While the Senate Finance Committee's plan to curb tax breaks for the popular Individual Retirement Account has touched off vigorous opposition, other important provisions affecting retirement income have stirred little reaction.
The panel voted to cut to five the years on the job required before an employe becomes "vested" -- entitled to eventual benefits -- in a pension plan. It raised the number of employes that must be covered by a pension plan by 10 percent to 80 percent of employes. And it prohibited employers from depriving employes of more than half of their pension benefits by including their Social Security payments in the calculations.
Although these provisions would appear likely to raise employers' pension costs, they apply only to single employer plans and will not go into effect until 1989 or after. Thus, pension experts do not expect any mass termination of plans. Also, the legislation, a compromise on issues that have been discussed for years, has widespread support.
"We endorse five-year vesting, although the change is a mile wide but an inch deep," said Ellen Goldstein, spokeswoman for the Association of Private Pension and Welfare Plans.
The support is not universal, however. Among the opponents is John N. Erlenborn, a former Illinois congressman who was instrumental in previous pension legislation. Now in private law practice in Washington where he represents the Chamber of Commerce, Erlenborn termed the vesting provisions "another straw on the camel's back."
He contended that earlier vesting, along with numerous other recent changes such as higher liability premiums, would combine to prompt employers to abandon "defined benefit" pension plans, which promise retirees a certain level of benefits, in favor of alternatives that put the risk on the employe rather than the employer. These include "defined contribution" and 401(k) plans, to which the employe contributes a specified amount but gets a pension that varies with the performance of the fund's investments.
Under current law, most employes must be vested after 10 years' service. At that point they have earned retirement benefits that the employer cannot take away from them. The new proposals would require that an employe's benefits be either completely vested after five years or 20 percent vested annually from years 3 to 7.
The result, said Erlenborn, would mean small amounts of money being invested on behalf of short-term (five-to-10 year) employes. Since no employer would want to carry these small accounts on the books until the employes' retirement many years later, a lump-sum benefit would be given to a departing employe. The employe would be more likely to spend rather than save it and the cost would cause a decrease in the benefits available for other longer-term employes.
In a paper issued last February, the Employee Benefit Research Institute, a nonprofit group that studies pensions, predicted that halving vesting would have given an additional 1.9 million workers pension coverage in 1985. Nationwide, the annual cost of five-year vesting would be 2 percent to 7 percent of total private pension plan contributions, or between $1.4 billion and $4.7 billion. But EBRI warned that "for some employers with young work forces and high turnovers, the cost could reach as high as 40 percent of current contributions."
Currently, 85 percent of employes in medium and large firms belong to plans with 10-year vesting. Defined contribution plans tend to have earlier vesting. However, since workers typically hold 10 or 11 jobs over a lifetime, EBRI notes, many never would vest even under the five-year rule. These workers no longer would be eligible to provide for their own retirement by contributing to an IRA and deducting those contributions from taxes.