THE WHITE HOUSE
Office of the Press Secretary
PRESS BRIEFING BY SECRETARY OF LABOR BOB REICH, SECRETARY OF TREASURY BOB RUBIN,
AND DIRECTOR OF THE SMALL BUSINESS ADMINISTRATION PHIL LADER
The Briefing Room
12:14 P.M. EDT
MR. MCCURRY: Good afternoon, everybody. Most of you, I think, have just had an opportunity to hear the President sketch out the steps that he is proposing to Congress to enhance the availability, affordability and security of pensions and retirement savings for this nation's workers, especially those who currently don't enjoy that type of pension coverage. And I'm delighted we've got some star witnesses today to tell you how important that is.
Delighted to have with us Secretary of Labor Reich, Secretary of Treasury Rubin, and Phil Lader, the Administrator of the Small Business Administration. They're here to take any questions you have on the materials you've received about the President's proposal. And each of them, I think, have got some short statements, beginning with Secretary Reich.
Glad to have you here.
SECRETARY REICH: Thank you, Mike.
Good morning. Welcome and thank you for coming. I'm joined this morning by Secretary of the Treasury Robert Rubin, and also by the Director of the Small Business Administration Phil Lader. We're here to provide more information to you on the President's pension initiative today. And let me provide a little bit of context.
The President's initiative is part of his effort to address the concerns of working Americans about their long-term economic security, and that of their children. The President and his administration have already done a great deal to address those concerns. As you know, the deficit has been cut in half; unemployment and inflation have been brought down to their lowest combined level in three decades. And nearly 8.5 million new jobs have been created in the United States.
But we still face a challenge, and that challenge is restoring wage growth and economic security over the long-term. And this is a long-term challenge. It's been with us for a long time, and it is a challenge in which all of us have responsibility. We have to ensure that the American Dream of opportunity is a reality for everyone -- everyone who is willing to work for it. And a major part of that dream is security for retirement.
I'll tell you, as I travel around the country as Labor Secretary, I engage in a little bit of a free-floating focus group with blue-collar workers and white-collar workers in offices and in retail establishments and factories, and I talk to them about their problems and issues and dreams and what's on their minds. And so often they say to me, retirement, pensions, savings; I'm not sure I'm going to be able to do it. I'm worried about not having it there for my wife, for my husband, for me, for my children. I'm worried that we're not going to have enough of a nest egg. I'm worried that I'm not saving enough.
Now, working people want to save. They want to save for their children's college education. But they are having a tough time doing it. As our economy goes through profound changes -- and the President has talked about the enormous changes, many people have talked about these changes. As workers switch jobs more often. You know 5 million people a year right now are switching jobs. We have a very different kind of an economy. Instead of the old economy of high-volume, standardized, stable mass production in which people could be fairly well assured they'd enter into one job, they'd have that job for 40 years in that same company. At the end of that 40 years they'd get a gold watch and a retirement.
No, it's very different now. And we have to have a different structure for that different economy. We have to ensure that laws governing the nation's pension system keep up with the times. And, most importantly, that they anticipate the future. After all, anticipating the future is what retirement planning is all about.
Now, 51 million working Americans -- 51 million of them -- are not earning pension benefits from their current employer. Many of them work for small businesses. In fact, in small businesses, one out of four employees in small businesses -- and I'm talking about small businesses of 100 or fewer employees -- one out of four has pension coverage from his or her employer.
Now, in very large businesses, it's just the reverse; three out of four have them. So, small businesses which have tended to be the engine of job creation and economic growth, we've got to help small businesses and help individuals in small businesses and employees in small businesses get pension coverage.
Now, in a State of the Union address this year, President Clinton challenged Congress to make it easier for small businesses to establish their own pension plans, and to protect existing worker pension plans. The plan that the President introduced today has three basic elements: Number one, expanding pension coverage for millions of working Americans who do not now have it. Provision number two: Increasing the portability of pensions as workers move from job to job. And, number three, ensuring the security of pensions, making sure that that pension will be there when workers are counting on it to be there.
