Here’s a fairly novel idea (unfortunately) that really should be tried more often in policy debates. Let’s call it the “how do you like them apples!” or the “good enough for the gander” approach. Take some controversial new policy proposal on the table, and then analyze what would happen to lawmakers if they were subjected to the same policies they’re trying to impose on the American public. In a recent New York Times article, reporter Mary Williams Walsh asks a very appropriate journalistic question, “What if a Pension Shift Hit Lawmakers, Too?” In this case, a proposal increasingly gaining favor in the private sector to adjust the way pensions accrue and are distributed would cost most members of Congress hundreds of thousands of dollars. But will this knowledge affect the debate, or will members of Congress ignore the consequences of a policy shift that in all likelihood, they will never have to live with?
Congress is expected to debate pension legislation in the months ahead, including proposals that would affect benefit levels and the strength of the pension system itself. An especially contentious debate is looming over regulations proposed by the Bush administration on how companies could convert their traditional pension plans to the cash-balance variety. In traditional pension plans, also known as “defined benefit plans,” you are promised a specified monthly benefit at retirement. The amount of your benefit is stated either as an exact dollar amount, such as $100 per month at retirement, or calculated using a plan formula that considers such factors as salary and service – for example, 1 percent of your average salary for the last 5 years of employment for every year of service with your employer. Another type of retirement plan is called a “defined contribution plan.” This type of plan does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as 5 percent of your earnings annually. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. (See the Department of Labor’s (DOL) What You Should Know About Your Pension Rights.)
Increasing gaining favor in the private sector is a variety of plan called the “cash-balance plan,” called that because employees periodically receive notice of a hypothetical cash balance that they can track as it grows. Since the 1980’s, hundreds of large companies have switched from traditional (defined benefit) to cash-balance plans. These plans combine features of the traditional pension with yet another type of retirement plan, the 401(k) (a defined contribution plan), in which employees manage their own retirement money and sometimes receive matching contributions from employers. Neither defined contribution nor cash-balance plans are inherently inferior to defined benefit plans for all workers. Contributions to defined contribution plans generally are invested on your behalf, and so you will ultimately receive the balance in your account, based on contributions plus or minus investment gains or losses. The value of your account will fluctuate due to the changes in the value of your investments, which in past years have made these types of plans very lucrative and more valuable than some defined benefit plans, but much less so in an economic downturn such as the one Americans are currently facing.
However, two significant problems with cash-balance plans, especially in conjunction with the conversion process, have emerged. One charge is that the plans discriminate against older workers. The reason that older workers are so adversely affected by cash-balance conversion is because of the way traditional defined benefit plans are most commonly calculated. According to AARP, the leading advocacy organization for older workers, benefits in traditional defined benefit plans are based on a worker’s tenure with one employer and average salary in late career, when earnings have peaked, while in a cash balance plan, workers build up benefits throughout their careers, and the balance is portable when changing jobs. When companies switch plans, longtime workers miss out on the benefit spike they would have received under a traditional plan, and they are too close to retirement to make up the difference in a cash balance plan. (See AARP Bulletin story.) A second common problem with cash-balance conversions is that they’re all too often simply calculated incorrectly, to the worker’s disadvantage of course. A 2002 audit by DOL’s Inspector General showed that 22 percent of the 60 conversion plans studied miscalculated lump-sum benefits for workers who quit their jobs before normal retirement age, underpaying them by as much as $55,629 each. See AARP Bulletin story and the DOL audit report.) Columnist Molly Ivins has also recently drawn attention to this issue. See Rescue Your Pension Plan.
Back to the politicians: no cash-balance conversion plan is currently in the works for Congress (although legislation to do so may be introduced on the basis of this study). However, what is happening now are plans to lift the current moratorium on cash balance conversions, imposed by the IRS in 1999. The Bush administration has proposed regulations that would settle the issue, laying out basic rules for making cash-balance conversions legal. Public comment will be accepted until Thursday (3/13/03), and hearings are scheduled in April. (For advice about making comments, see CWA letter information.) If the proposed regulations take effect, the moratorium will be lifted. For Rep. Bernard Sanders (I-VT), that’s not acceptable. In response, he commissioned the study by the Congressional Research Service, a nonpartisan branch of the Library of Congress, hoping that the new findings would “show the hypocrisy” of colleagues who would let other people undergo pension conversions but would not have to suffer ill effects themselves. (See Sanders’ press release, “What Is Good For The American Worker Should Be Good For Members of Congress.”) What the study found is that if, for example, if House Majority Leader Tom DeLay (R-TX), had a cash balance pension plan instead of a traditional defined benefit pension plan his pension benefits would be reduced by $357,057 or 58.7% under a cash balance conversion – from $608,143 under the current traditional defined benefit pension plan to $251,086 under the cash balance plan. If Speaker of the House Dennis Hastert (R-IL), had a cash balance plan instead of a traditional defined benefit pension plan his pension benefits would be reduced by $376,117 or 69% — from $540,572 to $164,455. Will this make a difference in the policy debate? It should, but probably won’t. For the New York Times story, DeLay did not respond to a request for comment, while Hastert’s office questioned whether it was fair to single out members of Congress for scrutiny when the entire federal compensation system is skewed toward smaller paychecks and larger pensions compared with the private sector. (Now why do you think that is? Do you suppose the politicians involved had anything to do with it?)
Just like the Congressional budget rules that require offsets of all new tax cuts with revenue raisers designed to balance the budget, maybe we should also keep looking for other ways to force Congress to live with the policies it seeks to impose on the American public. This new cash-balance conversion analysis provides a very good precedent for that.