Special Message to the Congress Proposing Pension Reform Legislation

To the Congress of the United States:

A dynamic economic system in a democracy must not only provide plentiful jobs, good working conditions, and a decent living wage for the people it employs; it should also help working men and women to set aside enough of the earnings of their most productive years to assure them of a secure and comfortable income in their retirement years.

This fundamental concept of prudent savings for retirement came under direct public sponsorship in the United States more than a generation ago, with the establishment of the Social Security System. Today, Social Security is the largest system of its kind in the world, and one of the most effective and progressive. Numerous significant improvements have been made in it during the past four years by this Administration in cooperation with the Congress.

In addition, public policy has long given active encouragement to the growth of a second form of retirement income: private pensions which are tailored to the needs of particular groups of workers and help to supplement the Social Security floor. Private pension plans now cover over 30 million workers and pay benefits to another 6 million retired persons.

But there is still room for substantial improvement in Federal laws dealing with private retirement savings. Those workers who are covered by pension plans--about half the total private work force--presently lack certain important types of Government protection and support. The other half of the labor force, those who are not participants in private plans, are not receiving sufficient encouragement from the Government to save for retirement themselves. Self-reliance, prudence, and independence--basic strengths of our system which are reinforced by private retirement savings and which government should seek to foster--are in too many cases not supported, and sometimes actually discouraged, by present practices and regulations.

Sixteen months ago I asked the Congress to enact pension reform legislation to remedy these deficiencies. Since then committees of both the House and the Senate have held useful hearings on reform, and the issue has received wide public discussion. The Administration has also completed studies on some additional facets of the pension question, and we have refined our proposals.

I believe that the time is now ripe for action on those proposals. They will be resubmitted within several days, in the form of two bills, the Retirement Benefits Tax Act and the Employee Benefits Protection Act. This message outlines the specific reforms contained in the legislation.

THE RETIREMENT BENEFITS TAX ACT

If working men and women are to have a genuine incentive to set aside some of their earnings today for a more secure retirement tomorrow, they need solid assurances that such savings will not be erased late in their career by the loss of a job, wiped out by insufficient financing of promised benefits, nor penalized by the tax laws. To this end, the Retirement Benefits Tax Act would embody the following five major principles:

1. A minimum standard should be established in law for preserving the retirement rights of employees who leave their jobs before retirement.

Protection of retirement rights, which is essential to a growing and healthy pension system, is ordinarily defined in terms of "vesting." A pension vests when an employee becomes legally entitled upon retirement to the benefits he has earned up to a certain date, regardless of whether he leaves or loses his job before retirement.

Despite some recent movement toward earlier vesting, many private plans still carry overly restrictive requirements for age or length of service or participation before vesting occurs. Thus, the pensions of more than two-thirds of all full-time workers participating in private pension plans are not now vested. All too frequently, the worker who resigns or is discharged late in his career finds that the retirement income on which he has been counting heavily has not vested and hence is not due him.

The legislation this Administration is proposing would meet this problem by requiring that pensions become vested at an appropriate specified point in a worker's career. That point should not be set too early: if a great many younger, short-term workers acquired vested rights, pension plans would be burdened with considerable extra costs and the level of benefits for retiring workers could be reduced. But neither should too long a wait be required before vesting begins, since many older workers would then receive little if any assistance. To strike the right balance, I urge the Congress to adopt a "Rule of 50" vesting formula, which is moderate in cost and works well to protect older workers.

Under this standard, all pension benefits which have been earned would be considered half vested when an employee's age plus the number of years he has participated in the pension plan equals 50. From this half-vested starting point, an additional ten percent of all of the benefits earned would be vested each year, so that the pension would be fully vested five years later.

For example, someone joining a plan at age-30 would find that his pension would become 50 percent vested at age 40--when his years of participation (10) plus his age (40) would equal 50. Similarly, the pension of an employee joining a plan at age 40 would become 50 percent vested at age 45, and that of an employee joining a plan 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 of the worker's continued employment.

So that this formula would not discourage employers from hiring older workers, who would have an advantage of more rapid vesting, the legislation would permit a waiting period of up to three years before a new employee must be allowed to join a pension plan, and it would also permit employees hired within five years of normal retirement age to be excluded from participation in a plan.

