets in in evaluating how many of the uninsured it would cover because it's so far, 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'll recognize Mr. Cardin for as much time as he may choose to consume.

MR. CARDIN: Thank you, Madam Chair. It's nice to have the whole committee. We might decide to mark up Social Security reform first, and then we'll go from there.

Well, let me first thank all of you for your testimony and for your work on trying to deal with the problems of uninsured. I would first like to 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 Patient's 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 principle that, the higher the cost the more likely that a county 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?

DR. GOODMAN: I think it is and it's not something -- because of what's happening in Washington, it's also what's 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 when inflation goes up.

So the effective cost to an employer is going to continue to escalate to maintain the current plan. Employees will be either -- according to your economic analysis, either are going to have to cut back someplace, have the employees pay more, or not provide the benefits. Is that what's going to happen?

And therefore, people are going to be under- insured or uninsured in greater numbers if Congress does nothing.

DR. GOODMAN: Well, I think it's just a little -- I think it's a little bit 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's probably what was happening a decade or so ago. But what has happened --

MR. CARDIN: If they can find it. Then I'm a little bit troubled by your argument that when we provide certain protections to patients that could add to the health care premium costs, that that adds to the number of uninsured.

That doesn't seem to be logical from your -- because health care cost is expensive.

DR. GOODMAN: But what I'm saying is that we pass a lot of laws which raise the costs of insuring against those health care costs. In other words, for an individual just to get basic health care coverage is to bind him to 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 costs of the health insurance itself, as opposed to the cost of health care, for healthy people.

And, number two, we're making it increasingly easy for people to wait until they get sick before they get health insurance.

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 and in sort of one fell swoop, it does affect coverage.

Now, what you're describing, I guess you're saying the logical conclusion of the argument we've been making is a depth spiral, that there's a point at which you're going to just lose and lose and lose.

And 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 in the number of people covered by employment.

I am concerned over time that. yes, if we don't keep premium increases corralled, that we're going to have the problem you're describing. But to add on top of that the mandates in all their various forms I would argue 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, then we're not doing -- then we have under-insured individuals, which can be just as serious a problem as uninsured.

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'm uninsured, aren't I?

MR. KAHN: I think we'll 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 I think 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's at the premium level or the coinsurance and deductible level.

At the other level, I guess I'm personally -- and obviously the companies I work for are not convinced -- that the set of requirements are going to assure patients what you are describing as their perception of what full coverage is. I think we'll just have to disagree --

MR. CARDIN: Mary Nell, you want to help me out on this?

MS. LEHNARD: I think there is no question that as trainings go up, they'll go up on their own, even without any changes here in Washington. If premiums go up we're going to see more shifting.

I think the primary thing we'll 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's not creating maybe in their minds enough cost-sharing.

But I think we're getting up to the point where it's 50- percent premium sharing by individuals. And that's why in our proposal 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're paying a significant part of the premium even if they've 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 is, it's not just patient protection it costs.

It's 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's what I -- we're in all lines of business. And I hear that the diversion from product development is significant.

MR. KAHN: I think that's 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're 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 codes should help those people who currently don't have health insurance become insured.

Chairman, thank you.

REP. ENGLISH: 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 would be appropriate?

DR. BUTLER: You know, Mr. English, I think that almost begs the question, what kind of revenue cost 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's no question about that. There is also no question that if you give a relatively small credit you're 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's kind of hard to answer your question. The kinds of proposals that have been put forward that would, say, provide a 30-percent credit, for example, would probably reduce uninsurance by somewhere between one and a half and two 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's a little difficult to answer your question.

REP. ENGLISH: Sure. 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.

DR. 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 towards your goal. But if you're 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, in practice the net cost to the person taking into account the credit is still going to be a very substantial portion of their income.

And it's probably going to be prohibitive, so they're not going to accept the credit under those kinds of cases. That's why I think approaches that try to combine a fixed amount, a larger fixed amount for people at the low end, may be in combination with a percentage credit, and 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 of 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.

REP. ENGLISH: If we were -- Mrs. Lehnard, did you want to add something to that?

MS. LEHNARD: I would just add that we actually did modeling on this at $1,200 tax credit for very small firms, less than 10 at 225 percent of poverty. And, you know, we -- the 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 seven million potentials pick up coverage, which suggests you really almost have to pay the full costs and then you still don't pick up the entire population.

REP. ENGLISH: Let me, again going back to Dr. Butler, ask you -- I think what you are contemplating here is clearly a refundable tax credit.

DR. BUTLER: Or at least partially refundable against payroll tax, if not net -- not in addition to that.

REP. ENGLISH: Do you foresee any potential fraud problems with a credit like that, or is that going to be relatively easy to enforce?

DR. BUTLER: Well, I think it's -- you know, it depends how you design it. A refundable credit I think -- a fully refundable credit does raise lots of issues because you are dealing with people who don't file taxes, and so on.

And 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 coverage, proof of insurance becomes an element, which even the employer can at least be your first line of defense in terms of, well, what is this person actually using it for.

I think you can deal with it a lot in that sense. I also mentioned in passing a proposal that Senator Daschle had a little while ago to say as an additional 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 it with less likelihood of fraud in those kinds of situations.

And again, that's not unlike what happens in the FEHBP, where you get an after-subsidy price as an employee.

REP. ENGLISH: And that reopens one other question. But first of all, Mr. Khan, did you have something to add?

MR. KAHN: Yes, Mr. English. I think that you might want to look at this structurally differently though. To focus on how big the credit has to be, I think maybe it's 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 to the tax structure, one, as you say, leads to fraud and abuse issues, and two, leads to just issues as to how do you locate them.

We also in our plan gave -- would give a credit to certain small employers directly if they purchased insurance. It's a costly proposal, but on the other hand it gets to the issue that Mary Nell Lehnard was talking about, which is it's the smallest employers who cover -- 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 bucks through the people in a credit that is going to be very difficult to design.

MS. LEHNARD: And we took one more twist on that. We said don't just do it for all workers in small firms, do it for the low-income workers in small firms.

REP. ENGLISH: Mr. Goodman.

DR. GOODMAN: Yeah, first on the fraud question, there is fraud in the EITC (sp) program. And 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.

And if the employer is involved, as Dr. Butler said, the employer will be monitoring. So you bring more monitors into the system.

REP. ENGLISH: Right.

DR. GOODMAN: The more monitors in the system mean 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 -- is talked about handing people cash and saying, "Go buy health insurance."

We're, I think, 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.

REP. ENGLISH: Very good. Any other contributions?

DR. BUTLER: I would just add one point, which is just about the credit to employers, which I am fairly skeptical about because I think that one of the issues is to how -- indeed, as has been discussed before, how to get people into larger groups and larger pools.

And if you look at a very small employer with five employees who is trying to buy insurance today in a pretty dismal market that they would face, to say we'll give them a credit and so argue that that's more efficient than allowing the employee a credit to go and join a larger pool somewhere else, I don't think that argument holds.

I think in fact an individualized credit is much more appropriate for the very small business sector than subsidizing the employee -- employer through a credit of any other kind of system.

REP. ENGLISH: Ms. Lehnard, briefly.

MS. LEHNARD: I would just make one quick point that on the pooling of small employers you don't have cases anymore 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: And 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.

REP. ENGLISH: Thank you. Thank you very much for your participation today, and I will dismiss this panel. Oh, let me turn this over and recognize Ms. Thurmam to inquire.

REP. KAREN THURMAN (D-FL): Thank you, Mr. Chairman. You like that sound? Let me see. Dr. Butler, I am intrigued, because yesterday, of course, we had a panel before the medical or the health care 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 on page 10 where you talked about non-employment base groups actually are more logical and skilled in their organization, so do you feel that way about opening up some of those government programs that are available to expand some of the coverage in these areas?

DR. BUTLER: Well, I don't think those two points are connected. What I argued was that, first of all, 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, ideally, so you're not going in and out.

It should be large in some way so that it is big enough to spread the risks, and so on. And I pointed out that there are organizations that currently exist that 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. But labor unions, churches, other kinds of groups like that --

REP. THURMAN: Well, would this be one that you would feel that should be explored then from the 55- to 64-year-olds?

DR. BUTLER: Excuse me?

REP. THURMAN: Or the 55- 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, for particularly Medicare with a premium?

DR. BUTLER: I don't believe in expanding Medicare and I don't think it's necessary to reach the condition I mentioned because, for example, if you did have people who did have people who, let's say, had a union-sponsored plan and had tax relief and a tax credit whether or not they were employed, then that system would run 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're 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 there's 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 they already have.

I don't think it makes a lot of sense to say to somebody who turns 60 and has good coverage, let's say through an organization, to now then say, "Well, now you're going to basically drop this and go on to Medicare." I think as far as possible --

REP. THURMAN: I don't think that has been --

DR. BUTLER: Well, I think that any --

REP. THURMAN: -- what has been called for.

DR. BUTLER: Well, I think that any -- the ideal situation would be to allow people to join organizations when they are working, throughout their working life, and to continue into Medicare.

In other words, my argument would be, on the contrary, 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.

