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[07/28/1999 - 10/27/1999] [PBGC]
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[07/28/1999 - 10/27/1999] [PBGC]
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Presidential Electronic Mail from the Automated Records Management System (ARMS)
Automated Records Management System (ARMS) Email from the Office of Policy Development (OPD) Bucket
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Schub Judy <[email protected]> ( Schub Judy <[email protected]> [ UNKNOWN 1)
CREATION DATE/TIME:28-JUL-1999 17:25:22.00
SUBJECT: Multiemployer Proposals
TO: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD ] )
READ:UNKNOWN
CC: Sirkin Stuart <[email protected]> (Sirkin Stuart <[email protected]> [ UNKNOWN 1)
READ:UNKNOWN
CC: Healy Monica <[email protected]> ( Healy Monica <[email protected]> [UNKNOWN])
READ:UNKNOWN
CC: Pacelli Jane <[email protected]> (Pacelli Jane <[email protected]> [ UNKNOWN]
READ:UNKNOWN
CC: Strauss David <[email protected]> ( Strauss David <[email protected]> [ UNKNOWN 1)
READ:UNKNOWN
TEXT:
As you know our views on raising limits, it should come as no
surprise that we think raising the early retirement dollar limits for
multis
is reasonable. However, it would create some inequities, since many
workers
in single employer private plans do "physical" jobs also and can be hit if
they retire early.
On aggregation, I checked with someone at PBGC who has done a lot
of
work with multis. He thinks that the plan aggregation rules are a "major
administrative headache" mainly because employers do not want to share key
information (such as salaries) with the unions.
Any views expressed by the author of this message are not those of the
Pension Benefit Guaranty Corporation.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD ])
CREATION DATE/TIME:28-JUL-1999 15:34:15.00
SUBJECT: Re: PBGC letter on pension reversion proposal
TO: Janet R. Forsgren (CN=Janet R. Forsgren/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
CC: oscar gonzalez ( CN=oscar gonzalez/OU=omb/O=eop@eop [ OMB 1)
READ:UNKNOWN
CC: mark d. menchik ( CN=mark d. menchik/OU=omb/O=eop@eop [ OMB ])
READ:UNKNOWN
CC: james j. jukes ( CN=james j. jukes/OU=omb/O=eop@eop [ OMB 1)
READ:UNKNOWN
TEXT:
My recommendation is to note that there was an actual veto on something
similar in the 1995 Reconciliation bill (this being one of the reasons
given) and that the same concerns arise here. Thus, we are not issuing a
new veto threat, per se, but an implied one. OMB will have to decide what
that means for clearance process issues.
I will send you all a revised version of the Itter with my edits.
Mark M. -- Can you get me a copy of what we said in the veto statement in
1995. tks.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Janet R. Forsgren ( CN=Janet R. Forsgren/OU=OMB/O=EOP [ OMB ])
CREATION DATE/TIME:28-JUL-1999 15:27:28.00
SUBJECT: PBGC letter on pension reversion proposal
TO: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
CC: Oscar Gonzalez (CN=Oscar Gonzalez/OU=OMB/O=EOP@EOP [ OMB )
READ:UNKNOWN
CC: Mark D. Menchik ( CN=Mark D. Menchik/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
CC: James J. Jukes ( CN=James J. Jukes/OU=OMB/O=EOP@EOP [ OMB
READ:UNKNOWN
TEXT:
I apologize for being late in joining this morning's conference call and
having to drop off before the end. I understand the group discussed
PBGC's pension reversion letter and that there was general agreement on
including a PBGC veto threat as well as making certain other changes (in
addition to the ones that Oscar had already forwarded to you). At your
convenience, please forward to Oscar and me a mark up of the letter
reflecting the changes agreed to in the conference call. If my
understanding about the inclusion of a veto threat is correct, the letter
will need to be vetted with OMB policy officials and through the West Wing
.
LR will coordinate with OMB LA to get the necessary sign-offs. Call me
if you have questions.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Mark D. Menchik (CN=Mark D. Menchik/OU=OMB/O=EOP [ OMB 1)
CREATION DATE/TIME:30-JUL-1999 14:29:40.00
SUBJECT: PBGC Letter on Rep. English Pension Reversion
TO: Oscar Gonzalez (CN=Oscar Gonzalez/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP@EOP [OPD])
READ:UNKNOWN
CC: Janet R. Forsgren (CN=Janet R. Forsgren/OU=OMB/O=EOP@EOP [OMB])
READ:UNKNOWN
TEXT:
Sarah wrote:
(1) The 2nd sentence now reads: "Although we are sympathetic with your
intent to encourage defined benefits plans, we strongly object, as we did
when similar proposals were suggested in 1995, to the proposal's threat to
matintain sufficient assets in defined benefit plans to protect the
participants the the Federal pension insurance program." I don't think
that works grammatically. How about: "Although we are sympathetic with
your intent to encourage defined benefits plans, we strongly object, as we
did when similar proposals were suggested in 1995, because the proposal
threatens the sufficiency of assets in defined benefit plans to protect
the participants the the Federal pension insurance program." Other
changes fine -- just needs to work.
I agree
(2) The new last sentence of the first paragraph should read: "In
addition, as the issue relates to the provisions of the Internal Revenue
[Service] Code and [ERISA (full name)] the Employee Retirement Income
Security Act, we recommend that you consult directly with the Treasury and
Labor Departments as well."
See above.
(3) The final sentence of the last paragraph should read: "In 1995, the
President vetoed the Budget Reconciliation
Act (H.R. 2491). [He cited as one basis for the veto,] His veto message
condemned the provision[s] of that bill that would have allowed employers
to take assets from a defined benefit pension plan and use them for other
purposes. The same concerns are prompted by this proposal."
See above.
MARK MENCHIK -- PLEASE DOUBLE CHECK THIS IS AN ACCURATE WAY TO DESCRIBE
THE VETO. Thanks.
OK
Oscar: You may now have the only complete copy. Please check it
again.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell CN=Sarah Rosen Wartell/OU=OPD/O=EOP [OPD])
CREATION DATE/TIME: 2-AUG-1999 22:20:17.00
SUBJECT: 8:00 memo
TO: Melissa G. Green ( CN=Melissa G. Green/OU=OPD/O=EOP@EOP OPD
READ:UNKNOWN
TEXT:
Financial Modernization: The conference committee holds its first meeting
at 3:00 today. We expect it to be largely ceremonial. Chairman Leach
believes that the meeting will consist of his appointment as chairman and
opening statements. The conference committee is huge. The entire Senate
Banking Committee and 14 members each from the House Banking and Commerce
Committees, along with various members appointed only for purposes of
specific provisions. Treasury has provided a statement to Senator
Sarbanes and Representative LaFalce to read regarding their understanding
of the Administration's position on various issues. (We cleared on the
statement last week.)
Child Labor Convention: The package has been cleared by all NSC offices
and goes to Berger tomorrow morning. Per Staff Secretary, if we want to
get this out before Congress adjourns, we need Berger's sign-off by
tomorrow afternoon (I'll hand-carry to Gene and Larry thereafter) to get
it to Staff Secretary tomorrow night so that the President can review and
sign it during office time on Wednesday. (Lael, Holly, Al Maldon, Karen
T. have already cleared.) Sarah is waiting for guidance from Gene. We
could send it to Congress and release a statement to the press late
Wednesday or anytime Thursday if he wants. Sarah has circulated a draft
Statement of the President and will circulate a draft child labor
convention Fact Sheet for WH Press.
Pensions: The NEC working group is trying to sort through all of the
pension provisions in the House and Senate tax bills, so that -- after a
veto -- we have clear guidance on Administration policy on various
provisions likely to be subject to negotiation. Unfortunately, a number
of key provisions we strongly oppose are important to Senator Roth or have
Democratic support. Treasury seems resigned that we'll accept many if a
tax bill happens this year. Also -- Sarah finally got a policy paper from
Treasury (6 months after it was requested) responding to proposals by
PBGC. Two provisions in the House tax bill -- raising the compensation
limits and the benefit limits for defined benefit plans -- are supported
by PBGC because of their desire to incent employers to expand (or at
least not fold) defined benefit plans. Treasury is firmly opposed. DoL
believes we should trade for expanded coverage provisions. The
provisions, however, appear to have much support -- including Democratic
support -- on the Hill. Sarah will frame the issues and run a process to
seek guidance.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: William G. Dauster (CN=William G. Dauster/OU=OPD/O=EOP [ OPD 1)
CREATION DATE/TIME: 5-AUG-1999 14:42:35.00
SUBJECT: Debt Reduction Report
TO: William G. Dauster ( CN=William G. Dauster/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
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TEXT:
Here as a Word document (about 19 pages) is the Treasury's report on the
benefits of debt reduction.
ATTACHMENT
I
ATT CREATION TIME/DATE: 0 00:00:00.00
TEXT:
Unable to convert ARMS_EXT:[ATTACH.D26JARMS22698771R.236 to ASCII,
The following is a HEX DUMP:
END ATTACHMENT
I
From Widening Deficits to Paying Down the Debt:
Benefits for the American People
August 4, 1999
Office of Economic Policy
U.S. Department of Treasury
Automated Records Management System
Hex-Dump Conversion
From Widening Deficits to Paying Down the Debt:
Benefits for the American People
August 4, 1999
Executive Summary
President Clinton and Vice President Gore, working with the Congress, set the
nation on a new course of fiscal responsibility. This program has reversed the
pattern of deficit spending. In fiscal year 1999, a surplus of $99 billion, or
1.1 percent of GDP is expected. This would be the largest surplus relative to
GDP since 1951. We have ended 28 consecutive years of deficit spending and
recorded the first back-to-back surpluses since 1956-57.
in early 1993, the Federal budget was projected to be in deficit by $429 billion in
1999. Instead, we now expect a surplus of $99 billion. This amounts to a saving
of almost $530 billion for 1999 alone.
Deficits over the years 1994 through 1999 were projected to total $2.1 trillion.
Instead, shrinking deficits and a surplus in the two most recent years have
slashed that figure by $1.7 trillion, or more than 80 percent. Over the next
decade, unified budget surpluses are projected to build, reaching $473 billion, or
3.4 percent of GDP, by 2009.
Because of this deficit reduction, we have reduced publicly held debt
approximately $87 billion this fiscal year- the largest on record after adjusting for
inflation. In the last two years, we have paid down $142 billion in debt. Since its
peak of $3.830 trillion in March of 1997, we will pay down the debt to $3.638
trillion this quarter.
The reduction in the deficit and lower interest rates have meant much lower
interest costs than had been projected. Over the past seven years, a total of
$189 billion in interest has been saved.
In the absence of deficit reduction, interest payments on the ballooning federal
debt would have swelled even more in the years ahead. It is estimated that
lower interest payments on the federal debt from 1993 through 2003 will save
taxpayers a total of almost $840 billion.
Deficit reduction has helped reduce mortgage interest costs for American
families. A typical American family with a mortgage of $100,000 might expect to
save about $2,000 annually in mortgage costs.
Deficit reduction has made more funds available for the private sector, helping to
spur investment. Private business investment has surged. Investment in
producers durable equipment has grown at double digit rates for six years in a
row for the first time on record.
Automated Records Management System
Hex-Dump Conversion
1
FIRST FEDERAL BUDGET SURPLUS SINCE 1969
Billions of Dollars
Percent of GDP
500
10
400
Budget deficit / surplus (left scale)
8
Share of GDP (right scale)
300
Projected
6
200
4
100
2
0
0
-100
-2
-200
-4
-300
-6
-400
-8
1970
1975
1980
1985
1990
1995
2000
2005
Fiscal Years
Source: OMB, Mid-Session Review FY-2000 Budget
Deficit spending had been the norm for the U.S. budget throughout most of the
post-World War II period. Surpluses were recorded in only three years of the
1950s and in only two years of the 1960s. Our last surplus was in 1969, and it
amounted to only 0.3 percent of GDP.
During the 1980s, deficits widened dramatically, reaching 6.1 percent of
GDP in 1983. The recessions of 1980-1982 contributed to the size of the
deficit. But even after six years of economic expansion, 1989's deficit was still
2.8 percent of GDP.
The deficit widened again in the early 1990s and reached a record in dollar terms
of $290 billion, or 4.7 percent of GDP. Since then, President Clinton's
program has reversed the pattern of deficit spending. In fiscal year 1999, a
surplus of $99 billion, or 1.1 percent of GDP, is expected. This would be
the largest surplus relative to GDP since 1951.
Over the next decade, unified budget surpluses are projected to build,
reaching $473 billion, or 3.4 percent of GDP, by 2009.
Even excluding Social Security funds, the cumulative "on-budget" surplus is
projected to exceed $1 trillion over the next ten years.
Automated Records Management System
Hex-Dump Conversion
2
FEDERAL DEBT ON A DOWNWARD PATH
Billions of Dollars
Percent
4,000
60
Federal Debt (left scale)
Share of GDP (right scale)
Projected
50
3,000
40
2,000
30
20
1,000
10
0
0
1970
1975
1980
1985
1990
1995
2000
2005
Fiscal Years
Source: OMB, Mid-Session Review FY-2000 Budget
The legacy of deficit spending was a huge piling up of Federal debt.
Between 1980 and 1993, the amount of Federal debt held by the public
more than quadrupled from $710 billion to $3.2 trillion. During this time,
publicly held debt surged from 26 percent to 50 percent of GDP.
Deficits, although declining, continued to add to the Federal debt through 1997,
when the amount reached $3.8 trillion. Because deficits were cut over the 1993-
1997 period, the debt relative to GDP eased to 47 percent.
Fiscal year 1999 is the second year in a row in which we have been able to
pay down some of the outstanding debt. As a result, the ratio of debt to GDP
is being slashed this year to about 41 percent. Under the Administration's
proposals, the amount of Federal debt outstanding is projected to fall further to
$1.6 trillion, or only 12 percent of GDP, by the year 2009, and is expected to
disappear entirely by 2015. This means fewer taxpayer dollars will be needed to
pay interest on the public debt between now and 2015.
Automated Records Management System
Hex-Dump Conversion
3
THE BUDGET DEFIC
UNDER THE CLINTC
Billions ofDollars
70 0
60 0
50
0
40 0 Pre - O BRA 1993
DeficitProjections
30
0
20 0
Actual
10 0
0
Project
- 1 0 0
FY2000 M
- 2 00
-
3
0
0
1 9 9 2 9 9 9 9 S 9 8 9 g 9 8 9 e 0 0 0 0 0 Q
FiscalYears
Source: OMB, M - Session Rev
The path to closing the Federal deficit began with the Administration's efforts in
1993 to reverse the previous decade's trend toward ever-widening deficits. The
Omnibus Budget Resolution Act of 1993 (OBRA 1993) was a critical step
toward achieving fiscal soundness.
The 1997 Balanced Budget Act provided another important push for fiscal
discipline.
Due to responsible fiscal policy and the noninflationary growth that it made
possible, the Federal budget is now on a path of rising surpluses. We are
on track to achieve a surplus approaching $100 billion in fiscal year 1999
instead of the $429 billion deficit that was projected for this year in early
1993. This amounts to a savings of almost $530 billion for 1999 alone.
Deficits over the years 1994 through 1999 were projected to total $2.1 trillion.
Instead, shrinking deficits and a surplus in the most recent two years have
slashed that figure by $1.7 trillion, or more than 80 percent.
Automated Records Management System
Hex-Dump Conversion
4
DEBTBURDENC
FROM PRE-OBR
Trillions ofDollars D e b t Held b y Pub
6
Act AadditionalAm unt
I
5
4
3
2
1
0
19 9129 9139 9149 9159 9169 9179 9189 9
FiscalYears
Source: OMB, M id - Session Rev
X
Had the deficit grown as projected in 1993, the Federal debt held by the public
would have ballooned to $5.4 trillion by 1999, representing 61 percent of GDP,
rather than the actual current $3.7 trillion, or 41 percent of GDP.
X
As a result, the Federal government's debt is $1.7 trillion lower than it was
projected to be. The average American family's share of the Federal debt
burden is therefore more than $24,000 smaller.
This $1.7 trillion represents roughly 19 percent of nominal GDP, and is money
that has been freed up for investment in American businesses and homes.
The attached table illustrates how that $1.7 trillion reduction in the debt burden
might be shared by each state, based on relative amounts of personal income.
Automated Records Management System
Hex-Dump Conversion
5
STATE SHARE OF REDUCTION IN DEBT BURDEN
Billions of Dollars
1.
California
$213.9
2.
New York
137.3
3.
Texas
117.4
4.
Florida
91.8
5.
Illinois
82.8
6.
Pennsylvania
76.6
7.
Ohio
67.1
8.
New Jersey
65.6
9.
Michigan
60.4
10.
Massachusetts
48.0
11.
Georgia
45.5
12.
Virginia
44.3
13.
North Carolina
43.2
14.
Washington
37.9
15.
Maryland
36.6
16.
Indiana
34.0
17.
Missouri
31.6
18.
Wisconsin
31.2
19.
Minnesota
31.0
20.
Tennessee
30.5
21.
Connecticut
29.3
22.
Colorado
27.1
23.
Arizona
25.6
24.
Alabama
22.2
25.
Louisiana
22.2
26.
Kentucky
20.2
27.
South Carolina
19.5
28.
Oregon
19.4
29.
Oklahoma
16.8
30.
lowa
16.3
31.
Kansas
15.6
32.
Mississippi
12.4
33.
Arkansas
12.3
34.
Nevada
11.3
35.
Utah
10.5
36.
Nebraska
9.8
37.
West Virginia
8.4
38.
New Mexico
8.2
39.
New Hampshire
8.2
40.
Hawaii
7.4
41.
Maine
6.8
42.
Rhode Island
6.3
43.
Idaho
6.2
44.
Delaware
5.3
45.
District of Columbia
4.6
46.
Montana
4.2
47.
South Dakota
3.9
48.
Alaska
3.8
49.
Vermont
3.4
50.
North Dakota
3.3
51.
Wyoming
2.7
Total United States
$1,700.0
Note: Allocated according to State personal income.
Source: OMB and U.S Bureau of Economic Analysis.
Automated Records Management System
Hex-Dump Conversion
6
FEDERAL INTEREST EXPENSES HAVE BEEN
SHARPLY REDUCED
Billions of dollars
CUMULATIVE
350
SAVINGS =
Projected
300
Before OBRA
$189 BILLION
250
Deficit Reduction
200
150
Actual Net
100
Interest Outlays
50
0
1986
1988
1990
1992
1994
1996
1998
Source: OMB, Mid-Session Review of FY-2000 Budget
The reduction in the deficit and lower interest rates have meant much lower
costs than had been projected prior to the passage of OBRA. Over the past
seven years, a total of $189 billion in interest has been saved, as illustrated
in the chart above. That amounts to roughly $2,700 for every American
family.
In the absence of deficit reduction, interest payments on the ballooning federal
debt would have swelled even more in the years ahead. It is estimated that
lower interest payments on the federal debt from 1993 through 2003 will
save taxpayers a total of almost $840 billion.
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7
TURNAROUND IN FEDERAL BUDGET
BOOSTS NATIONAL SAVING
Percent of Net National Product - Fiscal Years
15
Net National
Saving
10
1999*
7.2
5
1.3
0
-5
Unified Budget
Balance
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
FY-1999 estimated.