Let me now call on Phil Lader, the Director of the Small Business Administration, to talk in greater detail about the provisions of this initiative that portend specifically to small businesses.
ADMINISTRATOR LADER: This morning when we saw a small business owner introduce the President, it wasn't just Sean who was speaking of the need to help simplify the rules and make possible this type of effort on the part of small businesses. There are other small business persons, small business owners there, and there are more than 20 million other small business owners around the country. They employ about 50 percent of the nation's entire work force. This is very real, and the numbers are very, very large.
And, yet, as Bob mentioned, while large companies, typically three out of four employees of large companies are covered by employer pension plans, only one out of four of the employees of small businesses are. Now, why has that really happened? It's not that they don't want to do it, typically, but they are complicated, costly, there are not enough incentives for the lower- and moderate-income employees to start pension plans.
And so as a result, in 1993, the President's first report on small business identified this as a major problem of small business and thereby the entire economy. At the White House Conference, this past year, on Small Business, one of the major issues raised by the some 2,000 delegates from all over the country was the need to reform the way pensions can be established for the employees of small businesses.
What you see today in the President's announcement essentially is a response to that as a result of the Vice President's whole reinventing government initiative. What we seek to do here is take the best of the 401 plan and the best of the IRA and tailor-make it to a small businessperson's needs and capacity to administer that kind of a program.
The technical provisions, if I can summarize, a $5,000 tax-free contribution and this can be done automatically through payroll deductions to eliminate a lot of paperwork. The employer then contributes 3 percent of the salary, or, in the alternative, 1 percent plus a match of up to 5 percent of the salary. It's a one-page form. It eliminates lots of paper work, simplifies rules, cuts through red tape. It makes it very helpful for small businesses where before, in the aggregate, a spouse or a son or daughter would not be able to be covered if the parent or other spouse were covered in the pension plan. It eliminates that and allows all family members in a family business to participate in that small business's pension plan. And very important, it's 100 percent portable.
So in each of these ways, as you can see, the program is tailor-made to the need of the 20 million small businesses in the country. And while there are some private providers currently trying to simplify it, they can't change the law. It's going to require a change of pension law such as what was recommended by the President today to help make small businesses who want to provide for the security of their employees to be able to do so. And the President's recommendation today, his proposal, goes a very long way for small businesses in that regard.
SECRETARY REICH: Thank you, Phil.
To talk about the expanded IRA provisions and also the portability provisions, let me introduce Secretary of Treasury Bob Rubin.
SECRETARY RUBIN: Thank you, Bob.
The President out in the Rose Garden and Bob and Phil here have discussed the conceptual frameworks, so I will not repeat that. Let me just -- and I think discussed it extremely effectively. Let me just focus on the specifics with respect to the IRAs and also pension portability.
Number one on the President's proposal, the family income limits would be doubled, which we estimate would make tax-deductible IRAs available to 20 million more families. The limits would increase from $35,000 to $70,000 for individuals, and from $50,000 to $100,000 for couples, married couples.
Secondly, and I think very, very importantly, the President's proposal would create far greater flexibility with respect to the use of the corpus* in an IRA. Penalty-free withdrawals could be made for education and training, first-home purchases, catastrophic medical expenses, and long-term unemployment.
I think there's a very real chance that that would have significant impact on savings, partly because it would enable everybody to use the IRAs for a greater variety of needs, not just retirement; and secondly, because it will be a much more useful vehicle for younger people, and I think -- we think -- increased saving among younger people for the more immediate needs in their live as well, obviously, for retirement.
In addition, we have a new form of IRA, which contributions would be made on an after-tax basis, but then after five years you can take it out tax-free.