REP. THURMAN: I was just looking at your definition of what you had considered. Let me ask though, the panel.

The CRS has done a fair extensive report on all of the tax benefits in current law as or providing insurance through, for example, the employment-based plans. There are some tax deductions. Medical expense deduction -- all of us know that's a very difficult threshold to meet, but in fact it is there.

You've got cafeteria plans, you've got self-employed deductions. You've got flexible spending accounts, medical savings accounts, both military and Medicare, none of which are considered as part of our income.

I mean, it seems to me that we have a hodge-podge in many ways of tax credits available to us today. And still we're at 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, Ms. 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 of people who work in small firms.

REP. THURMAN: But, Mr. Kahn, if -- I mean, I understand the small firm. But let's say, for example, the self deduction, I mean, for -- you know, somebody who owns their own business and can do a self.

I mean, do we know how many people out there who are not taking advantage of that? And that's a very small firm. And those are some issues that I am really concerned that we're -- you know --

MR. KAHN: And I would argue --

DR. GOODMAN: If I can respond -- MR. KAHN: -- people are taking advantage of that based on income. I mean, law firms that are all partners and they're self- employed, they're taking advantage of it. And Joe's Bar & Grill that's 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.

DR. GOODMAN: Right.

MR. KAHN: And that's one of the issues before you.

DR. GOODMAN: But it is a hodge-podge on the tax side, almost as bad as the hodge-podge over on the spending side. It seems to me like there's a very strong case to be made with treating everyone the same -- fairness.

And so you say, "We're going to give a tax break to you if you buy health insurance and it's going to be X dollars. And it's 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.

And we strongly favor having that tax credit be just as generous for the low-income person as the high-income person, whereas today it's all geared toward people in the higher brackets.

DR. 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 the seven-and-a-half percent threshold, for example, you've got to itemize.

You've got to have significant expenses. You've got to be able to afford those expenses --

REP. THURMAN: It's meant for catastrophic.

DR. BUTLER: -- before you even take the -- so the huge gap is the people who are outside the employment-based system and are relatively low income. And that's 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 can make one other point, too, that 7.5 percent was totally arbitrary and it was done in tax reform --

REP. THURMAN: Why does that not surprise me?

MR. KAHN: -- in 1986, because --

DR. BUTLER: Shock.

MR. KAHN: -- they needed the money to make the whole tax reform work. And it was one of the areas, because it was lower for years, I mean, for eons.

And I can remember the day at which I was working for Senator Durenburger (sp) at the time and I said, "Don't do that." And he went and did it, but -- as other members did.

But the point is, that's arbitrary. And I think actually if you are looking at things to help people, that's one item that even though obviously you have to itemize, is arbitrary and probably too high.

MS. HOENICKE: If I could just 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 cut. There is no deduction for long-term care and that is a medical --

REP. THURMAN: Nancy and I are working on that.

MS. HOENICKE: Right. We know you are and I wanted to say thank you again if we didn't make that statement. Thanks.

REP. ENGLISH: I thank the gentle lady for her contribution. And do any other members wish to inquire? The chair recognizes Mr. McInnis.

REP. McINNIS: Thank you, Mr. Chairman. I would only make one point. Dr. Goodman, towards 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's 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 a tax credit instead, that's a welfare program. And so you should distinguish between the two.

DR. GOODMAN: I don't mind if you rhetorically distinguish that way. But what I am saying is that presumably government has an interest in 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.

REP. McINNIS: I don't --

DR. GOODMAN: And so if we --

REP. McINNIS: I'll 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, 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.

REP. ENGLISH: Thank you, Mr. McInnis, and 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 Mr. Jack Stewart, assistant director for pension of the Principal Financial Group of Des Moines, Iowa, on behalf of the Association of Private Pensions and Welfare Plans; Ms. Paula A. Calimafde, chair of the Small Business Council of Pennsylvania, Bethesda, Maryland and a member of the Small Business Legislative Council, and also on behalf of the American Society of Pension Actuaries and Profit-Sharing 401(k) Council of America; Mr. Jay 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 Arisa (sp) Industry Committee; and Mr. Jim McCarthy, vice president and product development manager of the private client group for Merrill Lynch & Company, 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.

Whereupon, the first panel is dismissed and the second panel is seated.

REP. ENGLISH: I recognize Mr. Stewart

MR. STEWART: Thank you, Mr. Chair. I am Jack Stewart, assistant director of pension at the Principal Financial Group of Des Moines, Iowa and I am here today on behalf of APPWP, 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 AAPWP'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 HR-1102, the Comprehensive Retirement Security and Pension Reform Act of 1999.

Introduced by Representatives Portman and Cardin, HR-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 co-sponsored 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 HR-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' HR-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 business owners that they will be able to fund reasonable a retirement benefit for those individuals, for themselves and other key employees, who 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 lean years, in the years ahead, to build adequate retirement income.

The catch-up 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 HR-1102 is the simplification of many Tax Code sections and pension rules that today still inhibit our private retirement system.

I have found these complicated rules to deter many small employers from offering retirement plans and make plan administration a costly and burdensome endeavor for companies of all sizes. The bill's simplification measures include needed flexibility in the coverage of non-discrimination tests, repeal of multiple-use tests, and the earlier fund evaluation date for defined-benefit plans and the reform of the separate lines of business rules.

HR-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 business with planned start-up and administration costs through a tax credit, reduces PBGC insurance premiums, and waives IRS user fees and has simplified reporting.

Based on my experience working with small companies, I am convinced that these changes will make our private retirement system more attractive to small employers.

APPWP is also pleased that HR-1102 would also 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.

Thank you.

REP. ENGLISH: Thank you, Mr. Stewart.

Ms. Calimafde, we look forward to your testimony.

MS. CALIMAFDE: I'm Paula Calimafde. I'm a practicing tax lawyer for over 23 years in the qualified retirement plan area. I'm the chair of the Small Business Council of America. I'm a director of the Small Business Legislative Council.

I was a delegate appointed by 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 a 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 three 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 business -- 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 look at this as a cost benefit analysis. Imagine a company which has three owners, four employees, and at the end of the year has $100,000 of profit.

That company can put the money back into the -- 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's 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 would be better off with a retirement plan than they would have 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, to require extra costs to administer the plan, both inside and outside, 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, 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 1970s, all of the '80s and the early '90s.

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.

HR-1102 is the first major piece of legislation to reach out in a reasoned manner to small businesses to bring them into the system. We now know, because the April 6th, 1999 CRS report for Congress entitled, "Pension Coverage, Recent Trends and Current Policy Issues," that once a small business establishes a retirement plan, a 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, will sponsor a retirement plan, participation is at the same high level that you would have in a bigger plan.

It's roughly 85 percent of all the employees of the company participate in that plan. In other words, coverage results.

I want to take a minute and look at the top-heavy rule. 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 HR-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 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 is akin to allowing the proverbial camel to go under the tent. The proverbial camel goes 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's inevitable that repeal is following. Actually, HR-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 the more onerous approaches.

In my opinion and in the opinion of those I'm representing today, ASPA, Profit-Sharing Council 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.

REP. ENGLISH: Thank you, Ms. Calimafde.

Mr. MacDonald, we look forward to your testimony.

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 ARISA Industry Committee, on behalf who I appear today.

I am here today to urge that the full committee enhance retirement security by, one, approving HR-1102; secondly, 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.

Thirdly, by permitting ESOP dividends to be reinvested without loss of dividend deduction for employers; and finally, to resist the efforts to prevent employers from establishing cash balance and other innovative and creative defined benefit plan designs.

HR-1102 corrects many of the problems that are a product of the multiplication of many of the 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 the contributions that can be made to tax-qualified plans.

Between 1982 and 1994, however, scores of laws were enacted that repeatedly allowed the ARISA limits on benefit funding. HR-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 that will not have time to accumulate their savings.

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.

Most recent 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.

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 believes the restored limits regarding compensation and the benefit that defined benefit plans may provide will be particularly beneficial in increasing retirement security available to American workers.

HR-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 death rule.

Eric also supports the bill's provisions that facilitate plan-to- plan transfers by providing that receding plan not maintain all of the optional forms of the benefit savings 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 as after tax.

Current law relating to ESOP discourages reinvestment of retirement savings and increases leakage. HR-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 employment security.

The committee will also consider this year extension of 420, which permits the use of excess pension assets in support of company's 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 are providing an understandable, portable and secure benefit, where employers, not employees, bear the investment risk and the participants' benefit is guaranteed by the PBCG.

A significant number of large and medium-sized employers have adopted the new plan design, breaking the golden handcuff and letting their workers out of the pension jail, if you will.

The plans have become very popular and are 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.

REP. ARCHER: Thank you, Mr. MacDonald.

Mr. McCarthy, welcome to the committee. We will be pleased to receive your testimony.

MR. McCARTHY: Thank you, Mr. Chairman.

My name is Jim McCarthy. I am principally responsible for tax product development at Merrill Lynch, and today I am here representing the Savings Coalition. I am honored to be here and I am pleased that the committee is taking such a proactive stance in this area.