Source: BEA, National Income and Product Accounts; OMB, Mid-Session
Review FY-2000 Budget.
The swing in the Federal budget from steep deficit to surplus has resulted
in a doubling of the net national saving rate from a post-World War II low of
only 3.5 percent of net national product (NNP) in fiscal year 1993 to an estimated
7.2 percent this year. This 3.7 percentage point rise in net national saving was
more than accounted for by a 5.7 percentage point swing in the Federal budget,
from a deficit of 4.4 percent of NNP in FY-1993 to a surplus estimated at
1.3 percent of NNP this year.
Growing Federal deficits had been a severe drain on national saving. In
borrowing from the private sector to finance the unified deficit, the Federal
government reduced the amount of national saving available for more productive
use in the private sector.
As a result of the swing from deficit to surplus, more funds are available
for private sector uses, helping to spur investment.
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8
PRIVATE INVESTMENT HAS SURGED
Billions of 1992 Dollars
850
EQUIPMENT
CONSTRUCTION
350
750
Residential
300
650
550
250
450
Business
200
350
250
150
88
89
90
91
92
93
94
95
96
97
98
99
88
89
90
91
92
93
94
95
96
97
98
99
Source: BEA, National Income and Product Accounts.
Private business investment has surged. As a share of GDP, real
investment has risen to a record high of more than 12 percent.
Purchases of producers' durable equipment have been particularly strong.
For the first time on record, annual growth rates were in double digits for six
years running. This component of investment, which includes computers, may
be especially closely related to productivity growth.
Investment in new business structures has also benefited from the low
interest rate environment. The nonresidential market has been recharged
since 1993.
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STRONG PRODUCTIVITY GROWTH
Percent at an Annual Rate
4.0
3.5
3.0
2.7
2.5
2.0
2.0
1.4
1.5
1.5
1.3
1.0
0.5
0.0
Trend
1995
1996
1997
1998
1974-94
Source: Bureau of Labor Statistics and U.S. Treasury estimates.
Rising investment, especially in equipment incorporating the latest advances in
technology, has contributed to a pickup in workers' productivity. Output per
hour in the nonfarm business sector has grown at a 2.0 percent annual average
rate from the end of 1994 through the first quarter of this year, a substantial
acceleration from the trend rate of growth of 1.4 percent (calculated on a
methodologically consistent basis) that prevailed from the 1970s through the
early 1990s.
Higher productivity leads to higher standards of living. Real average hourly
earnings of nonfarm production and other nonsupervisory workers have recently
posted the strongest increases since the early 1970s. Despite the rapid gain in
real wages, unit labor costs have actually decelerated because of strong
productivity growth, reducing the pressures on inflation.
Rising investment has also resulted in a rapid expansion of capacity,
contributing to an environment of noninflationary growth.
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10
DEBT REDUCTION MEANS LOWER INTEREST RATES
Monthly in Percent
LONG-TERM TREASURY BOND
30-YEAR CONVENTIONAL MORTGAGE
8.40%
7.67%
6.99%
5.46%
1992 Average
Average of Last 12 Months
1992 Average
Average of Last 12 Months
Source: Federal Reserve
The impact of deficit reduction on interest rates, especially long-term interest
rates, has been significant. On average, interest rates have risen by about
1 percentage point during previous economic expansions. Instead, long-term
rates have fallen during this expansion.
Market interest rates fluctuate and have risen recently but the average yield on
the 30-year Treasury bond over the last twelve months was less than
5-1/2 percent, down from an average of 7.67 percent in 1992. The Blue Chip
consensus of private forecasters predicts continued low interest rates.
Interest rates on conventional home mortgages averaged just under 7 percent
over the past twelve months - almost 1-1/2 percentage points below the average
in 1992.
Assuming an impact of deficit reduction on interest rates of 2 to
3 percentage points - a range that seems reasonable given the decline in
rates during this expansion and the rise in rates during previous
expansions - a typical American family with a mortgage of $100,000 would
save around $2,000 a year on mortgage payments. Like a tax cut, lower
mortgage payments would place more money in a family's pockets.
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11
HOUSING AFFORDABILITY SINCE 1993
HAS BEEN THE BEST SINCE THE EARLY 1970'S
Index
160
140
120
100
80
60
40
73
75
80
85
90
95
99
Source: National Association of Realtors
Lower mortgage interest rates contributed to making housing more affordable.
Housing affordability conditions since 1993 have been the most favorable
since the early 1970's.
The index shown above measures the size of a mortgage for which a family
earning the median income can qualify, relative to the median price of a home.
An index reading of 100 means that a family with median income can qualify for
a mortgage that would allow it to purchase a median-priced home. Since 1993,
half of all households had at least 30 percent more income than required to
buy the average home.
Lower monthly payments and the strong economy have opened the housing
market over the past six years to many more families whose income may be
below the median level.
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12
HOME SALES RISE AS MORTGAGE RATES FALL
..AND SALES HAVE HIT A RECORD
Thousands of Units, Monthly at an Annual Rate
Percent
Thousands of New Homes Sold, Annual Data
1,000
12
1,000
New single-family
30-year fixed
home sales
900
mortgage rate
5-month moving
11
(right scale)
average
800
(left scale)
800
10
600
700
9
400
600
8
200
500
7
400
6
0
88
89
90
91
92
93
94
95
96
97
98
99
65
70
75
80
85
90
95
99*
*
First six months at an annual rate.
Source: Federal Reserve and U.S. Bureau of the Census
Favorable housing affordability has led to a record-setting pace of home
sales. It is estimated that a sustained drop of 1 percentage point in the
mortgage interest rate paves the way for roughly 70,000 new home purchases
per year. That effect, coupled with low unemployment, rising income and wealth,
and high levels of consumer confidence, have spurred sales of both new and
existing homes to all-time highs.
New single-family home sales totaled 885,000 in 1998, exceeding the previous
record set in 1977 by 8 percent. Through the first half of 1999, new home
sales were on an annual pace of over 910,000.
Resales of existing homes also hit new peaks, according to the National
Association of Realtors. Sales of existing single-family homes reached almost
5 million last year, more than 13 percent above the old record of 1997. Resales
in 1999 continue to climb.
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13
HOUSING STARTS AND CONSTRUCTION
Billions of 1992 dollars
Millions of units, annual rate
200
2.0
1.8
180
Construction
1.6
160
(left scale)
1.4
140
1.2
1.0
120
Starts
(right scale)
0.8
100
0.6
89
90
91
92
93
94
95
96
97
98
99
Source: U.S. Bureau of the Census
Demand for new housing and residential improvements, financed at lower
interest rates, has led to strong growth in real construction spending since
the beginning of 1993. Real expenditures on residential building have grown at a
4 percent annual rate from early 1993 through the first five months of this year.
Starts of new homes, both single and multi-family, increased by one-third
since 1992, rising to 1.6 million in 1998. That made last year the best year for
home building since 1977 and 1978, when the baby boom generation began to
have a significant impact on the housing market.
The growth of new housing prompted large gains in construction of new
retail establishments as well. The commercial real estate market picked up
beginning in 1994, with real construction spending growing by an annual average
of almost 8 percent since then.
Growth in residential and commercial construction has contributed to
sizable gains in overall construction employment. Since January 1993,
construction jobs have increased by more than a third, rising by 1.7 million jobs
to 6.3 million as of this June.
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14
HOMEOWNERSHIP RATE THE HIGHEST EVER
Percent
67
66
65
64
63
62
65
70
75
80
85
90
95
99
Source: U.S. Bureau of the Census
Since the first quarter of 1993, an additional 7.9 million families have
become homeowners. For the first time ever, the number of families in the
U.S. who own their own homes topped 69 million and is nearing 70 million.
After falling in the early 1980s and stagnating through the mid 1980s until 1993,
the homeownership rate rose to an historical high of 66.8 percent in 1998.
Prior to the recent period, the old record homeownership rate was 65.8 percent,
set in the third quarter of 1980.
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15
HOMEOWNERSHIP RATES HAVE RISEN FASTER
Rate
FOR BLACKS AND HISPANICS
100
4.6%
Percent Increase in Rate
80
72.8
69.6
8.7%
15.8%
60
46.3
46.2
42.6
39.9
40
20
0
White non-Hispanic
Black non-Hispanic
Hispanic
1992
1999 (First Quarter)
Source: U.S. Bureau of the Census
The expansion in the homeownership rate has been most pronounced for groups
that have typically had lower participation in the housing market. While the
homeownership rate for black and Hispanic households still remains below that
of white households, both minority groups have enjoyed much more rapid
growth in homeownership than the rest of the population over the past six
years.
The homeownership rate for black non-Hispanic households increased from
42.6 percent in 1992 to 46.3 percent by the first quarter of 1999. The rate for
Hispanic households rose from 39.9 percent to 46.2 percent.
In addition to low mortgage rates and a strong economy, Administration actions
such as lowering FHA mortgage insurance premiums and forming the National
Partners in Homeownership program have contributed to the expansion in
homeownership.
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16
REFINANCINGS HAVE MADE HOMEOWNERS BETTER OFF
Millions of Refinancings*
7
Total of more than 19 million
6
5
4
3
2
1
0
1993
1994
1995
1996
1997
1998
*Estimated by Treasury Department
In addition to lowering finance costs to purchase a home, falling mortgage
interest rates have allowed homeowners to save money by refinancing
their existing mortgages. As mortgage interest rates fell below 7 percent in
1993, refinancings surged to nearly 5-1/2 million that year. Those homeowners
shaved about 2 percentage points off their mortgage rate on average, saving
about $1,800 a year in interest payments for a typical-sized loan.
The stream of refinancings continued through 1998, when another drop in
mortgage rates last year spurred an additional round of refinancings. Many
families refinanced more than once over the 1993-1998 period. Since 1993,
total mortgage refinancings have topped 19 million.
Many homeowners who refinanced borrowed a larger amount than their old loan
but because of lower mortgage rates were able to keep their monthly payments
steady. That extra cash was used in a variety of ways that helped families to be
better off, such as making home improvements, paying off other higher-rate
existing debt, buying a car, or paying for college.
Other homeowners chose to refinance 30-year mortgage loans with shorter loan
terms such as 15 years, thereby building up equity in their homes more quickly.
Some with adjustable rate loans took advantage of the historically low rates to
lock in the low financing costs by converting to a fixed-rate loan.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD ])
CREATION DATE/TIME: 6-AUG-1999 12:49:27.00
SUBJECT: Re: multiemployer section 415 relief
TO: Paul A. Tuchmann ( CN=Paul A. Tuchmann/O=OVP@OVP UNKNOWN
READ:UNKNOWN
TEXT:
Forwarded by Sarah Rosen Wartell/OPD/EOP on
08/06/99 12:49 PM
Sarah Rosen Wartell
08/03/99 08:33:12 AM
Record Type: Record
To: [email protected]
cc: See the distribution list at the bottom of this message
Subject: Re: multiemployer section 415 relief
A few edits (non substantive) so that it is a piece of paper that we could
provide to staff or union officials to elaborate on the administration
proposal.
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1
August 2, 1999
Possible Position Regarding Proposals to Give Multiemployer Pension Plans
Special Relief from Section 415 Defined Benefit Limits
Note: except where specified otherwise, all of the dollar limits described below are
indexed for cost-of-living; some of the amounts have been rounded to the nearest $1,000.
I. BACKGROUND
Internal Revenue Code section 415 limits pensions paid from tax-qualified defined benefit plans,
so that an individual's pension may not exceed a specified dollar limit (determined based on the
age of commencement) and may not exceed 100% of highest 3-year average pay.
The specified dollar limit for 1999 is $130,000 for pensions payable beginning at Social Security
Retirement Age (currently age 65, but scheduled to phase up to age 67), reduced actuarially for
earlier commencement. For example, the specified dollar limit is $104,000 for pensions payable
beginning at age 62, $89,000 at age 60, $62,000 at age 55 and $44,000 at age 50.
The Internal Revenue Code contains a special rule for defined benefit plans sponsored by
governments, tax-exempts and merchant marines. For these plans, the $130,000 section 415
limit applies to pensions payable beginning at age 62 (instead of Social Security Retirement Age)
and the actuarial reductions for earlier commencements are based on this age 62 limit. Because
the age 62 limit for these special groups is 25% higher than the generally applicable limits
($130,000 VS. $104,000), the specified dollar limits at earlier ages are correspondingly 25%
higher than the generally applicable rules. For example, the limit for governmental employees at
age 55 is $77,000 (or 125% of the generally applicable age-55 limit of $62,000).
Another relevant rule permits the payment of a minimum benefit of $10,000 (unindexed) for any
person -- even if retiring early and even with average pay of less than $10,000 -- who has not
participated in a defined contribution plan of the same employer.
For purposes of section 415, all plans maintained by an employer and related entities are
combined, except that the regulations permit a multiemployer plan to disregard benefits provided
by the same employer through other multiemployer plans. Thus aggregation of a multiemployer
plan and a single-employer plan maintained by the same (or a related) employer is required.
Representatives of multiemployer plans have sought further relief from the section 415 limits, as
outlined in the July 18, 1999 Multiemployer Section 415 Relief Status Report prepared by the
Building & Construction Trades Department, AFL CIO.
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II. ADMINISTRATION'S FY 2000 BUDGET PROPOSAL
The Administration's FY 2000 budget has proposed exempting multiemployer defined benefit
plans from the 100%-of-pay limit. This exemption has been incorporated in the current tax bill
in both the House and the Senate. The Administration's budget, in response to union
suggestions, has also proposed that no early retirement adjustments apply in the case of
multiemployer plan survivor and disability benefits. This latter provision is not included in the
current House or Senate tax bill, but was included in the Democratic House alternative.
III. POSSIBLE MODIFICATION OF ADDITIONS TO THE ADMINISTRATION'S
BUDGET PROPOSAL
The following describes a possible expansion of In addition to the section 415 multiemployer
relief as set forth in the FY 2000 Budget- In addition to -- repeal of the 100% of pay limit for
multiemployer plans and exempting survivor and disability benefits from the actuarial
adjustments for early commencement --, as provided for in the FY 2000 budget, multiemployer
plans would could-be --
1. Given the same special higher early retirement section 415 limit that currently applies to
defined benefit plans sponsored by governments, tax-exempt organizations and merchant marine,
and
2. Exempted -- where the multiemployer plan is a defined benefit plan -- from the aggregation
rule requiring plans to take into account benefits provided under other plans maintained by the
same employer when testing for compliance with the section 415 limits.
RATIONALE
Multiemployer plans should be permitted to provide for higher early retirement benefits because
the participants in these plans generally are engaged in hard physical labor and need to retire
earlier than white-collar workers, and because these participants tend to change employers with
particular frequency and are more likely to encounter difficulties in being hired because they
often find themselves between jobs at a relatively advanced age.
Multiemployer plans need relief from the plan aggregation rules because it is administratively
difficult for them to secure data from sponsors of single employer plans.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [OPD])
CREATION DATE/TIME:16-AUG-1999 14:52:33.00
SUBJECT: Re: FINAL CLEARANCE -- PBGC letter to Rep English
TO: Sandra Yamin ( CN=Sandra Yamin/OU=OMB/O=EOP@EOP[ OMB])
READ:UNKNOWN
TEXT:
I am checking on one fact and then will get back to you. Answer in short
is -- we're safe.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD
CREATION DATE/TIME:16-AUG-1999 16:56:14.00
SUBJECT: Re: FINAL CLEARANCE -- PBGC letter to Rep English
TO: Sandra Yamin ( CN=Sandra Yamin/OU=OMB/O=EOP@EOP OMB
READ:UNKNOWN
CC: janet r. forsgren ( CN=janet r. forsgren/OU=omb/O=eop@eop [ OMB
READ:UNKNOWN
CC: mindy e. myers (CN=mindy e. myers/OU=who/O=eop@eop [ WHO
READ:UNKNOWN
TEXT:
Rep. English has not introduced his proposal -- he just sent the language
to PBGC in working draft form. It is not contained in any of the current
tax bills that are pending and soon to be vetoed. Pension provisions
such as this rarely move on their own, but rather in the context of
broader pension/tax legislation.
While we have no current test of the support for this proposal's strength,
this issue is akin to the issue that the President said was a basis for
his veto in 1995 -- where he talked about the threat of pension raiding by
corporate execs. While the case here isn't quite as far reaching (in
that they would only be raiding pensions to shift to stock bonus plans
rather than before to switch to a broad range of other types of benefit
plans), we still would have a strong argument. They would be shifting
pension funds to a new fund to buy the company's own stock to make
themselves better able to fend off corporate takeovers. I don't suspect
that the republicans want to walk into that fight on its own (as opposed
to buried in a big bill.)
For context, let me tell you what I know about the 1995 debate. There,
30-40 republicans wrote a letter to the Speaker asking him to strike the
similar (although much broader) provision from the House bill. (He
ignored them.) In the Senate, there was an amendment strike a comparable
provision on the floor, sponsored by Kassenbaum, which got over 90 votes.
So it was out in the Senate, in in the House. It stayed in after
conference, and the president vetoed the bill, using this as one basis for
it. In any event, when the issue is in the public eye, we clearly have
the stronger of the public arguments. We're protecting pensions -- they
are letting corporations raid workers' retirement savings.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Janet R. Forsgren ( CN=Janet R. Forsgren/OU=OMB/O=EOP [ OMB 1)
CREATION DATE/TIME:17-AUG-1999 13:23:33.00
SUBJECT: PBGC reversion letter
TO: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP@EOP[ [OPD])
READ:UNKNOWN
TEXT:
FYI -- We have cleared the PBGC reversion letter to Congressman English
and PBGC plans to send it either today or tomorrow. PBGC will bring
signed copies to the next interagency pension group meeting for you and
the agencies.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Schub Judy <[email protected]> ( Schub Judy <[email protected]> [ UNKNOWN 1)
CREATION DATE/TIME:18-AUG-1999 16:07:57.00
SUBJECT: Political Analysis
TO: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD 1)
READ:UNKNOWN
TEXT:
I don't know if the attached is what you needed. Let me know if you need
something different.
<WP Attachment Enclosed>
<<SARAHMEM.WPD>>
Any views expressed by the author of this message are not those of the
Pension Benefit Guaranty Corporation.
- SARAHMEM.WPD
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Portman-Cardin currently has 135 cosponsors. 63 are Democrats, including several
leadership people (Bonior, Hoyer, Frost) and 7 Democratic members of the Ways and Means
Committee.
Since we have not spoken directly to these members or their staffs, it is impossible to
know why they co-sponsored. We do know that the multiemployer unions put a big push on
getting cosponsors. (The multis were particularly interested in the increased (DB) incentives.)
Also, members are anxious to be associated with anything that can be portrayed as dealing with
"retirement security." Further, Cardin may have worked the bill hard and he is well respected.
(Democrats continued to sign-on to the bill even after the tax debate -- several added their names
on August 3.)
I suspect that most members' offices did not analyze each provision in Portman-Cardin
before signing on. Pension issues are viewed as technical and so these issues are not on most
members radar screens. We really don't know what these members think about incentives, from
a policy perspective, especially the narrow area of DB incentives. Members who are vocal on the
inequities in the tax bill may view retirement security provisions somewhat differently.
