Serial No. 106-119


Printed for the use of the Committee on Education

and the Workforce

Table of Contents












Table of Indexes *












Thursday, September 14, 2000




U. S. House of Representatives


Subcommittee on Employer-Employee Relations


Committee on Education and the Workforce


Washington, D.C.








The Subcommittee met, pursuant to call, at 10:35 a.m., in Room 2175, Rayburn House Office Building, Hon. John A. Boehner, Chairman of the Subcommittee presiding.

Present: Representatives Boehner, Ballenger, Andrews, McCarthy, Tierney and Wu.

Staff Present: Christopher Bowlin, Professional Staff Member; David Connolly, Professional Staff Member; David Frank, Professional Staff Member; Amy Cloud, Staff Assistant; Rob Green, Workforce Policy Coordinator; Patrick Lyden, Professional Staff Member; Deborah Samantar, Office Manager; Michele Varnhagen, Labor Counsel/ Coordinator; Camille Donald, Legislative Associate; and Brian Compagnone, Staff Assistant.

Chairman Boehner. A quorum being present, the Subcommittee will come to order.

The Subcommittee is meeting today to hear testimony on how to improve pension coverage for American workers. I ask unanimous consent for the hearing record to remain open for 14 days to allow Members' statements, witnesses' written testimony and other material to be submitted for the record. Without objection, so ordered.




Earlier this year, the Subcommittee held four comprehensive and bipartisan hearings on modernizing ERISA's investment rules for the economy of the 21st century. Today, we are looking at the other side of the equation, pension coverage.

As we have heard in our previous hearings, the economy has changed fundamentally since 1974. We don't need to revisit previous testimony, but for our purposes today, it is worth mentioning three trends in particular: First, most new job growth is coming from small employers. Second, employees are changing jobs and careers faster than ever before. And, third, people are living longer.

Together, these trends have put significant pressures on our retirement security system, both the private pension system and Social Security. More importantly, it is going to have significant changes on the millions of Americans who will be retiring over the next few years.

According to a recent GAO study, which my colleagues Mr. Andrews and Mr. Owens requested, 53 percent of American workers are not covered by pensions. A vibrant Social Security program is vital, but private pension coverage is for many Americans the difference between a secure and an uncertain retirement. I believe the challenge for us now and for the next Congress is how can Washington lend a hand without getting in the way? How can we strengthen our retirement security system without interfering in the economy and unintentionally discouraging pension plan growth?

The first and most obvious step is to enact H.R. 1102, the Comprehensive Retirement Security and Pension Reform Act introduced by our friends Mr. Portman and Mr. Cardin. This Committee favorably reported the Portman-Cardin legislation more than a year ago. The House passed it in July with more than 400 votes. The Senate Finance Committee reported it last week unanimously. And I believe we all have a responsibility to enact that bill this year.

But if we are to go beyond Portman-Cardin, we also need to be willing to entertain bold ideas and challenge prevailing assumptions. I hope that we will do that today. Keeping with the spirit of bipartisanship and openness that we have maintained throughout this Subcommittee over this session of Congress, what I hope we will hear today is a thoughtful discussion of pension coverage issues both big and small.





Mr. Boehner. I would now like to yield to my friend and distinguished colleague from New Jersey, Mr. Andrews.




Mr. Andrews. Thank you, Mr. Chairman. Good morning, ladies and gentlemen.

I want to first commend and thank our Subcommittee Chairman, Mr. Boehner, for his diligence and continued commitment to this issue. He is correct when he states that he has approached this in both the spirit and the letter of bipartisanship, and I appreciate that, and I believe we are going to have some accomplishments in this Congress. We look forward, if he and I are both fortunate enough to be here next year, to building on those accomplishments in the new Congress as well. Frankly, it shouldn't matter who holds the gavel. I have a strong preference as to who should, but this is an issue that really defies partisan division and calls for bipartisan cooperation. I look forward to its continuation.

I want to take a moment and congratulate our Counsel, Michele Varnhagen, on her return to the Committee. She gave birth to a beautiful baby girl, Juliana, over the summer who will need a pension. Advances that we made in health care and nutrition and the environment make us confident that, God willing, Juliana and her peers will live to be 100 years old or more. That is terrific. The way work and leisure have become reorganized in this country, there is every reason to think that she may be viably able to choose to spend more of her adult years with leisure as her primary activity than work as her primary activity.

The needs placed on the retirement system are very, very great. John is correct when he says that a rock solid Social Security system is the first element that we ought to promote, with increased personal savings as the second element. The purpose of this hearing is to talk about how more people can enjoy a richer and more meaningful life through private pension over the years.

The study released by the GAO in recent weeks helps us to focus on the problem. The number of Americans working today who don't have private sector pension coverage is 70 million workers, or a majority of our workforce, 53 percent. It is important for us to focus on who these individuals are. In the private sector, 58 percent of workers do not have a pension. In the public sector, it is 27 percent.

When we begin to look at the demographic characteristics of the group, it also helps us focus on what we need to do to try and expand pensions. Forty percent of those without pensions have an income of less than $20,000 a year. Interestingly, two-thirds of those without pensions are full-time workers.

There is a tendency to say, well, if people work only part-time or seasonally, one would not expect them to vest in a plan, but two-thirds of the individuals without pensions are in fact full-time workers and year-round workers. There is also a tendency to say, well, it is a small business problem, and it is. Firms with 25 or fewer employees employ twenty-two percent of those without pensions, and firms with fewer than 100 employees employ 14 percent, so 36 percent is the aggregate. But firms with 100 or more employees employ almost two-thirds or 64 percent.

So although there is clearly a small business problem and clearly an issue about whether or not seasonal and part-time employees vest, it is important to note that 66 percent of those without pension coverage are full-time, year-round workers and 64 percent of them work in firms with more than 100 employees.

