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Home > Library > Stable Times > Volume 5, Issue 1
The quarterly publication of the Stable Value Investment Association
First Quarter 2001 • Volume 5 Issue 1
The Portman-Cardin Plan:
Increasing Retirement Security Must Be A Top Priority
By The Honorable Robert Portman, U.S. House of Representatives
With Americans living longer and 76 million baby boomers on the verge of
retirement, solving Social Security's fiscal problems has properly become
a top priority for the President and the Congress. But the spotlight on
Social Security also has dramatized the need to look more broadly at the
overall issue of retirement security.
We must take steps to preserve the long-term solvency of Social Security.
But Social Security was never intended to meet all the financial needs of
retirement, and for most Americans, it does not. Instead, it is just one
leg of a three-legged stool that supports Americans in their post-working
years. The other two are personal savings and tax-favored, employer retirement
plans - or pensions -- which can be everything from a defined contribution
plan like a 401(k) to a defined benefit plan that guarantees a certain retirement
payment.
In the past several years, Congress has attempted with some success to encourage
personal savings -- for example, through the popular Roth IRAs. We have
also begun to reverse the trend of the past two decades by starting to simplify
the laws governing private pension plans. But there is much more that must
be done to help the American people meet the challenge of providing for
their own retirement.
Pension plans are crucial to retirement security for millions of Americans.
A typical senior relies on a pension for almost 20% of his or her retirement
income. And, these plans make sense for our diverse and changing workforce.
They are flexible enough to adapt to the needs of employers of all sizes,
and workers like both the flexibility and the security that comes from having
their own accounts.
Pension savings are also good for the economy. Because they are pre-funded,
or already paid for, they create a large pool of savings, making investment
possible and enhancing economic growth. And, in part because of the automatic
withdrawal from paychecks that is typical of these plans, they create new
sources of savings that would not otherwise be in the economy. Economists
from across the ideological spectrum agree that enhancing personal savings
is key to long-term economic growth and prosperity.
Yet this vital component of retirement security needs help. We have all
heard that America's overall savings rate for individuals is now hovering
at historically low levels -- the Department of Commerce recently reported
that the national savings rate is a negative 1.3 percent. Baby boomers,
in particular, are not saving nearly what they will need for a comfortable
retirement.
Part of the reason is that many businesses -- particularly smaller companies
where most of the new jobs are being created -- are not offering retirement
plans due to the costs, complexity and liabilities. Since 1982, layers of
restrictions and regulations have been imposed on pensions, defined benefit
plans have practically ceased to exist in the small employer market and
coverage under pension plans in general has not expanded. Only half of all
private-sector workers have any kind of pension -- and only 20 percent of
small businesses offer any kind of retirement plan. Today's workers aren't
saving enough in part because pension coverage is inadequate.
Congress should act now -- on a bipartisan basis -- to increase retirement
security by enacting a comprehensive reform of outdated pension laws. That's
why I have joined my colleague Congressman Ben Cardin (D-Maryland) in introducing
legislation that provides the most significant expansion and reform of pension
laws in a generation. The Portman-Cardin bill tears down barriers to savings
by raising limits and allowing workers to set aside more of their earnings
on a tax deferred basis. It untangles complex and irrational rules that
burden retirement plans and their participants, and creates new incentives
for small businesses to establish plans.
Among the key provisions:
Allowing Workers To Save More For Retirement
- Increase IRA Contributions
from $2,000 to $5,000: Portman-Cardin raises the contribution limit
on both traditional and Roth IRAs from $2,000 to $5,000 per year, phased
in by 2003. A limited IRA catch-up provision allows workers 50 and older
to save the full $5,000 immediately.
- Increase Contribution
Limits for Pensions: Over the last 20 years, Congress has lowered
the annual dollar limits on contributions workers can make and benefits
they can accrue. These restrictions have been an obstacle to adequate
private pension savings. Portman-Cardin substantially increases
the limits for all types of plans and repeals the current 25 percent
of compensation limit on contributions to defined contribution plans.
- Catch-up Pension
Contributions: The Portman-Cardin bill increases the limits on all
employee pension contributions by $5,000 for workers 50 and older
so that they can "catch-up" for years when they weren't employed,
didn't contribute to their plan or otherwise weren't able to save.
In particular, this catch-up provision will benefit women who have
returned to the workforce after taking time away to raise families.
- Roth 401(k):
Portman-Cardin includes new "Roth" 401(k)s and 403(b)s, similar
to the popular Roth IRAs. With these savings plans, workers contributions
are not deductible as they would be normally, but the benefits paid
in retirement would be tax-free.
Small Business
Relief To Expand Retirement Plan Opportunities
- Modification
of the Top-Heavy Rules: The bill would simplify the burdensome "top-heavy"
rules in numerous ways, such as eliminating certain requirements
to collect data from five prior years in order to apply the rules.
These changes will provide relief, especially to small businesses,
and will help create new retirement plans.
- IRS Fees: Today,
the IRS charges a business a "user fee" when the business requests
a determination letter that its retirement plan is qualified under
the tax laws. Portman-Cardin would eliminate this user fee for small
businesses, removing a disincentive for small businesses to establish
a plan.
Addressing The
Needs Of An Increasingly Mobile Workforce
- Increased Portability:
The average worker will hold nine jobs by the age of 32, and workers
typically do not stay in any job for more than five years until
age 40. Portman-Cardin reflects the needs of an increasingly mobile
workforce. The legislation includes "portability" provisions to
allow workers who are changing jobs to roll over retirement savings
between different types of plans, including qualified plans (such
as 401(k) plans, section 403(b) arrangements, and section 457 plans.)
- Repeal of the
Same Desk Rule: In many situations, the "same desk rule" prevents
workers who move to a new employer from consolidating their retirement
savings in their new employer's plan. Portman-Cardin would repeal
this inappropriate restriction on portability.
- Faster Vesting:
Under current law, many employees do not become fully vested in
a pension plan until they have been with an employer for 5 years.
Portman-Cardin would lower the vesting requirement for matching
contributions to 3 years.
Making Pensions
More Secure
- Repeal the
"Full-Funding" Limitation and Reform Other Pension Funding Rules:
Over the past 15 years, numerous laws have restricted employers'
abilities to contribute sufficient amounts to defined benefit plans.
These restrictions can undermine the security of employees' pensions
and create significant burdens for employers. Portman-Cardin would
eliminate the unnecessary funding restrictions, which will help
ensure retirement benefit security in the years ahead.
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