'We need a national retirement policy.'

"We need a national retirement policy" Plato said, "What is honored in a country will be cultivated there." Perhaps, because we do not truly honor the retiree andutilize the experience and wisdom of the elderly, our society has not made the commitment to define, develop, and cultivate a national retirement policy.

Every year, at least 2.2 million of our neighbors and friends retire, yet fewer than half receive some form of pension benefits through the private system. Unless we adopt a national retirement policy to encourage employers to continue to provide retirement benefits, the number receiving benefits will continue to decrease.

In the 1930s, when the Depression hit and a crisis was upon us, we created the Social Security system. With all its faults, that system provides one leg of the "retirement stool," the others being private savings andprivate pension plans. The wobbliest leg of that stool is our pension system.

If we're not careful, private pension plans could literally disappear. And, without a national policy and commitment, there is little hope that the "retirement stool" will be available for the next generation of retirees.

The public pension plans are not only alive and well, but they are being liberalized almost as fast as private plans are being restricted and at a tremendous and not fully understood cost to the taxpayers. Perhaps a double standard is being developed. In any case, I'm not challenging what is happening with public plans but rather speaking out against the unfairness toward private plans adn the consequences of continuing on such a course.

Snarling pension legislation

On September 2, 1974, ERISA was signed into law. Today, most knowledgeable observers, and particularly professional pension plan advisors, would agree that it is not only needed but is also a good piece of legislation that corrects a number of abuses. That ERISA basically is accepted by government, sponsors, advisors, and participants is no accident. It was planned.

In the almost 16 years since ERISA, there has been a veritable deluge of pension legislation and regulation. Major pension legislation was passed in 1982, 1984 (two pieces), 1986 (two pieces), and 1987. In addition, new or amended regulations have been put in place every year (sometimes several in a calendar year) by the IRS.

All this caused many problems for the private pension system, not the least of which was dereliction by the IRS in issuing regulations in a timely manner. That attitude even got the attention of Congress, which provided in one piece of legislation that the IRS be required to issue regulations by a certain date. No penalty was involved so the IRS chose to ignore the wish of Congress. It seems impossible, and certainly is indefensible, that the IRS would take 10 years to issue final regulations for 401(k) plans--but it did!

Of course, a pension plan can be set up before regulations are available, but the penalties for guessing wrong on the final requirements are so harsh that companies find it difficulto to justify taking the risk.

The impact on the private pension system has been far reaching, far from good, and far more than is necessary. Sponsors have terminated plans rather than be subject to the constant changes, thus removing altogether some employees from pension plan coverage.

Congress cani take some blame for today's not-so-friendly pension environment. It can be faulted in four areas:

* First, pension legislation has been passed for which the regulation writing responsibility has been given to the IRS with no requirements that the intent of Congress be followed and with complete freedom of timing for getting the rules in place.

* Second, legislation has been passed with little input from industry. And the emphasis is on how much revenue can be produced instead of on whether it is good for private pensions or is needed to curb abuses.

* Third, certain legislation overlaps with provisions of prior legislation without rescinding them. This results in a hodgepodge of existing rules and leaves companies in doubt whether they are fully complying.

* Fourth, the goal of legislation to increase benefits for lower-paid participants is inconsistent with the results. Many plans have been terminated because of the additional burdens caused by such legislation.

The IRS, intentionally or not, has assumed an adversarial role on private pension matters. Its advice to Congress on pending pension legislation as well as regulation writing is, to an alarming degree, based on revenue considerations. Top-heavy provisions--the piece of legislation that places additional restrictions on highly compensated participants--are a good example. In this case, the IRS advised Congress to decrease deductions and thus raise revenue. The Service asked for no input from industry to discuss the need for or merits of the proposed provisions.

Confusion and compromise

Not too many years ago, professional advisors could help a plan sponsor design a plan which could continue more or less unchanged for years. Today, that is not possible, for two reasons: one is Congress and the other is the IRS. This onslaught against private pension plans, caused by the two groups' unconcern for stability and concern for revenue, has continued for over a decade now. New legislation, new regulations, and new directions have made stability impossible and the costs of instability are staggering. As each change became effective, plan sponsors were required to submit revised plans or set up revised administrative procedures, and they were forced to absorb the costs to comply.