Not surprisingly, a disproportionate number of these workers are quite young. Thirty percent of them are between the ages of 16 and 29, and 64 percent are between the ages of 30 and 59. So there is a focus or a concentration of this problem at the younger end of the age spectrum.

I do not offer and I am sure Mr. Owens would not offer these numbers as an indictment or accusation of anyone or any policy, but they are a very clear statement that we have work to do. We can't afford to be in a position decades from now where a majority of the workforce does not have a private pension. A question that this and future Congresses should deal with is how can we best change the law or reinforce parts of the law that work to broaden that coverage?

I think it is a fantastic blessing that children of Juliana's age group and my children's age group have the expectancy of a long and healthy life. What a wonderful development. We have a responsibility right now to make some changes in our law and our policy so that when they reach those years where they want leisure to predominate over work, that they can live a prosperous life and do the things that they want to do.

I am glad that we have three very distinguished witnesses who can help us think through this problem today, and I look toward to hearing what each of you has to say.

Chairman Boehner. I want to welcome our witnesses today and remind Members that after we hear from our three witnesses, we will have an opportunity to ask questions.

Our first witness today is Mr. Theodore Groom. Ted is with the Groom Law Group and has a long and distinguished history with ERISA. Ed Tinsley is from Albuquerque, New Mexico, and is President of K-Bob's Steakhouse restaurant. He has 1,200 employees in five States and has spent a great deal of time trying to determine how to cover more of his employees in a pension plan. And we have Michael Calabrese, Director, Public Assets Program, New America Foundation, to get a background in economics and retirement policy. Currently he is writing a book on pension issues.

I want to welcome all three of the witnesses. I don't think we are going to want to use the light this morning, since we only have three witnesses. We have time to listen to your thoughts, as long as you don't get carried away.

With that, Ted, if you would like to begin.




Mr. Groom. Thank you, Mr. Chairman, Mr. Andrews and other distinguished Members of the Subcommittee. I appreciate the opportunity to testify today on your continuing efforts to improve the pension system.

As the Chairman has stated, this Congress has made substantial progress in reforming the private pension system. Increased limits for benefits, contributions and deductions, and greater flexibility in funding and reduction of regulatory burdens all makes plans more attractive to plan sponsors and participants.

In my view, the first priority of the next Congress, as important as private pension reform is, should be Social Security reform. There are a number of reasons for this. The Social Security system is under-funded, and under-funding increases with time. The payment of the national debt does not solve this problem. The growth of benefit payments under the Social Security cash flow system is inherently limited to what most people estimate is about a 2 percent annual rate. And, very importantly, with respect to the issue of coverage, Social Security is the universal system for all Americans. In my view, it is here, not the private system, that safety net and many of the issues of coverage should be addressed. Social Security and the private pension system are integrally related.

Another important consideration for the Congress and particularly this Committee should be to consider what effect major changes that are currently under consideration for Social Security will have on the private pension system. If there are changes in the retirement age, if there are changes permitting individual accounts, if there are changes in payroll taxes, those will all have a basic impact on the private system. So one thing you might wish to consider next year is looking at those types of issues.

In the private system, reform should continue to focus on eliminating the complexities of government regulation that is now in place and restoring what John Shoven and I call consumer sovereignty. Within broad limits and based on equality of opportunity, we believe that employees and employers should be free to choose the amount and form of retirement savings unencumbered by a tax system that is biased against saving and in favor of consumption. We also believe that the Subcommittee should continue its focus on the regulation of investment management and advice.

In my written statement, I say I am hopeful that this Congress will enact the measures you have considered and passed this year. If that is not the case and perhaps even if it is, I think it is important for you to continue to look at these issues.

On the critical issues as Mr. Andrews said, I think there really is bipartisan agreement on the goals of government regulation of the private system. Both sides believe that we want a system that maintains integrity and that does so while imposing the fewest burdens on the operation of the marketplace. I think this is a terribly difficult subject that becomes numbingly complex and boring, and it is easy to get lost in the details. In my written statement, I suggest that getting a better grasp of the issues is worth the effort. Different rules for different sectors of the economy and for different participants make sense. Do pension participants really require greater protection than, for example, widows and divorced spouses covered by other rules? Would increased enforcement be a better buy than expenditures currently being made to apply the prohibitive transaction rules?

One suggestion for getting a somewhat better grasp on this idea would be to commission a study by the ABA, the GAO or by the Subcommittee to try to draw on different expertise from the securities industry, the banking industry, the insurance industry as well as the pension industry and see which of the many different systems in place make the best sense.

Turning to the GAO study of pension coverage, the first point I would make is I don't believe that universal coverage is the goal of the private pension system. I think it is the goal of the Social Security system. But in many of the cases where there is nonparticipation, nonparticipation makes sense. It is a rational response by individuals to how to best handle their compensation.

The second point I would make is that the GAO study does note a 5 percent improvement in pension coverage. That is very significant. When we see small changes in improved coverage that provides increased benefits for millions of Americans. So here I think the goal should be to incrementally improve the system, but I think you are wrong if you are focusing on a 100 percent system.

The next point I would make is that the important point of reference for the private pension system is life-cycle participation, not what I call a snapshot view in which you look at how many people are covered at any particular point in time. A study by Watson-Wyatt that was done several years ago analyzed how many workers are covered during some time during their lifetime. They analyzed that for the critical 40-to-60 year age group the coverage was closer to 70 percent than to 50 percent. Interestingly enough the coverage of the private pension system is about the same percentage as Americans who own homes. The categories of nonparticipation identified by the GAO are hardly surprising and include workers with incomes under $20,000.00, part-time workers and workers of small employers.

Another point is that you have to take the GAO study with a little grain of salt. It has many statistical issues, such as conducting the study by telephone survey. The GAO indicates they called a house, and talked to whoever answered. They say that 20 percent of the people they talked to were neither the worker nor the worker's spouse. They didn't say who that was, but presumably it was the daughter of the parent or somebody like that.