As the President said in his remarks, we do have a dynamic economy and the key to the future is to take advantage of the dynamism, but at the same time deal with the problems of transition that exist in a dynamic economy -- the understandable anxieties that people have in a far more dynamic economic environment. And one of the key problems in that area, one of the key issues in that area is pension fund portability. So the President's proposing the following:
Number one, the expanded IRAs and the new 401K type plans that Phil described will be fully portable, period. So there's no issue with respect to them. Secondly, we will issue rules to help employers to allow workers to roll over distributions from their former employer's plans into plans offered by the new company. In other words, there are impediments right now with respect to those rollovers; we will try to eliminate those impediments and thereby help the employers make the rollover available from the old plan to the new plan.
Secondly, we will change the rules to help employers avoid a one-year waiting period, as many companies now have, before allowing new companies to participate in the 401Ks. There are now concerns that employers have that cause them to put a one-year waiting period in place, and we will attempt to alleviate those concerns and thereby make their 401K plans available immediately upon hiring.
Federal government employees currently have to wait six to 12 months. We are proposing that that waiting period be eliminated so that you begin participating in the federal government's plan immediately beginning work.
Other aspects of this part of our program -- today, workers who are enrolled in multiemployer pension plans -- there are about 9 million of them -- must wait 10 years for vesting. We would propose cutting the vesting period in half. There is, as you probably know, a provision I think was enacted in 1994 to ensure that veterans who return to their civilian jobs can continue their pension coverage when they return from service and also catch upon benefits they missed.
The tax code has not been changed to be congruent with the provisions that I've just mentioned. We have proposed changing the tax code so there would be no ambiguity, no lack of clarity with respect to those provisions.
And, finally, there is an issue with respect to locating benefits. If a company terminates its plan and moves to go out of business, PBGC will perform this clearinghouse function.
SECRETARY REICH: Thank you, Bob.
We've talked about the first two pieces of the plan. That is, number one, expanding coverage; number two, expanding portability. Let me briefly cover now the third aspect of the plan which has to do with security -- the security of retirement earnings.
We've already done quite a bit in this area in this administration. The President's proposal, which was enacted in 1994, has reduced pension under-funding for the first time in a decade. I don't know how many of you follow pensions in detail, but when we came here we had a pension under-funding problem which threatened -- threatened to become another savings and loan problem if we did not attend to it.
And Congress and the President, working very, very closely together on a bipartisan basis came up with a plan which is now in effect to get companies to fully fund their pension promises, protecting the benefits of 40 million workers and retirees in traditional pension plans. Also in 1995 -- that was in 1994. In 1995, the Labor Department launched an initiative to protect savings in 401K plans for misuse, recovering about $7 million, opening up over 600 separate investigations and benefitting directly 9,000 workers, indirectly ensuring the safety of so many 401K plans.
I want to just say here with regard to the initiative we are talking about. It requires prompt action with regard to any finding by accountants or pension fiduciaries that there is any kind of fraud or misuse or irregularity. It requires plan administrators and accountants to report promptly serious misuse of funds with fines up to $100,000. It protects government employees as well from Orange County type of fiascoes, requires state and local government pension plans to be held in trusts so that employees do not lose their savings of the government declares bankruptcy, as Orange County recently did.
Finally, with regard to pension rating, let me bring your attention to this, because I think it's vitally important. In the 1980s, companies raided more than $20 billion from over 2,000 pension plans covering 2.5 million American workers. Now, legislation in 1990 curbed this abuse. It imposed a surtax of about 50 percent, made it very uneconomic and very, in fact, difficult for companies to engage in such raids. Still possible, but more difficult.
Now, this administration opposes proposals that allow corporate pension raids. The administration is going to continue to oppose any legislation that encourage pension reversions such as the one in the current GOP budget.
But in addition, in this particular piece of legislation we're talking about today, to ensure that current rules continue to prevent the abuses we saw in the 1980s, this particular act would require that the Labor Department report every year on pension reversions -- how much is being take out of surpluses in pension plans, to what extent is it becoming a problem again, to what extent do we have to even close the barn door tighter, lock it. Again, we are firmly opposed to any raids on the hard-earned money of American workers, and we are not going to allow it to occur.