Under the "Rule of 50," the proportion of full-time workers in private retirement plans with vested pension benefits would increase from 32 percent to 61 percent. Among participants age 40 and older the percentage with vested pension benefits would rise from 40 percent to about 90 percent.

To avoid excessive pension cost increases which might lead to reduction of benefits, this new law would apply only to benefits earned after the bill becomes effective, although the number of years a worker participated in a pension plan prior to enactment would count toward meeting the vesting standard. The average cost increase for plans which now have no vesting provision would be about 1.9 cents per hour for each covered employee; for plans that now provide some vesting it would be even less.

2. Employees expecting retirement benefits under employer-financed defined benefit pension plans should have the security of knowing that their vested benefits are being adequately funded.

Perhaps the most fundamental aspect of any pension plan is the assurance that when retirement age arrives, pension benefits will be paid out according to the terms of the plan. To give this assurance, it is essential that when an employer makes pension promises he begin putting away the money that will eventually be needed to keep them. Yet Federal regulations at present are lenient on this point, requiring that only a small portion of pension liabilities be put aside or "funded" each year.

My retirement savings proposal would augment this minimal protection with an additional requirement calling for at least 5 percent of the unfunded, vested liabilities in a pension plan to be funded annually. Over time, this rate of funding would build up substantial assets for the payment of pension benefits. It would make the average employee or retiree less dependent for his pension upon the survival of a former employer's business.

By requiring employers to be more forehanded and systematic in preparing to meet their pension obligations, this reform should help to reduce the frequency and magnitude of benefit losses when pension plans terminate. Even now the termination problem is not a major one: a study conducted at my direction last year by the Departments of Labor and the Treasury found that about 3100 retired, retirement-eligible, and vested workers lost pension benefits through terminations in the first 7 months of 1972, with losses totalling some $10 million. To put them in perspective, these losses should be compared with the more than $10 billion in benefits paid annually.

I also recognize, however, that these pension termination losses did work very real injustices and hardships on the individual workers affected, and on their families. Though the stricter funding requirements we are proposing will help to minimize these benefit losses, it has also been suggested that a Government sponsored termination insurance program should be established to see that no workers or retirees whatever suffer termination losses.

After giving this idea thorough consideration, I am not recommending it at this time. No insurance plan has yet been devised which is neither on the one hand so permissive as to make the Government liable for any agreement reached between employees and employers, nor on the other hand so intrusive as to entail Government regulation of business practices and collective bargaining on a scale out of keeping with our free enterprise system. With new support from the funding standard I am requesting, the private sector will be in a better position than the Federal Government to devise protection against the small remaining termination loss problem, and I encourage employers, unions, and private insurance companies to take up this challenge.

3. 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.

Under present law, neither an employer's contribution to a qualified private retirement plan on behalf of his employees, nor the investment earnings on those contributions, are generally subject to taxes until benefits are paid to the retired worker or his family. When an employee contributes to a group plan, the tax liability on investment earnings is similarly deferred--though in this case the contribution itself is taxable when initially received as salary. By contrast, a worker investing in a retirement savings program of his own is actually subject year by year to a double tax blow. He is taxed both on the savings contributions themselves as part of his pay and on the investment income his savings earn.

Employees who want to establish their own retirement plan or to augment an employer-financed plan should be offered a tax incentive comparable to that now given those in group plans. Accordingly, I am proposing that an individual's contributions to a retirement savings program be made tax-deductible up to the level of $1,500 per year or 20 percent of earned income, whichever is less, and that the earnings from investments up to this limit also be tax-exempt until received as retirement income. Individuals could retain the power to control the investment of these funds, channeling them into qualified bank accounts, mutual funds, annuity or insurance programs, government bonds, or other investments as they desire.

The maximum deduction of $1,500 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--a consideration which is of special importance to the 9 million full-time workers in this country who are between 40 and 60 years old and are not participating in private pension plans.

The $1,500 ceiling should be more than adequate for most workers. Supposing for example that a worker in that situation was to start an independent plan at age 40, tax-free contributions of $1,500 a year from then on would be sufficient to provide him an annual pension of $7,500, over and above his basic Social Security benefits, beginning at age 65.

The tax deduction I am proposing would also be available to those already covered by employer-financed plans, but in this case the $1,500 maximum would be reduced to reflect pension plan .contributions made by the employer.

4. 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.

