U.S. Needs Real Pension Reform That Will Benefit All Workers

For the Clinton administration, now in full campaign mode and on the lookout for safe issues--issues that resonate with voters and yet don’t upset too many important interests--few topics offer more satisfying politics than pension reform.

Everybody is for it. No one wants to argue against proposals designed to protect the nest eggs of the roughly 75 million baby boomers who are approaching retirement in 15 to 30 years.

Tougher federal regulations on how corporations handle traditional pension funds and 401(k) retirement savings plans have broad appeal--with none of the Big Government baggage that afflicted earlier Clinton proposals such as health-care reform. And pension reform fits with President Clinton’s “no-brainer” strategy for the campaign year, which has so far led to increased White House concern over airline safety, tougher rules governing meat inspections and curbs on tobacco advertising aimed at kids. Those decisions have hardly taxed Clinton’s storehouse of political courage and still have helped him get back in the good graces of centrist voters.

Clinton is like a quarterback sitting on a three-touchdown lead, playing conservative, ball-control football, trying to run out the clock. The only element of his centrist campaign strategy that has made him sweat this summer has been his controversial decision to sign a Republican-passed welfare reform bill. The move angered Clinton’s liberal Democratic base. But maybe that was the point: one bold move to prove to independents and conservatives that Clinton isn’t the captive of the left.

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Last Wednesday’s announcement, however, by Labor Secretary Robert B. Reich on pension reform was far more in keeping with this year’s strategy, a $76-million lagniappe, or gratuity, for voters so they don’t forget Bill Clinton on the eve of the Republican National Convention.

Reich announced tighter regulations on how corporations can handle employee funds earmarked for their 401(k) accounts, the oddly named employee savings plans that are rapidly replacing traditional pension plans as the retirement bulwark for most American workers.

Reich’s announcement was campaign politics at its best, designed to please the 23 million workers who participate in 401(k) plans while upsetting only the nation’s corporate benefits plan administrators and their consultants--of whom there are considerably fewer than 23 million.

Reich said the Labor Department will sharply reduce the amount of time corporations have to deposit employees’ money in their 401(k) accounts. Under current law, corporations have up to 90 days before they must actually invest or deposit the money on behalf of their workers--meaning they can use their employees’ funds for other things for three months. Some corporations have been taking advantage of that “float” to pad the bottom line.

“While the vast majority of plans are well run, we discovered through our enforcement efforts that too many employers held workers’ contributions to their pension plans too long before transmitting them to the plan,” Reich said Wednesday.

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The new rule, which will go into effect in six months, will require companies to deposit an employee’s funds no later than 15 business days after the end of the month in which the employee contribution to the 401(k) is made.

Current regulations, written in 1988, called on corporations to deposit the money as soon as possible and no later than 90 days after the employee contribution. But some corporations ignored the “as soon as possible” and quickly came to see the funds as a “kind of permanent interest-free loan amounting to three months’ worth of employee contributions,” Reich complained last winter.

The faster deposits under the new rule will give American workers an extra $76-million return in their 401(k) accounts in 1997, Reich said.

The benefits industry is already squawking, complaining that shorter lead times will lead to administrative headaches and increased paperwork costs. Yet even benefits experts acknowledge that employers don’t need three months.

“I don’t think anybody is challenging the need to move up from 90 days,” says Lynn Dudley, vice president for retirement policy at the Assn. of Private Pension and Welfare Plans, a Washington trade group.

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Yet the real question is not why Washington is doing so much on pension reform, but why Reich and others have done so little to ensure that the average American worker can look forward to a decent retirement.

A glance at the statistical trends over the last generation shows just how badly pensions have eroded. Traditional defined-benefit pensions--those that keep paying a retiree as long as he or she lives--are rapidly disappearing. Today, they are available mainly to the nation’s best-paid workers, whereas the rest of the country must make do with 401(k) accounts and other defined contribution plans that are far less costly to employers.

Indeed, although the 401(k) was originally designed by Congress to enhance personal savings and raise the nation’s savings rate, it has turned into an easy excuse for companies to dump their traditional pension plans.

In 1975, for example, 39% of the nation’s private-sector workers were covered by a traditional defined-benefit plan; by 1992, that percentage had declined to just 26% and was heading south fast, according to Labor Department statistics.

While corporate executives talk up the advantages of 401(k) accounts for their workers, many still maintain traditional pension plans for themselves and their highest-paid employees. A 1995 survey conducted for the Chicago-based Profit Sharing / 401(k) Council of America found that of those workers earning less than $20,000 a year, only 28.1% had traditional pensions, whereas 22.4% had access to 401(k)s or profit-sharing. Among workers earning $50,000 a year or more, however, 66.1% had traditional pensions and 65.6% had 401(k)s or profit-sharing plans.

The numbers are so disturbing that early on the Clinton administration briefly considered tackling the fundamental problems stemming from the shift from traditional pensions to 401(k)s, Dudley says.

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“The administration started with a philosophy that defined-benefit plans were inherently better than defined-contribution plans,” she observed. “So the administration established a working group on the shift from [pension plans to 401(k) accounts], and there was talk that once they finished with health care, Reich would do something on 401(k)s.”

However, once health-care reform fell apart and the Republicans took control of Congress, dramatic domestic initiatives were no longer welcome in the Clinton White House; modest, campaign-friendly proposals were in vogue. Dudley says the early trial balloons from the Labor Department about revolutionary change on defined-benefit versus defined-contribution plans soon disappeared.

So instead of fundamental reform, Clinton and Congress are now merely looking for ways to protect and defend 401(k)s.

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Washington is also about to let companies restructure their plans further toward their highest-paid executives. Legislation included in the minimum wage bill that passed earlier this month will free companies from so-called federal discrimination rules that now restrict highly compensated workers from contributing much more than lower-paid workers into their 401(k)s, according to David Wray, president of the Profit Sharing / 401(k) Council of America. The government would waive the limits on contributions by well-paid employees if the company agrees to provide matching contributions for all employees equal to roughly 4% or more of their wages, or to set up accounts for nonparticipating employees and make company contributions of at least 3% of their wages, even the worker still doesn’t pay into it.

Wray argues that the change is a positive move for American workers, one that will actually increase corporate and individual participation in 401(k)s.

Still, it also seems certain to further widen the gaping disparity in retirement benefits between top management and labor.

So look behind Reich’s crowd-pleasing announcement and you might see Washington turning a blind eye while the playing field gets tilted--again.