[Putting incentives aside, I note that there is plenty in Portman-Cardin for Democrats to
dislike: Roth 401 (k)s, increased IRA limits, weakening nondiscrimination and top heavy rules,
etc. But, despite this, a number of moderate members (Bonior, John Lewis, Levin, Pelosi, etc.)
are cosponsors.]
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [OPD])
CREATION DATE/TIME:18-AUG-1999 16:07:14.00
SUBJECT: Re: Political Analysis
TO: Schub Judy <[email protected]> ( Schub Judy <[email protected]> [ UNKNOWN 1)
READ:UNKNOWN
TEXT:
very helpful. I may come back for more. tks.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Carolyn T. Wu ( CN=Carolyn T. Wu/OU=WHO/O=EOP [ WHO ])
CREATION DATE/TIME:15-SEP-1999 13:32:05.00
SUBJECT: Re: Section 415
TO: Melissa M. Goldstein ( CN=Melissa M. Goldstein/O=OVP@OVP UNKNOWN 1)
READ:UNKNOWN
CC: sarah rosen wartell ( CN=sarah rosen wartell/OU=opd/O=eop@eop [OPD])
READ:UNKNOWN
TEXT:
Karen is fine with this.. We will call Georgine this afternoon. Thanks.
Melissa M. Goldstein@OVP
09/15/99 11:54:13 AM
Record Type: Non-Record
To: Karen Tramontano/WHO/EOP@EOP
cc: Carolyn T. Wu/WHO/EOP@EOP, Sarah Rosen Wartell/OPD/EOP@EOP
Subject: Section 415
We're going to send out the letter today. You mentioned that you might
want to call Georgine and possibly Sweeney to give them a heads-up. Also,
I'm attaching an explanatory document prepared by PBGC, Treasury, and
CEA. We want to make sure that you are comfortable with the last section
("Rationale") before using language from the piece in any talking points,
etc. Thanks,
Melissa Goldstein
OVP domestic policy
White House Fellow
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1
August 6, 1999
Proposals to Give Multiemployer Pension Plans
Special Relief from Section 415 Defined Benefit Limits
Note: except where specified otherwise, all of the dollar limits described below are
indexed for cost-of-living; some of the amounts have been rounded to the nearest $1,000.
I. BACKGROUND
Internal Revenue Code section 415 limits pensions paid from tax-qualified defined benefit plans,
so that an individual's pension may not exceed a specified dollar limit (determined based on the
age of commencement) and may not exceed 100% of highest 3-year average pay.
The specified dollar limit for 1999 is $130,000 for pensions payable beginning at Social Security
Retirement Age (currently age 65, but scheduled to phase up to age 67), reduced actuarially for
earlier commencement. For example, the specified dollar limit is $104,000 for pensions payable
beginning at age 62, $89,000 at age 60, $62,000 at age 55 and $44,000 at age 50.
The Internal Revenue Code contains a special rule for defined benefit plans sponsored by
governments, tax-exempts and merchant marines. For these plans, the $130,000 section 415
limit applies to pensions payable beginning at age 62 (instead of Social Security Retirement Age)
and the actuarial reductions for earlier commencements are based on this age 62 limit. Because
the age 62 limit for these special groups is 25% higher than the generally applicable limits
($130,000 vs. $104,000), the specified dollar limits at earlier ages are correspondingly 25%
higher than the generally applicable rules. For example, the limit for governmental employees at
age 55 is $77,000 (or 125% of the generally applicable age-55 limit of $62,000).
Another relevant rule permits the payment of a minimum benefit of $10,000 (unindexed) for any
person -- even if retiring early and even with average pay of less than $10,000 -- who has not
participated in a defined contribution plan of the same employer.
For purposes of section 415, all plans maintained by an employer and related entities are
combined, except that the regulations permit a multiemployer plan to disregard benefits provided
by the same employer through other multiemployer plans. Thus aggregation of a multiemployer
plan and a single-employer plan maintained by the same (or a related) employer is required.
II. ADMINISTRATION'S FY 2000 BUDGET PROPOSAL
The Administration's FY 2000 budget has proposed exempting multiemployer defined benefit
plans from the 100%-of-pay limit. This exemption has been incorporated in the current tax bill
in both the House and the Senate. The Administration's budget has also proposed that no early
retirement adjustments apply in the case of multiemployer plan survivor and disability benefits.
This latter provision is not included in the current House or Senate tax bill, but was included in
2
the Democratic House alternative.
III. ADDITIONS TO THE ADMINISTRATION'S BUDGET PROPOSAL
In addition to the section 415 multiemployer relief set forth in the FY 2000 budget -- repeal of
the 100% of pay limit for multiemployer plans and exempting survivor and disability benefits
from the actuarial adjustments for early commencement -- multiemployer plans would be --
1. Given the same special higher early retirement section 415 limit that currently applies to
defined benefit plans sponsored by governments, tax-exempt organizations and merchant marine,
and
2. Exempted -- where the multiemployer plan is a defined benefit plan -- from the aggregation
rule requiring plans to take into account benefits provided under other plans maintained by the
same employer when testing for compliance with the section 415 limits.
RATIONALE
Multiemployer plans are typically found in industries that involve hard physical labor and
relatively frequent changes of employment - Multiemployer plans should be permitted to provide
for higher early retirement benefits because the participants have a particular need to retire early:
the combination of hard physical labor and the weaker ties between workers and their employers
in these industries means that companies may be less likely to employ an individual once the
worker has reached an age at which he or she is less capable of bearing the physical stresses of
the work
Multiemployer plans need relief from the plan aggregation rules because it is administratively
difficult for them to secure data from sponsors of single employer plans.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Bennie C. Rogers ( CN=Bennie C. Rogers/OU=OMB/O=EOP [ OMB 1)
CREATION DATE/TIME:17-SEP-1999 13:47:47.00
SUBJECT: LRM BCR19 -- TREASURY Testimony , Cash Balance VS. Traditional Pension Plans
TO: Janet R. Forsgren ( CN=Janet R. Forsgren/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Robert F. Mahaffie ( CN=Robert F. Mahaffie/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Melissa M. Goldstein ( CN=Melissa M. Goldstein/O=OVP@OVP UNKNOWN ])
READ:UNKNOWN
TO: Natasha F. Bilimoria ( CN=Natasha F. Bilimoria/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
TO: Robin L. Lumsdaine (CN=Robin L. Lumsdaine/OU=CEA/O=EOP@EOP [ CEA ])
READ:UNKNOWN
TO: Caroline R. Fredrickson ( CN=Caroline R. Fredrickson/OU=WHO/O=EOP@EOP [ WHO )
READ:UNKNOWN
TO: Robert G. Damus ( CN=Robert G. Damus/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TO: Laurence R. Jacobson ( CN=Laurence R. Jacobson/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Joseph J. Minarik ( CN=Joseph J. Minarik/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TO: Broderick Johnson ( CN=Broderick Johnson/OU=WHO/O=EOP@EOP [ WHO D
READ:UNKNOWN
TO: Mary C. Barth ( CN=Mary C. Barth/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TO: David W. Beier (CN=David W. Beier/O=OVP@OVP UNKNOWN )
READ:UNKNOWN
TO: Karen Tramontano ( CN=Karen Tramontano/OU=WHO/O=EOP@EOP WHO D
READ:UNKNOWN
TO: Peter Rundlet ( CN=Peter Rundlet/OU=WHO/O=EOP@EOP WHO ])
READ:UNKNOWN
TO: Lisa Zweig (CN=Lisa Zweig/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Susan M. Carr ( CN=Susan M. Carr/OU=OMB/O=EOP@EOP [ OMB )
READ:UNKNOWN
TO: Larry R. Matlack ( CN=Larry R. Matlack/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TO: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
CC: [email protected] ([email protected] @ inet [ UNKNOWN 1)
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TEXT:
Following is LRM ID: BCR 19. Please read and respond by 4:30 PM, Today,
September 17, 1999 to the Treasury request for clearance of the attached
testimony by the Chief Counsel for the Internal Revenue Service (Brown)
for a hearing before the Committee on Health, Education, Labor and
Pensions on Hybrid Pension Plans scheduled to be held on September 2 st at
9:30 AM. (13 pages)
Agencies: Please contact me if you do not recieve this e-mailed LRM in
good working form. For your convenience, we will follow this e-mail by
sending a copy by fax.
EOP Staff: You will not receive a paper copy of this LRM.
Forwarded by Bennie C. Rogers/OMB/EOP on 09/17/99
01:37 PM
LRM ID: BCR19
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
Washington, D.C. 20503-0001
Friday, September 17, 1999
LEGISLATIVE REFERRAL MEMORANDUM
TO:
Legislative Liaison Officer - See Distribution
below
FROM:
Janet R. Forsgren (for) Assistant Director for
Legislative Reference
OMB CONTACT: Bennie C. Rogers
PHONE: (202)395-7754 FAX: (202)395-6148
SUBJECT:
TREASURY Testimony, Cash Balance VS. Traditional Pension
Plans
DEADLINE:
4:30 PM Friday, September 17, 1999
In accordance with OMB Circular A-19, OMB requests the views of your
agency on the above subject before advising on its relationship to the
program of the President. Please advise us if this item will affect
direct spending or receipts for purposes of the "Pay-As-You-Go" provisions
of Title XIII of the Omnibus Budget Reconciliation Act of 1990.
COMMENTS: Treasury is requesting clearance by COB today (Friday, September
17th) of the attached testimony by the Chief Counsel for the Internal
Revenue Service (Brown) for a hearing before the Committee on Health,
Education, Labor and Pensions on Hybrid Pension Plans scheduled to be held
on September 21st at 9:30 AM.
DISTRIBUTION LIST
AGENCIES:
62-LABOR - Robert A. Shapiro - (202) 219-8201
97-Pension Benefit Guaranty Corporation - Gail Sevin - (202) 326-4080
25-COMMERCE - Michael A. Levitt - (202) 482-3151
107-Small Business Administration - Jane P. Merkin - (202) 205-6700
61-JUSTICE - Jon P. Jennings - (202) 514-2141
31-Equal Employment Opportunity Commission - William J. White Jr. - (202)
663-4900
EOP:
Sarah Rosen Wartell
Joseph J. Minarik
Larry R. Matlack
Laurence R. Jacobson
Susan M. Carr
Robert G. Damus
Lisa Zweig
Caroline R. Fredrickson
Peter Rundlet
Robin L. Lumsdaine
Karen Tramontano
Natasha F. Bilimoria
David W. Beier
Melissa M. Goldstein
Mary C. Barth
Robert F. Mahaffie
Broderick Johnson
LRM ID: BCR19 SUBJECT: TREASURY Testimony, Cash Balance VS.
Traditional Pension Plans
RESPONSE TO
LEGISLATIVE REFERRAL
MEMORANDUM
If your response to this request for views is short (e.g., concur/no
comment), we prefer that you respond by e-mail or by faxing us this
response sheet. If the response is short and you prefer to call, please
call the branch-wide line shown below (NOT the analyst's line) to leave a
message with a legislative assistant.
You may also respond by:
(1) calling the analyst/attorney's direct line (you will be
connected to voice mail if the analyst does not answer); or
(2) sending us a memo or letter
Please include the LRM number shown above, and the subject shown below.
TO:
Bennie C. Rogers Phone: 395-7754 Fax: 395-6148
Office of Management and Budget
Branch-Wide Line (to reach legislative assistant):
395-7362
FROM:
(Date)
(Name)
(Agency)
(Telephone)
The following is the response of our agency to your request for views on
the above-captioned subject:
Concur
No Objection
No Comment
See proposed edits on pages
Other:
FAX RETURN of
pages, attached to this response sheet
ATTACHMENT I
ATT CREATION TIME/DATE: 0 00:00:00.00
TEXT:
Unable to convert ARMS_EXT:[ATTACH.D52JARMS24213606H.236 to ASCII,
The following is a HEX DUMP:
END ATTACHMENT
I
PREPARED TESTIMONY OF
CHIEF COUNSEL FOR THE INTERNAL REVENUE SERVICE
STUART L. BROWN
BEFORE THE
UNITED STATES SENATE
COMMITTEE ON HEALTH, EDUCATION, LABOR AND PENSIONS
HEARING ON HYBRID PENSION PLANS
INTRODUCTION
Mr. Chairman, I am pleased to appear before the Committee to discuss federal
tax issues relating to cash balance pension plans. I will begin with a very brief overview
of how the tax law applies to qualified retirement plans generally and how cash balance
plans fit into this overall picture. I will then discuss three tax law issues of potential
concern when a traditional defined benefit pension plan is converted to a cash balance
plan: rate of accrual issues; protection of accrued benefit issues; and age
discrimination issues. Finally, I will explain some of the general processes the Internal
Revenue Service uses to decide whether a retirement plan meets the requirements to
be a qualified plan under the tax law, and in this connection, I will describe the steps the
Service is now taking to make sure that the special issues that arise in cash balance
plan conversions receive appropriate review and are resolved correctly under the law.
OVERVIEW OF QUALIFIED PLANS AND CASH BALANCE PLANS
The Internal Revenue Code provides significant tax benefits to qualified
retirement plans and also includes detailed and intricate requirements that must be met
in order for those benefits to be available.¹ In general, the tax law gives employers a
current deduction for amounts contributed to qualified plans, exempts qualified plan
trusts from tax on the income earned by these contributions, and allows employees
covered by the plans to include their benefits in income only when they are received
(rather than when the benefits are earned). These tax benefits are, however, not
available to all retirement plans; they only apply to retirement plans that meet a number
of specific tax law requirements governing such matters as vesting and accrual of
benefits, as well as rules requiring certain breadth of employee coverage, prohibiting
discrimination in favor of highly compensated employees and barring the ceasing of
accruals or reductions in the rate of benefit accruals "because of the attainment of any
age." Retirement plans that meet these requirements are generally referred to as
"qualified plans."
1 These rules are generally found in Subchapter D of the Internal Revenue Code
of 1986, sections 401 et seq. Unless otherwise indicated, all statutory references in this
testimony are to the Internal Revenue Code of 1986.
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Qualified plans are broadly classified into two categories based on the nature of
the benefits provided: defined benefit pension plans and defined contribution plans.
Under a defined benefit plan, participants are promised they will receive a
specific level of benefits determined under a benefit formula contained in the plan
document. These benefit formulas have traditionally been based on factors such as
length of service and final average pay. For example, a typical defined benefit plan
formula could provide a benefit payable at normal retirement age equal to 1.5% per
year of service times average pay for an employee's last five years of employment.
This benefit is funded by all assets of the plan; participants do not have individual
accounts and the benefits they receive do not depend on the plan's investment results.
If the value of plan assets declines, or appreciates too slowly to provide the promised
benefits, the employer must make additional contributions to make up the shortfall.
Conversely, if plan assets grow more rapidly than anticipated, employees will not
receive any additional benefits, but rather the employer may be able to reduce future
contributions to the plan. In addition, benefits under defined benefit plans are generally
insured by the Pension Benefit Guaranty Corporation (PBGC).
Defined contribution plans, by contrast, determine the benefits payable to their
participants by maintaining individual accounts for each participant. All contributions to
a defined contribution plan (whether made by the employer or the employee) are
credited to the account of individual participants. Each participant's account is likewise
credited with the investment gain or loss attributable to its assets. 2 The ultimate benefit
received by the participant is based solely on the amount in the individual account at
the time the benefit is payable. Consistent with this overall benefit structure, the
employer's only obligation is to make the contributions required by the plan -- the
employer is not obligated to make additional contributions in the event the plan's
investments do not perform as well as anticipated. The benefits payable by defined
contribution plans are not guaranteed by the PBGC.
Under the Internal Revenue Code, a cash balance plan is a defined benefit plan
with a benefit regime that resembles the benefits more typically associated with a
defined contribution plan. The promised benefit under a cash balance plan is typically
based on a hypothetical account balance created for the participant. The typical plan
provides that each year this hypothetical account will be credited with both a "pay credit"
(e.g., five percent of compensation) and an "interest credit" (the interest rate could be
either fixed or variable). When the participant becomes entitled to receive benefits, the
benefits that are received will be based on the value of the hypothetical account. In
addition, cash balance plans often allow single sum distributions when a participant
separates from service, as is usual for defined contribution plans (rather than requiring
the participants to wait until retirement age).
2 Forfeitures may also be credited to the account.
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Even though the cash balance plan resembles a defined contribution plan in
these respects, it is, as a matter of law, a defined benefit plan. 3 The plan does not
allocate all assets to individual accounts for participants, and participants are entitled to
a stated benefit regardless of how plan assets perform. The hypothetical account
balance is merely a method of computing this promised benefit. For example, assume
that a 65 year old participant has a hypothetical account balance of $100,000 at normal
retirement age. Because the plan is a defined benefit plan, the participant will be
entitled to receive a single life annuity determined by applying actuarial factors specified
in the plan. 4 If the plan specified the 1983 GAM (GATT) mortality table and a seven
percent interest rate for this purpose, the single life annuity would be $10,128 per year.
The participant would be entitled to this benefit no matter how assets held in the plan
had actually performed.
Thus, while the benefit regime of cash balance plans typically resembles the
benefit structure of defined contribution plans, the employer (rather than the
participants) bears the investment risk with respect to plan assets -- an essential
element of defined benefit plans. Cash balance plans are also required to satisfy a
number of other tax rules that apply only to defined benefit -- not defined contribution --
plans. For example, actuarial factors used to determine benefits must be specified in
accordance with section 401(a)(25) so as to preclude employer discretion; single sum
distributions must be determined in accordance with the valuation rules of section
417(e); the accrued benefit for participants must be defined as provided in section
411(a)(7); and the plan must satisfy rules that relate to the pattern of benefit accrual
under section 411(b)(1). In addition, cash balance plans must satisfy generally
applicable qualification rules, including those designed to protect spousal rights and
ensure that plan benefits flow to rank-and-file as well as highly compensated
employees.
QUALIFICATION ISSUES PRESENTED BY CASH BALANCE PLAN CONVERSIONS
3 Sections 414(i) and 414(j); Notice 96-8, 1996-1 C.B. 359.
4Of course, if the participant is married, benefits must be paid in the form of a
qualified joint and survivor annuity unless there is proper consent by the spouse to
payment in another form. Section 417(a).
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Most of the recent tax law controversies raised in connection with the use of
cash balance plans have focused on conversions of more traditional defined benefit
plan structures into cash balance plans. 5 The conversion of a traditional defined benefit
plan to a cash balance plan typically involves an amendment to the benefit formula of
the existing plan to convert the formula into a cash balance formula. This change in
plan formula thus applies not only to new employees but also to employees who have
worked for a number of years under the old formula. These employees have accrued
benefits under the traditional defined benefit plan formula, and may also have definite
expectations about the benefits they anticipated they would earn in the future under the
traditional plan.
We have identified three tax law requirements that may not be satisfied in some
conversions. These three issues are: the rate of accruals under section 411(b)(1)(A),
(B) and (C); the protection of accrued benefits as required under section 411(d)(6); and
the prohibitions against reduction of benefit accruals "because of" age under section
411(b)(1)(H). Let me describe each of these issues.
Rate of Accrual Issues. Section 411(b)(1)(A), (B), and (C) provide specific
objective rules governing the pattern under which pension benefits must be accrued.