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 home builders, 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 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 HR-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 allowing additional catch-up 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 401(k) plans in the early '80s and '90s.

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 a historical context in just a moment.

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 -- and when I define leakage I say the number of distributions that are not rolled over to either an IRA or a subsequent employee 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 that the personal savings rate in this country has dropped from roughly eight percent during the '60s and '70s down to what many would argue is a very anemic one-half of one percent currently, and in certain months we have gone in fact negative.

While we believe the nature of the statistic is imperfect, we certainly believe that this is an area that needs to be addressed. Our own research, we have Douglas Bernheim (sp), a Stanford economics professor, who prepares a baby boom index for us.

That index currently stands at about 32 percent, which means there is 68 percent inadequacy of retirement savings. Let me just get into some of the provisions of 1546 very quickly.

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 savers, people who want a simple and portable vehicle in which to make their retirement savings.

We think this is especially critical in that the bulk of job creation is happening in the small employer market, and as a result, traditional plan coverage is just not rising there as fast as it is in the larger employer market.

The last provision would be catch-up provisions for those over 50, the ability to, in effect, fund a plan that has not been adequately funded before. We think this 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 1546. Thank you.

REP. 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 referred to 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, reach 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 savings in this country are at an all-time 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 savings in the aggregation. I would also say that the personal savings rate as a statistic compiled by the Bureau of Economic Analysis is in fact negative.

I would say that there is at best -- it's an imperfect measure in the sense that it's a residual effect. It doesn't take into account, for example, wealth that grows --

REP. ARCHER: I understand.

MR. McCARTHY: -- outside. But I don't think anybody is arguing that savings is adequate as it stands now. I mean, it clearly -- to both rank 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 1546 and a number of other proposals before this committee right now are steps in that direction.

REP. ARCHER: TO go back to your analysis, which I can't 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, we don't then say personal savings rates have gone down.

MR. McCARTHY: That is correct

REP. ARCHER: So that works both ways. When the market goes up we don't count that in this standard to determine what our personal savings rate is. But when it goes down, we don't count it either as a negative.

MR. McCARTHY: Right. There is some data, for example, the Federal Reserve flow of funds data, which takes into account, for example, equity holdings in households, which does -- that's called meter it both ways -- catches it on the upside and catches it on the downside.

That begins to be the type of basis for our analysis into things like, you know, are people adequately prepared?

REP. ARCHER: I thank you very much, all of you, for your testimony. Does any member wish to inquire?

Mr. Portman, then Mr. Weller.

MR. PORTMAN: Thank you, Mr. Chairman. I want to thank the panel who are with us now and also Jean Hoenicke, who spoke earlier regarding the necessity of reforms in our pension system to try to increase that savings rate, determine what she's talking about, private and personal.

APPWP has been very helpful, Mr. Stewart, as you know, in putting together this proposal over the years and has been particularly helpful in working with us with folks in the trenches who every day deal with these issues.

And I guess I want to ask you a couple of quick questions about limits. Can you explain why it's so important to raise -- particularly to find contribution limits?

MR. STEWART: Sure. First of all it's not really an increase, it's more of a restoration of the limits that the 1102 would impose. And second, the firm I work for works with mostly small to medium- sized businesses.

A lot of those are telling us -- the business owners -- they've had a tough maybe 5, 10 years getting their business started. They can't afford to start a retirement plan.

The key decision-maker may be in their forties or fifties at the time they get the business on solid ground. They need to be able to make up for the past years they haven't been able to contribute to a plan.

The limits would incent (sic) them. The restored limits would incent them to be able 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

REP. PORTMAN: That's the point and we tried to make that this morning. This is a question of getting the decision-makers to make the right decision, to in a sense have them have the same stake in this plan as the lower paid workers would have, so in the end everybody benefits.

Just in terms of limits, in 1986 the limit on 401(k)s and 403(v)s was $30,000. We are proposing raising it from 10 to 15, as you know.

MR. STEWART: Correct.

REP. PORTMAN: Paula, thank you again for your testimony. You testified for the subcommittee and you've been very helpful again. You're representing so many groups here today 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: I would be happy to. Can I also just go back to the limits question quickly, because from the small business perspective -- and also I think it's the large business perspective -- it's important to understand that the upper middle income taxpayers or earners and upper earners, income earners, have in effect been disenfranchised from the retirement plan system.

And if you sort of imagine the Social Security system, if you took out all 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 to qualified retirement system. These limits being kept so artificially low 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 increase contributions isn't there. Small businesses look to these plans, as I mentioned earlier, as a cost benefit analysis.

If the costs of the plan are too high in relationship to what the benefits that the owners and key employees can get, they just simply will not sponsor the retirement plan.

I think what's interesting about HR-1102 is, it keeps all of the reforms that were put in in the '80s to stop abuse and it strips away all the unnecessary complexity.

So it will definitely reduce costs for small businesses. My estimation is, this bill, if it were passed, would encourage small businesses to sponsor retirement plans.

REP. PORTMAN: Mr. MacDonald, just quickly, the chairman talked about the need to look at investments in productive vehicles, that that really is the key. And I couldn't agree more.

And that's why I think the pension area is so important. You mentioned a statistic I hadn't heard before, which is that 28 percent of investments and equities are now pension investments.

MR. MacDONALD: Yes.

REP. PORTMAN: And I guess if you could just touch on that, getting into the key issue here 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 kind of vehicles?

MR. MacDONALD: Well, we personally believe, both from a GTE perspective and an Eric's perspective that the expansion of the limits are going to encourage employers to stay with particularly defined benefit pans.

I mean, what you're really talking about here is the ability to have a disciplined, secured, guaranteed approach. It's funded, it's there, it's in the bank. It creates that savings. It's an automatic participation. And that's what we are ultimately trying to do with all of our people, is to get them to think broadly about the retirement security that they are going to need to have when they end their career.

REP. PORTMAN: Thank you.

Thank you, Mr. Chairman.

REP. 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, that 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 various stocks and bonds held by the pension funds?

MR. MacDONALD: Those -- I can only speak for my company, Mr. Chairman, but those statements exist today in our company. We go to great pains, and I think many large corporations do go to great pains to talk about two things: What is in the account? What are you accruing as an accrued benefit, and how that is invested.

And each year we go to great pains to talk about the investment of those funds and provide that information to people. I mean, it's a matter of fiduciary responsibility. It's there.

The people who run those investment funds have to report to people like myself and tell me. So it's only a matter of reproducing and providing it to those same people. I also think that it gives them a spirit of ownership and sense 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's what we're looking for. We're looking for loyalty, we're looking for commitment. That's what will encourage those types of participations in those plans.

REP. ARCHER: Well, 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 of each of the corporations to show what their actual ownership is beneficially, equity ownership in each of the 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's the latter that we list the total corporations that we're involved in. However, to your first point, is that they don't have to wait till the end of the 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 they want to use, so they are constantly projecting. That's our way to get them to understand the criticality of savings and financial security for the future.

REP. ARCHER: Well, I would suggest that if you went one step farther it would be even better, because if the individual worker saw I've got X thousands of dollars in my account and that means I own 10 shares of IBM and I own five and a half 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're doing.

Mr. Niel.

MR. NIEL: Thank you, Mr. Chairman. I thought the panelists were pretty good, incidentally, Mr. Chairman. I thought their presentations were pretty strong. But I want to ask a technical question.

Given the current level of activity with respect to conversion of traditional defined benefit plans on 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 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 before -- what their benefits are before the conversion, 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's 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 because they can see an account building up on their name, sort of getting back to what the chairman was talking about. But we would support adequate disclosure, yes.

REP. ARCHER: Other panelists?

MR. MacDONALD: If I may just interject there for a second, you know, the issue of providing people with information I think most companies are very comfortable with. But somehow this cash balance things has gotten completely out of sync.

There appears to be a feeling that it's 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's going on is, is that the demographics of the work force are changing. Case in point: We just bought a company in 1997, VBN. It's an Internet company, 2,000 company. This year we'll end with 7,000 employees. Next year we'll end with 14,000 employees.

When I went to them and talked to them about our plan -- rule of 76, age plus service -- they fell asleep. They couldn't care less. These are Internet-working people. They are basically looking at three to five years and are going somewhere else.

Their ability of portability is becoming the issue. There are a lot of us that would like to stay and have the handcuffs. Keep people in the jail, because then we're competing for talent.

What you have to do here is, you have to basically look at the needs of what the talent is right now. There's a shortage of labor out there. We have to do what they're demanding.

This isn't a issue of savings, this is an issue of what the war for talent is in the marketplace.

REP. ARCHER: Do other panelists care to comment?

MS. CALIMAFDE: I wish I could, but in the small business area there are relatively defined benefit plans, so this is a non-issue for small business, unfortunately.

MR. MacDONALD: Thank you, Mr. Chairman.

REP. ARCHER: Mr. Weller.

MR. WELLER: Thank you, Mr. Chairman. I want to thank the panelists for participating today. Mr. Niel, you hit on a subject I would like to ask Mr. Stewart about, if I could.

