Senate Panel Votes to Expand Pensions

The Senate Finance Committee agreed Wednesday to expand pension benefits to lower-income workers and to require companies to give employees pension coverage after only five years on the job.

The proposal would curb a feature of current law that allows companies to deny pensions to lower-paid employees because of their Social Security benefits. It also would limit the ability of firms to exclude certain employees--usually clerical or other low-paid workers--from their pension plans.

The provision assuring pension benefits to employees after five years with a company would stiffen current law, which allows firms to wait as long as 10 years before vesting their employees.

The changes in pension law would be phased in, generally becoming effective after 1988.

‘401(k)’ Plans

The committee also agreed to impose only modest limits on “401(k)” plans, in which a share of an employee’s salary is diverted, often with a company matching amount, to a tax-deferred retirement account. Under the committee plan, employees could set aside as much as a total of $12,000 a year in 401(k) plans and individual retirement accounts. The cap would be adjusted to rise with inflation.

By contrast, the tax bill passed by the House last year would impose a ceiling of $7,000 on 401(k) contributions and require that IRA contributions be reduced by $1 for every $1 diverted to 401(k) plans.

Finance Committee Chairman Bob Packwood (R-Ore.), whose initial recommendation to the committee included limiting combined 401(k) and IRA contributions to $7,000, complained that the proposal to allow $12,000 in tax-sheltered retirement savings amounted to a “tax dodge” that would allow the “elegant to live very exquisitely when they retire.” But Packwood joined the majority in a lopsided 13-4 vote to approve the higher limit, which was sponsored by Sen. Charles E. Grassley (R-Iowa).

That decision would provide tax benefits worth about $1.2 billion over five years, compared with Packwood’s proposal, to a small number of highly paid employees with 401(k) plans.

U.S. Workers Aided

In a major victory for federal workers, the Finance Committee also decided to retain a feature of current law that allows many government workers who contributed to their own pensions to receive fully tax-free income during their first three years of retirement.

Through its series of actions Wednesday, the committee would cost the federal Treasury about $10.5 billion in revenues over five years, compared with Packwood’s original proposal.

Compared with current law, the Senate package would provide additional retirement and pension tax preferences worth almost $5 billion over five years. The House, by contrast, tightened pension and retirement benefits by about $13 billion over five years.

To date, the Senate panel is already in the hole about $25 billion over five years compared with current law as it moves toward even more controversial issues. As a result, the committee ultimately must reverse some of its actions, close other tax preferences or limit its income tax rate reductions to avoid increasing the budget deficit.

Plans Unchanged

Most of the key decisions by the committee Wednesday were designed to preserve existing retirement benefits. Although the panel moved to curb some features of what members termed “abusive” pension plans that primarily benefit top executives, lobbyists for pension groups said that the package would allow nearly all current company retirement plans to continue without change.

Nonprofit organizations, which are permitted to offer pension plans under much more relaxed rules than business firms, were exempted from any changes in current law.

At the same time, people nearing retirement would not lose important current tax benefits under the committee plan. Any person who turned 50 before the beginning of this year, for example, would continue to be eligible for very favorable “10-year averaging” tax treatment of lump sum payments from a pension or retirement savings plan.

The package would also soften the penalty for early withdrawals from pensions for employees who are fired or forced into early retirement and for those who face high medical costs or a major accident loss.