Actually, there was an alternative--terminate the plan, which thousands of sponsors did. With so many terminations, you wonder how sponsors and advisors can be said to follow ERISA's requirements to do everything "on behalf of plan participants." Of course, such a requirement does not apply to Congress or the IRS, but they would deny they caused plan terminations even though plan sponsors have stated that the financial burden that went along with recent legislation was the reason.

Planning was further hampered by differences existing in the requirements of two government agencies. A plan sponsor was told by the IRS that no deduction would be allowed for the year because, according to IRS rules, the plan was overfunded. For the same year, the sponsor was told by the PBGC to pay a higher premium because, by its rules, the plan was underfunded--a veritable tug of war, with the sponsor in the middle being fiscally "pulled apart."

How do participants fare in this pension climate? Not very well, if their pension plan is terminated and not replaced. If a defined benefit plan is terminated and replace by a defined contribution plan, benefits may not be entirely lost but this may create other retirement benefit problems. Those affected most are the long-service, older participants, since a defined contribution plan simply cannot make up what was lost.

Participants deserve to be treated better. Before draining a swamp, an environmental impact study is needed. How about something similar for participants before unilaterally decreasing benefits? It is the lack of an impact statement that has put us in the employee benefit predicament we find ourselves today.

Primarily, defined benefit plans provide a monthly income at retirement. Defined contribution plans provide a lump sum payment at either retirement or early termination of employment. An Employee Benefit Research Institute survey showed that the average lump sum payment was used up in 30 months and two of the most popular uses for lump sums were an exotic vacation and a new car. While certain individuals may relish the idea of such a "windfall," this practice has a serious detrimentall effect on the ability of those individuals to provide for themselves in retirement. And, of course, if they can't, you and I will help through social programs funded by our taxes. Why does the government mandate that Social Security be a defined benefit type of plan and at the same time make a private defined benefit plan so difficult and costly to administer?

Who holds the key?

Something is needed, and the magic word is change. A simple legislative change or a regulation change won't do it. Changes need to be broader and deeper and are required on the part of government, sponsors, participants, and advisors.

The first change should be better communication. If the private pension system is to be healthy, it cannot be so in an antagonistic setting. I emphatically believe that government personnel do not set out to be adversarial on pension matters. However, their preoccupation with budget and revenue considerations has them, in effect, wearing blinders so that the results of their actions seem so lacking in other concerns that they are perceived as being adversarial and antagonistic.

What's the answer? Understanding the impact of decisions on people and cooperating through joint efforts and input by all parties concerned with private pensions. I submit that, while I may be lacking in knowledge about the complexities of the political and bureaucratic processes, our politicians and bureaucrats are also lacking in knowledge about our problems. One bit of information the IRS needs to understand is that pension contributions should not be categorized as lost revenue but as deferred dollars. Why? Because 82 percent of those dollars are eventually collected as taxes on retirement income payments to retirees.

It is through cooperative efforts that we will achieve understanding of each other and our problems. And it is only through cooperation and understanding that we will achieve a continuing open line of communication with all parties. It is the only way in which all issues can be put on the table so a greater awareness will evolve naturally. Awareness promotes concern and thus the two are partners in changing attitudes on pension issues.

The private pension system needs stability in order to be an important supporting member of the three-legged stool of Social Security, personal savings, and pensions for our retired citizens. I don't believe that anyone joins a government unit for the purpose of attacking the private pension system. But it is unfortunate that the current approach--of adding this restriction today and taking away that allowance tomorrow, changing Section 401 matters this year and planning Section 404 changes next year--has that effect. It is piecemeal without regard for the total picture. And decision-makers have created a "puzzle palace" resulting in what The Wall Street Journal calls "pension tensions." It can result in complete erosion, much like the sea wall under attack by continuing waves. The whole system is out of control. The law is so baffling to taxpayers, accountants, attorneys, and civil servants that compliance is impossible!

