Update Support for NCTR Pension Priorities Growing in Congress

March 29, 1999

By Cindie Moore, Washington Counsel
National Council on Teacher Retirement

Pension Reform Bills Introduced; NCTR Priority Provisions Included

Our pension champions have come through again this year. Reps. Rob Portman (R-OH) and Ben Cardin (D-MD) recently reintroduced the pension reform bill (numbered H.R. 1102 in this Congress). Senate sponsors, Bob Graham (D-FL) and Charles Grassley (R IA), have dropped in the Senate version, S. 741. Both bills include the two portability provisions supported by NCTR: rollovers between 401(k)s, 403(b)s, and 457s and using money from 403(b) or 457 accounts to purchase service credit. In addition, Reps. Earl Pomeroy (D-ND) and Jim Kolbe (R-AZ) have re-introduced their Retirement Account Portability Act (H.R. 739), which contains the two provisions. Senate sponsor, Jim Jeffords (R-VT) will be re-introducing his bill shortly.

H.R. 1102 and S. 741 also contain a new NCTR legislative priority. In January, the NCTR Legislative Committee recommended, and the Executive Committee approved, a resolution calling for the liberalization of the pension maximum limits. The Portman Cardin bill would: raise the DB limits from the current $130,000 to $180,000 and the annual contribution limits for 401(k)s, 403(b)s, and 457s to $15,000. The Graham Grassley bill provides somewhat lower levels, for example, $160,000 for the DB limit, $12,000 for 401(k)s and 403(b)s, and $10,000 for 457s. These increases would restore the limits to levels to which they would have risen had Congress not cut them back in the 1980s.

The outlook for action on pension reform is good. Both Houses of Congress approved a Budget Resolution that calls for a tax cut of $778 billion over 10 years. Pension legislation does not travel on its own, but is usually made part of a larger tax bill. Because of the strong interest, there is a good possibility that some pension legislation will be included along with the tax cuts.

Wayne Schneider Testifies for NCTR at Congressional Hearing

Wayne Schneider, General Counsel for the New York State Teachers' Retirement System, testified before the Oversight Subcommittee of the House Committee on Ways and Means, speaking in favor of portability expansion. NASRA, NCPERS, and GFOA joined in the testimony. Wayne applauded the portability provisions in the Portman-Cardin bill and similar provisions supported by the Clinton Administration. He also commended Congressmen Portman and Cardin for their proposal to liberalize pension benefit limits. Attached to his statement was a letter signed by states, local governments, and employee associations endorsing the Portman-Cardin bill.

At the end of his testimony, Rep. Rob Portman asked Wayne about what can be done to address the special retirement needs of women. Wayne pointed out that 75% of America's public school teachers are women and that their retirement systems usually allow purchase of service credit. These programs help teachers achieve portability. Those particularly assisted are women teachers who are in and out of the workforce because of family responsibilities. Wayne went on to explain that a provision in the Congressman's bill would allow teachers to use money in their 403(b)s to buy the service credit without paying income tax and any applicable penalties (see information at the beginning of this Update). This provision would give teachers an additional source of funds with which to buy the credit. Wayne's colloquy with the Congressman will be made part of the permanent hearing record, as well as his written testimony.

NCTR and Other Groups Fight Back on So Called Political Investments

Fed Chairman Alan Greenspan created a firestorm earlier this year when he said that public plans' investments are lower than private plans' because of so called political interference by states and localities in their retirement systems' investments. His comments were used by some GOP members to justify their opposition to the President's proposal for direct government investment of Social Security Trust Funds. Exacerbating the issue was a comment by Larry Summers, a high ranking Treasury official, generally agreeing with the Greenspan statement. As we reported earlier, hearings were held before a Ways and Means Subcommittee alleging that state and local government plans socially invest and the federal government would do so as well with the Social Security trust fund money.

Since our last update to you, we have continued to rebut these unfair charges. In particular, we wanted to show that public plans' rates of investment return are comparable to that of private plans. In the last update, we included a chart by the Trust Universe Comparison Service (TUCS) that demonstrated such comparability. We wanted to provide raw data for Ways and Means Committee members to buttress the data in the TUCS chart. Jeannine Markoe Raymond, NASRA, and I contacted retirement system administrators with Ways and Means Committee members in their states for one, three, five, and ten year data on rates of returns. Because of this joint effort, we were able to generate a chart displaying the data. If you were among the administrators who responded, thank you so very much. The chart was attached to a letter NCTR President, Don Miller, and NASRA President, Sparb Collins, sent to members of the House Ways and Means Committee.

After an intense struggle, we are making progress on disabusing Congress and the Administration of their views. I met with David Wilcox, Assistant Secretary for Economic Policy at the Department of Treasury recently. Among other things, he said that state and local government plans have good investment performance and are an example of how the federal government could successfully invest part of Social Security's trust fund money. He further said that state and local plans' rates of return are on par with those of private plans over the past 10 years. For prior years, public plans' lower rates of return were due to the conservative investment standards to which they were subject. Those standards have now been largely eliminated.

