The Association of U S West Retirees



House Overhauls Pension Laws, Raises Wages, Cuts Estate Taxes
Bills Face Tough Test in Senate Before Recess
Associated Press
The Wall Street Journal
Friday, July 29, 2006

WASHINGTON -- The House approved an ambitious overhaul of the nation's pension laws late Friday, then voted in the early hours Saturday to raise the minimum wage and slash estate taxes before heading to recess. The Senate will take up the legislation next week.

The House, in a 279-131 vote, passed legislation aimed at prolonging the traditional employer-based pension plans relied upon by millions, while also promoting new savings options and protecting the government from future taxpayer bailouts. The reforms "represent the most sweeping changes to America's pension laws in more than 30 years," said House Majority Leader John Boehner (R., Ohio).

Hours later, Republicans muscled the first minimum wage increase in a decade through the House by pairing it with a cut in inheritance taxes on multimillion-dollar estates. Combining the two issues was sure to cause problems in the Senate, where the minimum-wage initiative was likely to die at the hands of Democrats sharply opposed to the costly estate-tax cuts.

Still, Republican leaders saw combining the wage and tax issues as their best chance for getting permanent cuts to the estate tax, a top GOP priority fueled by intense lobbying by farmers, small business owners and super-wealthy families. "This is the best shot we've got; we're going to take it," said Rep. Boehner said. The unusual packaging also soothed conservatives angry about raising the minimum wage over opposition by GOP business allies.

The House passed the bill 230-180 before leaving for a five-week recess. Senate Minority Leader Harry Reid (D., Nev.) vowed Democrats would kill the hybrid bill, along with its 10-year, $300 billion-plus cost. "The Senate has rejected fiscally irresponsible estate tax giveaways before and will reject them again," he said. "Blackmailing working families will not change that outcome."

Thoughts of November

Republicans countered that Democrats opposed the bill to keep the issue alive for the November elections. But they also reveled in putting moderate Democrats in the uncomfortable position of voting against both the minimum wage increase and the estate tax cut -- and an accompanying bipartisan package of popular tax breaks, including a research and development credit for businesses and deductions for college tuition and state sales taxes.

The GOP package would increase the wage from $5.15 to $7.25 an hour, phased in over the next three years. Under current law, the estate tax is phased out completely by 2010, but jumps back to 55% on estates larger than $1 million in 2011.

The bill passed Saturday would exempt $5 million of an individual's estate and $10 million of a couple's taxes by 2015. Estates valued at up to $25 million would be taxed at capital gains rates, currently 15% and scheduled to rise to 20%. Tax rates on the remainder of larger estates would fall to 30% by 2015.

The maneuver was aimed at defusing the minimum wage increase as a campaign issue for Democrats while using the popularity of the increase to achieve the Republican Party's longtime goal of permanently cutting estate taxes.

That left Democrats fuming. "Just think of what it is to have a bill that says to minimum wage workers, 'We'll raise your minimum wage but only if we can give an estate tax cut to the 7,500 wealthiest families in America,' " said Minority Leader Nancy Pelosi (D., Calif.).

'Tilts the Table'

The pension overhaul came only hours before the estate-tax and wage vote. Opponents, mainly Democrats, said the bill did too little to prevent employers from eliminating their defined-benefit plans and favored some industries over others. "This tilts the table toward the decisions by companies to terminate or to freeze those plans," said Rep. George Miller (D., Calif.).

The legislation, which tightens controls on companies that fall behind in their contributions to defined-benefit plans, gives special repayment breaks to the airline industry. It is of particular urgency for several airlines threatening to terminate their plans.

The 900-page pension bill, the product of several years of congressional effort, would force employers that have fallen behind in their defined-benefit pension payments to catch up within seven years and close loopholes that have allowed companies to underfund their plans by an estimated $450 billion.

The measure also promotes pension alternatives, such as 401(k) plans, through such steps as automatic enrollment. It would give financial firms greater latitude in steering investors toward high-earning savings programs.

Lifeline for Carriers

The legislation would give airlines that have frozen their pension plans, Northwest Airlines Corp. and Delta Air Lines, an additional 10 years to meet pension obligations. American and Continental, the only two major airlines with active defined-benefit plans, would get an extra three years.

The fear is that if they abandon their plans -- Delta is already seeking to terminate its pilot pensions -- it will add billions in deficit to the Pension Benefit Guaranty Corp., which already has amassed a deficit of $22.8 billion. The PBGC now operates on premiums and interest earnings, but a big jump in the deficit could shift its burden onto taxpayers. The agency takes over benefit payments for terminated plans.

The pension bill aims to strengthen and improve the financial status of single-employer and multiemployer plans covering some 44 million Americans. It also would give legal certainty to future cash balance and other "hybrid" defined-benefit plans. Such plans have faced lawsuits over charges they discriminate against older workers.

Pension plans that are less than 80% funded would not be allowed to increase benefits during contract negotiations. Companies with plans that are at risk or in bankruptcy would be restricted in increasing executive compensation.

The legislation also gives financial firms that manage investment plans rights to offer advice to people with 401(k) and IRA plans. Advocates argued that individual investors today often don't have access to good advice, while critics questioned whether portfolio managers might give biased advice.

The legislation comes at a time when more companies are opting to scale back or eliminate defined-benefit plans. The PBGC says that such plans fell from 114,000 in 1985 to 31,000 in 2004. The bill, said AARP's David Sloane in a letter to lawmakers, "is designed primarily to protect the government from financial exposure" and "does little to address the erosion of the defined-benefit system."

Rep. Jim McDermott (D., Calif.) also pointed out that deep in the bill is a provision that gives defense contractors more time to meet new rules on payments and benefit limitations. The GOP leaders' decision to bring the pension bill to the House floor came after House-Senate negotiations on a larger bill linking pension overhaul with tax breaks collapsed Thursday night.

House Republicans sought to strip the tax measures from the bill so they could be used, along with the minimum wage hike, as sweeteners to push a permanent estate tax cut through the Senate.