ACTIONS WHICH WOULD STRENGTHEN THE PRIVATE PENSION SYSTEM The following table summarizes replies received from 17 correspondents, chosen from experts practicing in the private pension field, to the question: "What, in your opinion, would do most to strengthen the private pension system in this country?" TABULATION OF MOST FREQUENT ANSWERS-REPLIES FROM 17 CORRESPONDENTS Removal of detrimental factors (12 respondents commented here) Discourage "expansionist" philosophy for social security; hold such Reduce governmental interference; simplify IRS requirements; avoid Positive actions that can be taken (12 respondents commented here) Broaden the coverage of private pensions by encouraging plans for small employers; raise inadequate limits of deductibility for H.R.-10 plans. -Make employee contributions tax deductible, whether under existing employer sponsored plans or as individuals. Better public relations by the industry, through studies, publication, testimony (three respondents significantly pointed out the need for a change in the basic attitude of many governmental leaders).. Minor regulation possibilities (9 respondents commented here) Require meaningful disclosure and more adequate communication of benefit rights to employees... Require fiduciary responsibility; impose restrictions on trustees other than corporate trustees.. Accreditation of actuaries (through American Academy of Actuaries) to help ensure adequate funding... 866 7 5 00 8 7 3 5 Although the emphasis varies from one person to the next, I believe the foregoing opinions are widely shared by pension actuaries and consultants. A number of side comments were made by various of these correspondents. For example, one has observed there is an inherent bias in the manner in which information is presented to the public, as a result of which the industry has been less successful in communicating its side of the story than critics have been in voicing theirs. He bases this claim on the fact that writings of government officials and academicans are supported either by taxation or education endowments, while representatives of the private pension field (working usually for themselves or for relatively small firms), must take time from their regular duties in order to prepare the studies and publications needed to communicate the favorable aspects of private pensions. An interesting idea expressed was the possibility of applying a special business tax where an employer had no pension plan or where the plan fell below certain minimum standards established through legislation. The tax could be graded according to degree of insufficiency. Any such scheme undoubtedly should be accompanied by an overhauling of the code relating to tax deductibility of employee contributions, a simplification of IRS regulations, and so on. Another respondent suggested permitting employers to "opt out" of the Social Security system in favor of comparable benefits privately provided (as has been the case in England). Others suggested the possibility of eliminating the Social Security system as an old age pension scheme, and the substitution of the concept of minimum subsistence income for all persons, active or retired. One point on which nearly all consultants seem to agree is that the greatest threat of all to the private pension movement lies in the continuing "squeeze" between an expanded Social Security and a narrowing of the integration limits permitted by IRS. Many persons, including Robert J. Myers, Chief Actuary of the Social Security Administration, have spoken out boldly against the "expansionist" philosophy held by many government officials. MISCELLANEOUS CONCERNS RELATING TO THE POSITION PAPER: "PENSION ASPECTS OF THE ECONOMICS OF AGING: PRESENT AND FUTURE ROLES OF PRIVATE PENSIONS." A point of some concern is the readiness of some observers to criticize private plans for the absence of ancillary benefits, especially widows' or survivors' benefits. In my opinion such criticism is unjustified. Since the days of the earliest private plans, which provided only age retirement benefits after attainment of an advanced age, many ancillary benefits have been developed. Among those commonly found in pension plans today are disability pensions, special forms of early retirement pension, severance benefits in the form of vested deferred pensions), optional forms of retirement income switch permit, among other options, the election to take a portion of the total value in the form of a survivors' annuity), and lump-sum or instalment death benefits. The selection of particular forms of benefit (in addition to old age pensions) has depended on the priorities assigned by the interested parties, in allocating available funds. Yet, the benefits contained in the pension plan itself do not tell the entire story. Pension plans are almost always accompanied, in the employer's overall benefit package, by a separate program of group life insurance. Frequently these separate insurance programs are quite substantial. Moreover, during the past several years automatic widows' or spouses' pensions have become popular additions to quite a number of plans. Experts are predicting that this type of benefit will become one of the more common features of private plans before the decade is out. In both the type and amount of their benefits, private pension plans continue to keep pace with new ideas and developments, without any prodding