Just looking back at statistics when we talked about cash balance conversions, since the 1980s, seven million workers have been affected by transitions from cash balance plans and about 400 companies, including 22 Fortune 100 companies.

When I think about it, for a worker their pension or retirement program is pretty sacred, so they watch these things. From the standpoint of the company, what is in the interest of the company to convert from a traditional pension plan over to a cash balance plan?

MR. STEWART: I can give you a real-life experience. Just on Friday I was consulting with one of our existing customers in Chicago. It's a fairly large nationwide company that has locations at several different parts of the country.

Their feeling -- they have a traditional defined benefit plan and a traditional 401(k). They've got a lot of younger workers, as alluded to earlier. Their formula is a little bit complicated and they want to attract newer, younger workers who are going to be -- probably be moving on.

I mean, statistics would say 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 they gave us as we went home to prepare a proposal for them was, we want 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 mean, I think in the traditional D.B. arena, most people on the panel would agree, employees just don't know enough about --

MR. WELLER: In reclaiming my time here, you know, the Wall Street Journal has, of course highlighted some of the problems with the conversions. I am sure you have read those thoroughly.

MR. STEWART: Yes.

MR. WELLER: And of course in the Chicago area you have noted there have been some conversions affecting many of my constituents, since I first became aware of this issue when they contacted me with concerns.

You know, 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 employee. because we feel employees have a right to know the impact as we assume the company knows the impact on the company bottom line.

But the employees need to know the same. And what disturbs me though is that we have an example here as one consultant, for example, pitched a cash balance plan to a potential client. Let me quote this consultant.

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 employees have a right to know the impact of any conversion?

MR. STEWART: That's an unfortunate comment that the consultant had been made -- or had made. I agree that employees should know about the change in any benefit plan, whether it's a health plan or a pension plan.

MR. WELLER: Well, do you feel that employees deserve a comparison sheet before the conversion showing what they -- you know, under their current circumstances, under the current pension program comparing the current benefits as to the proposed change, what it would mean for them at retirement?

MR. STEWART: I think the association would strongly advocate a middle ground approach that would not be quite as burdensome as an individualized statement for a member, more of a, say, here's a scenario for a 30-year-old, a 40-year-old, a 50-year-old, a 60-year- old, with X number of years of service, average compensation being different.

MR. WELLER: But don't you already have that information? I mean, how can the corporation calculate the impact on the corporate bottom line without knowing the individual bottom line for each individual employee?

MR. STEWART: I think keep in mind that 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: Well, Senator Moynihan and I believe 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 statement. Would you support the legislation Senator Moynihan and I have offered?

MR. STEWART: We would be willing to work with you on trying to come up with an acceptable, again, middle ground approach.

MR. WELLER: I would like to work with you and your associates because I believe employees have a right to know. The corporation certainly knows. And whether you are a new employee joining or a long-time employee, you should certainly know the bottom line and the individual impact on your retirement with any conversion that might occur.

MR. STEWART: I appreciate your comments. I think employees do need to be aware. And the more they know about their plans, the better the plan is going to be.

MR. WELLER: Thank you, Mr. Chairman. Thank you, Jack.

REP. ARCHER: Mr. Cardin.

MR. CARDIN: Thank you very much, Mr. Chairman, and let me thank all of our witnesses for their participation, not just in the hearing today, but in helping Mr. Portman and I on HR-1102 and your other work in pension areas. We very much appreciate that.

First, following up on the conversation about employee information. This morning Mrs. Dunn commented on the importance of making sure that employees are educated on retirement options and what they will need to do to make sure that they will have secure retirement.

HR-1102 clarifies that when employers offer retirement planning education that it is not taxable to the employee and it clarifies that employers can offer retirement planning on a non-discriminatory 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 in support of these provisions from the Consumer Federation of America. CFA points out that the education and planning increase the savings.

More specifically, those savers who develop an overall financial plan report roughly twice the savings without a financial plan. But CFA notes that most Americans are ill equipped to develop their own retirement planning guide. So, Mr. Chairman, I would like to have that letter made part of the record.

REP. ARCHER: Without objection. Without objection. So ordered.

MR. CARDIN: I would just want to comment. I appreciate your response to some of Mr. Portman's questions as to the specific provisions in HR-1102 as to what impact it would have.

The chairman raises, I think, the initial challenge. We need to increase more private saving. Part of what HR-1102 does, as Mr. Stewart 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 I would appreciate your response to.

MR. STEWART: In our opinion, APPWP, yes, it would lead to more plan formation. The money that is contributed to that plan, as you know, is a little -- is more difficult to get at. It's 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's sort of two answers or two ways of looking at this. One is that the at 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 think they are on the radio now, by a second Ebry (sp) where they are talking about how important it is to save, and to save early and to save in a tax-free environment.

And my hope is that if this gets disseminated, young people in their thirties, who had usually not probably put a lot of money into a 401(k) plan are now going to start thinking twice and saying, "Well, maybe I had better participate a little bit more now because I know what that tax-free growth is going to do when I'm 60."

The other answer I think is in the small business area all the employees are carried along with the retirement plan. And a lot of these employees really can't save. They're really just making enough money to live.

So the retirement plan sponsored by the company is their savings. And if they get a five- percent profit-sharing contribution or a seven- percent profit-sharing contribution, that's real money growing tax-free they wouldn't have saved otherwise.

To the extent that HR-1102 is going to make it easier for small businesses to sponsor plans, and one of those factors I think is increasing the limits to where they were or returning the limits to where they were 17 years ago, I think you are going to see greater savings occurred 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 in following up on the chairman's point. We need to get to younger workers, we need to get to lower-wage workers earlier so that 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, Congressman. As a matter of fact, just looking at it first from a defined contribution benefit, you have to look at it if you eliminate the 25-percent cap you are really affecting the lower-paid worker.

The higher-paid worker is going to get to the $30,000 maximum. But what you are really immediately doing is going to the lower-paid worker --

MS. CALIMAFDE: That's right.

MR. MacDONALD: -- and allowing him or her to save more. That's number one. Number two, it bothers me that perhaps some of the legislation will be driven off the 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, is that if we can increase the limits from 160 to 235 you immediately are securing a benefit. You're 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 assured savings for people.

REP. ARCHER: Thank you.

MR. MacDONALD: Thank you, Mr. Chairman.

REP. 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.

REP. ARCHER: It really would take that long? Okay.

MS. CALIMAFDE: I'll do defined benefit and defined contribution. You end up with cash balances.

REP. ARCHER: I think we know what a defined benefit plan is. What's the difference between a cash balance and a defined contribution?

MR. MacDONALD: Go ahead.

MS. CALIMAFDE: I'll 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 defined contribution area, when it converts to a cash balance, it looks like a defined contribution plan but it really isn't all the way a defined contribution plan. What has happened is, there are individual account balances, so participants can see them. But I believe that the investment earnings are still guaranteed, aren't they?

MR. MacDONALD: Yes.

MS. CALIMAFDE: So a cash balance is really a hybrid type of plan.

MR. MacDONALD: Let me put it a different way, which is that the employer under a cash balance plan still assumes the risk. It's the employer's responsibility to ensure that that benefit, that accrued benefit, is paid.

So that when it may be on a fixed scale, starting from a younger age to an older age, but 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 the defined contribution plan in theory you could be putting your money in and it could be going away.

REP. 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 benefit obligation is that's there.

It's a defined contribution plan. I mean, everybody wants to gravitate it away from something --

REP. 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 her with her if they change jobs, in effect?

MR. MacDONALD: That's one example of it, yes.

MS. CALIMAFDE: Another thing it does is, the individual sees their own account balance. One of the problems of a defined benefit plan -- and it's unfortunate in a sense -- is that it is one big fund and an employee knows that if they stay with a company till retirement they might get 50 percent of their salary paid for as long as they live or their spouse lives.

But they don't -- they just have an amorphous kind of promise. In a defined contribution plan there is an account balance that they see every year and they see what's happening to it. 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 of looking at it, Congressman, is the defined benefit, for instance, that I'm in, it's like a hockey stick. It kind of limps along, and all of a sudden when I get the right age and the total amount of service -- in my case, age plus service equaling 76 points -- then it just jumps right up.

But I have no idea of what that accrue benefit is along the way or what it will be when it jumps up, because it's based on final average earnings. This 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's interesting, because what happens is the younger, more transient employees like the defined contribution plans, they like the 401(k) plans. The older employees who understand that this is going to be a stream of payments following them throughout their lifetime like the defined benefit plan.

And that's why it's sort of hard for companies right now to put these plans together in a way that the employees are appreciating them the most and getting the most out of them.

REP. ARCHER: Thank you for that explanation. I don't know if I'm the only one who needed to have it, but I hope it was beneficial to the other members of the committee.

Does any member wish to inquire? Ms. Johnson?

REP. JOHNSON: We've 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, at least the hope is that it will bring more people into the pension system, that people currently 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.

Even though that's very nice, you talk to any one of your kids who is married and raising children, they don't have the money to -- they are lucky if they can get one IRA contribution in and it's really tough to try to be saving even as much as the current law allows.