These rules were enacted as part of the Employee Retirement Income Security Act of
1974 ("ERISA") in order to prevent "back loading" of benefit accruals. Back loading
occurs when a disproportionate percentage of benefits are earned late in the
employee's working career.⁶ Analysis of this issue requires evaluating the pattern
under which plan participants accrue the benefits promised under the plan to determine
whether one of three statutory alternatives is met.
⁵Stein, "Some Serious Questions About Cash Balance Plans," Contingencies
American Academy of Actuaries (September-October 1999), page 28:
There is nothing inherently wrong with cash balance plans, as long
as employees have a clear and accurate picture of where they stand.
Let me begin my critique of cash balance plans with a confession:
I don't really believe there is anything inherently sinister about the concept
of cash balance plans. It's merely one of many types of plans through
which employers can help their employees save for retirement.
⁶Congress viewed this as an essential component of vesting. H.R. Rep. 93-807,
at 21, explains that "How much protection is actually afforded to employees under the
minimum vesting provision depends not only on the minimum vesting percentages set
forth in the bill, but also in the case of defined benefits on the accrued benefit to which
these minimum vesting percentages are applied". As an example, a requirement that
benefits be vested after 5 years of service (one of the Code's standards) would be
meaningless if a participant might accrue a benefit of only $1 per year for 19 years, and
a benefit of $30,000 in the 20th year.
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Cash balance plans generally seek to satisfy the 133 1/3% method of section
411(b)(1)(B). While there may be other ways in which to test whether a plan satisfies
the 133 1/3% test, one method focuses on the participant's hypothetical account
balance for the current year and projects it forward to normal retirement age using the
interest crediting rates specified by the plan. This hypothetical account balance at
normal retirement age is then converted to an annuity benefit, again using actuarial
factors specified in the plan. The annuity benefit as of the end of the prior year is also
measured using the same method. The difference in the annuity benefits for the two
years is then divided by the participant's compensation for the current year to determine
the accrual rate for the year.⁸ The accrued benefit and accrual rate for each year are
calculated using this method, then compared. If the accrual rate for any year exceeds
133 1/3 percent of that for any prior year, the plan will fail to be qualified.
While cash balance plan conversions can satisfy the 133 1/3 percent test, the
interplay of multiple benefit formulas, pay patterns, length of service, age of
7 Notice 96-8, 1996-1 C.B. 359.
8 The following example illustrates this process:
Consider a participant that is 50 years old with a year-end hypothetical account
balance of $60,000. The participant's compensation is $40,000, and the cash balance
plan provides an annual pay credit of five percent of compensation. The cash balance
plan provides that interest will be credited to the hypothetical account balance at a rate
of six percent for purposes of projecting the account balance to normal retirement age.
The plan also provides that the account balance at normal retirement age will be
converted to an annuity using an annuity factor based on six percent interest and the
1983 GAM (GATT) mortality table for purposes of determining the accrued benefit. The
50 year old participant will have a projected account balance at normal retirement age
(age 65) of $143,793, and an accrued benefit in the form of a single life annuity of
$13,506 at age 65. The accrued benefit at age 50 of $13,506 is the result of dividing
the projected account balance of $143,793 by an annuity factor of 10.646.
To calculate the accrued benefit at age 51, this same process is repeated.
However, at age 51, the account balance has been increased by an additional pay
credit of $2,000 (five percent of $40,000 compensation), and interest for one year on
the $60,000 account balance ($3,600). Thus, the account balance at age 51 is $65,600
($60,000 + $2,000 + $3,600). The now 51 year old participant will have a projected
account balance at age 65 of $148,315, and an accrued benefit in the form of a single
life annuity of $13,931 (equal to $148,315, divided by 10.646). The accrued benefit,
therefore, has increased from $13,506 at age 50 to $13,931 at age 51, an increase of
$425. The rate of benefit accrual as a percentage of compensation for this participant
(assuming compensation remains unchanged) is $425 divided by $40,000, or 1.06%.
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participants, and interest rates may result in accrual patterns that do not satisfy the rule.
Moreover, whether a conversion satisfies this requirement will depend, in part, on the
interplay of these factors, as well as on the plan's design; as a result, problems with the
rate of accrual may not be apparent simply by reviewing the plan document. We are
currently litigating a case in the Tax Court in which we have asserted in our answer filed
with the Tax Court that this is a key tax-qualification defect. The case is Arndt V
Commissioner of Internal Revenue and Onan Corporation, Dkt. 334-99"R".
Protection of Accrued Benefits. Section 411(d)(6) precludes an employer from
amending a plan's benefit formula to reduce benefits that have already accrued through
the date of the amendment.⁹ Section 411(d)(6) not only protects the basic accrued
benefit, but also protects other fundamental rights, for example, the right to receive an
early retirement benefit.
While section 411(d)(6) provides substantial and definitive protection for accrued
benefits, the scope of this protection is not unlimited. Most importantly, section
411(d)(6) does not protect benefits that have not yet been accrued but that would have
been earned in the future if the plan's benefit formula had remained unchanged and the
participant's employment had continued until normal retirement. In other words, an
employee's expectation that a benefit formula will remain in effect until the employee
retires is not protected by section 411(d)(6). Nor does section 411(d)(6) protect an
employee's expectation that future compensation increases will be taken into account in
computing an employee's benefits. It is well-established under current tax law that an
employer may not only amend a plan to reduce the rate of future accruals, but may even
terminate the plan entirely.
The general principles of section 411(d)(6) outlined above are also applicable in
the context of cash balance plan conversions. Thus, the conversion to a cash balance
formula with respect to future accruals will not violate section 411(d)(6) even though
some employees accrue future benefits at a lower rate under the new formula, provided
the post-conversion plan protects the benefits that participants had accrued under the
original plan at the time of the conversion. Following conversion, a cash balance plan
can be assured of satisfying the requirements of section 411(d)(6) if the plan separately
and specifically provides that the benefits accrued as of the date of the conversion
(including the optional forms of benefit) are protected, regardless of the level of benefits
determined under the plan's new cash balance formula.
9 For example, if a plan benefit formula provides for an annuity payable at age
65 equal to 2 percent of the employee's 3 average high years of compensation for each
year of service and an employee has completed 10 years of service at the time of an
amendment, the employee has an accrued benefit equal to 20 percent of the
employee's 3 average high years of compensation at the time of the amendment. This
benefit is protected by section 411(d)(6).
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Employers making cash balance plan conversions must promise each employee
the greater of the protected benefits under the original defined benefit formula or the
benefits calculated under the new cash balance formula. In practice, some may not.
And, if a plan relies solely on the value of the hypothetical account balance to protect
accrued benefits, the plan can encounter problems under section 411(d)(6) even if each
employee's opening hypothetical account balance is equal to the present value of the
employee's accrued basic retirement benefit under the original benefit formula (using the
plan's interest and mortality assumptions for single sum distributions). For example, a
cash balance plan that relies solely on the new benefit formula to satisfy the
requirements of section 411(d)(6) may encounter problems if the interest rate used for
interest credits is less at any point than the plan's interest rate used for calculating single
sum distributions.
This analysis is equally applicable in conversions that result in some employees
not accruing any additional benefits under the new plan formula for a number of years.
This situation often referred to as "wear away" -- can arise when an employee's
protected benefit under the original plan formula exceeds the benefit provided by the
new plan formula. In these circumstances, the cash balance plan may provide that no
additional benefits are accrued until the benefit under the new formula reaches the level
of the old benefit protected under section 411(d)(6). But this wear away of the protected
accrued benefit, standing alone, will not cause the plan to violate section 411(d)(6).
The substantive protections against reductions in benefits provided by section
411(d)(6) are complemented by the disclosure requirements of section 204(h) of ERISA.
ERISA section 204(h) requires pension plans to notify participants of any amendment
that will result in a significant reduction in the rate of future benefit accrual at least 15
days before the amendment takes effect. We recognize that concerns have been raised
about the adequacy of these notices in the case of cash balance plan conversions.
Several bills have been introduced in Congress that would expand the disclosure
requirements for pension plans that are amended to reduce the rate of future benefit
accruals. The Administration supports increased disclosure to employees.
Age Discrimination. The third potential tax law qualification issue that might be
presented by cash balance plan conversions is whether they result in prohibited age
discrimination. Section 411(b)(1)(H) prohibits a defined benefit plan from ceasing
accruals, or reducing the rate of benefit accruals, "because of the attainment of any
age." Likewise, section 411(b)(2) prohibits a defined contribution plan from ceasing
allocations, or reducing the rate at which amounts are allocated, to a participants
account, "because of the attainment of any age." Parallel provisions are found in section
204(b)(1)(H) of ERISA and in 29 U.S.C. section 623(i) (ADEA).
While these statutes clearly prohibit reductions in accruals "because of" the
attainment of any age, they do not necessarily prohibit plan designs in which a reduction
in accruals may be associated to some extent with the age of participants. Thus, a plan
may place a cap on the total amount of benefits, or may limit the years of service or
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participation taken into account in determining benefits. 10 This is true even though these
limits are inherently more likely to affect older employees. In addition, the rules
governing qualified plans are specific that subsidized early retirement benefits, social
security supplements, and disability benefits do not violate the age discrimination
prohibitions, even though the value of such plan provisions to participants may decline
with age.
The Service has not to date asserted that cash balance plan benefit formulas
result in per se violations of the age discrimination requirements of section 411(b)(1)(H).
In 1988, the IRS had issued proposed regulations to deal with many aspects of age
discrimination under sections 411(b)(1)(H) and 411(b)(2). In general, these regulations
provide that a plan will not violate the prohibition against age discrimination solely
because of a positive correlation between increased age and a reduction or
discontinuance in benefit accruals or account allocations under the plan. These
regulations were proposed before significant numbers of cash balance plan conversions
had occurred, and the special issues posed by cash balance plans were not considered
or addressed at the time they were developed.
Our consideration of cash balance plans began in the early 1990's when we
focused on the question of whether these plans satisfy the requirements of section
401(a)(4) that benefits or contributions not discriminate in favor of highly compensated
employees. Regulations were issued in 1991 to address issues of discrimination in favor
of highly compensated employees under section 401(a)(4). These regulations provide
that cash balance plans meeting specified criteria (designed to protect employees' rights
to benefits) would be treated as satisfying section 401(a)(4). This permits cash balance
plans to use a defined contribution plan-type approach in testing whether benefits
discriminate in favor of highly compensated as opposed to rank-and-file employees; this
approach was based on the recognition that the benefit pattern under a cash balance
plan closely parallels that under a defined contribution plan. 11
While the text of the 1991 regulations does not address age discrimination, the
preamble to the regulations does include a statement regarding age discrimination.
Noting that commentators had requested that the regulations address cash balance
plans, a hybrid plan design becoming increasingly popular, the preamble provides that --
The final regulations have added a safe harbor testing method for
cash balance plans. Because cash balance plans are defined benefit
plans that calculate benefits in a manner similar to defined contribution
plans, the safe harbor testing method is provided under the cross-testing
rules of 1.401(a)(4)-8(c). The safe harbor testing method permits a cash
¹⁰Section 411(b)(1)(H)(ii).
11 Treas. Reg. section 1.401(a)(4)-8(c)(3).
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balance plan to be tested on the basis of the hypothetical allocation
formula used to determine an employee's cash balance, rather than on the
actual benefits provided under the plan if certain conditions are satisfied.
Among other requirements, the interest adjustments through normal
retirement age must be accrued under the plan in the year the hypothetical
allocation to which they relate is accrued, and interest adjustments must be
determined using a fixed interest rate between 7.5 and 8.5 percent, or one
of a list of variable interest rates provided in the regulations. The fact that
interest adjustments through normal retirement age are accrued in the year
of the related hypothetical allocation will not cause a cash balance plan to
fail to satisfy the requirements of section 411(b)(1)(H), relating to age-
based reductions in the rate at which benefits accrue under a plan. The
safe harbor also imposes limitations on the granting of past service credit
and the provision of subsidized optional forms of benefit.
The application of the age discrimination requirements of section 411(b)(1)(H) of
the age discrimination requirements of section 411(b)(1)(H) involves a difficult analysis
that may differ depending on the factual context of the plan being considered. In recent
years we have seen rapid expansion of cash balance plan conversions in particular and
we are now reviewing the issue of age discrimination in the context of these conversions
in active coordination with the Equal Employment Opportunity Commission. In this
analysis, we are considering the whole range of factors that might indicate a cash
balance plan conversion has resulted in age discrimination. For example, we will
consider the impact of the wear away period, as it affects employees of various ages.
In the interim we have taken action to require that all cash balance plan conversions
pending with the Service be forwarded to the National Office for technical advice. To put
this action in context I would like to provide some background on the Service's
administrative programs in the qualified plan area.
IRS ADMINISTRATIVE PROGRAMS FOR QUALIFIED PLANS
As the preceding discussion indicates, the tax law imposes numerous and
intricate requirements in order for a retirement plan to receive the tax benefits of
qualified plan status. The Internal Revenue Service has established two basic programs
to ensure that plans comply with these rules and provide benefits to plan participants.
One program involves the issuance of "determination letters" to plan sponsors that ask
the IRS to review whether a plan, as designed, meets the qualification requirements; the
other program involves the examination of plans after the fact to determine whether
these requirements are met in practice. I will begin by describing the determination letter
program and then turn to the examination program.
Determination Letter Program. The tax law specifically requires that qualified
plans contain certain provisions in their governing legal documents. The Service has
long permitted plan sponsors to submit their plans for review by specialists within the
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Service to ensure that plan provisions comply with these requirements. This review
focuses on the design of the plan as reflected in its governing legal documents, and a
limited number of operational requirements, in order to determine whether the plan's
basic design satisfies the law. 12 Upon completion of this review, the Service will issue a
determination letter to the plan to confirm that it satisfies these requirements.
Although the determination letter program is voluntary, most plan sponsors ask
the IRS to review and approve a plan's design. A plan sponsor typically requests a
determination letter initially when the plan is started, again when the plan is amended
either to comply with law changes or to change the plan design, and, finally, if the plan is
terminated. 13 The number of determination letters processed each year varies
substantially depending on whether plan sponsors have reached a deadline for
amending their plan to comply with changes in the law. For example, when plans were
amended to comply with law and regulatory changes that took place from 1986 though
1993, the IRS processed 185,000 cases in 1995 and 119,000 cases in 1996. For 1997,
1998 and 1999, however, the IRS processed an average of 46,000 cases a year.
Approximately 8,000 of these cases would fall into the category requiring the most
careful review.
A complex plan amendment, such as the conversion of a traditional defined
benefit plan to a cash balance plan, requires more scrutiny than a less complex case.
This type of determination letter application is typically handled by senior agents in our
field offices, so that they can bring their experience to bear in evaluating these cases.
However, because of the concerns that have been raised about the conversion of
traditional defined benefit plans to cash benefit plans, we have recently taken an
additional step to ensure that determination letters covering such conversions receive
special scrutiny.
Thus, in addition to assigning these determination letters to senior agents in the
12 For example, the determination letter review includes an analysis of data on
the number of the employer's employees who are receiving benefits under the plan
and, if the plan provides benefits under different formulas, the number of participants
and different compensation levels who receive benefits under those formulas. Beyond
the basic review of data for coverage and nondiscrimination based on compensation, a
plan's operational results are not scrutinized in the determination letter process.
13 The determination program also reviews retroactive plan amendments. The
Code provides a limited period of time for a plan sponsor retroactively to correct any
provisions in plan amendments that might otherwise disqualify the plan. Currently, plan
sponsors have until the last day of the plan year beginning in the year 2000 to apply for
a determination letter for review of plan amendments, whether or not related to recent
law changes if the amendment was adopted after December 7, 1994.
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field, last week we instructed our field offices to request technical advice from our
National Office in every determination letter case that involves a conversion of a
traditional defined benefit plan formula to a cash balance formula. As part of this
process, we expect to review data on participant accrual patterns resulting from the
conversion. This centralized review process will enable us to consider carefully, on a
consistent nationwide basis, all of the potential tax issues that may arise in conversions.
It will, moreover, ensure that our consideration of possible age discrimination issues in
particular cases is informed by our policy level discussions with the EEOC on this issue.
It is also important to note that the determination process provides opportunities
for input from plan participants as well as the employer. The law requires employers to
notify plan participants when they seek a determination that a plan design meets or
continues to meet the requirements when the plan is started, amended, or terminated. 14
Following receipt of this notice, plan participants may submit comments about
qualification issues arising under the plan. In deciding whether to issue a favorable
determination letter, the Service carefully considers these participant comments, as well
as the submission by the employer.
To complete my discussion of the determination letter program, let me describe
the effect of a determination letter for the plan, the employer and the participants. A
favorable determination letter is a statement that, in the opinion of the Internal Revenue
Service, the terms of the plan document conform to the requirements of Internal
Revenue Code section 401(a), and that the plan is considered qualified for tax purposes,
under the law in effect at the time the letter is issued. While a determination may be
revoked at a later time if the Service believes the letter was incorrect, the Service will
generally not seek retroactive disqualification of a plan. Absent special circumstances,
the IRS will permit an employer who received a favorable (but later revoked)
determination letter to amend the plan to cure any subsequently discovered plan
infirmities.
While a favorable determination letter thus provides substantial protection to
employers and plans, it is important to note that the letter does not prevent plan
participants from asserting their rights under the law. The law permits plan participants
whose rights are violated by the terms of a plan (or a plan amendment) to recover
benefits -- even if the plan had received a favorable ruling from the Service. 15
IRS Examination Program. In addition to reviewing plan qualification issues in
14 Treas. Reg. section 1.7476-2; Statement of Procedural Rules, section
601.201(o).
15 See, e.g., Hickey V. Chicago Truck Drivers, Helpers and Warehouse Workers
Union, 980 F.2d 465 (7th Cir., 1992).
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advance at the request of plan sponsors through the determination letter program, the
Service also maintains an active examination program for qualified plans. The qualified
plan examination program functions much like the rest of the IRS' audit program:
Examinations of qualified plans are initiated by Service (not the employer) based on
selection criteria intended to focus our resources on areas where there is the highest
potential for noncompliance. The examination will consider not only issues of plan
design (as are also covered by the determination letter program) but also issues arising
in the actual operation of the plan. For example, a plan may provide an appropriate
vesting schedule, but in operation, plan participants may find that their benefits are
forfeited in violation of the plan terms. Alternatively, a plan that facially appears to
allocate benefits in accordance with tax law requirements may, because of the interplay
of multiple benefit formulas, pay patterns, length of service, age of participants and
interest rates, result in patterns of benefit accrual that are in conflict with Code
requirements.
There are, however, two notable differences between the qualified plan
examination program and the Service's other audit activities:
First, the focus of qualified plan examinations is not on revenue but on helping the
plan comply with the law so that the participants will receive the benefits they have
earned. Thus, when a problem is discovered in a plan audit, the Service will generally
attempt to work with the plan sponsor to correct the defect; disqualification of the plan is
used only as a last resort. To this end, the Service has established procedures for
correcting plan defects, both before and after they are discovered on audit. 16
Second, due to the highly specialized and technical nature of the issues
presented in qualified plan examinations, these audits have been centralized in 4 key
districts that cover the entire country (rather than spread among all 33 IRS districts).