I asked my daughter last night what she would say if she were asked whether her mother or I were covered by pensions; and she said, what's a pension? So I think in any type of survey you will have problems of that sort. That is not to be critical of the study; it is just to indicate some of its limitations.

Finally, going back to the first point I made, we have an integrated system in this country of private pensions and Social Security, and they serve different parts of the population in different ways. The Social Security system has a very high replacement ratio for low-income workers, and you have to look at the systems together.

Finally I wanted to make just one further comment, Mr. Chairman, on a coverage issue that may come up in this current Congress. The Senate Finance Committee recently adopted a tax credit for low-income and middle-income workers for contributions to private plans in order to encourage participation by those workers. In many ways, I am tempted to applaud that step. On the other hand, there are many details that we don't know such as whether the contributions they make ever end up getting taxed. I am unclear from reading the Senate Finance Committee work whether that is the case or not. But the more conservative, cautious side of me says it would be better to defer action on things like that because it tends to preempt possible moves that you might want to make in the Social Security system where there may be a real need to provide subsidies for low-income workers.

The other point is, and this is something I think is frequently lost when we have tax credits and tax relief that are targeted to particular income groups, it increases the effective marginal rates of moving up the income scale. So that if a wife leaves the workforce for a while and then considers returning, the effect of her returning increases family income from $35,000 to $70,000. The marginal tax rate that she will face will be greater than the marginal tax rate that Bill Gates faces because of limits such as this. So while these types of things can be beneficial in many ways, they can also inhibit people from reentering the workforce or from making changes in their employment that move them up the income ladder.

Again, thank you for permitting me to testify; and I would be happy at the appropriate time to respond to questions.







Chairman Boehner. Thank you, Mr. Groom.

Mr. Tinsley.







Mr. Tinsley. Chairman Boehner, Vice Chairman Fletcher, Ranking Minority Member Andrews and other distinguished Congresswomen, Congressmen and Committee Members, I thank you for the invitation to be here today to speak to this issue.

I would like to introduce myself first and tell you a little bit about our company and my background. I am the President, CEO and majority owner of K-Bob's Steakhouse chain, which I have been a part of for 10 years. I have been in the restaurant industry for 22 years. We have 31 K-Bob's Steakhouse locations across New Mexico, Texas, Oklahoma and Colorado. We are a combination of franchised and corporately owned units. We employ approximately 1,200 people system-wide. We are predominantly in smaller communities, and we offer a family-oriented type menu. My education comes from the University of Texas with an accounting degree, and I am a licensed attorney in Texas and in New Mexico.

Why we on behalf of K-Bob’s felt as if we needed to do something about this issue is because we identified that the number one challenge in our company and our industry over the last 3 years has been the people factor. That is the recruitment, selection, training and retention of people. It is also probably the biggest issue in our entire industry and in other small businesses.

The restaurant industry is the largest private sector employer in the country. We employ approximately 11 million people nationwide. We have sales approximating about $1 billion a day. Fifty percent of our employment force is below the age of 25. When we have a problem in our industry, very candidly, it is usually a big problem. So I felt as if that was one of the first challenges that we needed to confront.

The second was the need to convey to our people, primarily our hourly workforce, a more caring culture that cared about them both personally and professionally.

Thirdly we wanted to encourage savings and continuing education. I personally feel that those two attributes are primary in building a foundation for self-esteem. Self-esteem is what really creates a sense of pride in someone's profession and their workplace. I don't think there is anything more humiliating to an hourly workforce person than to have to come to their employer and ask for a $50 advance on their pay to get something repaired or to buy kid's clothes or whatever the case may be. So I feel that teaching them how to create a savings plan that they can access and that they can have over a longer term was very important as well.

Also important to understand is that the educational level of a lot of our workforce is on the lower side. So I felt we, as a company should promote education. We furnish and make available a substantial number of training modules that are provided through the Ed Foundation of the National Restaurant Association, in order for the education aspect of our people to go up.

So what did we do? We created a plan that we call K-Care. The incubation stages started about 3 years ago, and now it has turned into what I consider one of the premier plans or ideas that our industry has founded. It is a benefits package for hourly employees and only pertains to the hourly workforce.

Our management has plenty of perks. They have the profit-sharing plans; they have automobiles; they have health insurance; they have bonuses; they have all kinds and array of benefits. But what we identified is our hourly workforce was pretty much left out in the cold, so we wanted to define something that was specifically for them and was exclusively theirs. So salaried management does not participate in this plan.

I think it was extremely important to have simplicity in it, not only so the managers and the owners of the restaurants could explain it but also so the employees could understand it. Therefore with these elements, building the foundation, we came up with four different aspects to make our plan work.

The very first thing we wanted to incorporate was a financial performance barometer. When you talk to that segment of the workforce and start talking about 401(k)s and profit and loss statements, you get what I call a deer in the headlights look. You know how that look is if you have ever been driving on a country road and get a deer caught in your headlights. It is kind of a blank look. That is what we encountered.

So looking at how we were going to base the funding of the program, we had to identify a means by which these people would understand how it was happening. So we arrived at tips. Our industry is a heavily tipped industry, and so we felt that barometer was well and easily understood from the dish machine operator in the back of the house to the hostess, to the line cook, to the prep person, to the server. All knew that the higher the tip was, the better the experience the guest had, from the food quality to the presentation to the service to the ambiance in the restaurant. So it was a very simple formula.

I want to tell you if you compare that theory or that type of presentation to a P and L, there is all the difference in the world in what someone can understand at that educational level. So we elected tips to be the first element that we funded our plan with, and we matched 5 percent of reported tips. That also cured a problem that our industry has historically had that the IRS identified for us several years ago, and that is underreporting of tips in our industry. So basing it on that also increased the honesty factor, and created an additional revenue source for the Social Security fund. Because, obviously, if more reported tips occur, then the FICA portion on that from the employers' and the employees' standpoint is rather substantial.