So to move from 3,000 to 5,000, that's nice, but my understanding of it is that that will not bring new people into the system. And while it will allow those in the system to retire with greater comfort, by the criteria of expanding pension savings opportunities that proposal is not powerful. Am I-- would you disagree with me on that?

MR. McCARTHY: I would disagree, if I could have a moment. There's a few things. First of all, the demographics and work patterns in the American work force are changing to the point -- you know, we talked about an Internet company and 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.

And that's 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 are a number of different worker profiles that need to be addressed.

One of those is the fact that 50 percent of workers aren't 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 Ebry will tell you this -- anybody 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, your behavior changes, and you go from being a spender and a consumer to a saver.

The savings becomes a thing to be nurtured in and of itself. And as a result, we think 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 that you can buy a couple of different funds or enough shares of a couple of different companies that you can actually see some investment performance and then you make another contribution and so forth, 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've gotten enough size that you begin to care about the health and well-being of that fund of assets.

MS. CALIMAFDE: Ms. Johnson, I would like to try hand at that one. When I was thinking about the marriage penalty -- and that is something 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.

And I think the way our economy is today that $100 or $200 probably would not go very far. And when you contrast what that might cost compared to HR-1102 and what this could conceivably do for small business employees, I have a very hard time saying why we should spend $100 and spread it all over everybody, versus giving what could amount to real retirement security here.

It doesn't quite answer the question. I guess if you asked me directly, I'd say I would rather see the money go into HR-1102. I think that would ultimately help the country better but, you know, if I had to compare a marriage penalty to increasing IRA, I would increase the IRA limits. So I think, you know, there's sort of different steps of priorities.

REP. JOHNSON: Thank you.

MR. MacDONALD: I might also argue that we can't lose sight of the fact of Section 420. What that would to do -- the last panel just talked about health care. I mean, the ability to fund retiree health care through pension assets is also a very important thing. And so, again, all of this is a package. I think many of us look at that that way.

REP. JOHNSON: Thank you very much. That's very helpful.

REP. ARCHER: Let me just jump in again, if I may. We are in an area that intrigues me and interests me tremendously. We are now speaking of personal IRAs as retirement accounts, right? That's the whole concept that we're speaking of here.

And yet, the pressure has been on the Congress and it has built over the years to permit the withdrawal of those funds for a number of other uses so they are not there for retirement.

And 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 permit -- to be withdrawn for adoptions, and on and on and on. So we can't simply discuss this in the vacuum that we're talking about retirement accounts.

We've got 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's more than just talking about it as a retirement account.

MR. CARDIN: Mr. Chairman, will the chairman yield on that point just for a moment.

REP. ARCHER: Yes.

MR. CARDIN: I want to concur in your comments. One of the frustrating parts is, is we try to develop policies to encourage more money being put aside for security on 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 believe. I think as we look to expand the program, as we look to 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 joining the chairman to see whether we can't do something about some of these provisions.

MR. McCARTHY: Mr. Chairman, if I could respond for just a second?

REP. ARCHER: Mr. McCarthy.

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, you know, intends that today.

About 15 percent -- between 15 and 17 percent goes to people under 59-1/2 who are experiencing some type of dislocation that they need these funds and are not -- the funds are not available to them for one of the enumerated exceptions under Internal Revenue Code Section 72-T, which is where all the medical expense and adoption expense and all the exceptions come in.

Less than 2 percent in the aggregate of these exception reasons -- you know, we see it in the distribution flow that we have, and it's probably the largest in the industry. Less than 2 percent in the aggregate represents all 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's what 72-T and these acknowledgement of other life events.

Ebry will tell you that employer plans outstrip in value the value of all the owner-occupied residences in the country. And as a result, since it's such a large portion of people's holdings, if you don't acknowledge these other life events, as a result, you know, people are just not going to save.

They're going to have a zone of paralysis and say, "I can't afford to lock my money up until I'm past 60."

MR. McRIERY: Would the gentleman yield for just a quick underscoring of that?

REP. ARCHER: Mr. McRiery is recognized.

MR. McRIERY: Mr. McCarthy, are you saying in essence that enabling people to withdraw their IRA money for purposes other than retirement actually encourages savings?

MR. McCARTHY: I'm saying that absolutely and emphatically. The perception overweights in people's mind from their actual behavior and you get a lot more savings because people can need it. But once you hit that critical mass, as I said to Ms. Johnson, once you hit that critical mass you don't want to take that money out. You're going to find another way to meet that need unless you absolutely have to.

MR. McRIERY: So if we had a different tax system and we had an unlimited IRA, you could just put in whatever you want, tax-free, and you just 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'm all for it. It would make my people -- it would make my peers in the other tax product areas a little jealous. But sure, I would be all for it.

MR. McRIERY: It would in fact be --

MR. MacDONALD: You know, there is one fundamental difference.

MR. McRIERY: It would be a consumption tax then, wouldn't it, basically?

MR. McCARTHY: Essentially, yes.

MR. McRIERY: Which I think the chairman --

REP. JOHNSON: Keep going.

MR. MacDONALD: There would be one fundamental difference however on 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 bit difference of having the freedom of savings in that regard.

MR. McRIERY: No question about it. But I think Mr. McCarthy's point is a good one, that the more flexible you make these savings vehicles the more attractive they become to people, and the more likely they are to in fact not spend when they get the money, but save; and that's good, not bad.

REP. ARCHER: 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 some day this country can get there because I believe we will benefit enormously from it in the future.

But there's so many various cross-currents in all of 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 that savings. It was merely a transfer from one vehicle to another vehicle.

And an awful lot of us who are in a position to do that are definitely going to do it. We are going to do all that we can to lighten our tax burden within the letter of the law.

And to what degree that impacts on behavior, I'm not sure that we have final studies to be able to analyze. But it does get to be a very complex situation. We need more savings and we need to do those things that constructively protect existing savings, which is to me 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. And then we've got 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 just briefly respond to a statement made by one of our witnesses.

And as I understood her comments, she said that by eliminating the marriage penalty that married couples would have a savings of about $100.

Actually, the marriage tax penalty for 21 million Americans -- married couples, which means 42 million Americans -- is $1,400. It's higher for some, less for others. But on average it's $1,400. I certainly believe that that opportunity to eliminate the marriage tax penalty would free up $1,400 that otherwise would go to Uncle Sam that folks could deposit into their IRA or their 401(k) or whatever they set aside for retirement.

Thank you, Mr. Chairman.

MS. CALIMAFDE: Mr. Weller, are you referring to if you completely repealed it, because I think I was looking at a phase-in of a repeal over a number of years.

MR. WELLER: Complete repeal would be $1,400.

MS. CALIMAFDE: Yeah, but I think -- is a complete repeal like -- I can't remember the number. It was so many billions of dollars.

MR. WELLER: Well, there's the --

MS. CALIMAFDE: I was talking about, you know, if you phased in what it would be worth.

MR. WELLER: Sure. Well, Merge 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, benefited 28 million couples and it was about $240. So that's real money for real people. That's a month of child care or it's 10 percent of what you might want to put into your IRA.

MS. CALIMAFDE: Well, I'm not saying it's not. Don't get me wrong. But if that same amount of money for that bill went towards something like 1102 and you were able to get literally millions of employees now being covered and receiving a five-percent contribution into that plan and it was able to stay in that plan for a number of years, I don't think 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: Well, as one who desires greatly to eliminate the marriage tax penalty and also supports retirement savings and sponsoring a number of initiatives, I would beg to say that if you eliminate the bias against married couples, they are going to have more money to set aside for savings.

Regardless, if you do nothing about the marriage tax penalty, it's still there and we need to eliminate that so people have more money to --

MS. CALIMAFDE: Ideally, you could do both, right? That would be the ideal world.

REP. ARCHER: Gentlemen, are you about this time or is he? He is complete? So often we get a little bit 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 the plastic credit card. We have 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't 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's relatively small -- let's say it's $400, they may take it out in a plan loan to buy like a prom dress or this or that -- things that really are not critical.

Once that number starts getting to a level -- in my mind, the level seems to be $1,000 in savings, all of a sudden it seems like something they need to protect and they don't want to invade it.

So that step one is that if you just can acquire enough you like -- then it seems there is a tendency to leave it alone. The second I think is just education of we're all living longer. You cannot retire only on Social Security and live in the manner you are accustomed to in most cases.

And you're just going to have to provide for your own retirement. And to do that, the retirement system is the best method to accrue these funds for yourself. So I think it's education, but -- REP. ARCHER: I certainly agree with that. But human nature is a very, very powerful force. And 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 -- and you don't 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 and all you have to do is present it and you've got it.

And then the bill comes at the end of the month and it's even hard to see what your total debt is because the only thing that is really featured is your minimum monthly payment. And this is the really enemy today in this country for savings.

But I'm 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 another on the big picture also, and I recognize Mr. Portman, who has been trying to get into this discussion for the last few minutes.