Those are the provisions -- again, coverage, portability and security. My colleagues are here with me, and we are prepared to answer, hopefully, your questions.
Let me just say, before we begin, there are discussions on the Hill with various members of Congress about other provisions as well. For example, there are some outdated rules, we understand, that penalize women with regard to pensions. We are taking a look at those. Certain members of Congress are concerned about them, and we are discussing those rules with them.
And I also want to just compliment, on behalf of my colleagues here, Phil Lader and Bob Rubin, I want to compliment our staffs who have worked extremely hard at coming up with this proposal and dealing with extraordinary detail -- detail that even the three of us have had a hard time fully comprehending.
Q I'm still not sure I understand why a small business employer now would have an incentive under your plan to offer a pension plan as opposed to the current situation. Is it just because he would have a one-page form instead of a lot of other things he'd have to do? Is it really the cost of the match, you know, his main hurdle? I mean, what hurdles are you clearing out of the -- where is his real incentive to do this?
SECRETARY REICH: I could answer and then -- Phil, would you rather begin?
ADMINISTRATOR LADER: Two elements, if I could. The technical side, you're correct. Obviously, the simplified form -- the simplified form and the other provisions that we addressed. But I want to get to a more basic issue, and that's the question of the work force itself. Small businesses are competing globally as well as in their neighborhoods for employees, qualified employees. They have to offer the kinds of benefits to attract and to retain the quality of the employees that will help that small business prosper. So when you ask the question, what's the incentive, it's not simply the technical provisions, though they are very important to change them, but it's the whole question of the nature of small businesses and the need to attract the kind of employees who deserve in the employer's mind that type of pension benefit.
Q Can I follow up on what Susan is saying -- I think the question still is, aren't there a lot of companies that simply can't afford it now, and even if it were simpler, wouldn't be able to afford it in the future?
SECRETARY REICH: It certainly will be a factor and each entrepreneur and business owner will be making that decision. The question is, if that entrepreneur, such as the ones here today, wants to do it as responsible corporate citizenship, recognizing it helps his business or her business long-term to recruit and retain the quality employees that they seek, then they want to do it in a way that is simplified. And right now the funds that go to accountants, the costs involved in setting up plans, maintaining them, are such that it really is a disincentive to doing that.
What we propose today, what the President's plan does, is help reduce that in such a way that allows small businesses to do what they believe is in their best self-interest. And many of them we believe, such as those represented today, will believe setting up plans like this will help them and their workers.
Q What's the game plan for getting this through Congress? What can you point to that makes this more than simply a positioning exercise in an election year?
SECRETARY REICH: I think several things. Number one, every step of the way in terms of pension reform over the last three and a half years has been bipartisan. We've had a great deal of cooperation from Congress. And that goes back to the 1994 act which required employers to fully fund their defined benefit plans. It goes back to all of the issues that we have discussed with Congress on fully providing portability. In fact, there's a great deal of interest in Congress right now on portability -- a bipartisan interest in portability.
Pension and retirement security has not been a partisan issue in the past. We have no indication it will be in the future, and we are cautiously optimistic that we can get this done.
You know, this forms part of a triad -- the Kassebaum-Kennedy bill with regard to health insurance, helping people who are laid off, make sure they get health insurance, not lose health insurance. Number two, the dislocated worker bill, the President's G.I. Bill for American workers, which has bipartisan support in Congress -- very strong Republican as well as Democratic support to consolidate all the job training programs and provide people with vouchers -- this is the third piece. And we believe, and we continue to hope that we can get all this done.
Q Do you have a strategy to deal with Congress on this?
SECRETARY REICH: We always have a strategy to deal with Congress.
Q Can you outline it for us?
SECRETARY REICH: I don't feel competent to outline it, no.
Q How much will the changes in deductibility cost the government in terms of revenues?
SECRETARY REICH: Well, let me ask our Treasury Secretary.
Q And how is it offset, and how do you pay for it?
SECRETARY RUBIN: With respect to deductible -- you're talking about the IRAs? We've estimated over seven-year periods about $7.7 billion, and that is in our budget, so it is already paid for in the budget that we've submitted.
