WASHINGTON – Americans could put more tax-deferred income into personal retirement accounts and corporations would have to set aside less to cover their defined benefit pension obligations to retirees under legislation that the House may take up this week.
Backers say it could save underfunded pension plans billions of dollars and protect the benefits of current and future workers.
The legislation, sponsored by Reps. Rob Portman (search), R-Ohio, and Ben Cardin (search), D-Md., would also change a 40-year-old rule under which individuals must start withdrawing money from their retirement accounts at age 70 1/2. Reflecting that Americans now live longer, the new age would be 75.
Portman and Cardin, who have joined in the past to promote change in pension law, originally promoted an ambitious plan costing some $230 billion over 10 years. They had to scale that back as Congress attempts to deal with quickly growing budget deficits, but their plan would still require $50 billion over the next decade.
Even with House passage, the measure has a long way to go in the Senate. The Senate Finance Committee is working on legislation to better protect workers in the wake of the Enron scandal. Committee aides said they were studying the Portman-Cardin legislation.
A key element of the bill is replacement of the 30-year Treasury bond (search) as the basis for calculating defined benefit plan obligations. The government stopped issuing new 30-year bonds in 2001, and Portman and Cardin would use high-quality corporate bonds, which tend to carry higher interest rates and are thought to be a more accurate measure for pension obligations.
The corporate bonds would be the standard for three years while the Congress and the Treasury Department, which has been working on its own formula, work on a more permanent solution.
James Klein, president of the American Benefits Council (search), said the legislation would protect both employers and the plans they now offer to employees.
He cited one survey finding that, under the current 30-year Treasury rate, 21 percent of defined benefit plan sponsors expect to freeze their benefits for current workers and 27 percent expect to change benefits for newly hired employees.
Without reform, he said, employers' 2003 overinflated contributions could be six times as much as the $14 billion they coughed up in 2001.
The argument that companies are forced to pay too much into plans comes as the Pension Benefit Guaranty Corp. (search) warns that more than half of the nation's 32,000 traditional defined benefit plans are underfunded by a total of $300 billion.
Some House Democrats, who say the Bush economic policy is responsible for precipitously rising budget deficits, oppose the plan as being yet another costly program the government can't afford. They also argue that it won't help lower-income people who can't afford to increase payments into pension plans.
But Liz Varley, director of retirement policy for the Securities Industry Association (search), said the bill would "play a vital role in helping the Baby Boom generation successfully meet the challenge of preparing for retirement."
In addition to allowing retirees to hold on to their retirement savings until age 75, the measure would speed up already planned increases in retirement account contribution limits.
Individuals would be allowed to put up to $5,000 each year in individual retirement accounts and up to $15,000 in 401(k) accounts beginning in 2004.
The Ways and Means Committee approved the legislation Friday after a bizarre episode in which Democrats walked out and committee Chairman Bill Thomas, R-Calif., summoned police.
Democrats boycotted the meeting soon after it began, citing what they said where the undemocratic way Thomas runs the committee and saying they weren't given information on substantial changes to the bill until midnight the night before. Democrats charged Thomas with calling police to evict them from a room adjacent to the hearing room where they were plotting strategy; Republicans said police were summoned because the one Democrat who stayed at the hearing, Pete Stark (search) of California, was using abusive language.