REP. PORTMAN: I restrained myself earlier trying to compare IRAs to pensions and marriage penalty and so on. But I will say that I think what Ms. Calimafde just told you is that the answer to all the problems is HR-1102.

MS. CALIMAFDE: Hear, hear.

REP. PORTMAN: But seriously, I do think in Beckman's (sp) education thing that what Ms. Dunn raised earlier and then what Ben Cardin followed up with with this letter from Consumer Federation of America is that we should do more in terms of education.

And a lot of that can be done at the work place where, after all, most Americans are going every day, and by getting folks into savings. Whether it's an IRA or a pension is very helpful.

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 that we need to keep in mind the power of this matching contribution from the employer and how that will generate over time such additional savings.

And second, of course, the fact that these are, in a sense, forced savings plans. And that's really I think what Mr. MacDonald was mentioning earlier, that when you have this sort of a program in place, it forces you to save.

And that particularly 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 where they're lower middle income folks who think they can't save enough. And the education is a critical part of that and it's part of the legislation.

Thank you for giving us all this time today on the pension front, Mr. Chairman, and for the witnesses today.

REP. ARCHER: Well, I compliment all of our witnesses and all of the members who have expressed an interest in this issue, because I believe that 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, which is so important because it magnifies the total savings, is not counted, as I understand it, in the personal savings rate.

REP. PORTMAN: That's correct.

REP. ARCHER: But it is counted in the net private savings and that's the point that I was trying to make. And it is very, very important that we not just be focused on the personal savings rate but that we be focused totally on net private savings.

Thank you very much.

REP. PORTMAN: Thank you, Mr. Chairman.

MR. MacDONALD: Thank you.

REP. ARCHER: The chair invites our final panel of witnesses to take place at the witness table. Ms. Slater, Mr. Sandmeyer, Mr. Loop, Mr. Thompson, Mr. Coyne, and Mr. Speranza.

Whereupon, the first panel is dismissed and the second panel is seated.

REP. ARCHER: Welcome to each member of our final panel. Thank you for coming and participating today. I am sorry that you had to wait perhaps a little longer than you would have liked, but hopefully it was productive for the committee.

Ms. Slater, would you lead off, and if you will, identify yourself for the record and then proceed with your testimony.

MS. SLATER: Thank you very much, 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 nearly three decades -- for three decades, I should say.

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 other small business owners, especially over nine 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 on the market value of all 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 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 state tax returns filed were from estates of $2.5 million or less. And more than 50 percent of the revenues generated is 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 Lisa Minot (sp), former member of the President Clinton's Council of Economic Advisors, the cost of complying with the estate tax laws are roughly the same amount as the tax revenue collected.

There are those who say the tax is needed to redistribute the wealth. Well think about this, Allen Binder (sp), 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 (sp), 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 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, 1) is a 55 percent tax rate, the highest rate in our tax system; 2) a tax at the worst time, when a death occurs; and 3) a tax on assets that have been taxed at least two or three times before.

The reason the family businesses state coalition comprised of over six 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 of a short-term solution to a long- term pollution. 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 business, 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 net revenue and the fix is elimination.

What do Nabot (sp) and I want? We want the death tax, the gift estate and generation skipping tax to be eliminated. We believe that there is responsible bi-partisan legislation in both the House and in the Senate to do that now. Congresswoman Dunn and Congressman Tanner have introduced HR8 and Senator Kyle and Senator Kerry have introduced F1128. Both bills eliminate the death tax in a realistic manner. We want families in America to be free from being held hostage to 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.

CHAIRMAN ARCHER: Thank you, Miss Slater. Our second witness is Mr. Ronald Sandmeyer. If you'll identify yourself for the record you may proceed.

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'm here today on behalf of the National Association of Manufacturers. The NAM is the nation's largest national broad-based industry trade group. It's 14,000 companies and subsidiaries include more than 10,000 small and medium sized manufacturers.

I'm president and CEO of Sandmeyer Steel Company, 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 do 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. A 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 sized 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 that 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 decision-makers. 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 in training additional employees.

Time and money spent preparing for the death tax achieves just no economic 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 due. Uncertainty is unavoidable in estate planning.

First of all, a business owner cannot know when the tax will have to be paid. It's 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 pay off can burden the 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's 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 decisions 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 that 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 a family business owner. 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 co-sponsors that repeals the estate, gift and generate skipping taxes immediately. HR86 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 the committee have a different bill, HR8, that phases out the tax by reducing rates five 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. The phase out, aside from eventually eliminating the tax, also provides real and immediate relief by lowering rates in the short term.

Repeal, unfortunately, has not found as firm footing in the Senate, it's not gained the bi-partisan that both Cox and Dunn/Tanner enjoy in the House. That situation has changed recently when Senator Kyle introduced the Estate Tax Elimination Act, S1128. His new bill repeals all the death taxes and does away with a step up in basis. The NAM strongly endorses S1128 with one caveat, we only 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's critically important to keep the current basis rules in place until the death tax is totally eliminated. The Kyle 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 bi-partisan 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's all the difference in the world between taxing 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's why capital gains' taxes don't force companies out of business but the death tax usually does.

It's clear that momentum has been building for death tax repeal. And I would urge you to eliminate death as a taxable event. Thank you.

CHAIRMAN ARCHER: Thank you, Mr. Sandmeyer. The next witness is Mr. Loop. Mr. Loop, we're happy to have you with us, you may proceed.

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, Incorporated, 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, vide president of American Farm Bureau Federation. Eliminating estate taxes is a top priority for Farm Bureau. We believe the tax should be ended because it can destroy family farms and ranches and because the tax penalties agriculture producers who work hard to become successful.

When farms are sold to pay estate taxes, family businesses are ruined, employers 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 of the farm and ranch operators aged 55 years or older, the future of American agriculture depends on Congress's willingness to eliminate estate taxes.

Now I'd like to speak as Carl Loop, president of Loop's Nursery and Greenhouses. Eliminating 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 $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 therefore sale would destroy the business.

My son, David, and I run the day-to-day operation 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've 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 my estate will be free of estate taxes to the extent that it would 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've already paid taxes on what we've 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 one time estate tax payment.

Farm Bureau supports passage of HR8, the death tax elimination act, which phases out death taxes through rate reduction. This bi- partisan bill takes a common sense approach to ending 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 farm accounts, capital gains tax cuts, and the fair imposition of self- employment taxes. Thank you for this opportunity and I'd be glad to answer any questions.

CHAIRMAN ARCHER: Thank you, Mr. Loop. Our next witness is Mr. Thompson. If you'll identify yourself you may proceed.

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 Needling (sp), Texas.

I'd 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've gradually grown and expanded the business and now operate 32 stores in the Texas and Louisiana marketplaces. As a family business we're committed to serving the needs in the communities where are stores are located and our associates live and work.

One of our biggest threats of 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 multimillion dollar, multibillion dollar, mega-chains 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 new 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 potential force us to liquidate assets, jeopardizing the future growth of our company and the continued employment of our loyal associates.

I'm here today on behalf of the National Grocers Association to ask for this repeal of this unfair and anti-family tax. 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 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, HR8, which would phase out the estate tax by reducing the tax rate five percentage points per year until it reaches zero. Representative Chris Cox has introduced the family heritage preservation act, HR82, which calls for the immediate repeal of the death tax.

I want to thank the chairman for his comments this morning, Representative 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 a wholesale grocer, farmers, restaurant owners, or other small business.

A 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 multi- billion 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.

CHAIRMAN ARCHER: Thank you, Mr. Thompson. Also thank you very much for staying within the five-minute limit. Our next witness is Mr. Coyne. If you'll identify yourself for the record you may proceed.

MR. COYNE: Yes. Good afternoon Mr. Chairman, and members of the committee. On behalf of the 600,000 members of the National Federal 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 Coyne. My family owns and operates Tuckerton Lumber Company, which is headquartered in Serve 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. Today Tuckerton Lumber Company 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 chains in the country for this distinction.

Tuckerton Lumber Company 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 401K 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 in reinvesting profits can actually threaten our business.

For the past ten 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 accountant's 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 six days a week, often late into the night, for the past 18 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. The business is our life. It puts food on the table of 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 co-sponsoring the Cox bill or the Dunn/Tanner bill. I hope that this support will translate into action this year and help protect the thousands of family businesses like Tuckerton Lumber Company.

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.

CHAIRMAN ARCHER: Thank you, Mr. Coyne. Our final witness is Mr. Speranza. And if you'll identify yourself, you may proceed.

MR. SPERANZA: Good afternoon, Mr. Chairman and members of the committee. My name 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 has, represents over three 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'm a member of the board of directors for that organization as well and that organization's representative on the Chamber board of directors. I also represent the greater Rochester, New York, metro chamber of commerce. And lastly, 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'd request that my formal written statement be incorporated in the record and that that of Food Marketing Institute also be incorporated in the record.

The federal estate and gift tax is complex, unfair, and inefficient. Number one, it raises approximately 1.5 percent as revenue in the country, and just coincidentally that's 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, to show a great disparity. Number three, people are penalized who have saved, risked more and worked hard, many of whom you've heard today. This estate and gift tax is a tax on the virtue of working hard and saving. And lastly, when this onerous tax applies, workers can be laid off, businesses have to borrow funds, reduce capital investments and liquidate or sell their businesses. This negatively impacts the owners of those business, their employees, their families, and many others.