Just to give you a number or two to think about, for every half a percent tips increase in the United States, that is an additional $1 billion in reported wages. With our plan, we have increased tip reporting in our company by 2.5 percent. If our industry did that, very simply put, that is about $5 billion in additional wages. You put the FICA tax to that, and it is about $650 million a year in additional Social Security income just by this simple plan.

The second aspect that we contribute to the plan is for continuing education. As I mentioned previously, there are a large number of source modules that we have in our industry to provide continuing education opportunities, from small course books to videos to one that we are most proud of called Serve Safe, that teaches safe food handling practices and so forth. Each employee puts up their own money for the course materials, because that way we know they are honest and they are committed to see the course through. Once they complete the course, we give them their money back plus 1 percent into their K-Care fund.

The third funding element is vacation earnings. I think much of the time we talk about a caring culture with regard to that segment of the workforce. What is really most important to them and all of us as well is the time that can be spent with family, and that is vacation time. But when you get ready to go take vacation and you are paid $6 to $11 an hour you are thrown into double jeopardy. You get a double whammy. You don't get paid during the time that you are on vacation plus you are trying to take your kids to Disneyland or camping or to the beach, and you are spending money. So we incorporated that third element, to earn the equivalent of one day's paid vacation per quarter into the K-Care fund. So it equates to four paid vacation days per year.

The fourth funding element is a fun element. It is called K-Cash. It revolves around contests or creative ideas that you might have as a business operator. It allows for a tremendous amount of flexibility. We reward birthdays, anniversaries, and contests for selling the most of a certain product and things like that.

To put it in perspective, what we are talking about is a different level of communication than what I have seen go on up here on the Hill. Very candidly, with all due respect, there is a tremendous amount of good things that each one of you are doing, but one element that has been missed is this lower segment of the workforce and what we can do to help them overcome some of the challenges that they have in their daily lives.

For instance, when I look at the Portman-Cardin legislation, I think it is a wonderful plan, a wonderful move in the right direction. But, very candidly, when you start talking about six figures out here in some of these numbers, it doesn't make a whole lot of sense to the people that I am talking about. The amount that goes into their K-Care fund can range anywhere from $400 a year to as much as $2,000 a year. That doesn't seem all that significant to a lot of people that are insulated from that, but it is.

I think God has ways of working. I was involved in operations on the front lines of our company about a year and a half ago and there is a reason for that. It made me open my eyes to the everyday lives of some of our people who make up the infrastructure of our company. It has been a real eye-opener.

I think next what I would like to do is talk about some of the obstacles that we continue to encounter when we try to do something like this. One is I think it is very important that whatever we do we make it very simple. When we start talking about long-winded explanations or things like this, we have to understand simplicity in the eyes of the employer, the small business operator who is running a restaurant or a small business. They are not really focused on trying to set up a plan like this. They are focused on trying to figure out how to get their door open in the morning, how to meet payroll, beating checks to the bank with deposits, things like that. That is what makes it up. So if you burden the employers with a long-winded 40 pages of detail as to how these plans work, it won't happen.

The other side of it, from the employees' perspective, is they need to be able to understand it. What we are talking about and what we are dealing with here is a lower educational level. And if you don't have an understanding of this, there is no benefit to the people that are trying to participate in the plan because they don't appreciate it and it creates suspicion. Anytime that an employer tries to put something together and they don't get their workforce to understand it, there is this inept kind of suspicion as to what is behind all of this. So it is vitally important that we keep whatever we do simple.

I think the other aspect that is extremely important is flexibility to their needs. Congresswoman Heather Wilson's office provided me with a list of bills that were introduced in 1999 trying to see if there was something similar to what I was talking about, and I began to read, and I saw a real sensitivity to flexibility. But what I didn't see is the recognition that these people's issues and problems are substantially different than what we think about up here. So it has to be flexible or it means nothing to them.

I will tell you when we set this plan up a couple of years ago for instance I was so excited about teaching these folks how to save. I will never forget the first server that pulled money out of her plan. We allow 50 percent withdrawal per year. If there had been a dog in my office, I would have kicked it. I said, my goodness, she doesn't understand. We are set here to teach them how to save. What is going on? I picked up the phone, called the manager down in Socorro, New Mexico, and asked what was going on? Why is she pulling money out of her K-Care plan? The manager said her daughter had a blood disorder and she needed to take time off from work and needed to pay for the gas money to get her to Albuquerque. So that hit hard.

Then the list goes on, from transmissions being repaired for people to get to work to school clothes. I didn't see any of those kind of issues mentioned in any of this legislation that was introduced in 1999.

But if we start trying to tell these people when they can take money out and utilize it for those kind of needs, I think we have done a tremendous injustice. Right now, the way we have to treat it is through payroll. The money goes into the plan. When it comes out and an employee wants to withdraw it, it has all the FICA burdens, the income tax burden, all the unemployment, SUTA, FUTA, and HUSA. It is a darn challenge. When you are talking about it, you think, well, that is only 10 to 15 percent, but that is a lot of money when someone goes to pull out is $40 or $50 bucks. So that is important.

The ERISA implications I think is the last obstacle that we have identified. When I first heard ERISA, just that name sounded kind of like the name that they should have had in the Wizard of Oz for the Wicked Witch of the North or something.

Fortunately I had to take some continuing legal education for my bar license in New Mexico so I identified a course in ERISA and went and sat in on it. I consider myself somewhat intelligent, but I will tell you what, it blew right by me in a hurry.

Chairman Boehner. That is why people like Ted are around.

Mr. Tinsley. He is not cheap, though, I bet.

It is the fear and the implications of ERISA, the reporting requirements, the potential liability, and the cost. Here is an example of the excitement when we first set this plan up. Ours is entirely employer fund but the original idea or concept was to allow employees to contribute to this plan, too. There were employees that said we want a $5 to $10 a paycheck set aside. So we thought, they are showing interest; this is good.