Moreover, in recognition of the concerns that have been raised by cash balance plan
conversions, last week, we directed that any examination involving such a plan must
request technical advice from the National Office. As I noted previously, having all
cases (both examinations and determination letters) involving cash balance plan
conversions reviewed in the National Office should enable us to more thoroughly
consider both the technical and policy issues raised by these conversions.
CONCLUSION
Mr. Chairman, as the Committee is well aware, the conversion of traditional
defined benefit plans to cash balance plans raises a number of complex and difficult
questions that ultimately may need to be answered by reference to a wide range of
policy considerations. I hope my brief overview of the potential tax issues these
conversions may present under current law, together with my description of how the IRS
16 Rev. Proc. 98-22, 1998-12 I.R.B. 11.
12
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will be addressing these issues in the near term as we carry on our tax administration
responsibilities, will be helpful to the Committee in its consideration of these important
matters.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sirkin Stuart <[email protected]> (Sirkin Stuart <[email protected]> [ UNKNOWN
CREATION DATE/TIME:23-SEP-1999 12:57:21.00
SUBJECT: RE: Final version of tax papers
TO: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD 1)
READ:UNKNOWN
CC: Schub Judy <[email protected]> ( Schub Judy <[email protected]> [ UNKNOWN])
READ:UNKNOWN
CC: Healy Monica <[email protected]> ( Healy Monica <[email protected]> [ UNKNOWN])
READ:UNKNOWN
TEXT:
I'm not complaining but people here were surprised not to see mention of
pensions in light of your phone call yesterday. Is it in another document,
or did we get lucky?
-Original Message
From: [email protected]
[mailto:[email protected]]
Sent: Thursday, September 23, 1999 8:56 AM
To: [email protected]; [email protected];
[email protected]; David_W._Beier%[email protected];
Pieter_J_Boelhouwer%[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected] [email protected];
[email protected]; [email protected]; [email protected];
[email protected]; [email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected]; [email protected];
[email protected]; [email protected]; [email protected];
[email protected]; [email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]; [email protected];
[email protected]
Subject: Final version of tax papers
FYI -- These are public after POTUS makes his remarks.
Forwarded by Sarah Rosen Wartell/OPD/EOP on 09/23/99
08:54 AM
Melissa G. Green
09/22/99 11:15:54 PM
Record Type: Record
To: See the distribution list at the bottom of this message
cc:
Subject: Final version of tax papers
Please pass on
Forwarded by Melissa G. Green/OPD/EOP on 09/22/99
11:10 PM
Jason Furman
09/22/99 11:06:33 PM
Record Type: Record
To: Patrick M. Dorton/OPD/EOP@EOP, Melissa G. Green/OPD/EOP@EOP
cc:
Subject: Final version of tax papers
Includes three documents:
1. President Clinton and Vice President Gore: A Responsible Budget That
Puts First Things First
2. Why the President Will Veto the Republican Tax Bill
3. The Predictable Consequence of the Republican Tax Cut Would Be To Divert
Hundreds of Billions of Dollars From the Social Security Lockbox and Debt
Reduction(See attached file: maintax 1.doc)
Message Sent
To:
Michele Ballantyne/WHO/EOP@EOP
Gay L. Joshlyn/OPD/EOP@EOP
Sarah Rosen Wartell/OPD/EOP@EOP
Jonathan A. Kaplan/OPD/EOP@EOP
Thomas A. Kalil/OPD/EOP@EOP
Jeanne Lambrew/OPD/EOP@EOP
Sylvia M. Mathews/OMB/EOP@EOP
Dorothy Robyn/OPD/EOP@EOP
Richard L. Siewert/WHO/EOP@EOP
[email protected]
Malcolm R. Lee/OPD/EOP@EOP
Daniel D. Heath/OMB/EOP@EOP
Brian A. Barreto/WHO/EOP@EOP
Sally Katzen/OMB/EOP@EOP
Gary Waxman/OMB/EOP@EOP
Sharon H. Yuan/OPD/EOP
William G. Dauster/OPD/EOP@EOP
Shannon Mason/OMB/EOP@EOP
Natasha F. Bilimoria/OPD/EOP@EOP
Carl Haacke/OPD/EOP@EOP
Jason R. McNamara/WHO/EOP@EOP
Ronald Minsk/OPD/EOP@EOP
D Holly Hammonds/OPD/EOP@EOP
Lori Hendricks/OPD/EOP@EOP
Malcolm R. Lee/OPD/EOP@EOP
Elaine M. Mitsler/OPD/EOP@EOP
Lael Brainard/OPD/EOP@EOP
Richard M. Samans/OPD/EOP@EOP
Sonal R. Shah/NSC/EOP@EOP
Robert F. Wescott/OPD/EOP@EOP
Brian V. Kennedy/OPD/EOP@EOP
Lisa Green/OPD/EOP@EOP
Brooke B. Livingston/WHO/EOP@EOP
Leslie Bernstein/WHO/EOP@EOP
Minyon Moore/WHO/EOP@EOP
Linda L. Moore/WHO/EOP@EOP
Thomas D. Janenda/WHO/EOP@EOP
Loretta M. Ucelli/WHO/EOP@EOP
Scott R. Hynes/OVP@OVP
Charles W. Burson/OVP@OVP
David W. Beier/OVP@OVP
Andrew F. Schneider/OVP@OVP
Rachael E. Sullivan/OVP@OVP
Matthew T. Schneider/WHO/EOP@EOP
Rebecca L. Walldorff/WHO/EOP@EOP
Ruby Shamir/OPD/EOP@EOP
Nicole R. Rabner/WHO/EOP@EOP
Katharine Button/WHO/EOP@EOP
Sara M. Latham/WHO/EOP@EOP
Mary Morrison/WHO/EOP@EOP
Marjorie Tarmey/WHO/EOP@EOP
Mona K. Sutphen/NSC/EOP@EOP
Robert L. Nabors/OMB/EOP@EOP
Adrienne C. Erbach/OMB/EOP@EOP
Sandra L. Via/OMB/EOP@EOP
Janet L. Graves/OMB/EOP@EOP
Joseph J. Minarik/OMB/EOP@EOP
Ophelia D. West/OMB/EOP@EOP
Sandra Yamin/OMB/EOP@EOP
Barbara Chow/OMB/EOP@EOP
Shannon Mason/OMB/EOP@EOP
Sally Katzen/OMB/EOP@EOP
Karen Tramontano/WHO/EOP@EOP
Carolyn T. Wu/WHO/EOP@EOP
Richard L. Siewert/WHO/EOP@EOP
Ann F. Lewis/WHO/EOP@EOP
Aprill N. Springfield/WHO/EOP@EOP
Lindsay R. Drewel/WHO/EOP@EOP
Dominique L. Cano/WHO/EOP@EOP
Justin L. Coleman/WHO/EOP@EOP
Joel Johnson/WHO/EOP@EOP
Cathy R. Mays/OPD/EOP@EOP
Bruce N. Reed/OPD/EOP@EOP
Anna Richter/OPD/EOP@EOP
Anne W. Bovaird/WHO/EOP@EOP
Adrienne K. Elrod/WHO/EOP@EOP
Alice H. Williams/CEA/EOP@EOP
Audrey Choi/CEA/EOP@EOP
Lisa D. Branch/CEA/EOP@EOP
Rebecca Hunter/WHO/EOP@EOP
[email protected]@INET@LNGTWY
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: William G. Dauster (CN=William G. Dauster/OU=OPD/O=EOP [ OPD ])
CREATION DATE/TIME:23-SEP-1999 11:06:03.00
SUBJECT: Why the President Is Vetoing the Republican Tax Bill
TO: William G. Dauster ( CN=William G. Dauster/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
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ATTACHMENT I
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END ATTACHMENT 1
PRESIDENT CLINTON AND VICE PRESIDENT GORE:
A RESPONSIBLE BUDGET THAT PUTS FIRST THINGS FIRST
September 22, 1999
President Clinton and Vice President Gore Have Proposed a Fiscally Responsible Budget Plan that
Eliminates the Debt, Strengthens Social Security and Medicare, and Maintains Key Priorities like
Education. Under the President's proposal:
The debt held by the public would be repaid by 2015, resulting in lower interest rates and higher incomes.
Medicare solvency would be secured for at least a quarter century and Medicare would be reformed to make
it more efficient and competitive, and its benefits modernized with a new prescription drug benefit.
The Social Security surplus would be dedicated to paying down the debt and solvency would be extended.
The budget framework would invest in key priorities like education, environment, public safety, and
national security, while keeping overall spending at tight but realistic levels.
A fair and responsible tax cut would provide tax relief for middle-class Americans while helping them save
for retirement.
The President's Balanced and Responsible Budget Will Help Keep the Economy Strong, Building on the
Progress That He Has Made in Bringing America's Fiscal House Back in Order. The debt held by the
public is now $1.7 trillion lower than it was projected to be when the President came into office. This
achievement has kept interest rates down and confidence and investment up, contributing to the strongest
American economy in generations.
By comparison, debt quadrupled under Reagan and Bush. Under Presidents Reagan and Bush, the debt held
by the public quadrupled, increasing from 26 percent of GDP in 1981 to 50 percent in 1993.
The surplus this year is the largest on record. In 1992 the deficit was $290 billion and projected to grow to
more than $400 billion this year. As a result of the decisive action the President took in 1993 and 1997, the
budget surplus for this year is expected to be $99 billion, or 1.1 percent of GDP. This would be the largest
dollar surplus on record, and the largest relative to GDP since 1951.
The largest pay-down of debt in history. The Treasury Department recently announced that we will pay
down $87 billion of debt held by the public this fiscal year. That is the largest pay-down of debt on record.
In the last two years, we will have paid down $142 billion of debt held by the public.
Investment has boomed. The benefits of fiscal discipline for our economy have been enormous. Interest
rates are lower than they would have been otherwise, helping to fuel a 12.4 percent annual increase in
producers durable equipment investment since 1993-compared to 3.1 percent annual growth from 1981-92.
Unemployment is the lowest in a generation. The unemployment rate has fallen to 4.2 percent - the lowest
level in 29 years - and the Nation has created more than 19 million jobs since January 1993.
President Clinton Has a Plan to Pay Down the National Debt by 2015. The President has proposed that we
move Social Security surpluses entirely off-budget, reserving them to pay down the national debt and use the
interest savings from debt reduction to extend the solvency of Social Security. Paying down the debt would be
highly beneficial:
Interest payments would be eliminated. Under the President's budget, we can pay down the debt held by the
public by 2015. As a result, interest payments, once projected to eat up 28 percent of all federal spending in
2015, would also be eliminated.
Prepare for the retiring baby boomers. Paying off the debt will free up funds for investment, help keep
interest rates low, and boost workers' productivity and incomes. This fiscal discipline is the best way to
prepare the government, and the Nation, to meet the challenge of the retiring baby boomers.
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Strengthening and Modernizing Medicare, While Paying Down the Debt to Prepare for Our Future
Obligations. On June 29, the President introduced a plan to strengthen and modernize the Medicare program
and prepare it for the health, demographic, and financing challenges it faces in the 21st Century.
Making Medicare more efficient and competitive. The President's plan will save an estimated $72 billion
over 10 years by introducing greater competition between private health plans and traditional Medicare and
adopting successful private sector tools for managing Medicare. It also invests $7.5 billion to restore some
of the provider payment reductions from the Balanced Budget Act of 1997.
Securing Medicare solvency for a quarter century. As part of this comprehensive reform package, the
President's plan dedicates $328 billion of the non-Social Security surplus over 10 years to shore up
Medicare's Hospital Insurance trust fund. These resources will be used to pay down additional debt held by
the public and, together with the other reforms, this will extend solvency for at least a quarter century.
Modernizing benefits. The President has proposed to modernize Medicare to provide an optional
prescription drug benefit for all beneficiaries. About 75 percent of Medicare beneficiaries lack adequate,
dependable, affordable private-sector coverage of prescription drugs.
President Clinton Has a Fiscally Responsible Plan to Extend the Solvency of Social Security.
Keeping Social Security surpluses for Social Security. The President proposes to lock away all of the Social
Security surplus, a step that would pay down debt and prepare the government, and the Nation, for the
retirement of the baby boomers.
Social Security solvency and debt reduction transfers. After a decade of debt reduction, the President's plan
dedicates the interest savings resulting from this debt reduction to the Social Security Trust Fund. These
fiscally prudent steps will pay down the government debt, reduce interest payments in the future, and
provide resources to extend the solvency of Social Security by a half century.
Working together to extend solvency for 75 years. In addition to using the savings from debt reduction for
Social Security, the President has called for a bipartisan effort to make the reforms necessary to extend
solvency to 2075 while dealing with poverty of older women and eliminating the retirement earnings test.
Maintaining Our Domestic Priorities, Including National Defense, Education, Law Enforcement, Public
Health, the Environment, and Veterans Programs.
Funding for priorities. As part of a balanced and responsible framework with Social Security and Medicare
reform, the President's budget allocates an additional $328 billion over the next ten years for discretionary
spending beyond the levels provided in the 1997 Balanced Budget Act.
Spending is kept below inflation. These spending plans are tight but realistic, keeping overall discretionary
spending growth slightly below inflation, and domestic discretionary spending in 2009 roughly 10 percent
below its current level adjusted for inflation.
The President Is Committed to Fair and Substantial Tax Cuts for Middle-Income Americans.
The President proposes $250 billion of tax cuts targeted to the middle class. The President has proposed
Universal Savings Accounts (USAs) which would provide a tax credit to help middle-income families save
for retirement. The President's budget provides targeted tax relief to help families meet child care needs
and provide long-term care for ill relatives, to help communities build modern schools, and to encourage
investment in areas of our country which have not fully participated in our expansion.
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WHY THE PRESIDENT WILL VETO THE REPUBLICAN TAX BILL
September 22, 1999
The President Has Said That the He Will Veto the Republican Tax Cut Because:
It would likely drain hundreds of billions of dollars from the Social Security surplus, money that should
have been used for debt reduction.
It puts at risk our fiscal discipline and the continuing economic expansion.
It would explode in cost, threatening our fiscal discipline and leaving America permanently in debt.
It would leave no money to extend Medicare solvency or provide for prescription drugs.
It would lead to an untenable reduction in domestic spending, with potentially huge cuts in education, law
enforcement, public health, the environment, and veterans programs.
It would be unfair to working Americans.
PROTECTING SOCIAL SECURITY SURPLUSES AND FISCAL DISCIPLINE
The Republican Tax Bill Would Likely Drain Hundreds of Billions of Dollars From the Social Security Surplus,
Diverting Money From Debt Reduction While Not Extending The Solvency of Social Security By a Single Day.
Uses the entire non-Social Security surplus. The Republican tax cut, without sunsets, would cost more than $850
billion over 10 years; with interest added it would use up the entire $996 billion non-Social Security surplus
projected by the Congressional Budget Office.
Uses Social Security surpluses after 2004. The Republican tax cut uses more than the entire on-budget surplus after
2004, forcing the Republicans to choose between using Social Security revenues to pay for their tax cut or making
even larger cuts in education and other parts of core government.
Predictable consequence of the tax and budget plan is to drain hundreds of billions of dollars from the Social
Security surplus. The Republican budget resolution plans to cut defense and domestic discretionary spending by
nearly $700 billion relative to the President's plan. Spending cuts of this magnitude would require a nearly 50
percent cut in non-defense discretionary spending in 2009. If these untenable cuts were not made, the consequence
of the tax and budget plan would be to divert hundreds of billions of dollars of the Social Security surplus from
promised debt reduction.
The Republican plan would not extend Social Security solvency. The Republican plan does not extend solvency
past 2034. Worse still, by diverting money from debt reduction it will make it even more difficult for the Nation to
meet our obligations to future retirees.
The Republican Tax Cut, Assuming It Was Continued, Would Explode After 10 Years, Just When Social
Security Begins To Come Under Strain and Medicare Approaches its Projected Insolvency (2015). The tax cut,
together with funding for essential national defense, would leave America permanently in debt.
Sunsets hide potential cost. To keep to a $792 billion tax cut, the Republicans sunset many of the major provisions
after 2008; the result is that taxes increase by more than $60 billion in 2009 relative to their 2008 level. Reversing
this implausible provision would bring the total cost to more than $850 billion.
Cost would explode to $2.7 trillion in second decade. Projections by the Department of the Treasury indicate that
the tax cut would cost $2.7 trillion between 2010 and 2019. The extra debt service associated with the tax would be
another $1.4 trillion - bringing the total cost of the tax cut over the second 10 years to about $4 trillion.
Cost, with interest, is $5 trillion over 20 years. If continued, the tax cut and the associated interest would cost $5
trillion over 20 years.
Does not pay down the debt. The President's plan invests in key priorities and pays off the debt by 2015. If the
Republican tax cut were continued, and defense was funded at the levels requested by the President, the debt would
never be repaid.
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The Republican Tax Bill Would Threaten Our Fiscal Discipline and Risk Our Economic Expansion.
Paying down the debt is best for the economy. Leading experts, from Federal Reserve Chairman Alan
Greenspan to Wall Street's Henry Kaufman, have recognized that paying down the debt, not large tax cuts
or spending increases, would be best for our economy.
President's plan would pay down more debt. The predictable consequence of the Republican tax and budget
plan, because it ignores Medicare and requires 50 percent cuts in domestic spending, would be to contribute
less to debt reduction than would the President's plan, resulting in less investment in the technologies and
equipment that make America's workers the most productive - and the highest paid - in the world.
Republican plan threatens our fiscal discipline. The commitment to a large and exploding tax cut based
merely on projected surpluses threatens our commitment to fiscal discipline and risks raising interest rates.
NOTHING FOR MEDICARE
The Republican Plan Leaves Nothing for Medicare, Which Is Projected To Become Insolvent In 2015.
Tax cut uses all non-Social Security surpluses. The Republican tax cut spends the entire non-Social
Security surplus, leaving nothing for Medicare solvency.
Substantial solvency for Medicare will require additional resources. Medicare experts agree that additional
resources are needed to extend Medicare solvency substantially without risky cuts or higher payroll taxes.
No surplus to modify 1997 reforms. Many Republican Members of Congress have supported increasing
Medicare spending by repealing some Balanced Budget Act of 1997 provisions. If none of the surplus is
saved for Medicare, even larger cuts in hospitals and nursing homes would be required to extend solvency.
LARGE CUTS IN MEDICARE AND CORE GOVERNMENT
As Written, GOP Tax Bill Would Also Trigger Automatic Across-The-Board Cuts That Would Cut
Medicare & Entirely Eliminate Key Programs.
Triggers mandatory cuts. The Republican tax cut, as written, would trigger across-the-board spending cuts
in mandatory programs (known as sequestration) under the Budget Enforcement Act's pay-as-you-go rules.
Cuts Medicare. These cuts would eliminate $41.4 billion from Medicare over the next 5 years (2000-2004),
according to an Office of Management and Budget analysis.
Eliminates key programs. These cuts would automatically eliminate several key programs, including farm
safety net programs (cut by $19.2 billion), veterans education and training (cut by $2.0 billion), child
support enforcement (cut by $10.3 billion), and Social Service Block Grants that pay for child protection,
child care, and the needs of the elderly and disabled ($4.4 billion).