Just one example of this tax, the tax court decided a case called the Estate of Chenowitz. In that case, it was a privately held company whereby the stock was valued one way for the adjusted gross estate purposes where the tax was applied. That very same block of stock was valued in a totally and substantially lower way for marital deduction purposes. What then happened is an unsuspecting surviving spouse had to pay a major amount to tax because of this convoluted interpretation. Now the interpretation may or may not be right as it relates to the law. But it's 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'm also a tax attorney. I've worked in the estate and gift tax area for approximately 30 years. When I was in law school I took every course I could in the area and wrote a Law Review article in that area, under the supervision of Professor Steven Lynn. After law school I went on to get a post graduate degree in tax law and studied under Professors Maxfield and Stevens. Stevens, Maxfield and Lynn are the foremost authorities in estate and gift tax in the United States. Their treatise is the foremost work in this area.

Now, over the course of my career, I've worked with individuals, families and their businesses to assist them in this very difficult and complex area and it gets more complex as times goes by. At this point in time the law is incomprehensible, it's unfair, it's confiscatory and downright un-American.

Now why do I share all this with you? The reason I share this with you, it's time for Congress to put estate tax attorneys like me out of business. And I'm not the only one who feels 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, where I live -- which I'll describe in more detail in a moment -- which shows many innocent people are losing their jobs as a result of this tax.

Over the last three months I've worked closely with the Public Policy Institute of New York State. It's a research and educational organization affiliated with the business council to complete a survey on the impact of the federal estate and gift tax on family owned businesses in Upstate New York. And I have to tell you; the economy in Upstate New York is not doing well. The survey has not yet been formally published, but the data submitted by 365 family businesses shows that at least 15,000 jobs are at risk over the next five years, just from those 365 companies, as a result of the estate and gift tax. Now, logic would dictate that the number is substantially larger in New York State when you look at all of the businesses in New York State and you look at all the businesses in the nation. I look forward to sharing the details of this survey when it is complete. Now we've worked on this survey with Professor Douglas Holdtaken (sp), who is the chairman of the economics department at Syracuse University. And I note in the joint committee's report for today's hearing that his work is mentioned on page 121.

One of the most telling points that Professor Holdtaken makes in this report is that the true cost of this tax falls upon those individuals who lose their jobs and their families. Now, the, we want to thank you, Congresswoman Dunn, Congressman Tanner, for supporting and taking a leadership role on HR8, which obviously phases out the estate tax over a 10 to 11 year period of time at five percent a year. So thank you very much for your support. Above and beyond that, we also support in principle -- and the U.S. Chamber and the organizations that I represent -- the Kyle-Kerry bill. That's been described earlier so I won't go into great detail. That eliminates the estate and gift tax immediately, it eliminates the step up in basis, provides a carry over basis, and in most cases provides a rate on disposition of assets at 20 percent. It also takes death away as a taxable event. If that approach were to be used, I might add one additional point, that Internal Revenue code 302 would need to be modified. Because family owned businesses could end up paying a 39.6 rate versus a much lower capital gain rate.

So in conclusion, the estate and gift tax deletes the estates of taxpayers who have saved their entire lives. But let's 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.

CHAIRMAN ARCHER: Thank you, Mr. Speranza. The chair is going to go slightly out of order because one of our members, Mr. Tanner, has got a need to go to another meeting and he's very, very interested in this issue. So the chair recognizes Mr. Tanner for any brief comments.

REP. 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, is, and you all have done a far better job than I think any of us could do, but what's striking here is two things. One, it's been said that small business is the real economic engine in this country and creates the vast amount of jobs that are created from time to time therein. And that also all of you on this on this panel are not CEO's of the fortune 500 or fortune 100 companies, but there's family owned businesses and agricultural enterprises which I believe is the fabric of this nation. It must be maintained and preserved. You all have been eloquent in your presentation and I hope that as we go forward the HR8 can receive a place of high priority, Mr. Chairman, in your consideration of this entire matter. Thank you.

CHAIRMAN ARCHER: Well, I share the gentlemen'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 the, what we used to call, estate tax. And we're getting closer all the time. And I'm 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 greater taxation under the death tax. By reducing the exclusion from 600,000 to 200,000. And our new majority said that's totally wrong and we started moving the ball in the other direction down the field. And hopefully we will one day achieve the ultimate goal of complete elimination. But I have a lot of other desired goals.

You mentioned the compliance cost of, the administrative cost of the death tax. And we have a similar situation with the income tax where we got the brightest and best names of this country spending full time figuring out how to make end runs around the income tax. And that's 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 name Harold Applensky (sp) who makes his living off of advising people how to reduce their death tax liabilities. And 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 don't want to intrude into your personal financial holdings -- but I think it's 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've got to do is look at the code and you'll find out that that is the case.

I would like to ask Mr. Coyne, since you represent the NFIB, and as a former small businessperson 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, number one priority for tax relief of the NFIB this year?

MR. COYNE: I believe, I believe that's true. I know certainly for our business that is the case and has been for ten years.

CHAIRMAN ARCHER: I can understand why it would be for your business. But I'm curious as to whether it is also the number one priority for tax relief for the NFIB.

MR. COYNE: The complete elimination --

CHAIRMAN ARCHER: Yes.

MR. COYNE: -- 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 surplus's wedge out over the ten 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, way, 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, and I'm very sympathetic to that. But we have to live with the official estimates and the estimates are that over a five year period immediate repeal would lose $170 billion worth of revenue. And over ten years it would be roughly double that. So you can see the revenue constraints that we have to operate under. And that's just a reality that we all need to be aware of as we pursue this ultimate goal which will get to where you would like to go at some point in time.

But I do, I do compliment each of you. And I wish more members of the committee were here to listen to you. Ms. Slater, you made a, I thought, extremely compelling presentation.

REP. SLATER: Thank you.

CHAIRMAN ARCHER: 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're recognized.

REP. DUNN: Thank you very much, Mr. Chairman. And I appreciate you're 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 that we're 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 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've heard the panelists talk about the cost of compliance in the private sector alone being a similar amount, $23 billion. So that's 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's 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 HR8, which many of you have mentioned in your testimony, would score at $44 billion over five years and it would score at under $200 billion over 10 years. And that is a comparison to the $780 billion that we're looking at for tax relief compared to $200 billion.

As the Chairman says, we have to live within those numbers. And I think it's 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, other people's personal thought about this whole thing that we are constrained by the scoring of this 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 rate on inheritance. Japan is the only nation that supercedes the United States. We are at top rate 55 percent. As we know, the President, on his proposals, 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've 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. Mrs. Slater, you have worked with many, many people, women owned business owners, the minority community, in your work as head of Nabot 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 in the minority community and on women.

MS. SLATER: Well it's devastating because of the fact that this is, you know -- first we're supposed to have 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 is, you know, 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.

I mean, you know, 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 Stiverson (sp) High School in New York City at the age of 16. So you know he was a smart guy. And he graduated from CCNY (sp) in 1949 after the war interrupted his education. And he worked very, very hard to become an engineer and to become a licensed engineer. And there was only 13 in his class at the time. Fought very hard.

It's 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 overcome. It's a, and this is -- know now also that women business owners are starting businesses at even a faster rate. And one of the things that women business owners 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 need to, 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.

REP. DUNN: Thank you very much, Ms. Slater. I would like to ask the unanimous consent to enter into, into the record an editorial by Harry C. Alford, Jr. He is the president and CEO of the National Black Chamber of Commerce. And he has written op-ed that I think is very revealing, that has to do with the quest for economic empowerment that gets you "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. So, Mr. Chairman, if I may request unanimous consent to enter this op-ed into the record, please?

REP. HERGER: Without objection.

REP. DUNN: Thank you.

REP. HERGER: Thank you very much, Ms. Dunn. And thank you, Ms. Slater, for that very moving testimony. So many, those of us who are supporting this type of legislation here that it's only the "fat cats", the very wealthy that we're helping. And it's very interesting and very informative to hear your testimony that really we're helping some of the very groups and minorities that we most want to help in this nation are really hindering. So thank you very much. Mr. Hulshof inquire.

REP. HULSHOF: Thank you very much, Mr. Chairman. Mr. Darden, I know you're 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're also representing the National Association of Manufacturers.

MR. DARDEN: Yes, sir.

REP. HULSHOF: Is that right? Please communicate to him that certainly he and his brother are in a distinct minority. And 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 to 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 this, on the death tax. And so please communicate to him just how much in the minority he is, he and his family.

We are making progress, ladies and gentlemen. And the fact that you're here, the fact that, as Mr. Tanner pointed out, I think, earlier, that today the American's 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 helping. Some of those television spots or 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, 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 fact of the planet.