from government. This adaptability is one of the oustanding features of the healthy growth of private plans in the past. I believe it is particularly unhealthy for a handful of individuals, in government or out, to postulate themselves "arbiters" of the question of benefit priorities, on the theory of special insight into questions of social reform. I believe these issues should be settled democratically in the market place, on the basis of competition for good employees or through collective bargaining. Little purpose would be served by bringing to light disagreements with the author on miscellaneous matters of fact or interpretation, yet it may be of value to clear the record on a point or two. In citing "exemplary" plans, the author labors under a misconception that plans of the TIAA-CREF (money-purchase) type are somehow superior to others. Possibly he confuses the liberal vesting provisions of such plans with "superiority" in general, rather than recognizing that similar vesting can be provided under any form of pension plan. His praise of the TIAA plan with which he is personally familiar is quite understandable, though it also concedes unfamiliarity with the history of money-purchase plans, which fell into rather general disfavor in the early 1950's due to glaring deficiencies in their basic benefit structure. The weakness of money-purchase plans in comparison with "fixed-benefit" plans is reflected in the fact that 90 to 95% of all private pension plans today are of the fixed-benefit type. I shall not bother to elaborate here, as the situation is well known to pension experts. The two industrial plans and the plan bargained by UAW with several large automotive companies, also included in the paper as "exemplary" plans, are basically of the fixed-benefit type, one having a variable annuity feature. Why these particular plans were cited by the author, however, I cannot say. They are reasonably good plans are not particularly unusual in any important respect other than the special early retirement provision of the UAW plan. Their benefit levels are matched by many other plans. Thus, one cannot subscribe to the unequivocal statement that "the superiority of these exemplary plans cannot be attributed simply to normal growth and development over time; conscious commitments lie behind their innovative provisions." I submit that many, many employers and unions have made as great a commitment, frequently with even greater innovation. Just as in the parable of the blind men and the elephant, the quoted statement is based on inadequate information relative to the field as a whole. Finally, under the heading "Conflicts in Plan Purposes" (which might more appropriately have been termed "Diversity of Plan Objectives"), the author of the paper presents in a negative way what proponents of private pension loans view as the positive advantage of "flexibility." He states that the "conflicts" have contributed to the difficulties of developing a public attitude regarding private pension plans. One might ask whether we need a uniform "public attitude" to justify the existence of private institutions. If that were so, for example, many of our finest institutions of higher learning would be forced to conform to mediocre educational standards set by an uninspired and nebulous "public attitude." The situation, it seems to me, argues for quite the reverse of social uniformity. Diversity is the key to progress and this distinctive feature of private pensions, as opposed to social pensions, presumably should be viewed as both normal and desirable in the private field. CONCLUSION Those who believe strongly, as I do, in the potential of the private pension system must take exception to the expenditure of taxpayers' money in research which appears to be deliberately aimed at shifting emphasis from private to public pensions, thereby inhibiting further growth in the private sector. The fundamental question here should be: "How best can a healthy private institution be expanded to embrace an ever larger segment of our working population"? Accompanying this line of inquiry, a related question is: "What changes, voluntary or otherwise, would be desirable in existing pension plans to effect a higher level of ultimate coverage under these plans"? Here, though it is my belief that too much has been made of this particular issue by critics, it is likely that most persons of responsibility in the private pension field would be willing to accept some "ground rules" in the nature of minimum vesting standards. At the same time, however, vesting is not the paramount issue. The basic problem is to find a practical means of making available to small employers, the self-employed, indeed any individual, a vehicle to finance private retirement security. One possible approach was outlined in an earlier part of this statement. This problem can most certainly be solved if we are prepared to pay the price from whatever revenues are available for domestic social improvements. As in so many other areas, however, we are faced with a question of priorities. There are many social problems which a majority of our citizens would undoubtedly argue to have a prior claim on our resources. For this reason alone, I do not believe that a substantial reordering of priorities in favor of the "Economics of Aging: Toward a Full Share in Abundance" is a practicable goal at this time. Notwithstanding