After about 5 or 6 months into the plan, we had the people that are administering the investment for us look at it. Their lawyer said, oops, you couldn’t do that. You are treading on thin ice with ERISA, and you could have all kinds of problems and go to jail. I said, well, we would eliminate that. So, unfortunately, we had to go back, and refund those employees their money. Josephine, our salad wagon person in one of our locations, wanted $10 a check withheld. I wanted to delegate telling her she couldn’t do it because it wasn't fun.

I think basically the idea is to improve and simplify simplicity. When you think it is simple, make it simpler because it is from the reporting standpoint, it is from the administrative standpoint, it is from the bookkeeping standpoint. And thank goodness for technology now that we are able to develop software that makes a lot of this easier.

I think that flexibility for employees to get part of their balance out annually is vitally important. We allow 50 percent. You keep 50 percent in there, so you teach them how to save and continue on that path, yet give them that flexibility so they can actually taste it. So I think that it is important, not treat it as payroll. We need to get it out of the payroll realm, because I can see very few employers and employees being as excited about this if we continue to have it run through payroll. Encourage employers to do it.

I would strongly urge tax credits for the educational aspect of it. I notice there were some tax credit ideas in some other legislative bills that were introduced that had to do with setting up administrative costs. I think that is wonderful. As Congressman Boehner has mentioned if we can do a better job helping young people establish pensions and savings, then it is going to ease the pressure off Social Security. I think there could even actually be a formula put together that says that if employers will participate and fund these programs at this level, perhaps they can get a credit against their portion of the FICA tax that would normally be paid.

I think that can work in tipped industries as I suggested if you tie it to increased tip reporting. We have worked very well with the IRS addressing this issue, and I see some real benefits coming to the Social Security system by additional revenues through this. So the more participation you get, I think it is a win-win game.






Chairman Boehner. Mr. Calabrese, we would like to hear from you.






Mr. Calabrese. Thank you. Good morning, Mr. Chairman and other distinguished Members of the Committee. Thank you for inviting me.

I would like to commend this Committee for its foresight in addressing this critical issue. Although most debate is focused on reforming Social Security, I believe that the Nation's real retirement security crisis is the fact that, during the best of times, more than 70 million working adults have no pension coverage other than Social Security. We need to do more to give lower paid workers a combination of the opportunity and security that they need to cope during an era of accelerating technological and economic change.

Unfortunately, current saving incentives are weakest for those least likely and least able to save and strongest for those likely to save anyway. The current system also needlessly burdens employers and magnifies rather than mitigates inequality.

I have outlined a proposal to use matching credits to create more powerful saving incentives. I describe how a progressive match can strengthen the current employer-based system to achieve a more portable, equitable and universal system of private pension coverage. With eligibility tied to individuals rather than to plan sponsors, the burden of ensuring this basic benefit would shift from employers to society, giving firms the flexibility to sponsor a plan or sponsor a plan not purely for competitive reasons.

Despite its many virtues, in many other respects our private pension system is failing. The tax deduction for pension saving is one of the Federal Government's most expensive programs, costing $93 billion in net tax expenditure this year alone. Yet this program serves less than half the nation.

I believe your efforts to expand coverage should take account of the following trends and unmet national needs:

First, Americans are overly dependent on Social Security. Forty percent of today's elderly rely on Social Security for 90 percent or more of their income. Half of those retirees live below 125 percent of the poverty line, and 11 percent remain in poverty.

I believe a great deal of the opposition to partial privatization of Social Security is related to this high rate of dependency and its visibility. Most personal saving is done in pension accounts. Yet most American workers are not covered by employer-sponsored plans. Pension coverage rates have been essentially flat since the 1970s.

Congressman Andrews summarized the GAO study, and I won't go into that, but it is important to realize that the coverage rates in the private sector are considerably lower than overall. The share of private sector workers with coverage is less than 43 percent, which is below the peak level during the 1970s. Coverage is also likely to fall further over the next decade, down to a projected 41 percent in the private sector as low coverage service sector industries such as retail grow and high coverage industries such as manufacturing continue to decline as a share of U.S. employment.

Private sector employers as a whole also have been cutting back on the dollar value of pension benefit contributions relative to wages, down about 25 percent. These cutbacks have fallen almost entirely on lower wage workers in blue collar and service occupations.

A second national problem is that the U.S. personal savings rate is at a historic low, while our foreign debt is at an historic high. It is critical to determine what policies will boost net national saving and investment at the margin so that we can sustain recent rates of productivity growth and more than offset the declining ratio of workers to retirees.

A third need is to increase pension portability. In the emerging new economy, labor market mobility is increasing and job security is decreasing.

Fourth, I believe it is time to free business from the burden of administering basic social benefits, both pension and health. It is clear that most firms, particularly small entrepreneurial firms, either cannot or prefer not to shoulder the administrative overhead of a pension plan. Yet today we have a peculiar situation where the Federal Government provides tens of billions of dollars in subsidies for benefit compensation but only to a minority of companies, most of which go to big companies with disproportionate numbers of highly paid employees.

Finally, we need to make our benefit subsidy system more equitable. The data show that rising pension benefit inequality is magnifying, as I said, not mitigating income inequality. The pension coverage gap between workers in the lowest and highest earnings quintile is 59 percentage points, about 10 points worse than 2 decades ago. Tax deductions provide little saving incentive for low-wage workers or their employers. It should be no mystery, therefore, why even a very large company with a predominantly low-wage workforce would have little, if any, incentive to sponsor a pension plan.

The entire Federal carrot is biased to firms with high wage workers, whereas the sticks of ERISA regulation apply to all firms. I would like to propose an alternative that addresses these five national needs, one that I described as universal wealth accounts on top of Social Security.

In my written testimony, I outline a proposal to expand coverage using the incentive of matching credits. These refundable matching credits could either be targeted at individuals who lack adequate work based coverage or, even better, it could be integrated with the existing pension system and applied to new contributions going forward.