Even these cuts would not pay for the tax cut. Even the reduction or elimination of these programs would
offset only a small fraction of the Republican tax cut; the remainder would force choices between large and
untenable cuts in core government or diverting Social Security funds from promised debt reduction.
The Republican Tax Cut Is Based On Untenable Reductions in Domestic Priorities, Including Education, Law
Enforcement, Public Health, the Environment, and Veterans Programs.
President's spending is tight but realistic. The President's budget devotes $328 billion to discretionary
spending, which still keeps spending slightly below its current level adjusted for inflation. Domestic
discretionary spending will be kept roughly 10 percent below its current level adjusted for inflation by 2009.
50 percent cuts under Republican plan. The Republican tax and budget plan, if they match the President's
defense request, would lead to a nearly 50 percent cut in all domestic discretionary spending in 2009. This
could require massive cuts in everything from education, to the environment, to public safety.
Predictable consequence is less debt reduction. If these highly damaging cuts are not made, the Republican
tax and budget plan would divert hundreds of billions of dollars from promised debt reduction.
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UNFAIR TO WORKING AMERICANS
The Large Republican Plan Delivers Only a Fraction of Its Benefits to the Middle Class; Even These Benefits
Could Be More than Wiped Out by the Higher Interest Rates That Could Result from this Fiscally Irresponsible
Policy.
Little tax relief for the middle class. Under the Republican tax plan, 24 percent of the tax cuts go to the top
I percent of families, those earning over $347,000 per year. At the same time, less than 22 percent of the
benefits go to the roughly 90 million families - 80 percent of all families - earning less than $82,000 per
year.
Higher mortgage payments could reverse tax break. Under the Republican plan, middle-income families
will see an average tax reduction of about $350. If mortgage rates rose even ½ percentage point, this tax
break would be fully offset by higher mortgage payments for a typical middle-income family with a
$100,000 mortgage.
Estate tax elimination provides large benefits to a few, just years before Medicare is projected to become
insolvent. Eliminating all estate tax revenues for 2009 would cost almost $36 billion, which would provide
an average benefit of over $700,000 to the roughly 50,000 estates - less than 2 percent of all deaths -
subject to taxes. At the same time, if no steps are taken, the Medicare trust fund will start to be depleted and
will become insolvent in 2015.
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THE PREDICTABLE CONSEQUENCE OF THE REPUBLICAN TAX CUT
WOULD BE TO DIVERT HUNDREDS OF BILLIONS OF DOLLARS FROM THE
SOCIAL SECURITY LOCKBOX AND DEBT REDUCTION
September 22, 1999
The Republican Tax Cut, With Interest, Would Break the Social Security "Lockbox" After 2004 as shown
in the table below.
2005
2006
2007
2008
2009
Non-Social Security Surplus (CBO)
92
129
146
157
178
Republican Tax Cut*
85
117
140
168
188
Additional Interest From Tax Cut
11
16
24
33
44
Social Security Surplus Diverted
-4
-4
-18
-44
-54
From Debt Reduction
*Assumes that the full tax cut is continued after 2008.
To Avoid Using Social Security Surpluses, the Republican Tax and Budget Plan Is Forced To Cut All
Domestic Discretionary Spending by Nearly Half in 2009 (assuming that defense is funded at the President's
level). This could require cuts of nearly 50 percent in everything from air traffic safety to education to
healthcare to veterans programs.
The Republican budget resolution sets aside $606 billion for all discretionary spending in 2009. If the
Republicans fund defense at the levels requested by the President ($384 billion in 2009), they would be able
to devote only $222 billion to all domestic spending, including education, healthcare, and veterans
programs, in 2009. This is substantially below the roughly $304 billion spent on non-defense discretionary
spending in 1999. This represents a nearly 50 percent cut relative to 1999 levels adjusted for inflation.
If These Unfeasible and Undesirable Cuts Are Not Made, then the Republican Tax Cut Would Spend
Hundreds of Billions of Dollars from the Social Security Surplus. Under highly conservative assumptions,
even with large discretionary spending cuts, the fully phased in Republican tax cut would divert Social Security
surpluses from debt reduction, leaving the debt hundreds of billions of dollars higher than the President's plan.
The Republican Tax Cut, If Continued, Would Leave America Permanently In Debt. It is unrealistic to
assume that the Republican tax cut will be reversed. If the tax cuts were continued:
The cost of the tax bill would explode just when the baby boomers begin to retire, Medicare becomes
insolvent (2015), and Social Security payroll revenues begin to fall short of benefits.
The cost between 2010 and 2019 would be $2.7 trillion, according to projections by the Treasury
Department. The total cost, including lost interest savings, would be over $4 trillion.
The total cost over the 20 years between 2000 and 2019, including interest, would be about $5 trillion.
The debt held by the public would not be eliminated (assuming defense is funded at the level requested by
the President).
The Exploding Republican Tax Cut
$5
$4
Trillions of dollars
$3
$2
$1
$0
2000-09
2010-2019
Note: Cost with interest, assuming tax cut is continued.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD 1)
CREATION DATE/TIME:23-SEP-1999 08:56:50.00
SUBJECT: Final version of tax papers
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TEXT:
FYI These are public after POTUS makes his remarks.
Forwarded by Sarah Rosen Wartell/OPD/EOP on
09/23/99 08:54 AM
Melissa G. Green
09/22/99 11:15:54 PM
Record Type: Record
To: See the distribution list at the bottom of this message
cc:
Subject: Final version of tax papers
Please pass on
Forwarded by Melissa G. Green/OPD/EOP on 09/22/99
11:10 PM
Jason Furman
09/22/99 11:06:33 PM
Record Type: Record
To: Patrick M. Dorton/OPD/EOP@EOP, Melissa G. Green/OPD/EOP@EOP
cc:
Subject: Final version of tax papers
Includes three documents:
1. President Clinton and Vice President Gore: A Responsible Budget That
Puts First Things First
2. Why the President Will Veto the Republican Tax Bill
3. The Predictable Consequence of the Republican Tax Cut Would Be To
Divert Hundreds of Billions of Dollars From the Social Security Lockbox
and Debt Reduction
Message Sent
To:
Michele Ballantyne/WHO/EOP@EOP
Gay L. Joshlyn/OPD/EOP@EOP
Sarah Rosen Wartell/OPD/EOP@EOP
Jonathan A. Kaplan/OPD/EOP@EOP
Thomas A. Kalil/OPD/EOP@EOP
Jeanne Lambrew/OPD/EOP@EOP
Sylvia M. Mathews/OMB/EOP@EOP
Dorothy Robyn/OPD/EOP@EOP
Richard L. Siewert/WHO/EOP@EOP
[email protected]
Malcolm R. Lee/OPD/EOP@EOP
Daniel D. Heath/OMB/EOP@EOP
Brian A. Barreto/WHO/EOP@EOP
Sally Katzen/OMB/EOP@EOP
Gary Waxman/OMB/EOP@EOP
Sharon H. Yuan/OPD/EOP
William G. Dauster/OPD/EOP@EOP
Shannon Mason/OMB/EOP@EOP
Natasha F. Bilimoria/OPD/EOP@EOP
Carl Haacke/OPD/EOP@EOP
Jason R. McNamara/WHO/EOP@EOP
Ronald Minsk/OPD/EOP@EOP
D Holly Hammonds/OPD/EOP@EOP
Lori Hendricks/OPD/EOP@EOP
Malcolm R. Lee/OPD/EOP@EOP
Elaine M. Mitsler/OPD/EOP@EOP
Lael Brainard/OPD/EOP@EOP
Richard M. Samans/OPD/EOP@EOP
Sonal R. Shah/NSC/EOP@EOP
Robert F. Wescott/OPD/EOP@EOP
Brian V. Kennedy/OPD/EOP@EOP
Lisa Green/OPD/EOP@EOP
Brooke B. Livingston/WHO/EOP@EOP
Leslie Bernstein/WHO/EOP@EOP
Minyon Moore/WHO/EOP@EOP
Linda L. Moore/WHO/EOP@EOP
Thomas D. Janenda/WHO/EOP@EOP
Loretta M. Ucelli/WHO/EOP@EOP
Scott R. Hynes/OVP@OVP
Charles W. Burson/OVP@OVP
David W. Beier/OVP@OVP
Andrew F. Schneider/OVP@OVP
Rachael E. Sullivan/OVP@OVP
Matthew T. Schneider/WHO/EOP@EOP
Rebecca L. Walldorff/WHO/EOP@EOP
Ruby Shamir/OPD/EOP@EOP
Nicole R. Rabner/WHO/EOP@EOP
Katharine Button/WHO/EOP@EOP
Sara M. Latham/WHO/EOP@EOP
Mary Morrison/WHO/EOP@EOP
Marjorie Tarmey/WHO/EOP@EOP
Mona K. Sutphen/NSC/EOP@EOP
Robert L. Nabors/OMB/EOP@EOP
Adrienne C. Erbach/OMB/EOP@EOP
Sandra L. Via/OMB/EOP@EOP
Janet L. Graves/OMB/EOP@EOP
Joseph J. Minarik/OMB/EOP@EOP
Ophelia D. West/OMB/EOP@EOP
Sandra Yamin/OMB/EOP@EOP
Barbara Chow/OMB/EOP@EOP
Shannon Mason/OMB/EOP@EOP
Sally Katzen/OMB/EOP@EOP
Karen Tramontano/WHO/EOP@EOP
Carolyn T. Wu/WHO/EOP@EOP
Richard L. Siewert/WHO/EOP@EOP
Ann F. Lewis/WHO/EOP@EOP
Aprill N. Springfield/WHO/EOP@EOP
Lindsay R. Drewel/WHO/EOP@EOP
Dominique L. Cano/WHO/EOP@EOP
Justin L. Coleman/WHO/EOP@EOP
Joel Johnson/WHO/EOP@EOP
Cathy R. Mays/OPD/EOP@EOP
Bruce N. Reed/OPD/EOP@EOP
Anna Richter/OPD/EOP@EOP
Anne W. Bovaird/WHO/EOP@EOP
Adrienne K. Elrod/WHO/EOP@EOP
Alice H. Williams/CEA/EOP@EOP
Audrey Choi/CEA/EOP@EOP
Lisa D. Branch/CEA/EOP@EOP
Rebecca Hunter/WHO/EOP@EOP
[email protected]@INET@LNGTWY
ATTACHMENT 1
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END ATTACHMENT 1
PRESIDENT CLINTON AND VICE PRESIDENT GORE:
A RESPONSIBLE BUDGET THAT PUTS FIRST THINGS FIRST
September 22, 1999
President Clinton and Vice President Gore Have Proposed a Fiscally Responsible Budget Plan that
Eliminates the Debt, Strengthens Social Security and Medicare, and Maintains Key Priorities like
Education. Under the President's proposal:
The debt held by the public would be repaid by 2015, resulting in lower interest rates and higher incomes.
Medicare solvency would be secured for at least a quarter century and Medicare would be reformed to make
it more efficient and competitive, and its benefits modernized with a new prescription drug benefit.
The Social Security surplus would be dedicated to paying down the debt and solvency would be extended.
The budget framework would invest in key priorities like education, environment, public safety, and
national security, while keeping overall spending at tight but realistic levels.
A fair and responsible tax cut would provide tax relief for middle-class Americans while helping them save
for retirement.
The President's Balanced and Responsible Budget Will Help Keep the Economy Strong, Building on the
Progress That He Has Made in Bringing America's Fiscal House Back in Order. The debt held by the
public is now $1.7 trillion lower than it was projected to be when the President came into office. This
achievement has kept interest rates down and confidence and investment up, contributing to the strongest
American economy in generations.
By comparison, debt quadrupled under Reagan and Bush. Under Presidents Reagan and Bush, the debt held
by the public quadrupled, increasing from 26 percent of GDP in 1981 to 50 percent in 1993.
The surplus this year is the largest on record. In 1992 the deficit was $290 billion and projected to grow to
more than $400 billion this year. As a result of the decisive action the President took in 1993 and 1997, the
budget surplus for this year is expected to be $99 billion, or 1.1 percent of GDP. This would be the largest
dollar surplus on record, and the largest relative to GDP since 1951.
The largest pay-down of debt in history. The Treasury Department recently announced that we will pay
down $87 billion of debt held by the public this fiscal year. That is the largest pay-down of debt on record.
In the last two years, we will have paid down $142 billion of debt held by the public.
Investment has boomed. The benefits of fiscal discipline for our economy have been enormous. Interest
rates are lower than they would have been otherwise, helping to fuel a 12.4 percent annual increase in
producers durable equipment investment since 1993-compared to 3.1 percent annual growth from 1981-92.
Unemployment is the lowest in a generation. The unemployment rate has fallen to 4.2 percent - the lowest
level in 29 years - and the Nation has created more than 19 million jobs since January 1993.
President Clinton Has a Plan to Pay Down the National Debt by 2015. The President has proposed that we
move Social Security surpluses entirely off-budget, reserving them to pay down the national debt and use the
interest savings from debt reduction to extend the solvency of Social Security. Paying down the debt would be
highly beneficial:
Interest payments would be eliminated. Under the President's budget, we can pay down the debt held by the
public by 2015. As a result, interest payments, once projected to eat up 28 percent of all federal spending in
2015, would also be eliminated.
Prepare for the retiring baby boomers. Paying off the debt will free up funds for investment, help keep
interest rates low, and boost workers' productivity and incomes. This fiscal discipline is the best way to
prepare the government, and the Nation, to meet the challenge of the retiring baby boomers.
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Strengthening and Modernizing Medicare, While Paying Down the Debt to Prepare for Our Future
Obligations. On June 29, the President introduced a plan to strengthen and modernize the Medicare program
and prepare it for the health, demographic, and financing challenges it faces in the 21st Century.
Making Medicare more efficient and competitive. The President's plan will save an estimated $72 billion
over 10 years by introducing greater competition between private health plans and traditional Medicare and
adopting successful private sector tools for managing Medicare. It also invests $7.5 billion to restore some
of the provider payment reductions from the Balanced Budget Act of 1997.
Securing Medicare solvency for a quarter century. As part of this comprehensive reform package, the
President's plan dedicates $328 billion of the non-Social Security surplus over 10 years to shore up
Medicare's Hospital Insurance trust fund. These resources will be used to pay down additional debt held by
the public and, together with the other reforms, this will extend solvency for at least a quarter century.
Modernizing benefits. The President has proposed to modernize Medicare to provide an optional
prescription drug benefit for all beneficiaries. About 75 percent of Medicare beneficiaries lack adequate,
dependable, affordable private-sector coverage of prescription drugs.
President Clinton Has a Fiscally Responsible Plan to Extend the Solvency of Social Security.
Keeping Social Security surpluses for Social Security. The President proposes to lock away all of the Social
Security surplus, a step that would pay down debt and prepare the government, and the Nation, for the
retirement of the baby boomers.
Social Security solvency and debt reduction transfers. After a decade of debt reduction, the President's plan
dedicates the interest savings resulting from this debt reduction to the Social Security Trust Fund. These
fiscally prudent steps will pay down the government debt, reduce interest payments in the future, and
provide resources to extend the solvency of Social Security by a half century.
Working together to extend solvency for 75 years. In addition to using the savings from debt reduction for
Social Security, the President has called for a bipartisan effort to make the reforms necessary to extend
solvency to 2075 while dealing with poverty of older women and eliminating the retirement earnings test.
Maintaining Our Domestic Priorities, Including National Defense, Education, Law Enforcement, Public
Health, the Environment, and Veterans Programs.
Funding for priorities. As part of a balanced and responsible framework with Social Security and Medicare
reform, the President's budget allocates an additional $328 billion over the next ten years for discretionary
spending beyond the levels provided in the 1997 Balanced Budget Act.
Spending is kept below inflation. These spending plans are tight but realistic, keeping overall discretionary
spending growth slightly below inflation, and domestic discretionary spending in 2009 roughly 10 percent
below its current level adjusted for inflation.
The President Is Committed to Fair and Substantial Tax Cuts for Middle-Income Americans.
The President proposes $250 billion of tax cuts targeted to the middle class. The President has proposed
Universal Savings Accounts (USAs) which would provide a tax credit to help middle-income families save
for retirement. The President's budget provides targeted tax relief to help families meet child care needs
and provide long-term care for ill relatives, to help communities build modern schools, and to encourage
investment in areas of our country which have not fully participated in our expansion.
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WHY THE PRESIDENT WILL VETO THE REPUBLICAN TAX BILL
September 22, 1999
The President Has Said That the He Will Veto the Republican Tax Cut Because:
It would likely drain hundreds of billions of dollars from the Social Security surplus, money that should
have been used for debt reduction.
It puts at risk our fiscal discipline and the continuing economic expansion.
It would explode in cost, threatening our fiscal discipline and leaving America permanently in debt.
It would leave no money to extend Medicare solvency or provide for prescription drugs.
It would lead to an untenable reduction in domestic spending, with potentially huge cuts in education, law
enforcement, public health, the environment, and veterans programs.
It would be unfair to working Americans.
PROTECTING SOCIAL SECURITY SURPLUSES AND FISCAL DISCIPLINE
The Republican Tax Bill Would Likely Drain Hundreds of Billions of Dollars From the Social Security Surplus,
Diverting Money From Debt Reduction While Not Extending The Solvency of Social Security By a Single Day.
Uses the entire non-Social Security surplus. The Republican tax cut, without sunsets, would cost more than $850
billion over 10 years; with interest added it would use up the entire $996 billion non-Social Security surplus
projected by the Congressional Budget Office.
Uses Social Security surpluses after 2004. The Republican tax cut uses more than the entire on-budget surplus after
2004, forcing the Republicans to choose between using Social Security revenues to pay for their tax cut or making
even larger cuts in education and other parts of core government.
Predictable consequence of the tax and budget plan is to drain hundreds of billions of dollars from the Social
Security surplus. The Republican budget resolution plans to cut defense and domestic discretionary spending by
nearly $700 billion relative to the President's plan. Spending cuts of this magnitude would require a nearly 50
percent cut in non-defense discretionary spending in 2009. If these untenable cuts were not made, the consequence
of the tax and budget plan would be to divert hundreds of billions of dollars of the Social Security surplus from
promised debt reduction.
The Republican plan would not extend Social Security solvency. The Republican plan does not extend solvency
past 2034. Worse still, by diverting money from debt reduction it will make it even more difficult for the Nation to
meet our obligations to future retirees.
The Republican Tax Cut, Assuming It Was Continued, Would Explode After 10 Years, Just When Social
Security Begins To Come Under Strain and Medicare Approaches its Projected Insolvency (2015). The tax cut,
together with funding for essential national defense, would leave America permanently in debt.
Sunsets hide potential cost. To keep to a $792 billion tax cut, the Republicans sunset many of the major provisions
after 2008; the result is that taxes increase by more than $60 billion in 2009 relative to their 2008 level. Reversing
this implausible provision would bring the total cost to more than $850 billion.
Cost would explode to $2.7 trillion in second decade. Projections by the Department of the Treasury indicate that
the tax cut would cost $2.7 trillion between 2010 and 2019. The extra debt service associated with the tax would be
another $1.4 trillion - bringing the total cost of the tax cut over the second 10 years to about $4 trillion.
