GOP Public Pension Reform Gets a Surprise Boost

By Ray Harmon • September 23, 2014 • 0 Comments
Republican Sen. Orrin Hatch (R-Utah) introduced the Secure Annuities for Employee (SAFE) Retirement Act (S. 1270) last year to reform the public and private pension systems and, amid recent retirement reform hearings on Capitol Hill, his public pension reform idea is now getting noteworthy support from an otherwise unlikely place: the left-leaning Urban Institute.

Last week, the Urban Institute announced that it gave Hatch’s public pension proposal “straight A” grades, making it the only such plan in the country to achieve this feat. This could make Hatch’s proposal the most likely to garner bipartisan legislative support and drive the reform conversation in Washington, D.C.

The Urban Institute’s report card considers seven criteria:

1. rewarding younger workers;
2. promoting a dynamic workforce;
3. encouraging work at older ages;
4. retirement income for short-term employees;
5. retirement income for long-term employees;
6. making required contributions; and
7. funding ratio.

Hatch’s concept aced every category.

Public Pension Reform

So what is Hatch’s plan? The bill creates new, optional DB plans, called “SAFE Retirement Plans,” for state and local governments to address the various funding crises making headlines across the country in the last few years. As the Senator describes them, “SAFE Retirement Plans are state regulated, market based, fixed annuity solutions to the retirement income crisis in the states, with a consumer safety net, only minimal involvement by the federal government and no federal taxes.”

The basic mechanics of the plan? Insurance companies would bid annually for state contracts, with the state paying the winning insurer some up-front amount each year and the insurer offering every employee an annuity amount for one year of work. The insurance company would then bear the market risk and reap the tax benefits, while an employee’s eventual pile of annuity contracts would be aggregated and distributed as a monthly check in retirement.

The Rest of the Bill

The Hatch bill also addresses the private retirement system, including some provisions affecting 403(b) plans. Specifically, the proposal aims to reduce the complexity for terminating 403(b) plans by explicitly permitting 403(b) custodial accounts and annuities with account balances to be distributed at plan termination in the same way as “fully paid” annuities can be distributed now. This is intended to allow the plan to wind down smoothly while still protecting participants’ rights to their accounts.

The bill also contains some proposals developed by ASPPA’s Legislative Relations Committee. It includes a new “Starter 401(k)” plan for workers to save up to $8,000 per year and without the administrative burden of a traditional 401(k) plan. It would also boost the qualified plan adoption tax credit and provide employers with additional time after the end of the year to set up a company retirement plan. The bill also aims to streamline the plan amendment and restatement processes and improve rules for electronic disclosure to participants and beneficiaries.

As you might guess, the state of politics in D.C. these days doesn’t bode well for the prospect of passing these kinds of large-scale packages. But we could be seeing some of these items pop up again in future sessions if they continue to receive support.

Ray Harmon, Esq., is government affairs counsel for ASPPA.