The recently enacted federal retirement law is barely on the books, and most of its provisions will not take effect until January. But the debate over additional changes in pension laws is already well under way.
The new pension law, drafted by Democratic vice presidential nominee Geraldine A. Ferraro and signed into law by President Reagan this fall, is designed to make it easier for women and younger workers to earn retirement benefits under private pension plans. It is, essentially, an expansion of the existing system.
On Oct. 9, Ferraro outlined further pension reform measures that experts say have the potential to alter the pension system radically. Ferraro's plan, known as the "VIP bill," is expected to be widely debated in 1985 and will face serious opposition from corporations eager to control the cost of corporate benefits, according to pension experts.
The pension reforms enacted this fall faced relatively little opposition from corporations because they presented more of an administrative than a financial burden.
The new pension law that will take effect in January lowers from 25 to 21 the age at which employers must enroll most workers in pension plans and lowers from 22 to 18 the age at which employes begin earning vesting credits. Lowering the age for earning credits is aimed principally at women who enter the work force and interrupt their careers to raise a family.
Reducing the age at which employes are enrolled will create administrative headaches without much benefit to the workers, who are likely to change jobs, according to analysts of pension trends. Because most pension plans require 10 years of service for employes to become fully vested, the new law is meaningful only if workers stay at their jobs for that period of time -- an atypical practice among younger workers. If the number of years of service required for vesting is reduced, as Ferraro has suggested in the VIP bill, the change would have greater import.
The new law prevents pension plans from counting a one-year maternity or paternity leave as a break in service and permits workers to stay away from their jobs for five years without sacrificing pension credits. Under old laws, such breaks in service often resulted in loss of pension rights.
Two widely publicized provisions of the new pension law effective next year will prevent employes from waiving coverage for survivors without the written consent of their spouses and will give state courts authority to treat pensions as joint property in divorce cases.
An employe who wishes to have pension benefits terminated upon death, rather than continuing for the surviving spouse, will have to obtain the spouse's written consent to do so. Electing to continue benefits for a survivor means a lower pension check while the pensioner is alive.
The new law grants automatic death benefits to the spouse of a worker who is fully vested, even if the worker dies before the company's early retirement age. Some pension managers criticized this provision. Unless a worker reaches the age of 45 or 50, the payment to which the worker would have been entitled at early retirement age is too small to make a significant difference to survivors, according to pension experts.
Pension managers said most employers have group life insurance programs that meet this need more effectively by providing significant benefits to the surviving spouse at the time of the worker's death. "Companies with pension plans have group life insurance to meet this need," said Philip M. Alden, vice president of Towers, Perrin Forster and Crosby, a New York benefits consulting firm.
The proposed legislation, the VIP bill, is so called because it deals with vesting, integration and portability. These are "the three areas in which ERISA the Employee Retirement Income Security Act is in the greatest need of reform if it is to be fair to all workers and flexible enough to accommodate modern-day working patterns," Ferraro said in the Congressional Record, speaking on behalf of the bill.
Vesting is the minimum number of years of work necessary for an employe to be eligible for a full pension at retirement. The VIP bill would reduce that period from 10 to five years. The bill would permit multi-employer pension plans to retain 10-year vesting, as long as there is complete reciprocity for workers who move from one regional pension plan to another in the same industry.
"In a time when many industries, particularly the high-tech industries, actually encourage workers to change employment every few years, and when the high unemployment rate makes it difficult for many workers to accumulate 10 years of uninterrupted service under a pension plan, this reform will assure that far more workers receive benefits when they retire," Ferraro said.
The 'I' in the VIP bill refers to integration, the practice of offsetting a pension plan participant's earned benefit by the amount of Social Security benefits the worker will receive on retirement. The VIP legislation would require all integrated pension plans to provide a minimum benefit, above and beyond the Social Security benefit.
About 45 percent of medium and large plans and almost all smaller pension plans use integration in calculating retirement benefits, Ferraro said. The impact on the lowest-paid workers is very serious because integration can wipe out their pensions entirely, leaving them totally dependent on Social Security, Ferraro said.
The "P" in the VIP bill refers to portability. Because workers may vest in several pension plans during their work careers, this proposal would give them the opportunity to take these small vested benefits and invest them in portable pension accounts to maximize retirement income.
A worker who left employment with a vested benefit of $7,000 or less would have the option of leaving it in the employer's pension plan or withdrawing the money for deposit in the employe's own Portable Pension Account, under the proposal.