Cost, with interest, is $5 trillion over 20 years. If continued, the tax cut and the associated interest would cost $5
trillion over 20 years.
Does not pay down the debt. The President's plan invests in key priorities and pays off the debt by 2015. If the
Republican tax cut were continued, and defense was funded at the levels requested by the President, the debt would
never be repaid.
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The Republican Tax Bill Would Threaten Our Fiscal Discipline and Risk Our Economic Expansion.
Paying down the debt is best for the economy. Leading experts, from Federal Reserve Chairman Alan
Greenspan to Wall Street's Henry Kaufman, have recognized that paying down the debt, not large tax cuts
or spending increases, would be best for our economy.
President's plan would pay down more debt. The predictable consequence of the Republican tax and budget
plan, because it ignores Medicare and requires 50 percent cuts in domestic spending, would be to contribute
less to debt reduction than would the President's plan, resulting in less investment in the technologies and
equipment that make America's workers the most productive - and the highest paid - in the world.
Republican plan threatens our fiscal discipline. The commitment to a large and exploding tax cut based
merely on projected surpluses threatens our commitment to fiscal discipline and risks raising interest rates.
NOTHING FOR MEDICARE
The Republican Plan Leaves Nothing for Medicare, Which Is Projected To Become Insolvent In 2015.
Tax cut uses all non-Social Security surpluses. The Republican tax cut spends the entire non-Social
Security surplus, leaving nothing for Medicare solvency.
Substantial solvency for Medicare will require additional resources. Medicare experts agree that additional
resources are needed to extend Medicare solvency substantially without risky cuts or higher payroll taxes.
No surplus to modify 1997 reforms. Many Republican Members of Congress have supported increasing
Medicare spending by repealing some Balanced Budget Act of 1997 provisions. If none of the surplus is
saved for Medicare, even larger cuts in hospitals and nursing homes would be required to extend solvency.
LARGE CUTS IN MEDICARE AND CORE GOVERNMENT
As Written, GOP Tax Bill Would Also Trigger Automatic Across-The-Board Cuts That Would Cut
Medicare & Entirely Eliminate Key Programs.
Triggers mandatory cuts. The Republican tax cut, as written, would trigger across-the-board spending cuts
in mandatory programs (known as sequestration) under the Budget Enforcement Act's pay-as-you-go rules.
Cuts Medicare. These cuts would eliminate $41.4 billion from Medicare over the next 5 years (2000-2004),
according to an Office of Management and Budget analysis.
Eliminates key programs. These cuts would automatically eliminate several key programs, including farm
safety net programs (cut by $19.2 billion), veterans education and training (cut by $2.0 billion), child
support enforcement (cut by $10.3 billion), and Social Service Block Grants that pay for child protection,
child care, and the needs of the elderly and disabled ($4.4 billion).
Even these cuts would not pay for the tax cut. Even the reduction or elimination of these programs would
offset only a small fraction of the Republican tax cut; the remainder would force choices between large and
untenable cuts in core government or diverting Social Security funds from promised debt reduction.
The Republican Tax Cut Is Based On Untenable Reductions in Domestic Priorities, Including Education, Law
Enforcement, Public Health, the Environment, and Veterans Programs.
President's spending is tight but realistic. The President's budget devotes $328 billion to discretionary
spending, which still keeps spending slightly below its current level adjusted for inflation. Domestic
discretionary spending will be kept roughly 10 percent below its current level adjusted for inflation by 2009.
50 percent cuts under Republican plan. The Republican tax and budget plan, if they match the President's
defense request, would lead to a nearly 50 percent cut in all domestic discretionary spending in 2009. This
could require massive cuts in everything from education, to the environment, to public safety.
Predictable consequence is less debt reduction. If these highly damaging cuts are not made, the Republican
tax and budget plan would divert hundreds of billions of dollars from promised debt reduction.
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UNFAIR TO WORKING AMERICANS
The Large Republican Plan Delivers Only a Fraction of Its Benefits to the Middle Class; Even These Benefits
Could Be More than Wiped Out by the Higher Interest Rates That Could Result from this Fiscally Irresponsible
Policy.
Little tax relief for the middle class. Under the Republican tax plan, 24 percent of the tax cuts go to the top
1 percent of families, those earning over $347,000 per year. At the same time, less than 22 percent of the
benefits go to the roughly 90 million families - 80 percent of all families - earning less than $82,000 per
year.
Higher mortgage payments could reverse tax break. Under the Republican plan, middle-income families
will see an average tax reduction of about $350. If mortgage rates rose even ½ percentage point, this tax
break would be fully offset by higher mortgage payments for a typical middle-income family with a
$100,000 mortgage.
Estate tax elimination provides large benefits to a few, just years before Medicare is projected to become
insolvent. Eliminating all estate tax revenues for 2009 would cost almost $36 billion, which would provide
an average benefit of over $700,000 to the roughly 50,000 estates - less than 2 percent of all deaths -
subject to taxes. At the same time, if no steps are taken, the Medicare trust fund will start to be depleted and
will become insolvent in 2015.
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THE PREDICTABLE CONSEQUENCE OF THE REPUBLICAN TAX CUT
WOULD BE TO DIVERT HUNDREDS OF BILLIONS OF DOLLARS FROM THE
SOCIAL SECURITY LOCKBOX AND DEBT REDUCTION
September 22, 1999
The Republican Tax Cut, With Interest, Would Break the Social Security "Lockbox" After 2004 as shown
in the table below.
2005
2006
2007
2008
2009
Non-Social Security Surplus (CBO)
92
129
146
157
178
Republican Tax Cut*
85
117
140
168
188
Additional Interest From Tax Cut
11
16
24
33
44
Social Security Surplus Diverted
-4
-4
-18
-44
-54
From Debt Reduction
* Assumes that the full tax cut is continued after 2008.
To Avoid Using Social Security Surpluses, the Republican Tax and Budget Plan Is Forced To Cut All
Domestic Discretionary Spending by Nearly Half in 2009 (assuming that defense is funded at the President's
level). This could require cuts of nearly 50 percent in everything from air traffic safety to education to
healthcare to veterans programs.
The Republican budget resolution sets aside $606 billion for all discretionary spending in 2009. If the
Republicans fund defense at the levels requested by the President ($384 billion in 2009), they would be able
to devote only $222 billion to all domestic spending, including education, healthcare, and veterans
programs, in 2009. This is substantially below the roughly $304 billion spent on non-defense discretionary
spending in 1999. This represents a nearly 50 percent cut relative to 1999 levels adjusted for inflation.
If These Unfeasible and Undesirable Cuts Are Not Made, then the Republican Tax Cut Would Spend
Hundreds of Billions of Dollars from the Social Security Surplus. Under highly conservative assumptions,
even with large discretionary spending cuts, the fully phased in Republican tax cut would divert Social Security
surpluses from debt reduction, leaving the debt hundreds of billions of dollars higher than the President's plan.
The Republican Tax Cut, If Continued, Would Leave America Permanently In Debt. It is unrealistic to
assume that the Republican tax cut will be reversed. If the tax cuts were continued:
The cost of the tax bill would explode just when the baby boomers begin to retire, Medicare becomes
insolvent (2015), and Social Security payroll revenues begin to fall short of benefits.
The cost between 2010 and 2019 would be $2.7 trillion, according to projections by the Treasury
Department. The total cost, including lost interest savings, would be over $4 trillion.
The total cost over the 20 years between 2000 and 2019, including interest, would be about $5 trillion.
The debt held by the public would not be eliminated (assuming defense is funded at the level requested by
the President).
The Exploding Republican Tax Cut
$5
$4
Trillions of dollars
$3
$2
$1
$0
2000-09
2010-2019
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Note: Cost with interest, assuming tax cut is continued.
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RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Mark D. Menchik ( CN=Mark D. Menchik/OU=OMB/O=EOP [ OMB 1)
CREATION DATE/TIME:27-SEP-1999 14:43:04.00
SUBJECT: Re: Pensions working group
TO: Gay L. Joshlyn ( CN=Gay L. Joshlyn/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
CC: larry r. matlack ( CN=larry r. matlack/OU=omb/O=eop@eop [ OMB ])
READ:UNKNOWN
CC: [email protected] ( [email protected] [ UNKNOWN 1)
READ:UNKNOWN
CC: [email protected]@inet ( [email protected]@inet [ UNKNOWN D
READ:UNKNOWN
CC: sarah rosen wartell ( CN=sarah rosen wartell/OU=opd/O=eop@eop [ OPD ] )
READ:UNKNOWN
TEXT:
Works fine for me -- thanks.
Gay L. Joshlyn
09/27/99 02:40:28 PM
Record Type: Record
To: Sarah Rosen Wartell/OPD/EOP@EOP
cc: See the distribution list at the bottom of this message
bcc:
Subject: Re: Pensions working group
Is Thursday afternoon ok?
Sarah Rosen Wartell
09/27/99 09:45:59 AM
Record Type: Record
To: Mark D. Menchik/OMB/EOP@EOP
cc: gay I. joshlyn/opd/eop@eop, [email protected],
[email protected]@inet, larry r. matlack/omb/eop@eop
bcc:
Subject: Re: Pensions working group
gay -- Please find another time. thanks.
Mark D. Menchik 09/25/99 11:13:26 AM
Record Type: Record
To: Sarah Rosen Wartell/OPD/EOP@EOP
cc: Gay L. Joshlyn/OPD/EOP@EOP, [email protected],
[email protected]@inet, Larry R. Matlack/OMB/EOP@EOP
bcc:
Subject: Re: Pensions working group
On Thursday morning, 10-12, I and several of the PWBA members will be at a
budget meeting at DOL. Is another time possible?
Sarah Rosen Wartell
09/24/99 06:55:48 PM
Record Type: Record
To: Gay L. Joshlyn/OPD/EOP@EOP
cc: See the distribution list at the bottom of this message
Subject: Pensions working group
Please schedule a pensions working group "update" meeting for next
Thursday morning. Please advise folks of the time and place. Thanks.
Message Copied
To:
Joel K. Wiginton/WHO/EOP@EOP
Broderick Johnson/WHO/EOP@EOP
Natasha F. Bilimoria/OPD/EOP@EOP
Sarah Rosen Wartell/OPD/EOP@EOP
David W. Beier/OVP@OVP
Pieter J. Boelhouwer/OVP@OVP
Mark D. Menchik/OMB/EOP@EOP
Robin L. Lumsdaine/CEA/EOP@EOP
Laurence R. Jacobson/OMB/EOP@EOP
Bruce D. Long/OMB/EOP@EOP
Janet R. Forsgren/OMB/EOP@EOP
Bennie C. Rogers/OMB/EOP@EOP
Lisa B. Fairhall/OMB/EOP@EOP
Douglas D. McCormick/OMB/EOP@EOP
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
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[email protected]
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Message Copied
To:
mark d. menchik/omb/eop@eop
gay 1. joshlyn/opd/eop@eop
[email protected]
[email protected]@inet
larry r. matlack/omb/eop@eop
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell CN=Sarah Rosen Wartell/OU=OPD/O=EOP OPD
CREATION DATE/TIME:12-OCT-1999 13:43:09.00
SUBJECT: more on 415 limits
TO: David W. Beier (CN=David W. Beier/O=OVP@OVP UNKNOWN])
READ:UNKNOWN
TEXT:
First, Rick Magahey is preparing a short note for you that is good, but
states something slightly differently than my earlier note. I think we
are both right. My note assumes that the AFL was asking for multiemployer
beneficiaries to get better treatment than other special categories
(merchant marines, gov't, non-profits) and Mahgehy's suggests that the AFL
was proposing to be added to the special category list and then increase
the limits for everyone in that group. At different times, they have
argued both. The last paper we had for them is as Magehey describes.
Second, on cost: OMB internal estimates for what we proposed in the VP's
letter were $10-40 million over 10 years (not refined more precisely than
that -- over 5 years would be about a third). They assume that they
additional increment added by the AFL's further proposal would be a
fraction of that but no precise estimates have been done.
AFL, using Joint Tax Committee figures, estimated that their whole
proposal would cost less than $37 million over 5 years, $81 million over
10. However, we include in our baseline some of these costs.
Third, we understand that the AFL-CIO is arguing that this change is
necessary to restore a historical ratio between the early retirement limit
and the regular retirement limit. Treasury argues that the relationship
is irrelevant to the point. Some history: In 1974, for the first time
Congress imposed a cap on benefits. At that time, the cap was the same
whether you retired at 55 or 65 -- there was no actuarial reduction.
Later, in 1982, they recognized that a retirement benefit level at age 55
was worth more than the same benefit at 65 and imposed an actuarial
reduction in the cap. However, they imposed a transitional rule to help
phase in the cap and prevent harm to those in the interim. The
transitional rule created a floor of $75,000 for early retirement benefits
for everyone. In 1986, they left the frozen transitional floor in place
for just a few special categories of beneficiaries -- gov't and
non-profits and merchant marines. That floor was not indexed, but the
normal retirement age cap was. Over time, that floor became irrelevant,
as the normal retirement age actuarily reduced for early retirement rose
above $75,000. (Other aspects of the special treatment for that group --
reducing from age 62 level rather than the age 65 level and thus giving a
25% larger benefit -- remains relevant.)
Thus, Treasury argues that (1) these limits are extremely generous for
pensions benefiting from tax subidies as we propose to change them; and
(2) the historical relationship they advance his no policy basis; and (3)
whatever the merits of that number, it never before applied to
multiemployer plans so arguing for them is besides the point.
Fourth, one clarification to my point about the views of various
agencies. PBGC thinks that all these benefit caps should be raised. They
question the policy justification for raising them for multiemployer plans
and no other. Thus, they support the administration position reflected in
the VP letter. But they argue that all the limits should be increased
together to help give highly compensated employees a stake in the
company's pension plan and thus incent employers to continue to provide DB
plans, thus indirectly benefitting low wage workers. (Others -- including
Treasury and the Center on Budget and Policy Priorities -- dispute that
conclusion. We have agreed to disagree internally for the time
being.)
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Ellen Nissenbaum <[email protected]> ( Ellen Nissenbaum <[email protected]> [ UNKNOWN
1)
CREATION DATE/TIME:14-OCT-1999 17:47:39.00
SUBJECT: FW: another pension meeting
TO: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD
READ:UNKNOWN
TEXT:
Sarah: this bounced back first time, so sending it again.
Left you a voice mail when you get a chance.
Good news is some Dems may write to the WH to express their concern with
these pension items.
When we did a conf call today with editorial writers, the USA Today guy
seemed to know of the PBGC's support of some of the higher inc limits!
From:
Ellen Nissenbaum
Sent:
Thursday, October 14, 1999 1:12 PM
To: 'peter orszag'; Iris Lav
Cc: 'sarah rosen wartel'; 'mark iwry'; 'chuck marr'; 'stan fendley'
Subject: another pension meeting
Importance: High
Great news: Diane Bennet has agreed to join us for the staff briefing(s?)
on Tuesday. Did you see her excellent testimony, Peter?
I've arranged a private session with Rockefeller and Conrad's staff at
12:30 on Tuesday (w/sandwiches before the 1:30 briefing).
In talking to the staff, I was surprised to learn from Steve Bailey with
Conrad that the Senator enthusiastically supports increasing the income
limits on the DB plans as a way of maintaining DB plans in the future.
Thinks as a practical business decision you have to continue to provide
incentives to employers your old "trickle down" argument [our terms,
not his]. Conrad does share our views on the IRAs. Remember, David
Strauss is a N. Dakotan and former Senate AA. Has a lot of influence over
certain Senators.
Nonetheless, Steve wants to join us. (I often do things together with
Rock/Conrad's tax staff. they usually think alike, but obviously not
always).
I'm hopeful that Rock will be more willing to engage on the overall set of
pension issues.
Peter: here's the final schedule for Tuesday
Press conf a.m.
Kerry office: 11:30
Rock/Conrad: 12:30
Briefing for Sen staff: 1:30
Kennedy team: 3:00
House briefing: 4:00
I had two more key meetings I wanted to arrange but just used up Peter's
last hour. Iris and I will do other meetings next week.
We'll work out with you and Iris all the presentation, etc.
Stan: thanks, we'd love an easel for the briefing. We do now have at
least one blow up chart.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD )
CREATION DATE/TIME:20-OCT-1999 09:09:47.00
SUBJECT: FW: Center for Budget and Policy briefings on Pension Provisions
TO: Melissa G. Green ( CN=Melissa G. Green/OU=OPD/O=EOP@EOP [ OPD
READ:UNKNOWN
TEXT:
Forwarded by Sarah Rosen Wartell/OPD/EOP on
10/20/99 09:09 AM
McGahey Richard <[email protected]>
10/20/99 08:50:23 AM
Record Type: Record
To: Sarah Rosen Wartell/OPD/EOP
cc:
Subject: FW: Center for Budget and Policy briefings on Pension Provisions
Sarah--
FYI, here is a report from our Congressional Affairs office on the
CBPP/Orszag briefings with Congressional staff. One troubling point:
notice in the House briefing that Cardin's staffer invokes David Strauss
and
PBGC as supportive of the bill. I'm not aware of anything David has been
doing recently to advocate this, but you probably are (or should be) aware
of significant tension between David and Treasury on this. Call me if you
want to discuss further.
--Rick
From: Maroney Kevin
Sent: Tuesday, October 19, 1999 7:20 PM
To: Palast Geri; McGahey Richard; Kramerich Leslie; Kane Rondalyn; Gohl
Earl
Subject: Center for Budget and Policy briefings on Pension Provisions
The Center for Budget and Policy Priorities today held three
briefings (one for press at the Willard Hotel, one for HSE staff, one for
SEN staff) on the distributional impact of the pension provisions
contained
in HR 3081, Rep. Lazio's minimum wage bill. The briefers summarized the
findings that are contained in the Center's policy paper that was released
on October 8th (see: www.cbpp.org). I have some additional handouts that I
will distribute to folks shortly.
HOUSE BRIEFING: 30 staffers attended. Note that during the HSE
briefing, Rep. Cardin's pension staffer, David Koshgarian, in response to
statements by the Center on the distributional effects of the bill, stated
that I want my friends in the room to know that David Strauss of the PBGC
supports the higher limits in this bill, at least with respect to Defined
Benefit plans." In response to this, Peter Orzag, one of the Center's
briefers, (and formerly of the Administration) stated that "David was
speaking his personal views, not those of the Administration."
David Koshgarian also stated that the bill did not raise the
contribution limits, but indexed them to where they should be given
inflation. He then asked what impact the 1993 change in the law had which
lowered the compensation limits for pension purposes from $235,000 to
$160,000. Peter responded that this lowering of the compensation limit did
not affect pension coverage rates.
SENATE: 40 staffers attended. Chairman Jeffords staff, Chairman
Roth's staff and Senator Baucus' staffer (Maria F.) attended the briefing.
Maria challenged statements by the Center that the pension provisions were
"trickle down" stating that the tax benefits are targeted to those who pay
taxes--employers--and noted that many workers pay little taxes. Maria
stated that the bill took this approach because it was a way of getting
employers to offer benefits without creating a new government program, ala
USA Accounts (the President's proposal).
