When it comes to individual retirement arrangements, commonly called accounts, tax-bill conferees are in a "damned if they do, damned if they don't" situation. If they vote to preserve full tax breaks for IRAs, they're implementing bad tax policy; a vote against them is sure to raise the ire of folks back home.
But the conferees have another option. By strengthening the "pension equity" provisions tucked away in the Senate tax bill, they can both meet the goals of tax reform and satisfy the concerns of their constituents on the home front.
Behind the flood of IRA complaints is a deep-seated disillusionment with a private pension system that is not meeting the needs of most of the working population. People want the IRA tax breaks because they aren't getting decent pensions.
Certainly those who are covered by pension plans but are not getting benefits have legitimate gripes about losing their IRA deductions. Millions of workers already lose out every year because of gaps in the system. Many have never worked long enough to earn a pension; others find their benefits shrunk to abysmal levels by tricky pension formulas.
It was precisely because of these gaping loopholes in the pension system that Congress decided in 1981 to expand IRAs to workers covered by pension plans. Unwilling to legislate a comprehensive reform of the whole pension system, the members of Congress instead took a patchwork approach to retirement-income policy: Leave the system as is, and add an attractive savings device to fill in the gaps.
But IRAs have not turned out to be the savior that they were conceived to be. Statistics show that the majority of low and moderate wage earners are unable to stash away $2,000 a year in an IRA. Out of an estimated 14% of all eligible taxpayers who contributed to an IRA in 1983, 8% earned less than $30,000. Their average contribution was only $143. By contrast, high earners consistently contribute to IRAs, and they would be saving even without IRA tax incentives.
The solution is not to keep $14 billion a year in tax breaks that are helping only a minority of the work force; it's to institute dramatic, far-reaching pension reform that will help workers at all income levels.
Congress has that chance now. By adopting the Senate's pension-equity provisions concerning "vesting," "integration" and "coverage," the conferees would be taking a long-overdue step to remedy the worst abuses in the pension system. These provisions would:
--Reduce from 10 to 5 the number of years that most employees need to workto get a pension.
--Limit the practice of pension integration in which companies use Social Security to figure an employee's pension.
--Require plans to include more workers.
In voting for these provisions the Senate recognized that it would be hypocritical to advocate tax reform and still allow substantial tax breaks for a private pension system paying benefits haphazardly at best. The private pension system, now burgeoning with $1 trillion in assets, gets the largest of all federal tax subsidies--an estimated $39 billion a year.
These provisions would provide bottom-line protection. But they are compromise measures that would lead to continued disappointment. With some fine-tuning, these provisions could shape a truly reliable and adequate system.
The most critical improvement is to extend five-year vesting protection to all workers. As it is, the Senate provision would exclude pension plans in which more than one company makes contributions. This would leave millions of union workers in the trucking and construction industries and many other trades without protection. The theory goes that workers under these plans don't need five-year vesting because they can build a pension credit by staying in their industries and working for different companies paying into the same pension fund. Yet with layoffs and a competitive marketplace, there's no guarantee that workers can find a job in the same trade.
The integration provision also needs to be strengthened. Although the Senate measure addresses the worst abuses, in which Social Security totally eliminates a pension, it would let companies wipe out as much as half of an employee's pension. This could still be devastating to low-wage earners who need their full pensions to supplement Social Security. If the conferees are unwilling to eliminate integration altogether, they should require companies to leave employees with at least three-fourths of a pension.
People care deeply about their future security, and aren't about to leave it up to fate. If Congress adopts and strengthens the pension-equity provisions of the Senate tax bill, it can effectively address the concerns of current and future workers. People won't be fearful about losing tax deductions for IRAs once the private pension system is paying out adequatelyto workers of all income levels.