The most essential element would be to replace tax deductions for new pension saving with refundable credits on a sliding scale. A tax deduction is neither a powerful nor equitable means to encourage saving at the margin. Society's marginal savers who are mostly lower income and younger workers need the sort of matching incentives found in generous 401(k) plans or in the Thrift Savings Plan for Federal employees.

On page five of my testimony, I have a chart outlining one scenario of how a matching incentive structure might look at different income levels. Notice that, unlike the current system, the saving incentives would be far greater for those less likely and less able to save. Unlike other recent proposals using matching credits, in my example every worker, however affluent, would receive at least a 25 percent match on a substantial amount of saving. However, with the match of 25 cents on the dollar, high income workers would need to save $8,000 to receive the same $2,000 subsidy available to a very low income worker who would need to only save $1,000 but who receives a 2 for 1 match.

I assume that the treatment of existing DC pension assets and of DB plans would remain unchanged. I also assume that the inherent progressiveness of a refundable matching credit would permit generous upper limits on total contributions, with Roth IRA treatment for unmatched contributions that is neither deducted from taxable income nor taxable upon withdrawal. By extending pension saving incentives to all workers as individuals, employers would have the option to get out of the business of administering pension plans without reducing their employees' after-tax compensation. Contributions to existing plans by either workers or employers would be eligible for matching credits. This should insulate any pension plan from a reduction in contributions and create an opportunity for employers to deliver a bigger benefit to its middle and low-wage workers. Anti-discrimination rules and testing should become unnecessary.

This approach could also provide for complete pension portability and simplicity. Workers not participating in an employer plan should be given two options, two choices, either to open what I call an individual career account at the financial institution of their choice, such as new type of IRA, or to choose a default option simply by checking a box on their W-4 at work. The Federal Thrift Savings Plan would be a good option for managing a low cost clearinghouse for these small, less profitable accounts.

Finally, I would allow borrowing for lifelong skills training or for a down payment on a first home. Since retirement security depends in large part on earnings growth over a career, workers should be able to borrow to pay for higher education or skills training.

I would just like to quickly mention a few more modest and incremental reforms that I believe would help the bottom half of the workforce to save for retirement in the meantime.

First, I believe we should encourage payroll deduction IRAs. The typical worker without a pension plan would be far more likely to save if they could contribute, for example, $40 per pay period by automatic payroll deduction rather than trying to come up with $2,000 for a year-end deposit. At a minimum, firms over a certain size should be required at an employee's request to automatically withhold and transfer a contribution each month to the employee's IRA. In addition, Congress should consider a tax credit that would fully offset the cost to employers of administering a voluntary payroll deduction IRA program.

Second, Congress should consider shorter vesting periods. Workers at all ages are changing jobs more frequently and often forfeit employer contributions contingent on 5-year vesting schedules.

Third, it would not be burdensome to require automatic plan enrollment. Although pension participation should remain voluntary, sponsors could be required to initially enroll all newly eligible workers. This would ensure that workers who opt out are aware of their eligibility and are affirmatively deciding not to participate.

Finally, I suggest that we complete the task of ending all distinctions between the various defined contribution plan types. It ought to at least be easy for employees to transfer their account balances from any type of plan to another as well as to an IRA when they change jobs.

Thank you.







Chairman Boehner. I want to thank all of the witnesses for their testimony.

Mr. Groom, you said that nonparticipation in a pension plan is often a rational response to individual situations. Do you want to expound on that a bit?

Mr. Groom. I think for many, many workers with lower income, such as young people, the most pressing needs are current consumption needs, paying for their education, paying for their housing, paying for their health. So I don't look at pensions as deferred compensation, but as a part of compensation. So the question is, how is compensation of the worker best used?

It is a very rational choice by a 25-year-old to spend his money or to ask his employer to spend his money or to choose a job in which his money is spent for needs other than pensions. When you get older and when you get up in the workforce, pensions take on a totally different priority; and it is more important in that case to start saving.

Chairman Boehner. Mr. Groom, you heard the testimony from Mr. Calabrese about ways of covering, especially, more low-wage workers, and public subsidy of a private pension plan. We often talk about the three-legged stool of retirement security: Social Security, private pensions, and individual savings. In your mind, where does each fit in the retirement security equation? And how would you characterize a relationship between Social Security and private pensions?

Mr. Groom. I think, first of all, Social Security, as its name implies, is a social insurance system. It takes into account factors other than the merits of the individuals' contributions and the fortunes of the worker, and it provides a safety net for all Americans to provide a minimum level of income. It does provide some return on investment depending upon your contribution, but it is heavily loaded toward the lower income levels, and it is heavily loaded to provide welfare benefits.

I think there is universal agreement among Americans, Democrats and Republicans, rich and poor, that this is a good thing to have, a system that guarantees a floor of income. Beyond that, I think Americans don't believe in general that everybody is entitled, regardless of their effort and regardless of their pay and contribution to society, to any high level of earnings. So private pensions and savings essentially provide earnings beyond the minimum level that is provided by Social Security.

Now, there were a number of remarks that Mr. Calabrese made that I agreed with, but my points of disagreement would be, I think it is important in order to have Americans understand their system to have one Social Security system, and not different systems in which there is cross-subsidizations going on and different entitlement programs sprinkled around. I think we ought to provide a good Social Security program that has good growth, income, and coverage, and provides a good minimum benefit to workers. But, beyond that, I think that the pension system and private savings is the function.

One of the basic areas in which John Shoven and Mike Boskin, to mention more illustrious names than my own, and I hold this view is where we disagree with people like Mr. Calabrese. I think we do not regard pensions as tax expenditure. There is a number in the tax expenditure budget of $70 or $80 billion or some large number for pensions, but we think that that is a wrong way of looking at the tax system. That taxation of consumption is more the norm in our system and is the direction in which we should be going. Savings should be taxed when consumed, not when saved. If you look at it that way, pensions don't involve any tax expenditure. So we don't look at that as an expenditure program.

