Special Message to the Congress on a Pension Reform Program.

To the Congress of the United States:

Self-reliance, prudence and independence are qualities which our Government should work to encourage among our people. These are also the qualities which are involved when a person chooses to invest in a retirement savings plan, setting aside money today so that he will have greater security tomorrow. In this respect, pension plans are a direct expression of some of the finest elements in the American character. Public policy should be designed to reward and reinforce these qualities.

The achievements of our private pension plans are a tribute to the cooperation and creativeness of American labor and management. Over 4 million retired workers are now receiving benefits from private plans and these benefits total about $7 billion annually. More than $140 billion has been accumulated by these plans to pay retirement benefits in the future. But there is still much room for expanding and strengthening our private pension system.

Three groups in our society have a tremendous direct stake in the growth and improvement of private pensions. The first is made up of that 50 percent of American wage earners who are not in private group plans at the present time and who have no tax incentive for investing in retirement savings as individuals. The second group includes those who are enrolled in group plans which provide benefits for their retirement needs which they regard as insufficient or which do not ensure that the benefits which are accumulating while they work will actually be made available when they retire. If we meet the problems of these two groups today, we will also be taking a giant stride toward improving the quality of life tomorrow for an important third segment of our population to which they will eventually belong: the retired Americans whose independence and dignity depend in large measure on an adequate post-retirement income.

Older persons have spoken eloquently about the need for pension reform, especially at the White House Conference on Aging, which was recently held in Washington. It is clear that our efforts to reform and expand our income maintenance systems must now be complemented by an effort to reform and expand private retirement programs.

The five-point program I present today includes three new legislative proposals, a renewed endorsement of an earlier proposal, and a major study project which could lead to further legislation.

1. Employees who wish to save independently for their retirement or to supplement employer-financed pensions should be allowed to deduct on their income tax returns amounts set aside for these purposes.

Today only 30 million employees are covered by private retirement plans. This fact alone demonstrates the need to encourage greater private saving for retirement.

Under present law, both the contributions which an employer makes to a qualified private retirement plan on behalf of his employees and the investment earnings on those contributions are generally not subject to taxes until they are paid to the employee or to his beneficiaries. The tax liability on investment earnings is also deferred when an employee contributes to a group plan, though in this case the contribution itself is taxable. But when an employee saves independently for his own retirement, both his contribution and the investment earnings on such savings are currently subject to taxes.

This inequity discourages individual self-reliance and slows the growth of private retirement savings. It places an unfair burden on those employees (especially older workers) who want to establish a pension plan or augment an employer-financed plan. To provide such persons with the same opportunities now available to others, I therefore ask the Congress to make contributions to retirement savings programs by individuals deductible up to the level of $1500 per year or 20% of income, whichever is less. Individuals would retain the power to control the investment of these funds, channeling them into bank accounts, mutual funds, annuity or insurance programs, government bonds, or into other investments as they desire. Taxes would also be deferred on the earnings from these investments.

This provision would be especially helpful to older workers who are most interested in retirement. The limitation I propose would direct benefits primarily to employees with low and moderate incomes, while preserving an incentive to establish employer-financed plans. The limit is nevertheless sufficiently high to permit older employees to finance a substantial retirement income. For example, a person whose plan begins at age 40, with contributions of $1,500 a year, could still retire at age 65 with an annual pension of $7,500, in addition to social security benefits.

This proposed deduction would be available to those already covered by employer-financed plans, but in this case the upper limit of $1,500 would be reduced to reflect pension plan contributions made by the employer. An appropriate adjustment would also be made in the case of individuals who do not contribute to the Social Security system or the Railroad Retirement System.

2. Self-employed persons who invest in pension plans for themselves and their employees should be given a more generous tax deduction than they now receive.

Under present law, self-employed persons may establish pension plans covering themselves and their employees. However, deductible contributions are limited annually to $9,500 or 10 percent of earned income, whichever is less. There are no such limits to contributions made by corporations on behalf of their employees.

This distinction in treatment is not based on any difference in reality, since self-employed persons and corporate employees often engage in substantially the same economic activities. One result of this distinction has been to create an artificial incentive for the self-employed to incorporate; another result has been to deny benefits to the employees of those self-employed persons who do not wish to incorporate which are comparable to those of corporate employees.

To achieve greater equity, I propose that the annual limit for deductible contributions by the self-employed be raised to $7,500 or 15 percent of income, whichever is less. This provision would encourage and enable the self-employed to provide more adequate benefits for themselves and for their workers.

3. A minimum standard should be established in law for the vesting of pensions--i.e. for preserving pension rights of employees even though they leave their jobs before retirement.

A basic problem in our present pension system is the situation of the worker who loses his pension when he is discharged, laid off, resigns or moves to another job. A person who is discharged just before retirement, for example, sometimes finds that the retirement income on which he has been relying--and which has been accumulating for many years--simply is no longer due him.

Preservation of the pension rights of employees who leave their jobs--vesting-is essential to a growing and healthy private pension system. A pension is fully vested when an employee is entitled to receive all benefits accumulated up to a certain date regardless of what happens in the period between that date and his retirement. Despite encouraging increases in the degree of vesting, the pensions of more than two-thirds of all current participants in private pension plans are not now vested. Even among older employees, whose need for vesting is most acute, many pensions are not now vested. Forty percent of participants age 45 or older, 34 percent of participants age 50 or older, and 26 percent of participants age 55 or older do not have vested pension rights.