the foregoing observation, since it is possible to develop otherwise workable programs which would broaden the private pension movement, as well as have other beneficial effects in the economy, preparation of desirable alternatives is most certainly in order. Supplementing the material in this statement is an article by the present writer entitled "Myths in Proposed Pension Regulations," which appeared in the October 1969 issue of Financial Executive magazine, copy of which is attached. Mr. MOORE. There is another statement. Mr. Griffin was invited to appear here today and was not able to be here. He has also submitted a statement. I should also like to ask that this statement be incorporated in the record of your committee if I may. Mr. DENT. Without objection it is so ordered. (The statement referred to follows:) STATEMENT OF FRANK L. GRIFFIN, JR., CHAIRMAN, THE WYATT Co. In considering the merits of any legislative proposal having to do with the regulation of private pensions, it is necessary first to decide one's position on the fundamental underlying issue: Do we believe in the private system of providing employee benefits and ordering benefit priorities in accordance with the needs of individual groups, or do we not? Do we wish to preserve the capitalformation and inflation-deterrent potential of well funded private plans, or do we not? Do we believe that private pensions are an appropriate means of pro viding retirement income to supplement a basic floor of protection for all individuals under Social Security, or do we believe that private plans should be phased out in favor of an unlimited "expansionist" goal for Social Security? Let us not delude ourselves that the fundamental issue is other than that mentioned above. Thus, until we are clear on the true objectives of those standing behind proposed pension regulation, we are breaking our lances on false issues and dialogue is meaningless. Responsible persons within the administration have alleged that much of the influence behind pension proposals stems from those in government who are dedicated to the downfall of private pensions and the substitution of a mammoth Social Security system. Be that as it may, it is certainly the belief of most persons close to the private pension scene that no "ground swell" exists for so-called pension reform. Rather, virtually all agitation to date appears to have come either from academicians with relatively little knowledge of the background or practice of private pensions or from public servants who, perhaps understandably, feel that every private activity ought to be closely scrutinized and regulated. I happen to believe firmly in the role of private pensions in satisfying desirable social and economic goals within the framework of individual initiative and free choice. Therefore I am opposed to any course which is likely to drive employers away from the private system and concurrently encourage Social Security "expansionists" to fill the void. Given a favorable economic and political climate, the private pension system is fully capable of continued expansion, both with regard to the amount and form of benefits provided and the extent of its coverage of the total private work force. There are a number of ways in which a continuation of a climate favorable to private pensions could be assured, but certainly one of them is not to penalize those employers who are already doing the best job of providing for their employees in retirement. These employers, whose plans contain the most liberal benefits, are well funded, and are qualified as non-discriminatory under I.R.S. rules, are the very ones toward whom most proposed Federal legislation has to date been aimed.* If we assume the true objective of such legislation is to strengthen the private pension system, it makes little sense to concentrate attention here rather than to find ways to encourage the adoption of sound, well financed plans by employers who either have no plans at all or who have only unfunded plans where no financial guarantee of benefits exists. It may be recalled that The Honorable Jacob K. Javits presented in the Congressional Record for July 1, 1969 a summary of the Pension Research Council study entitled: "Status of Funding Under Private Pension Plans in the United States," authored by Mr. C. L. Trowbridge and the present writer. This book represents the first factual nationwide study of funding and vesting under I.R.S. qualified pension plans in the United States. Among the facts brought out by the study were statistical demonstrations (i) that vesting is at a reasonably advanced stage in its natural evolution without any compulsion whatever from government, and (ii) that a vast majority of private pension plans are following eminently sound funding programs, ahead of any reasonable benchmark which could be postulated. It may also be recalled that Senator Javits, placing his own interpretation on the meaning of these statistics, stated "It (the study) belies the claims of those who have been saying that legislation would . . . discourage the further growth of the private pension system." The Senator was a bit off the mark in this observation. His review ignored, for one thing, the great and desirable diversity existing both in the benefits and funding of private plans. For example, the study proved that it would be the smallest employers who would be hardest hit by the costs