Chairman Boehner. Mr. Calabrese, as I read your written testimony, and listened to you today, what intrigues me is how we really help these workers at the low end of the wage scale, the employees that work for Mr. Tinsley. Wouldn't the subsidization suggestion and the tax credits work better in a Social Security system as opposed to a private pension system?

Mr. Calabrese. Certainly I believe we should continue to provide a minimum floor as we have now which is not for everybody but roughly for most people around the poverty line through Social Security, with a distributional system at the base. But, above that, I think you have to ask people to shoulder some responsibility on their own if they have to do the saving.

For example, I differ with President Clinton who I think proposed a universal savings account plan which would give grants of money to everybody, whether they saved or not. What I propose is that we just extend the sort of generous matching incentives you have in a private 401(k) plan, for example, to everybody, particularly at the low end where people aren't going to and are not able to save very much, anyway. So through their own effort of saving, by taking responsibility and putting some dollars forward to save, we increase national saving, and they get more retirement security, and are less dependent on Social Security.

Chairman Boehner. Mr. Groom talked about the eventual integration to some extent between private pension systems and Social Security. The fact is that when you look at one of the problems in Social Security, that is, how do we get a greater return on investment in the Social Security Trust Fund, it is pretty clear that there is a broad bipartisan coalition moving towards allowing workers to keep a portion of their Social Security taxes and putting it in their own account. As you begin to look at these individual accounts for a partial privatization of Social Security, you begin to have a vehicle for all American workers that could be used to integrate private pension and savings plans. This may not be the appropriate forum to do that, but to encourage investment for low-wage workers using your example; a tax credit in those types of accounts may in fact be an option.

With that, let me turn to Mr. Andrews.

Mr. Andrews. Thank you, Mr. Chairman.

I first want to correct the record. I read from the wrong column in the GAO report on a couple of numbers, and I wanted to be clear that it is 40 percent of the workers without a pension plan who make more than $20,000. It is 49 percent of those without a plan who work full time year-round, and 58 percent who are older than 30.

I appreciate Mr. Tinsley's testimony very much because it was specific. It was about real people. Mr. Tinsley, we appreciate the effort that your company is making to try to do something significant and meaningful for your employees. Using that as a way of approaching this, I wanted to ask each of you your view on what we should do to deal with the following situation:

Most servers in the restaurant industry do not have the kind of plan that Mr. Tinsley's employees do. I am not criticizing that industry. I am just stating a fact. The person I am concerned about is a woman who is working as a server in a restaurant and with her tips and her wage she is making $19,000 a year. She cleans houses on the weekend, does other odd jobs and has a gross income of $25,000 a year. She is 45 years old, and we have every reason to believe that, under this study, she has no private pension plan at all. What should we do about her? Should we do anything? If so, what would it be?

Mr. Groom, do you want to offer your opinion?

Mr. Groom. I am not sure there is anything that government really should do, but I think my testimony ties in with Mr. Tinsley’s. He presented his in a much more interesting and dramatic and specific fashion than I did, but there is a direct relationship.

I am arguing that, in the private system, employers and employees ought to have great flexibility to work out the types of arrangements that make sense in their businesses, which is exactly what he tried to do. I am arguing for less government regulation and less burden, and what he is complaining about is the problems that he ran into with government regulation and burdens that interfered with developing the type of creative plan he wants. This is a great labor market and I have great faith that American workers can work out these problems for themselves for the most part.

Mr. Andrews. Is it a fair characterization that you believe we should encourage more employers to do what Mr. Tinsley has tried to do?

Mr. Groom. Absolutely.

Mr. Andrews. Mr. Tinsley what changes in the law would make it more attractive for you to do more of what you are doing right now? What would you like to see us change?

Mr. Tinsley. I think that, first of all, there must be simplicity in the understanding a small business operator has to set this up without going awry of some rule or regulation or law. I am a firm believer in one size doesn't fit all. As Mr. Groom has just stated, we should allow more flexibility for the employers in the design of their plans to meet their specific needs in their industry and business and don't require the payroll burdens that we have encountered. Actually, we have to run those benefits through payroll.

I think we should eliminate that kind of barrier, and the fear of the unknown as I mentioned, with the ERISA situation. Congressman, I believe in low-wage earner category, there is less than 8 percent participation in any kind of pension program.

Mr. Andrews. I assume that under my example, if my hypothetical person worked for you and her tips were $15,000 of that income, that you would contribute about $750 toward her fund or 5 percent?

Mr. Tinsley. Probably about that amount, but I am not necessarily sure that you are right in the method by which you are calculating. So although we are arriving at the same number, we probably just went by a different route.

Mr. Andrews. If her tips were $10,000, you would contribute $500?

Mr. Tinsley. We calculate all of the reported tips for the restaurant. Not only do the servers participate in this plan, but also your dish machine operators, and everyone in the restaurant participates in this plan, which is based on reported tips that the server actually reports. So it is vitally important, because it is the same and we look at it as a teamwork effect. The dish machine operator making sure the plates are clean, the cook making sure the food presentation is right, the hostess with the smile on her face all make up the teamwork.

Mr. Andrews. So she is going to share in a pool, in other words?

Mr. Tinsley. Not to get too industry specific, but pooling of tips is not a good word in our industry because it goes awry of the law.

Mr. Andrews. I am certainly not suggesting that. But her yield is in part dependent on everybody's effort, not just her own?

Mr. Tinsley. Absolutely.

To answer your question specifically, I would like to give you one instance. I think in our plan, and this is where we talk about Social Security or private pension programs, one thing that we have noticed is a tremendous increase in self-esteem and excitement about what these folks are doing. They get a certificate in the mail every quarter that tells them where their account stands. It is a neat little certificate. They get it at their home. It tells them how their investment has done, what they have, if it has increased and so forth. I think that is something the government doesn’t do. I think private industry has to do it.