One step in the right direction occurred a few years ago with the introduction in Congress of the Heinz-Clay bill, a proposal for a national retirement income policy. But Congress was concerned with other matters so it wasn't discussed. The bill contained many specific provisions, including minimum and maximum benefits and restrictions on early distributions. Some of the ideas were incorporated into the Tax Reform Act of 1986. Now, it's time to take a second look at a national policy for pensions. The following general ideas were part of the Heinz-Clay bill:

* All plans should be separated into retirement and nonretirement (capital accumulation) plans. Retirement plans are generally defined as plans that pay benefits in a retirement income form from either a defined benefit plan or a profit-sharing plan. Nonretirement plans may provide for benefits in other ways than through periodic payments.

* An employer should not provide non-retirement plan coverage for employees unless the employees are first covered under a meaningful retirement plan.

* A retirement plan should provide a meaningful retirement benefit.

* There should be a maximum benefit provided from retirement plans and a maximum contribution allowable for defined contribution plans.

* A reasonable penalty for an early distribution from retirement should be adopted.

While the Tax Reform Act of 1986 did incorporate mcuh of the Heinz-Clay proposal, the indexing of maximum benefits is pegged to the Consumer Price Index and not to the Social Security taxable wage base. The final bill, however, does not end up with a pension policy and, again, what curbing there was of benefits was made without any regard to the need of employees.

Thus, what we need is a stabilized program for retirement and a hands-off policy by the IRS!

How do we get there?

First, the key is to be proactive. We need to create a new policy. Milliman & Robertson will be cosponsoring forums with the National Employee Benefit Institute (NEBI) throughout the U.S. for the purpose of educating--bringing people together--to increase communication, understanding, and cooperation. We need to design a new system and build a consensus as to how to achieve our goal.

Second, we need a presidential commission. Its purpose is to propose and write a national retirement income policy, to "institutionalize" the issue. We need bipartisan representation from Congress, industry, labor, and the Administration. The commission should report within six to nine months and, in the meantime, there should be a moratorium on any pension legislation affecting retirement income until the commission's work is completed.

Third, we need a separate administrative agency that is not involved in tax revenues and has administrative responsibilities only, to coordinate and set policy. Aren't people problems as important as the environment? Even President Bush is seriously considering establishing a new cabinet-level environmental agency!

Fourth, we need a national retirement income policy board to provide funds for pension studies and to recommend policy changes to Congress.

The mission: a new policy

What is needed is an effort by industry professionals to put a simple but sound proposal before the legislators dealing with a policy for our retirement income system. One proposal that has merit would put a stop to any more pension legislation until a retirement policy could be developed by representatives from both industry and government.

Without this kind of action, the prediction by the New York State Bar Association of massive pension plan termination due to burdensome complexities in the system might come true. If a plan with a current $1 million annual contribution terminates, the government would realize additional tax receipts of perhaps $350,000. But future retirees will have lost $1 million that will have to be replaced somehow for them to be able to afford retirement. The likelihood of this coming from personal savings is remote for many individuals. That leaves the government, and thus the effect is to take it away today and give it back at a later time.

That is not logical. Nor is there any ultimate benefit to anyone compared with continuing a current pension plan. In my view, a national policy is not just desirable--it is imperative.

A stable, acceptable employee benefit structure would do the following:

* Be a very good social policy.

* Allow plan sponsors to plan effectively for benefit programs.

* Provide a program of benefits employees could count onm for when they eventually retire.

* Drastically reduce the cost of compliance.

* Take employee benefits out of the arena where changes are a matter of political whim and budget desires.

A TV ad a few years ago talked about the savings that proper maintenance of your auto engine could bring and the results of improper maintenance. It used the phrase, "You can pay me now, or you can pay me later." Congress needs to be shown that a sound, well-balanced employee benefit program does not cost. It pays, through greater job satisfaction during active years and greater self-sufficiency during retired years. Certainly, that's good social policy and a worthwhile objective for both government and business. It's time we let Congress know what we think of the idea of a national retirement program.

Abraham Lincoln said it best, "The legitimate object of government is to do for a community of people whatever they need to have done but cannot do at all in their separate and individual capacities."

We ned a national retirement benefit policy that truly honors our retirees and rewards them, commensurate with their hard work and cotnributions made during their active, working years. To do any less would be to "dishonor" them--and that is unacceptable.

Milliman and Robertson is an employee benefits consulting firm based in Seattle.