of compulsory early vesting, a circumstance which becomes lost in the overall averages the Senator used to evaluate the feasibility of legislation. One need only recall the following truth: "It is possible to drown in a river the average depth of which is three inches." Senator Javits' conclusion also ignored the natural human desire to avoid unnecessary restriction by whatever means possible. It seems perfectly clear that regulation would lead to de-emphasis of private pensions on the part of those employers free to select less regulated forms of employee benefit (profit sharing, savings plans, etc.). One might better conclude that the study indi Titles II, III and IV of HR 1045, for example, apply only to pension plans which are already on a qualified, funded basis. cated very little need for pension regulation, unless one prefers the dubious logic of: "Since regulation would affect so few persons, it is therefore feasible." Are we to have regulation for its own sake? With regard to mandatory vesting, it should be noted that this feature of legislative proposals in reality constitutes a pre-empting by government of the rights of the parties to these plans to establish their own benefit priorities. Vesting, like disability pensions or widows' pensions or lump-sum death benefits, is an additional benefit which can be added to the age retirement allowances of a pension plan. Historically and otherwise, vesting is a severance benefit which carries a price tag. Therefore, it must "get in line" with these other forms of additional benefit when priorities involving cost are established. The real question is: Who should set these priorities? Who should say whether severance benefits (vesting) are more important than allowances to disabled employees or widows of deceased employees, for example? Should it be the parties to these plans (employers and unions who have traditionally set their priorities on the basis of the needs of the group), or the government? In a letter to Senator Javits, the present writer stated, among other things: "Since the professed purpose of most proposed legislation is to enhance pension security while encouraging private plans, let me ask the following pertinent questions: "(1) Why is no one concerned with private plans which are not on a funded basis at all, or with plans for public employees which on the whole are very poorly financed even with respect to currently accruing costs? ('truth in pension costs' denied the taxpayer)? "(2) Why should employers be induced, by restrictive legislation in any area hitherto subject to free choice and exhibiting healthy growth, to retreat from the private pension field in favor of other less regulated forms of employee benefit, or be led to decide against funding their plans? Would such a result be consistent with enhancement of security or the encouragement of private plans? "(3) Why do legislators concentrate on relatively unimportant flaws in our pension security structure while completely ignoring the real thief of pension security, inflation? Inflation, resulting largely from governmental fiscal policies, has been estimated to have over 100 times as much impact in terms of lost pension benefits as the termination of plans before completion of funding. (This statement is supported by the government's own figures.) "Based on long experience in this field as well as on my research for the funding study under discussion, I am firmly of the opinion that the need for any pension regulating is far from demonstrated. I believe it is likely to have detrimental effects not yet foreseen by its proponents, especially when coupled with repeated Social Security expansion-not only through restrictions on freedom of choice by employers and unions but also through a potential shrinkage of an important source of capital for our productive machine. I believe greater insight as well as familiarity with the complex and diverse private pension field are essential to an intelligent appraisal of the desirability of legislation on this subject." (I now understand that Senator Javits will introduce this Administration's disclosure and fiduciary responsibility bill.) Given his options in the matter, any employer in his right mind is going to choose other forms of employee benefit program if pensions are to be circumscribed with all manner of restrictive rules and regulations, denying him freedom to set benefit priorities and costing him money for unwanted supervision or so-called "reinsurance." And let us not forget that employers do have their options today, and will continue to have as long as comparable unregulated forms of benefit are available and no compulsion exists to adopt or maintain a pension plan per se. The many employers who have not yet adopted pension plans and the many others with existing plans who may unilaterally decide to substitute less regulated forms of deferred compensation, such as thrift plans, savings plans or profit sharing, may be removed permanently from the field through excessive regulation. Any father knows there is only one way to "regulate" a recalcitrant boy and keep him from running away to escape punishment. That is to hold him while "corrective measures" are administered. The proposed approach on pensions is all wrong, if you really intend to strengthen their role "at home," so to speak. If you intend to shape them to your will, you will have to close the escape |