At present, self-employed people who establish pension plans for themselves and their employees are subjected to certain tax limitations which are not imposed on corporations. Pension contributions by the self-employed are tax-deductible only up to the lesser of $2,500 or 10 percent of earned income. 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 unincorporated entities and corporations often engage in substantially the same economic activities. Its chief practical effect has been to deny to the employees of self-employed persons who do not wish to incorporate benefits which are comparable to those of corporate employees. It has also led to otherwise unnecessary incorporation by persons solely for the purpose of obtaining tax benefits.

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 earned income, whichever is less. This provision would enable the self-employed to provide more adequate benefits for themselves and for their workers, without causing excessive revenue losses.

5. Workers who receive lump-sum payments from pension plans when they leave a job before retirement should be able to defer taxes on those payments until retirement.

In order to avoid the problems of administering funds for the benefit of a former employee, an employer will sometimes give a departing employee a lump sum payment representing all his retirement benefits. Present law requires that the employee pay income tax on that payment even if he intends to put it aside for his retirement. A worker who remains with one employer pays no such tax. This discrimination should be corrected.

The legislation we are proposing would amend the tax law to permit the worker who receives a lump-sum payment of retirement benefits before he retires to put the money into another qualified retirement savings program---either in his own or an employer-sponsored plan--without having to pay a tax on it, or on the interest it earns, until he draws benefits upon retirement.

THE EMPLOYEE BENEFITS PROTECTION ACT

An important companion to the five point reform contained in the Retirement Benefits Tax Act is our proposed legislation to make the Federal Government a tougher watchdog over the administration of the more than $160 billion in private pension and welfare funds benefitting American workers.

Submitted by this Administration more than 3 years ago, this needed reform languished in both the 91st and 92nd Congresses. Each month that it has sat unenacted, the small minority of employee benefit fund officials who are careless or unscrupulous have been permitted to deny hard-working men and women part of their benefits. That is why we are today proposing to the 93rd Congress a strengthened and improved Employee Benefits Protection Act, with an urgent request for prompt action.

Control of pension and welfare funds is shared by employers, unions, banks, insurance companies, and many others. Most pension plans are carefully managed by responsible people, but too many workers have too much at stake for the Government simply to assume that all fund management will automatically meet a high fiduciary standard.

Accordingly, the bill we are proposing would establish for the first time an explicit Federal requirement that persons who control employee benefit funds must deal with those funds exclusively in the interest of the employee participants and their beneficiaries. Certain corrupt practices such as embezzlement and kickbacks in connection with welfare and pension funds are already Federal crimes, but many other types of activity which clearly breach principles of fiduciary conduct are overlooked by present statutes. My proposal would plug these holes in the law to give workers a more solid defense against mishandling of funds.

Present reporting and disclosure requirements would also be broadened to require of benefit plan administrators a detailed accounting of their stewardship similar to that rendered by mutual funds, banks, and insurance companies.

To back up these changes, the new law would give additional investigative and enforcement powers to the Secretary of Labor, and would permit pension fund participants and beneficiaries to seek remedies for breach of fiduciary duty through class action suits.

Finally, the Employee Benefits Protection Act would foster the .development of uniform Federal laws in employee benefits protection, complementing but in no way interfering with State laws that regulate banking, insurance, and securities.

BRIGHTENING THE RETIREMENT PICTURE

By moving rapidly to enact the pension incentive and protection package I am recommending today, this Congress has the opportunity to make 1973 a year of historic progress in brightening the retirement picture for America's working men and women.

Under the reforms we seek, every participant in a private retirement savings plan could have a better opportunity to earn a pension and greater confidence in actually receiving that pension upon retirement. Those who are not members of an employer pension plan or who have only limited benefits in such a plan 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. And all participants could have well-deserved peace of mind in the knowledge that their welfare and pension funds were being administered under the strictest fiduciary standards.

The achievements of our private welfare and retirement plans have contributed much to the economic security of the Nation's workers. They are a tribute to the cooperation and creativity of American labor and management. We can be proud of the system that provides them-but we must also be alert to the Government's responsibility for fostering conditions which will permit that system's further development.

I urged at the outset of my second term that in shaping public policy we should "measure what we will do for others by what they will do for themselves." By this standard, few groups in this country are more deserving than the millions of working men and women who are prudently saving today so that they can be proudly self-reliant tomorrow.' I urge the Congress to help these citizens help themselves by going forward with pension reform.

RICHARD NIXON

The White House,

April 11, 1973.