Q Your proposal will allow individuals to remove funds from IRAs for things like education, medical expenses without that 10 percent penalty. Would that same waiver apply for large employer pension plans? That is, if I was in my company's profit-sharing or 401K plan, could I remove money before 59 1/2 without penalty for stipulated purposes?
SECRETARY RUBIN: The withdrawals that you mentioned are part of the IRA plan, so the answer to your question does that apply only in the context of the IRA plans.
SECRETARY REICH: Let me just say one thing about these withdrawals. Again, based on conversations -- innumerable conversations I've had with workers, particularly younger workers who are considering putting away money in an IRA. One of the deterrents has been fear that if they put it away, they will not be able to get it back when they have to use it under those rare occasions where they have a medical emergency, or they have unemployment that exceeds unemployment insurance coverage, or when they have to send and want to send a kid to school. By enabling people to take money out for these rare occurrences, we expect -- and there is good reason to believe -- that people will feel more comfortable putting money in to an IRA.
Q Secretary Reich, you made the point of saying that you oppose corporate rating on these funds. As far as the 401K program, though, much has been said already about how many companies are not investing properly either through deceit or stupidity of the funds that they collect under the 401K program. Can you outline for us what the problem is now, how widespread this problem is, how much money we're talking about. Is this a small pimple on the economic scene of 401Ks?
SECRETARY REICH: I do not believe, based on the information we have that the problem of 401K fraud is widespread. I think the 401K system is sound. It is a good investment device, but it has been growing so fast that there are naturally going to be a few rotten apples. And it is our responsibility to make sure that employers who wittingly or unwittingly have diverted those pension funds, those withholdings, make sure they get them back.
Again, those of you have been following this may know, we have already put in a six-month window of opportunity, a kind of amnesty period in which employers who might have wittingly or unwittingly diverted some of this money can put it back, get it back to workers, and not face any penalty. Our interest is getting this money back. I do not believe it's widespread, but I believe that there is cause for vigilance.
Q What kind of response are you getting to that grace period?
SECRETARY REICH: I don't know yet.
Q The follow-up I had was, as far as employees, is there any way they can protect themselves now from a company that is, again, wittingly or unwittingly doing that? And when this grace period ends, what are you going to do to these companies that still insist on doing it if your legislation hasn't passed yet?
SECRETARY REICH: Oh, we have -- right now it is illegal to divert those funds. And that's why we have more than 600 investigations opened. We've already got a lot of money back for people. In fact, there are not only civil investigations, but there are also some criminal investigations, criminal penalties. We've been working with the Justice Department. Don't worry. We are being vigilant on that score.
But it is important that employees also be vigilant. And as we talked about before, there is not substitute for employees taking a very simple measure of comparing the pay stub to the report you get back on your pension plan. If you see money going in that corresponds with the money that's being withheld, there's no problem. If you do sense that there is a disparity, a substantial disparity, you've got to ask some questions.
Q Secretary Rubin, how can you guarantee the security of the funds and without government interference of the company?
SECRETARY RUBIN: I'm sorry, the security of which funds?
Q Of the pension funds.
SECRETARY RUBIN: Oh, I think the best -- I don't think it's a question of guarantee. I think that what the government should do is exactly what Bob Reich, Secretary Reich just described which is to have an extremely vigilant oversight and enforcement effort to make sure that there is not, as Bob so well said, wittingly or unwittingly a misuse of the funds. And I think that's exactly what the government should do to meet the problem that you just --
Q Will you have to spend more money doing that?
SECRETARY RUBIN: Well, let Bob Reich respond.
Q -- exploding at the rate -- will you need more people, more funds to be more vigilant?
SECRETARY REICH: I'm not going to turn down from Congress any additional enforcement resources. And it is my humble opinion that in this area we could use more enforcement resources not because the problem is growing that fast, we have no reason to believe it is. But because there does seem to be something of a problem, even a relatively small problem, we want to root it out.