And so I think we're making some progresses 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 co-sponsored some sort of death tax relief, which is a significant number. And I'm 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 Congress Daily it talks about next week's schedule in the Senate. And I noticed that the treasury, secretary designee, Mr. Somers, is up for confirmation hearings. And if you weren't aware, and I'd like your comment perhaps as those hearings will commence soon, Mr. Somers 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 "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. Somers' comments.

MR. SPERANZA: I would like to. I'd 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 when you talk about grits, grass, crops, q-tips and the like. People work hard all their lives, the people you heard today. They can't understand where their money is going and why it's tied up in the way that is. And I firmly believe that people ought to, who work hard, be able to do that. I don't think that's being greedy to be able to know how your assets are going to be handled.

Number two is, in the State of New York as an example, the laws going to change but if you were to make a gift today there's a 21 percent gift tax rate. So if you add 55 and 21 you get 76 percent. For 76 percent of a gift to go to government, I don't think that's greedy. And one last point as it relates to that, when you talk about how you score these kinds of bills, and I understand you have to do static scoring, but logic shouldn't be lost here whether you're greedy or not. But just think of somebody thinking about making a gift at 76 percent versus ratcheting down these amounts over time or eliminating the death tax completely, either under a Dunn/Tanner or Kyle-Kerry approach. People will dispose of assets at 20 percent, we see that right now with capital gains in the government. They're not going to dispose of assets at 60 or 76 percent.

REP. HULSHOF: And I appreciate that comment. I notice my time is about to expire. I would just - at town meetings back in the 9th 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 and so I appreciate you being here. Especially Mr. Loop, I appreciate your kind words regarding the farm and rancher management account that you included in your written testimony. I see my time is out and so I would yield back. Thank you.

REP. HERGER: Mr. Loop, did you have a further comment --

MR. LOOP: I would just like to comment because I certainly don't see this as greedy. And these people are not wealthy people, and particularly when it comes to farm people. Farmland has appreciated in value. Most of these people don't have liquid assets, don't realize they have an estate tax problem. And certainly these are not greedy people that need relief from estate taxes.

REP. HULSHOF: Thank you very much, Mr. Chairman. I yield back.

REP. HERGER: Thank you, Mr. Hulshof. Mr. McInnis will inquire.

REP. MCINNIS: Thank you, Mr. Chairman. Well, first of all my colleague, Mr. Hulshof, my response to your question with regards to Mr. Somers, if I was a U.S. Senator I would vote no on his confirmation based entirely on that particular remark. I think that's one of the least educated comments I've heard in my political career. In regards to the gentlemen Mr. Loop. Mr. Loop, my family on my wife's side have been ranchers. They realize they have an estate tax problem. I mean they lived for all their life. They're going to die rich because they have a lot of land holdings. The fact is, there's nothing they can do about it. They can't afford counsel. People say, well, go buy life insurance. They barely make enough every year. In fact, three out of four years they lose money.

In my particular district, I have a unique district in that I'm one of the wealthier districts in the country. I've got the Rocky Mountains in Colorado. We've 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 herds you have. Once you can't sustain the size of the herds you can't sustain the family, and it goes on down. And unfortunately it also hurts open space because, of course, the highest use of that land is to put it in two acres lots or 35 acre lots and so on.

I want to mention a couple things. One, all of you, I'd like you to take a look at my bill. I've got a bill out there that takes the, increases the annual gift exclusion from $10,000 to $20,000. That has not been changed since the early 1970s. One way that you can over some time do some type of planning is to begin to transfer to the next generation. And at $20,000 you can move some property over a period of time with some substantial property.

One other thing I might note, I had a good friend -- Mr. Speranza, I'm sorry on the name pronunciation, but your comments were excellent. I had a very close friend of mine who sold an asset that he had, got hit with a capital gains tax and then, unfortunately, he got terminal cancer and he died four or five months later. So the effective tax rate on the estate was somewhere around 72 percent. When I was talking with 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. It was very interesting because the family members said, no, 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, the other 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 than a few dollars every week, but certainly not under the same kind. And it went on down. There is clearly a trickle down effect. And what has happened is that money was removed almost instantly within the time limit, the three 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, and I want to point this out to you. I can, and I've 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 your comments today, and Ms. Slater, and what it does to business in the minority community. I mean this is nothing but thievery by the federal government. So I don't think I've overstated my position, it's accurate. I feel very strongly. Thank you, Mr. Chairman.

REP. 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 an area very long can relate to, and each of us have. So it really emphasizes how crucially important the work we have before us is.

With that, Mr. McCrery will inquire.

REP. MCCRERY: Thank you, Mr. Chairman. Mr. Coyne, you said that you'd spent a lot of time with your tax attorneys and so forth trying to prepare your grandparents estate and your parents, I guess. In all those discussions have you talked about the change that the Congress made in the estate tax law a couple 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? Have you talked about that?

MR. COYNE: Certainly we have. And it was welcomed but my grandfather did pass away ten years and the, although grateful for all and any relief, we did get the sense that it was, in our situation, too little too late.

REP. 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. I think he said no good tax lawyer would recommend that a family held business even try to do that because of all the conditions attached. Mr. Darden, is that a fair recap of what he said?

MR. DARDEN: Yes. Yeah. The issue is whether or not the tax attorney is worried about being hit with a malpractice suit afterwards if it turns out that the family does not qualify at a later date. The key objection, I think, to that provision also is that it is uncertain whether or not you, you know, you really can't base your business plans on the knowledge that you are going to qualify for that because there's 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 family that has diverse assets, there's the concern that if you rely on getting that then you buy less insurance because you're counting on qualifying, then you're leaving the door open if you don't qualify.

REP. MCCRERY: And I see Mr. Speranza nodding his head that this is a problem, that that section that we revised is not really of much help. Is that your opinion?

MR. SPERANZA: There's no question about it. Not only me but other tax advisors are very reluctant to use it. It's very complicated, number one. Number two is people structure their businesses in a particular way for many, many purposes and to force family businesses to do things in a certain just to try to save taxes when there's no guarantee just doesn't work in most cases. So it was a good attempt but unfortunately it didn't work.

And just one additional comment. On the suggestion of raising the $10,000 annual amount to $20,000, I would respectfully suggest that in the tax community we chuckle over how many decades it's going to be before there's another change. It was $3,000 for decades, it went to $10,000 for decades; that is not a way to plan. What we really need is overall, an overall approach that all of us have talked about today. With all due respect, we'll 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 businesses, family owned businesses create jobs. And a significant number of those businesses that create those jobs are above the exemption amount, either now or what it might be in the future. We just need relief for this country.

REP. MCCRERY: Yeah, well, I'll ask you in just a second, what kind of relief, I mean. But let me hammer this point a little bit. Mr. Coyne, the reason I asked you first because you evidently 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's okay. If you have and you're knowledgeable on it and you think you might be able to use this tell me. Because I'm about ready to say -- and I was the author of the bill that was included in the Omnibus tax bill that made this change in the estate taxes. I thought it was the best thing we could do with the limited amount of money we had to work with. Now what I'm hearing from you is I was wrong and it wasn't the best thing we could do. And I'm not a tax lawyer, I'm just a poor country lawyer with no particular knowledge of the tax codes. So I admit, I probably wasn't the best one to craft this provision. However, it was with good intent, trying to help family businesses. But if you're telling me now that it was money wasted, maybe we can recoup that money and we can repeal that change and use that money to lower the rates, you know, or whatever we can do. So, Mr. Coyne, are you telling me you don't care if we repeal that provision. Does the NFIB not care if we repeal that provision?

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 that we can survive this. Because at the time my grandmother was 82 years old and been married for 55 years and I guess the statistics on spouses surviving after that --fortunately she's still strong and kicking. But at the time it was really very daunting. So I really don't know, I'm not familiar with the particular intricacies of that.

REP. MCCRERY: Okay. Well, if you could ask NFIB if they would mind if we repealed that change in the tax code and applied that money to Jennifer Dunn's bill or somebody else's approach. And then, Mr. Speranza, I'll give you a chance to answer my question. If it's no good to do what we did with the family business, if it's no good to do with the gift, increasing the gift allowance, and if it's no good increasing unified credit, what should we do?

MR. SPERANZA: One of two things. Number one, the Dunn-Tanner approach is excellent. So, for example, if you repealed the provision you just talked about you then have some funds for maybe the first five or ten or fifteen percent. That would be number one. Number two, taking death out of the mix as to a taxable event. If you go to the Kyle-Kerry approach, again it's another approach that all the organizations I represent support in principle, that that would be another way to go as well. And I still have to go back to a 20 percent rate, personally and from the organizations that I represent, that is going to actually release capital that's now tied up. People will not make gifts now, they just won't do it. So I would suggest either Dunn-Tanner, Kyle, some combination, but that's the approach to go down.

REP. MCCRERY: Okay. Thank you.

REP. HERGER: I want to thank the members of this panel for your taking the time to come here and appear before us and give your testimony and share with us your personal experiences as well as all the members of our other panel. And with that, this hearing of the ways and means committee on reducing the tax burden stands adjourned. Thank you very much.

END

LOAD-DATE: July 14, 1999

Document 37 of 54.


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