This account would work like an Individual Retirement Account (IRA), with two major differences. Tax-Free Status of Benefits Under Scrutiny
First, only the pension benefit could be deposited in this account. Workers would not be allowed to add $2,000 each year. Second, any withdrawal from this account before age 59 1/2 would be punishable with a 100 percent excise tax penalty. The purpose of this strict penalty is to assure that the money would be used as intended, for retirement income, Ferraro said.
"My impression is that the portability issue has been largely diffused by the requirement in the new law for early vesting," said Alden. "But it is conceivable we will see vesting requirements liberalized by law even further through portability."
All of the changes and proposals for further changes in pension laws have accelerated the trend toward 401(k) tax-sheltered saving plans. Employers like these savings plans because they are simpler than pension plans and because employes make contributions, freeing companies of the need to finance the plans themselves.
Employes like the plans because of their flexibility, which allows workers to gain access to the funds in some cases, and because of their tax advantages, under which employes may contribute pretax earnings and defer income taxes on those earnings until the future. Employes also like the plans because employers usually match contributions, up to specified amounts or percentages.
But some pension experts fear that reliance on these savings plans for retirement income is dangerous because employes have access to the funds in "hardship cases" before retirement. In traditional pension plans, funds typically may not be withdrawn before retirement.
However, most employers have not used the increasingly popular 401(k) plans to eliminate pension plans but, rather, to supplement them. "In typical savings plans, employers put in about 50 cents for every dollar an employe puts in, up to 6 percent of the employe's salary," said Dallas Salisbury, president of the Employe Benefits Research Institute.
One potential curb on employe benefits is a limit on the amount of medical and other benefits corporations can deduct as expenses on behalf of each employe. The Reagan administration has proposed such a cap in the past, and members of Congress, looking for ways to reduce the federal deficit, have shown an increasing interest in limiting tax-free fringe benefits. Capping the amount firms can deduct as expenses also might help control medical costs, some legislators believe.
Alden said the proposals face tremendous opposition for many reasons, including complexity, because medical costs vary greatly in different parts of the country. Putting a cap on tax-free health benefits, according to Alden, is a major issue for younger employes, because its enactment could lead to further cuts in employer-provided medical benefits and higher employe contributions to their own health care costs.
All of these changes are taking place in an atmosphere in which more corporations are offering "cafeteria plans" that give employes greater flexibility in structuring a package of benefits that meets their specific needs.
"The most dramatic trend in corporate benefits is the sponsorship of these cafeteria plans that enable employes to redirect their salaries, which would otherwise be fully subject to tax, to provide for payment of such expenses as medical premiums and health care expenses, not otherwise reimbursed under their employer's regular plan," said Lloyd S. Kaye, a principal at Mercer-Meidinger Inc., a New York benefits-consulting firm.
"For example, in households where both spouses are working and there is a need for child care during the day, many cafeteria plans enable an employer to arrange for an employe to redirect compensation pretax to pay for such care," Kaye said. "Otherwise, the cost of the care and the wide disparity in compensation between those who have children and need the service and those who don't would make it impossible for many companies to offer this benefit." In some cafeteria plans, employes can trade benefits provided to everyone for flexible benefit credits. This might mean that a two-salary couple with children and two benefit packages could trade one health care benefit for a day care benefit.
Kaye said cafeteria plans enable employes to make choices between cash and nontaxable benefits such as dependent care, medical expenses, group legal expenses and group term life insurance up to $50,000. These benefits are typically tax-free benefits for employes.
Kaye said Congress may act to limit these tax-free benefits by putting a cap, for example of $5,000, on total cafeteria plan benefits per employe.
Kaye and some other pension experts also noted the movement by some companies to eliminate pension plans and add 401(k) plans, in cases where corporations have pension funding surpluses in excess of pension fund requirements. With the dramatic rise in the stock market, many companies, with pension assets invested in equities, had surplus pension funds. The only way companies could gain access to such funds was by terminating the pension plans, establishing annuities for employes covered under the plans, and then using the surplus funds for other corporate purposes.
"The absolutely crucial issue in corporate benefits from the employe's point of view is going to center on the tax policy debate in Congress," Salisbury said.
"Will workers be able to continue to receive a variety of benefits tax-free or tax-deferred? This is the key question," Salisbury said.