The Senate Finance Committee is scheduled to vote today on a tax change that would affect 17 million workers who help finance their own pension plans.
Opponents of the pension tax rules change, which has already been approved by the House, hope to convince the Senate committee that the change won't raise revenues and could trigger a massive surge of federal retirements. Currently, 200,000 workers are eligible to leave federal service on pensions.
Under the plan being considered, pensions that are now tax-free for up to three years would be subject to taxes as soon as workers retire.
Reps. Steny Hoyer (D-Md.), Frank Wolf (R-Va.) and Edward Roybal (D-Calif.) wrote to Finance Committee Chairman Bob Packwood (R-Ore.) noting that the Reagan administration has acknowledged that the plan won't make money for the government in the long run.
The administration had maintained that the controversial pension tax change would raise $7.5 billion during the next four years. But on March 27, Treasury Secretary James A. Baker III wrote to Hoyer, a member of the House Appropriations and Democratic Steering and Policy committees, to the effect that "over the long run, the proposal would be closer to revenue neutral."
Baker's letter said the primary reason for backing the change "is not to gain revenue" but to "make a retirement tax policy more consistent and equitable for all taxpayers."
The Hoyer-Wolf-Roybal letter says it would be inequitable to change tax rules for federal, public and private employes who -- unlike most Americans -- contribute to their own pension plans. Their contributions are taxed as part of salary while they are working, hence the no-tax period after retirement.
Those retirees don't pay taxes on pensions until they have recovered all the money they put into the plan. That recovery period can last up to three years, although the typical civil service retiree gets it all back in 18 months and then pays taxes on the full pension.
Federal agencies -- including the CIA, FBI, National Aeronautics and Space Administration and IRS -- have warned that a sudden change in tax rules could trigger massive retirements from the government's most experienced worker corps.
The House tax reform bill would make the change effective for anyone retiring after July. The Senate proposal would phase out the tax benefit by January 1988.
The Federal Government Service Task Force estimates that the change would mean an early and unexpected tax bite of $10,000 in the first three years for the typical retiree, and up to $30,000 for the government's top executives. Although the lifetime tax bite wouldn't be any greater, retirees would pay sooner under the reform proposal. The portion of pension to be taxed immediately would be prorated over their life expectancy.
Many government workers object to the proposed change, because they have made the tax-free period a cornerstone of their retirement plans. Any income they get during the so-called tax free period -- such as lump sum leave payments, income from savings bonds or other jobs -- is taxed at a lower rate because their annuities aren't considered income.
If the committee approves the change, it is likely to become part of the final tax reform bill worked out by Senate-House conferees. If the the committee rejects the proposal, that dramatically improves chances that it could be knocked out in conference.