Social Security Reform Quiet, but Opposition to Mandatory Social Security Mounting

The Social Security reform effort has yet to coalesce in Congress. A variety of hearings have taken place on such issues as whether the federal government should invest a portion of the trust fund money in the stock market (see report above) or how Universal Savings Accounts (USAs) should be structured. We understand from Senator John Breaux (D-LA), an influential member on the issue, that he and other sponsors of reform measures last year are meeting behind the scenes to assess the possibility of whether they can agree on a single piece of legislation.

Meanwhile, opposition to mandatory coverage of newly hired state and local government employees is growing. Last year, most of the major Social Security bills would have required such coverage. To combat that effort, a variety of efforts have been undertaken. Governors from a number of states sent a letter to President Clinton urging his opposition. Senators Voinovich (R-OH) and Feinstein (D-CA) are circulating a letter among their colleagues. Joel Walters, Executive Director of the Missouri Public School Retirement System, and employee association representatives persuaded members of their Congressional delegation to sign a joint letter. NCTR President, Don Miller, sent a letter to all members of the House Ways and Means and Senate Finance Committee asking them to oppose the proposal. Thanks to the efforts of the Connecticut Education Association and the Connecticut Teachers' Retirement System, Congresswoman Nancy Johnson (R-CT), a key member of the Ways and Means Committee, recently stated her opposition.

These efforts are building a groundswell that will make it difficult for sponsors of Social Security reform to include mandatory coverage. Ways and Means Committee Chairman, Bill Archer, told me that he doubts it will be part of a final package. Senator Breaux said that he would refuse to cosponsor any legislation that contains it. At this stage, we have established a good basis from which to oppose the issue.

GAO Compares Federal Pension Plans with Those Offered by the States

The General Accounting Office (GAO), Congress' investigatory arm, just released a report comparing the two federal pension plans with those offered to state employees. It wanted to determine how many state retirement programs currently open to general employees include the same design components as the Federal Employees' Retirement System (FERS) and the Civil Service Retirement System (CSRS). It also looked at what design changes states have made to their retirement programs since the programs were established and what design changes (especially converting defined benefit (DB) plans to a DC structure) they have recently considered and why. (Note, GAO looked at the retirement plans that cover either general state employees only or general state employees and other employees, including teachers. Thus, it did not look at retirement plans that cover teachers only.)

The authors concluded that few of the state retirement systems had the four design components set out in the study. Those components are: a DB plan, a DC plan with an employer contribution, a DC plan without such a contribution, and Social Security. It did find that all states have in some way changed the design components since the programs were established. For example, states made changes in their retirement programs when the federal government authorized states to voluntarily participate in Social Security beginning in the 1950's.

GAO looked specifically at whether states had considered dropping their DB plans in favor of a DC component with an employer contribution and Social Security. It found only two states that have no DB plan for its general state employees: Michigan, which recently created a mandatory DC plan for state employees hired beginning in 1997 and Nebraska.

The study's authors determined that 21 of the 48 states with DB plans had recently considered eliminating the DB component in favor of a program consisting of a DC component with an employer contribution and Social Security. Officials in the 21 states said that reducing government costs, enhancing portability, and/or lobbying by special interests were the major reasons for looking at the change. They also cited a number of reasons for not dropping their DB plans, the most common of which were that (1) studies showed no need for the change; (2) further study was needed; (3) labor unions opposed the change; and/or (4) there was lack of interest or support for the change.

Officials in the 27 remaining states told GAO that their states had never considered dropping their DB plan. The most common reasons cited for the lack of such consideration were: (1) the DB plan provided greater benefits, including survivor and disability benefits; and/or (2) they viewed the DB plan as a better way to retain employees. The study will be helpful in refuting the belief that states are converting their DB plans to a DC structure.

Other Issues of Interest

Medicare. Now that the bipartisan commission working on Medicare reform has failed to agree on recommendations, watch for introduction of Medicare bills in Congress. The Commission proposed that the government would no longer pay patients' bills directly or set prices for services that Medicare covers. Instead, it would give patients money to help them pay insurance premiums, either for private HMOs or the traditional "fee for service" version of the program. Senator John Breaux (D-LA), Chairman of the Commission, is eager for some kind of Congressional action on the issue.

Social Security Earnings Limits. Reps. Sam Johnson (R-TX) and Collin Peterson (D-MN) have sponsored a bill (H.R. 5) that would eliminate the Social Security earnings limit for individuals over 65 who want to continue working, but keep receiving their full Social Security benefit. Under current law, Social Security cuts the benefit of people between the ages of 65 and 69 who work. The laws in many NCTR member states allow retired teachers and others to work up to some dollar limit without experiencing a reduction in their benefit. Some of these states key the dollar limit to the Social Security earnings limit, thus, the Johnson-Peterson bill would be of interest to them.

GPO Relief Introduced. Rep. Bill Jefferson (D-LA) re-introduced legislation to modify the government pension offset (GPO). The bill, H.R. 1217, would allow retirees and widows affected by GPO to receive a minimum $1,200 per month before the current law offset could be imposed. The bill would provide relief for the approximately 266,000 retirees and widows who are eligible for a government pension and a Social Security spousal benefit. On a related issue, Rep. Barney Frank has introduced H.R. 860, to modify the Social Security Windfall Elimination Provision (WEP).

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