Again, it's very important that people have confidence in the 401K system. It is a good system, there is no reason to panic about this. And one reason we are being so vigilant in our enforcement is to make sure that people can have confidence in the 401K system.
Q Secretary Rubin, two questions on the expanded IRAs. The first is the proposal to double the income eligibility. Is that new or has that been part of the President's proposal since his Middle Class Bill of Rights?
SECRETARY RUBIN: No, that was part of the Middle Class Bill of Rights. I think it's a very good proposal and one that we would very energetically hope will happen.
Q Second, the doubling of the income levels -- is that adjusted gross income --
SECRETARY RUBIN: Is that AGI? The answer to that question, I am told, is yes.
MR. MCCURRY: Two more questions, here and there.
Q To entice employers to offer -- to allow their employees into the plans before one year is something that can be done through the administration, or does this have to be done through legislation?
SECRETARY REICH: I'm sorry, we didn't understand the question.
Q To let employees participate in plans before one year --
SECRETARY RUBIN: Oh, I see. I'm sorry. This is the question of employers eliminating the one-year waiting period. There were several impediments to doing that; one of them is that employers have been worried that if they get a whole bunch of people who are there for only a short period of time, it could affect them with respect to the nondiscrimination rules, and we can provide a safe harbor on that.
Q Is that something that Treasury can do on its own, or does it have to be done through legislation?
SECRETARY RUBIN: We can do it on our own through either a ruling or a regulation.
Q On the multiemployer and state and local pension plans, are you proposing to eliminate the requirement that pension benefits be based on the average salary of the last three years of employment for employees in those plans, or not?
SECRETARY RUBIN: I can truly say I do not know the answer to that. Mark, do you know the answer?
AIDE: It depends on governmental plans --
SECRETARY REICH: I'll tell you -- we have the benefit of our own experts here, and --
SECRETARY RUBIN: I think you've now gotten to the point --
SECRETARY REICH: We can arrange to make sure that they are available to you for that level of specificity.
Q One other question, also, along these lines. Is there any of these provisions that the President can simply put forward by executive order as opposed to putting them through Republican-led Congress? And can you tell us which ones you think you might be able to do that with?
SECRETARY RUBIN: Yes, I'm sorry. We can do, either by ruling or regulation -- we can take the measures that we need to with respect to eliminating the impediments to employers, eliminating the one-year rule, and we can do the same, I believe, with respect to the rollovers -- yes, so we can do it both. We can do either by IRS ruling or IRS regulation.
SECRETARY REICH: In the 401K area, again as a matter of just contacts for some of you, we are also, by regulation, now in the process of reexamining the 90-day period, it's a kind of grace period in which employers have, before they take the withholding for the 401K and have to actually put it into a plan.
Unfortunately, some employers have regarded that 90-day period as a kind of revolving loan fund. And by regulation, we are examining the question of whether that can be truncated without inconveniencing or unduly burdening employers.
MR. MCCURRY: Last question.
Q Do you have any sponsors for this legislation?
Q How do you figure your proposal to expand the -- or to create this nest plan? How do you figure that will help up to 10 million workers? Is that how many were qualified? Is that just your estimate -- oh, we figure one in four will take us up on this, or how do you figure?
ADMINISTRATOR LADER: Well, with 20 million small businesses in the country and with an expressed desire by many of them to be able to help participate in this, you can see the number of employees. Is that a precise number? It has to be a rough estimate in that sense. But the order of magnitude is very, very great by any type of evaluation.
Q And the 10 percent match that you suggested for the employers, how does that compare with the average of what big companies offer? Do you know? You know the three percent match -- is that lower or higher than what a lot of big companies offer in their pension plans?
SECRETARY RUBIN: I don't know the answer to that, but as Bob said, if you can -- we're finished. There are people here from Treasury who can answer that, presumably.
SECRETARY REICH: Can you just talk to the real experts.
THE PRESS: Thank you.
END 12:49 P.M. EDT