Mr. Andrews. Has the plan helped the retention rate among your employees?

Mr. Tinsley. Absolutely. In fact, what created a lot of this was that we had an excessive amount of turnover. Our industry does as a whole. It has cut it in half.

Mr. Andrews. Mr. Calabrese, I wanted to ask you how my hypothetical person would fare under your proposal. What would it do for her?

Mr. Calabrese. Certainly much better, I think. The big difference here is that I don't believe it makes sense to expect the sort of employers that this woman has, for example, her restaurant or the people she cleans house for on Saturday, to set up and administer a pension plan. Because if they have a predominantly high turnover or low-wage workforce, it may make more sense if this person as an individual American is eligible for a share of what we are spending on pension saving subsidies. And so that way they can set up their own pension account if their employer doesn't have one.

Mr. Andrews. If I understand your proposal, for her to get a match or a contribution, she has to make a contribution, correct? So if she contributes nothing, she gets nothing, is that right?

Mr. Calabrese. Right.

Mr. Andrews. What if she contributes $250 a year, $5 a week? What does she get?

Mr. Calabrese. Well, again, I gave an example of what it could look like. Under that example, she would get a $500 match, on a 2-to-1 basis. And so she would end up with $750 in her account.

Mr. Andrews. From the public treasury?

Mr. Calabrese. Right.

Mr. Andrews. How would that account be invested? How much control would she have over where it goes and who invests it?

Mr. Calabrese. She would have as much as she wanted. If she wants to set it up at her bank or a mutual fund company, she could do that. Or she could check a box on her W-4 and the employer would simply add her $5 contribution to withholding and send it into a default account.

Mr. Andrews. Your proposal is refundable, is it not? Meaning that even if her income tax liability is zero or less than zero with the EITC, she would receive it?

Mr. Calabrese. Right.

Mr. Andrews. Thank you very much.

Chairman Boehner. I think all of you to some extent talked about the current law and obstacles to employers in setting up pension and welfare plans. As an employer myself, having dealt with ERISA, I know exactly what you are talking about. They are complicated, they are expensive, and require small employers to hire very expensive lawyers, like Mr. Groom.

Mr. Groom. There has got to be some good in every bad program.

Chairman Boehner. I want for a moment to explore those obstacles. If you each could take a minute or so and based on your own experience with these issues, talk about the obstacles to setting up a pension plan today, and any suggestions on how we could overcome them. I would like to hear them.

Let's start with Mr. Calabrese. We don't want to always start at the same end.

Mr. Calabrese. I think one of the obstacles is that it takes a certain critical mass to be worth doing. So, for example, when you have a small or new company you may feel that you haven’t sufficient incentive in terms of the extra compensation it is going to bring to your employees on average. Also you may not have the consistency in revenues yet, or be of a sufficient size where it really pays to do that. So you have to reach a certain threshold of size and stability as an employer.

In our economy we have an increasingly high churn rate with lots of new businesses being created, going in and out of business, or merging. It just seems to make less and less sense to me to put that burden on employers unless they want to do it for competitive reasons.

Chairman Boehner. Mr. Tinsley.

Mr. Tinsley. Thank you. I think the comparison or the analogy that I could make is this whole discussion kind of reminds me of when I go to our marketing department and we say we are going to run a promotion. We are going to promote chicken fried steaks. You have to come in on Tuesday between 3 o'clock and 4:30 in the afternoon, and you have to wear a pink shirt, and you can't have gravy on it. You have to have this and that. Pretty soon you get so many restrictions and so many little things that have to be followed that you have no customers show up to take advantage of it.

I think that is really what is happening here, in the small business environment. You have so many small business operators, that there are so many little things that you have to be concerned about, that no one wants to participate. Whenever there is that lack of understanding, there is that suspicion, the same way that I explained the suspicion from employees to employers, the same way from employers to the United States Government.

Chairman Boehner. Mr. Groom.

Mr. Groom. I think, in terms of the regulatory burdens, the problem is the cumulative effect of everything. It is always difficult to single out one thing, but I will just mention two that I think should be looked at.

One is the very complex nondiscrimination rule, which covers 500 pages of regulations and has some strange impacts. It has proven to be very burdensome and discouraged many employers from setting up plans.

A second set of rules that really needs to be looked at are the minimum distribution rules from the standpoint of individuals. This is something that many, many people don't think about, but it hits you when you get to be age 70. There are rules that are in place that specify what elections each participant must make relative to their minimum distribution, and they are very complex rules. These apply to every American who has a pension distribution. You have to make choices each year, as you grow older.

Chairman Boehner. This is a section of the code that basically at 70 requires you to start taking money out of your plan so that it can be taxed.

Mr. Groom. Absolutely.

Chairman Boehner. It doesn't sit there accumulating untaxed.

Mr. Groom. That is the point. You’ve got it exactly right, and that is the purpose of it. But you really don't need to do that, because, ultimately, even if you hold it in your account, it will get taxed when you die in the income tax system, and it will grow in value. So at a later point in time the present value of that amount to the government is exactly the same as getting it early. For most people this is not a practical problem.

The problem most retired people have is not deferring money, but that they tend to over consume their money rather than to defer it later. It is an unnecessary burden and it is a very difficult, complicated thing for older people. It is one reason I think the Roth system is attractive. Because once you have a Roth IRA or a Roth 401(k), which is in the Senate version, you don't have to worry about these types of problems. So that would be another specific example I would give.

Chairman Boehner. Mr. Andrews?

Mr. Andrews. I just want to extend my thanks to the witnesses for a very stimulating and informative panel. Thank you.

Chairman Boehner. Let me also thank each of you for taking the time to come and share your ideas with us as the Subcommittee continues to pursue these retirement security questions. I am certainly sure you will see a continuation of these hearings next year, regardless of what happens in November. Thank you all very much.

Whereupon, at 11:50 a.m., the Subcommittee was adjourned.