Sen. John Heinz (R-Pa.) and Rep. Bill Clay (D-Mo.) introduced identical bills yesterday that they said were aimed at increasing pension benefits and extending them to more Americans.
The Retirement Income Policy Act of 1985 would provide much broader pension coverage and reduce the amount of time required to qualify for a pension. But it would also strike at increasingly popular tax-deferred savings plans known as 401 (k) plans.
The primary beneficiaries of this proposed legislation would be members of the postwar Baby Boom generation who will begin retiring about the year 2011. The losers would be employers. The cost to employers of providing retirement income would be higher if the bill were enacted, according to the bill's proponents.
The main provisions of the bill are:
*A requirement that by 1991 all workers except part-timers, the newly hired and very young employes be covered by pension plans at companies that have such plans.
*Reduction of the time required on the job to earn benefits from 10 to five years.
*Incentives for small businesses to offer pension plans.
*A prohibition against deducting the amount of Social Security received to the point where the retiree receives no private pension benefits.
*A clear distinction between retirement and other savings plans.
Pensions today provide only 14 percent of senior citizens' income. Only half of the families retiring on Social Security today receive income from pensions, and only half of them get more than $4,800 a year, said Heinz.
Just over half of the work force is covered by pension plans, while 47 million Americans have no pension plan. The percentage of covered workers has declined from 56 percent in 1979 because there are fewer workers in mature industries such as manufacturing and construction, where employes are more likely to be covered by pensions, according to a report by the Employee Benefit Research Institute (EBRI).
A recent private forecast calculates that, without legislation, the share of workers covered will increase to 63 percent by 2011 because more women will participate in pension plans than in previous years. Passage of the Heinz-Clay proposal would raise that figure to 81 percent.
The bill mirrors the Reagan tax proposal's opposition to retirement plans that are really a form of tax-exempt savings. Both proposals would eliminate the 401 (k) plan as it now stands. Currently, such plans allow employes to reduce their taxes by putting away, tax-deferred, up to 25 percent of their wages, to a maximum of $30,000 a year. Most employers match workers' contributions, usually at a rate of 50 cents for every dollar saved by the employe.
Most employers allow so-called hardship withdrawals before retirement for such financial needs as college tuition or a primary residence. Ordinary income tax is payable upon withdrawal, but there is no additional tax penalty. Moreover, more than a third of companies permit employes to borrow against those accounts, according to Hewitt Associates, a research firm.
The popularity of these plans has skyrocketed in recent years. EBRI estimates that the number of participants has grown from 1.7 million in 1983 to 9.5 million this year. Eighty percent of the Fortune 500 companies offer 401 (k) plans. Of the estimated 19 million employes eligible to participate, approximately half do so. That compares with about 16.7 million persons (or 17 percent of the 98 million eligible) who have established Individual Retirement Accounts. EBRI's Dallas Salisbury estimates that contributions to 401 (k) plans this year will total $13 billion, compared with $32 billion in IRA funds, but EBRI also predicts that 401 (k) benefits, left unchanged, could surpass IRAs.
But in addition to becoming increasingly popular, the plans have come under fire. The Reagan tax proposal would repeal 401 (k) plans. The version of tax reform proposed by House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) would limit combined 401 (k) and IRA contributions to $5,000 annually and allow no withdrawals, except in the case of death or disability, before age 59 1/2. The proposal is designed to save $6.2 billion in tax revenues over the next five years. The Heinz-Clay bill would set the combined limit at $10,000.