Richard Bender (Senator Harkin) asked what percentage of the savings
under the bill would merely be asset shifting. Peter explained that with
respect to high wage earners that this was an area that was being debated
right now. He stated that there is agreement that there is considerable
less
asset shifting with respect to low wage earners (because they don't have
assets to shift) and that the national savings rate with respect to these
workers could be increased.
Diane Bennett, an attorney who appeared with the Center, commented
that she did not think there was any way to increase savings among small
businesses. She thought that the business owners simply could not afford to
sponsors plans and that workers in these businesses wanted the immediate
cash. Even if these employers did have pensions, all too often, the
workers
would have small 401k accounts that are quickly consumed when they leave
employment.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell ( CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD
CREATION DATE/TIME:22-OCT-1999 09:37:00.00
SUBJECT: Another one for gene
TO: Melissa G. Green ( CN=Melissa G. Green/OU=OPD/O=EOP@EOP [ OPD
READ:UNKNOWN
TEXT:
See below. Gene and I need to talk soon about pension issues. Last night,
I hear there was a good chance that Archer's mark-up will proceed. Issues
include:
(1) Good sentence about the pension aspects of the bill that he is
comfortable putting into Press Guidance -- (see problems below -- also
apparently, Lockhart quoted on estate tax but not pensions leaving the
impression...)
(2) Opportunities for the Administration to be more visible: (a) Gene
doing Member briefings -- Treasury/Labor doing Staff briefings (or some of
both); (b) Lubbick/McGahey letter to the committee before mark-up coupled
with a few choice quotes from Gene placed in a story or two; (c) issue WH
statement or letter on the issue or other event focused????? To decide,
it might help to have a meeting with Gene and Larry or Chuck Brain and
Broderick (and someone from Senate side) to discuss their assessment of
where members are and how "out there" we can afford to be.
(3) How to resolve a sticky outstanding issue between Treasury, Labor and
PBGC. PBGC is widely understood as supporting DB contribution and benefit
increases. We get that in our face when we complain. I am writing an
options cover paper for issue briefs by the agencies on both sides. Could
we do deputies or principals meeting and get it decided?
In support of all this, Treasury is working on new background paper for
Gene. I hope to have by end of the day.
(3)
Forwarded by Sarah Rosen Wartell/OPD/EOP on
10/22/99 09:28 AM
Ellen Nissenbaum <[email protected]>
10/21/99 12:21:00 PM
Please respond to Ellen Nissenbaum <[email protected]>
Record Type: Record
To: Sarah Rosen Wartell/OPD/EOP
cc:
Subject:
Hi Sarah. I can only imagine how crazed you are with fin.mod.services and
not have much time to deal with pensions, so I know we'll catch up by
phone (vs. email or voice mail) when you can. In the meantime, passing
along some info/thoughts.
Several clear from both our private Hill meetings and the two briefings:
1. There's growing interest, even concern, in these pension tax provisions
among D's, esp those not on the tax Committees. Even some Dems on
Portman/Cardin are telling us they want to engage on this issue, e.g. the
"Dear Colleague" I'm organizing around our analysis. (I'm always careful
to talk about the "pension tax provisions in the vetoed tax bill," and not
refer to P/C or G/G directly. Helps a tad.)
2. The pension lobby is gearing up even more to protect their provisions
in the bill, partly in response to our attacks. So it raises the
visability of the whole issue. We're writing a response.
3. Many if not most of the Dem offices I've talked to who are not on the
tax Committees are not aware of the Administration's concerns and clearly
need to know. Some of the Senate Dem staff expressed an interest in a
briefing from Admin types!
4. While it's obviously possible (likely?) that min wage is slipping, the
fact that it's still hanging out there continues to provide opportunities
to raise the pension issue since Members/staff think they should be
prepared in case the bill actually hits the floor. Peter's points about
no new n'l savings, just asset shifts and risks of reduced pension
coverage seem to be getting a lot of attention. I hope you all are
continuing to think about what Gene et al might do in a "high" profile
way to raise this issue and the Admin's concerns.
On that point, a small concern: Joe Lockart was widely quoted last
night about the WH's concerns re the min wage bill We're not
interested in moving forward w/ unpaid tax cuts.") The concern is that it
unintentionally implies that if the tax cuts were offset, they would be
acceptable.
I think it would be useful (esp for Dems who are beginning to stick their
necks out on this cautiously) for the press folks to have a sentence or
two in any remarks on the min wage bill referring to the problematic
pension pieces, and specifically the loss of pension coverage risk. I
remember Gene's quote on pensions from a transcript I got some time ago.
It was, as usual, terrific and would be good for Joe and others to repeat
now in the context of min wage.
Offered in the spirit of constructive suggestions!
Hope this is helpful. Look forward to catching up soon.
(By the way, so is bankruptcy moving or not?)
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Ronald E. Jones ( CN=Ronald E. Jones/OU=OMB/O=EOP [ OMB ])
CREATION DATE/TIME:25-OCT-1999 11:54:53.00
SUBJECT: Re: TREASURY/LABOR Letter Recommending Veto of HR3081 Wage and Employment Growth Act of
1999
TO: Janet R. Forsgren ( CN=Janet R. Forsgren/OU=OMB/O=EOP@EOP [ OMB ])
READ:UNKNOWN
TO: Mark D. Menchik ( CN=Mark D. Menchik/OU=OMB/O=EOP@EOP [ OMB D
READ:UNKNOWN
TO: Bennie C. Rogers ( CN=Bennie C. Rogers/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TO: Sarah Rosen ( CN=Sarah Rosen/OU=OPD/O=EOP@EOP [ OPD ])
READ:UNKNOWN
TO: larry r. matlack ( CN=larry r. matlack/OU=omb/O=eop@eop [ OMB 1)
READ:UNKNOWN
CC: Richard E. Green ( CN=Richard E. Green/OU=OMB/O=EOP@EOP [ OMB 1)
READ:UNKNOWN
TEXT:
PBGC (Sevin) objects to the Treasury-Labor letter. They believe the item,
highlighted below and others, have not been agreed upon within the
Administration.
Also, we have serious concerns regarding the pension provisions in the
bill that raise the maximum limits for tax-qualified plans and weaken the
pension anti-discrimination and top-heavy protections for moderate- and
lower-income workers. These provisions are regressive, would not
significantly increase plan coverage, and could lead to reductions in
retirement benefits for moderate- and lower-income workers. It also
contains a provision that would undermine the Secretary of Labor's ability
to enforce ERISA.
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Mark D. Menchik (CN=Mark D. Menchik/OU=OMB/O=EOP [ OMB ])
CREATION DATE/TIME:25-OCT-1999 12:31:36.00
SUBJECT: Re: TREASURY/LABOR Letter Recommending Veto of HR3081 Wage and Employment Growth Act of
1999
TO: Ronald E. Jones (CN=Ronald E. Jones/OU=OMB/O=EOP@EOP [ OMB )
READ:UNKNOWN
CC: bennie c. rogers ( CN=bennie c. rogers/OU=omb/O=eop@eop [ OMB 1)
READ:UNKNOWN
CC: sarah rosen (CN=sarah rosen/OU=opd/O=eop@eop [ OPD 1)
READ:UNKNOWN
CC: richard e. green ( CN=richard e. green/OU=omb/O=eop@eop [ OMB ])
READ:UNKNOWN
CC: janet r. forsgren ( CN=janet r. forsgren/OU=omb/O=eop@eop [ OMB
READ:UNKNOWN
CC: larry r. matlack (CN=larry r. matlack/OU=omb/O=eop@eop [ OMB ])
READ:UNKNOWN
TEXT:
Sometimes DOL doesn't check with PBGC, so we should give PBGC's objection
a full hearing. Still, I don't agree with 'em.
It's my recollection that the language that PBGC finds objectionable is
consistent with the deliberations and actions of the NEC pension group. (
Sarah: Right?) In that group, PBGC supported raising the limits as
applied to defined-benefit plans only, but its view did not prevail.
Since the letter's language uses just a few words to refer to all
tax-advantaged pension plans, PBGC is being very sensitive indeed. I'd
prefer keeping the original.
Alternatively, I'd accept:
raise the maximum limits for all tax-qualified plans
which allows (but doesn't require) the Administration to accept some
raised limits. But I don't know how others would view it and don't know
if that change is enough for PBGC. Any edit will have to be about as brief
and effective as the original.
From: Ronald E. Jones on 10/25/99 11:55:06 AM
Record Type: Record
To: See the distribution list at the bottom of this message
cc: Richard E. Green/OMB/EOP@EOP
Subject: Re: TREASURY/LABOR Letter Recommending Veto of HR3081
Wage and Employment Growth Act of 1999
PBGC (Sevin) objects to the Treasury-Labor letter. They believe the item,
highlighted below and others, have not been agreed upon within the
Administration.
Also, we have serious concerns regarding the pension provisions in the
bill that raise the maximum limits for tax-qualified plans and weaken the
pension anti-discrimination and top-heavy protections for moderate- and
lower-income workers. These provisions are regressive, would not
significantly increase plan coverage, and could lead to reductions in
retirement benefits for moderate- and lower-income workers. It also
contains a provision that would undermine the Secretary of Labor's ability
to enforce ERISA.
Message Sent
To:
larry r. matlack/omb/eop@eop
Mark D. Menchik/OMB/EOP@EOP
Sarah Rosen/OPD/EOP@EOP
Janet R. Forsgren/OMB/EOP@EOP
Bennie C. Rogers/OMB/EOP@EOP
RECORD TYPE: PRESIDENTIAL (NOTES MAIL)
CREATOR: Sarah Rosen Wartell (CN=Sarah Rosen Wartell/OU=OPD/O=EOP [ OPD ])
CREATION DATE/TIME:27-OCT-1999 12:34:26.00
SUBJECT: multiemployer pension sec 415 Issues --
TO: William G. Dauster ( CN=William G. Dauster/OU=OPD/O=EOP@EOP [OPD])
READ:UNKNOWN
TEXT:
this is background -- before we did our new proposal
Forwarded by Sarah Rosen Wartell/OPD/EOP on
10/27/99 12:34 PM
[email protected]
07/27/99 08:07:23 PM
Record Type: Record
To: See the distribution list at the bottom of this message
cc: Gay L. Joshlyn/OPD/EOP, Paul A. Tuchmann@OVP
Subject: multiemployer pension sec 415 Issues --
Date: 07/27/1999 08:01 pm (Tuesday)
From: Harlan Weller (Mark Iwry)
To: BORTZW, BurmanL, HUNTERG, NULLA, RICHARDSOND, SHACKLEFORDD,
SMITHPA, WALKERD, WELLERH, WellingtonD, DOM3.DOPO5.ANDREWSL,
DOM3.DOPO5.TooheyF,ex.mail"[email protected]",
ex.mail."[email protected]", ex.mail."amy.null",
ex.mail."[email protected]", x.mail."David.Richardson",
ex.mail."David_W._Beier%[email protected]",
ex.mail."deborah.walker", ex.mail."donald.wellington",
ex.mail."donna.shackleford",
ex.mail."[email protected]",
ex.mail."frank.toohey", .mail."gillian.hunter",
ex.mail."[email protected]",
ex.mail."[email protected]", ex.mail."harlan.weller",
ex.mail."[email protected]", ex.mail."[email protected]",
ex.mail."[email protected]",
ex.mail."[email protected]",
ex.mail."[email protected]",
ex.mail."[email protected]",
ex.mail."[email protected]",
ex.mail."[email protected]",
ex.ma
CC: ex.mail."[email protected]".
ex.mail."Paul_A._Tuchmann%[email protected]"
Subject: multiemployer pension sec 415 Issues --
Attached, per Sarah's request, is a set of explanatory notes laying out
background information for conference call re building & construction
trades proposals for multiemployer pension plan tax code relief
- MULTIE~1.WPD
Message Sent
To:
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Bruce D. Long/OMB/EOP
[email protected]
David W. Beier@OVP
[email protected]
[email protected]
[email protected]
Douglas D. McCormick/OMB/EOP
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Janet R. Forsgren/OMB/EOP
[email protected]
[email protected]
Laurence R. Jacobson/OMB/EOP
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Lisa B. Fairhall/OMB/EOP
[email protected]
Mark D. Menchik/OMB/EOP
[email protected]
[email protected]
[email protected]
[email protected]
Natasha F. Bilimoria/OPD/EOP
Oscar Gonzalez/OMB/EOP
[email protected]
[email protected]
Pieter J. Boelhouwer@OVP
Sarah Rosen Wartell/OPD/EOP
[email protected]
[email protected]
Sonyia Matthews/OPD/EOP
[email protected]
[email protected]
[email protected]
ATTACHMENT 1
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TEXT:
Unable to convert ARMS_EXT:[ATTACH.D91JARMS20162340B.336 to ASCII,
The following is a HEX DUMP:
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G:\BTC\99LEGIS\multemployer 415 issues.wpd
D-I-S-C-U-S-S-I-O-N D-R-A-F-T 7/27/99
Proposals to Give Multiemployer Pension Plans
Special Relief from Section 415 Defined Benefit Limits
Note: except where specified otherwise, all of the dollar limits described below are indexed for
cost-of-living; some of the amounts have been rounded to the nearest $1,000.
I. BACKGROUND
Internal Revenue Code section 415 sets forth 2 limits on defined benefit plans, a dollar based
limit and a compensation based limit.
The dollar based limit for 1999 is $130,000 payable at Social Security Retirement Age (currently
age 65, but scheduled to phase up to age 67), reduced for earlier commencement. For example,
the dollar based limit is $104,000 at age 62, $89,000 at age 60, $62,000 at age 55 and $44,000 at
age 50.
The Internal Revenue Code contains a special rule for defined benefit plans sponsored by
governments, tax-exempts and merchant marines. For these plans, the $130,000 section 415
limit applies to pensions payable beginning at age 62 (instead of Social Security Retirement
Age), and the limits at earlier ages are correspondingly 25% higher than the generally applicable
rules. For example, the limit for governmental employees at age 55 is $77,000 (or 125% of the
generally applicable age-55 limit of $62,000).
The compensation based limit is 100% of highest 3-year average pay (the "100%-of-pay limit").
Another relevant rule permits the payment of a minimum benefit of $10,000 (unindexed) for any
person -- even if retiring early and even with average pay of less than $10,000 -- who has not
participated in a defined contribution plan of the same employer.
For purposes of section 415, all plans maintained by an employer and related entities are
combined, except that the regulations permit a multiemployer plan to disregard benefits provided
by the same employer through other multiemployer plans. Thus aggregation of a multiemployer
plan and a single-employer plan maintained by the same (or a related) employer is required.
II. CURRENT PROPOSALS
Administration. The Administration's budget has proposed exempting multiemployer defined
benefit plans from the 100%-of-pay limit. This exemption has been incorporated in the current
tax bill in both the House and the Senate and was included in the Democratic House alternative.
The Administration's budget, in response to union suggestions, has also proposed that no early
retirement adjustments apply in the case of multiemployer plan survivor and disability benefits.
This latter provision is not included in the current House or Senate tax bill, but was included in
the Democratic House alternative.
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BCTD. The Building and Construction Trades Department has now indicated that it has
somewhat different priorities, as reflected in the July 18, 1999 Multiemployer Section 415 Relief
Status Report prepared by the Building & Construction Trades Department, AFL-CIO. In
addition to repeal of the 100% of pay limit for multiemployer plans, the BCTD proposal, as
described in the July 18 document, contains the following two elements:
1. Provide the multiemployer plans with the same special higher early retirement section 415
limit that currently applies to defined benefit plans sponsored by governments, tax-exempt
organizations and merchant marine, but increase that special higher limit for all of those
categories of plans to $104,000 for ages 55-59 (expressed as 80% of the normal retirement dollar
limit in effect for the year -- currently 80% of $130,000). The special higher limit would be
reduced actuarially below age 55. (This means the age 50 limit for multiemployer plans would
be $74,000 (as opposed to the general corporate limit of $44,000.)
The House version of the tax bill does not include this provision.
The Senate version includes a portion of the proposal: it extends to multiemployer plans
the special current-law early retirement section 415 limit that applies to governments, tax-
exempts and merchant marine, but does not increase that special limit from the current
$77,000 at age 55 to the requested $104,000.
The Democratic House alternative would have increased the special higher early
retirement limit for multiemployer plans (but not for governments and tax-exempts),
setting the early retirement limit for ages 55-59 at $104,000 and reducing actuarially
below age 55.
2. Exempt participants in multiemployer plans from the generally applicable requirement that,
for purposes of applying the section 415 limits, benefits provided under a single employer plan
need not be aggregated with benefits provided by a related employer under a multiemployer plan.
However, the exemption from aggregation would not apply unless you are testing the dollar
limit; accordingly, the exemption would be available when applying the 100%-of-pay limit and
in applying the $10,000 minimum benefit rule.
This exemption from aggregation has been include in the Senate, but not the House
version of the tax bill.
The Democratic House alternative provided for this exemption as well.
DISCUSSION
ISSUE 1 - Special Higher Early Retirement Limit
There is an argument that higher early retirement limits should apply to participants who
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are engaged in physical labor because they generally need to retire earlier than white-
collar workers.
The proposal would allow tax-qualified multiemployer plans to pay very generous early
retirement benefits, presumably beyond the benefit levels that most rank-and-file workers
would ever accumulate. (An annual benefit of $104,000 beginning at age 55 is equivalent
to an annual benefit of more than $200,000 beginning at age 65.)
Creation of a new special rule with a $104,000 (80%-of-Social Security Retirement Age)
floor invites others to seek comparable favorable statutory treatment. Including
multiemployer plans in the current-law special rule for governments and tax-exempts
would minimize the risk of spillover to all types of plans. (Among other things, this
would tend to encourage workers to retire earlier.)
ISSUE 2 - Exemption from Aggregation of Plans
Under current law, aggregation is applied for 3 different purposes: the dollar limit, the percentage
of pay limit and the special $10,000 annual payment exception¹.
The BCTD argues that aggregation in applying the 100%-of-pay limit and $10,000 floor
generates substantial administrative cost and paperwork, and that this cost is unnecessary
because multiemployer plan benefit formulas are not compensation-based.
Giving the requested relief from aggregation would permit "double dipping" -- allowing
some individuals to obtain double benefits from the same employer, often for the same
work. Presumably, many of the beneficiaries of this special relief would be union
officials who are covered by both a multiemployer plan in which the union local is a
participating employer covering its employees (union officers and staff) and a single-
employer plan sponsored by the international union for the same employees and other
union officers and staff.
The BCTD document indicates that the aggregation relief would not open the door to tax
manipulation because employers could not simply adopt extra multiemployer plans for
their employees without collective bargaining.
Some are concerned that pension double-dipping in excess of 100% of pay might be used
as an inconspicuous means of delivering higher total compensation to selected individuals
I
The House version of the tax bill would phase up the $10,000 to $40,000 (unindexed)
by 2003 (and would eliminate the condition that the participant not be covered by a defined
contribution plan). This would mean that the minimum benefit provision would deliver more
meaningful benefits.
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(although this would not be expected to be a problem in the union context).
Other versions of this proposal would exempt these plans from aggregation for purposes
of the section 415 dollar limit as well; the exemption from aggregation for purposes of
the 100%-of-pay limit could readily expand to the dollar limit.
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