This problem can be corrected by requiring that pensions be fully vested at an appropriate specified point in a worker's career. But how should that point be determined? If it were set at too early a point, so that too many younger workers were vested, it could create a considerable burden for employers and reduce the level of benefits for retiring workers. On the other hand, if too long a wait were allowed before vesting begins, then many older workers would receive little if any assistance. Both of these pitfalls can be avoided, however, through a carefully drawn formula which provides a shorter waiting period before vesting begins for older workers.

The formula that I propose to the Congress is based upon what I shall call the "Rule of 50." Under this standard, every pension would be considered half vested when an employee's age plus the number of years he has participated in the pension plan equals 50. The vesting process would begin with this jump to half-vested status. After this point has been reached, an additional ten percent of the pension would be vested every year--so that the pension would be fully vested five years later.

Under this standard, which must apply to the workers who are 30 years of age or older, anyone joining a plan when he is 30 years old would find that his pension would begin to vest at age 40, when his years of participation (10) plus his age (40) would equal 50. The pension of an employee joining at age 40 would begin to vest at age 45, and that of an employee joining at age 50 would begin to vest immediately. And in each case, the degree of vesting would increase from 50 percent to 100 percent over the subsequent five-year period.

This plan gives older workers the advantage of more rapid vesting, a fact which could limit somewhat new employment opportunities for older workers. To help alleviate this danger, I recommend that a three-year waiting period be allowed before a new employee must be permitted to join a pension plan, and also that employees hired within five years of retirement need not fall under this vesting rule. These safeguards would ensure that older workers are not disadvantaged by this program.

This "Rule 50" would raise the share of participants in private pension plans with vested pensions from 31 percent to 46 percent. Even more importantly, among participants age 45 and older the percentage with vested pensions would rise from 60 percent to 29 percent. Overall, the number of employees with vested rights would increase by 3.6 million, of whom 3 million would be age 45 and older.

To avoid excessive cost increases in pension plans which might lead to reduction of benefits, this new law would apply only to benefits earned after the bill becomes effective. The average cost increase for plans with no vesting provision now would be about 1.8 cents per hour for each covered employee.

4. The Employee Benefits Protection Act which I proposed to the Congress in March of 1970 should promptly be enacted into law.

This legislation was designed to protect American workers against abuses by those who administer pension funds. As I pointed out when I first made this proposal, "the control of these funds is shared by employers, unions, banks, insurance companies, and many others." Most of these funds are honestly and effectively managed. But on occasion, some are not. By requiring administrators to manage such funds exclusively in the interest of the employee beneficiaries, the proposed law would provide a Federal remedy against carelessness, conflict of interest, and a range of corrupt practices.

The proposed law would also broaden reporting and disclosure requirements and strengthen investigatory and enforcement powers. There would be no interference, however, with State laws which now regulate the insurance, banking and securities fields.

It was 21 months ago that I asked the Congress "to give urgent priority to the Employee Benefits Protection Act." I described it then as an action which "further expands my program to protect the American worker as he works, when he is out of work, and after his working career is over." I now renew my request for action in this field--and am resubmitting this legislation in slightly revised form so that it will be even more effective. I urge that the Congress act promptly. There is no excuse for further procrastination.

5. I have directed the Departments of Labor and the Treasury to undertake a one-year study to determine the extent of benefit losses under pension plans which are terminated.

When a pension plan is terminated, an employee participating in it can lose all or a part of the benefits which he has long been relying on, even if his plan is fully vested. The extent to which terminations occur, the number of workers who are affected, and the degree to which they are harmed are questions about which we now have insufficient information. This information is needed in order to determine what Federal policy should be on questions such as funding, the nature of the employer's liability, and termination insurance.

Even the best data now available in this field is itself incomplete and questionable. It was gathered for the period from 1955 to 1965 and it indicates that less than one-tenth of one percent of all workers then covered by pension plans were affected by terminations in any given year. It should also be noted that some workers who are affected by terminations may not actually lose their benefits. The wrong solution to the terminations problem could do more harm than good by raising unduly the cost of pension plans for the many workers who are not adversely affected by terminations.

Nevertheless, even one worker whose retirement security is destroyed by the termination of a plan is one too many. It is important, therefore, that the nature and scope of this problem be carefully and thoroughly investigated. I have directed the Departments of Labor and the Treasury to complete their study within one year.

The proposals which I offer today would enhance substantially the retirement security of America's work force. Those who are not members of group pension plans and those who have only limited coverage would be encouraged to obtain individual coverage on their own. The self-employed would have an incentive to arrange more adequate coverage for themselves and their employees. All participants would have greater assurance that they will actually receive the benefits which are coming to them. And they could also be far more certain that their pension funds were being administered under strict fiduciary standards.

There is sometimes a tendency for Government to neglect or take for granted the "little man" in this country, the average citizen who lives a quiet, responsible life and who constitutes the backbone of our strength as a nation. "He can take care of himself," we say, and there is a great deal of truth in that statement. The self-reliance of the average American is an extremely important national asset.

The fact that a man is self-reliant, however, does not mean that Government should ignore him. To the contrary, Government should do its part to cultivate individual responsibility, to provide incentives and rewards to those who "take care of themselves." Only in this way can we be sure that the self-reliant way of life will be a continuing and growing part of the American experience.

My pension reform program would help do this. It builds on traditional strengths which have always been at the root of our national greatness.

The private pension system has contributed much to the economic security of American workers. We can be proud of its growth and its accomplishments. The proposals I offer will strengthen and stimulate its further development.

I hope this program will receive the prompt and favorable consideration of the Congress. For it can do a great deal to protect the rights of the average American during his working years and to enhance the quality of his life when he has retired.

RICHARD NIXON

The White House

December 8, 1971