President Clinton's proposed 401(k) and other retirement savings reforms reveal, perhaps unintentionally, that a major reason half of America's workers aren't covered by pension plans, or that many have inadequate coverage, is government.
The proposed reforms are a good first step. He and Congress should go further.
Businesses aren't altruistic, and rightly so in a competitive, relatively free market economy. But many businesses - and non-profit organizations - are willing to provide a package of benefits, including pension plans, when encouraged by the right incentives and facing only a minimum of disincentives.
Tax laws and other regulations, such as filing requirements and anti-discrimination rules, have made the cost too great for many businesses to bear. Beyond companies, non-profit organizations were irrationally shut out from even offering 401(k)s by a tax-law change in the mid-1980s. In addition, a similar tax change made individual retirement accounts less advantageous for many people, further eroding retirement saving. Rules have even endangered retirement savings of employees, particularly with the commingling of the funds of deferred compensation plans of public employees with the assets of state or local governments.
Mr. Clinton's proposals, reannounced with election year fanfare April 11, will eliminate some of the disincentives and further retirement plan coverage. These proposals were, overall, a repackaging of ideas put forward in scattershot fashion over the past four years. Were he truly interested in pension reform and growth, Mr. Clinton should have introduced these proposals when he had a Congress of the same party.
However, Republicans philosophically should be in general agreement with the proposals, and ought to push the package, and additional changes, through Congress.
Among the changes that deserve support, Mr. Clinton proposes to eliminate red tape for small business 401(k) plans by keeping employer filings to a one-page form and ending complicated discrimination tests.
For all 401(k)s, one proposal would encourage employers to eliminate the typical one-year waiting period by allowing employers to exclude non-highly paid new employees from discrimination tests.
The package also would require state and local governments to hold deferred compensation accounts in a trust, securing them against claims in the event of creditor claims, such as when the Orange County, Calif., bankruptcy put into jeopardy the savings of public workers.
The package would liberalize IRA rules, which now prevent tax-deductible contributions for many families with combined earnings of more than $50,000. This relaxation is long overdue.
But other changes need to be made. First, the cap on the maximum salary that can be taken into account in funding a tax-exempt pension should be raised to at least $250,000, and perhaps even $500,000. The salary cap has weakened top management interest in, and support for, employee pensions. It is probably a contributing factor to the decline of defined benefit plans.
Second, there are dozens of niggling requirements in the pension rules that ought to be eliminated or simplified.
Mr. Clinton's proposals should be the start, not the end, of pension simplification and encouragement.