PREPARED STATEMENT OF JOHN N. ERLENBORN, U.S. CHAMBER OF COMMERCE

Mr. Chairman and members of the Subcommittee, my name is

John N. Erlenborn. I am a partner in the law firm of Seyfarth, Shaw, Fairweather & Geraldson. I am pleased to appear here today, before the Subcommittee on which I served for many years, on behalf of the U.S. Chamber of Commerce, the world's largest federation of business companies, chambers of commerce, and trade and professional associations. Accompanying me is James A. Klein, Manager of Pension and Employee Benefits for the Chamber.

I serve on the Chamber's Labor and Employee Benefits Committee and on several of that Committee's councils and task forces that develop policy on labor and employee benefits matters. I am Chairman of the Chamber's Task Force on Retirement Income Policy.

During my twenty years in Congress, no single subject occupied more of my time than pension law and related matters. I hope that my remarks today, drawing upon my perspectives both inside the Congress and inside the private sector, will assist you in this important inquiry into retirement policy.

The Chamber applauds Chairman Clay, members of the Subcommittee, and other members of the full Education and Labor Committee for undertaking a comprehensive analysis of retirement policy, which is evidenced by the introduction of the Retirement Income Policy Act (RIPA), H.R. 3594, the Retirement Universal Security Arrangements Act (Retirement-USA), H. R. 3098, and the convening of this hearing.

The Chamber totally agrees with the major goals of these bills,

i.e., expanding privately sponsored pension coverage and enhancing retirement security. We do have some concerns, which are expressed in this statement,

with the way the bills seek to meet those goals. We hope the Chamber's comments today and in the future will assist you during any further consideration of these measures.

Any current consideration of a retirement policy measure must be viewed against the backdrop of the tax reform process and the many changes that the House-passed tax bill, H.P. 3838, makes to retirement plans. We believe that the objective of a sensible and stable retirement policy is far better served by a deliberate and unhurried analysis of retirement needs, which H.P. 3594 and H.R. 3098 seek to initiate, rather than in the context of a comprehensive tax reform bill. Accordingly, we urge you in the strongest terms possible, to help to ensure that any final tax reform measure not include modifications to current pension law.

I. THE IMPORTANCE OF PRIVATE RETIREMENT PLANS

The central theme of the Chamber's view of retirement policy is belief in and support for the so-called three-legged stool of retirement security. These legs include (1) Social Security, which provides the foundation for income protection upon which other forms of income are built;

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plans (in which the employer promises and pays a fixed benefit) and defined contribution plans (in which the employer and/or employee contribution is established and the ultimate benefit paid depends on the growth of the particular plan); and (3) personal savings.

The tax laws have been a principal inducement for employers to initiate and maintain pension plans. Personal savings have been encouraged through the tax laws as well, with favorable tax treatment afforded to employer-sponsored savings plans and, more recently, the creation and expansion of individual retirement accounts (IRAs). Thus, it can be seen that although there has been no formal adoption of a policy statement, a national retirement income policy has been formulated implicitly and recognized in the structuring of the present system through various legislative enactments.

In light of this extensive and interrelated retirement income structure, if Congress should determine that there is a national need to strengthen some component of the three-legged stool, it may be able to accomplish that objective through fine-tuning rather than through a comprehensive revision of retirement policy and the enactment of laws that embody that policy.

II. PENSION COVERAGE

I believe that it is fair to say that the origin of H. R. 3594 and H.P. 3098 is the recognition that private pension coverage is far from universal. Of course, this nation has made great strides in providing private pensions. The Employee Benefit Research Institute (EBRI) reports that in 1962 only 16% of all married couples received a private employer-sponsored pension. By

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Overall, EBFI reports that 52% of the work force is covered by a pension. The Chamber's own employee benefits survey, which has been conducted continuously since the 1950's and which surveys all forms of benefits, found that 83% of companies responding to the survey in 1984 had pension plans. Whatever measure is used, we all acknowledge that private pension coverage is not as extensive as it should be especially among small businesses. This greatly concerns the Chamber because the failure to expand coverage adequately puts greater pressure on private savings and, especially, on the Social Security system to do the whole job in providing retirement income -- a purpose for which the Social Security system simply was not designed.

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A. Small Business Concerns

The Small Business Administration (SBA) has gathered compelling evidence of the depth of the pension coverage problem for small businesses. According to SBA, 86% of firms with over 500 employees offered pension plans to their employees in 1983; however, only 19% of firms with fewer than 25 employees did so.

To expand pension coverage for small firms, understanding the obstacles that small firms confront is vital. First, small firms frequently lack stable profits to establish and fund pension plans. Second, pension plans, especially defined benefit plans, can be enormously costly and complex to administer. SBA reports that it costs smaller firms (those with fewer than 10 employees) about twice as much per employee to operate a defined benefit plan as it does for large companies (those with over 500 workers).

Moreover, each time tax and labor laws affecting pensions are enacted, small companies must devote a disproportionate share of their resources to

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Equity and Fiscal Responsibility Act (TEFRA), the Deficit Reduction Act (DEFRA), and the Retirement Equity Act (REA) have established new standards to meet. Compliance is especially troublesome for small firms. For those companies without pension plans, continual legislative changes force them to stand on the sidelines, wondering whether the rush of pension legislation will abate long enough to let them establish affordable plans in a climate of predictability.

The Chamber appreciates the phased-in effective date of H.R. 3594, which is responsive to the business community's concern about ever-changing pension laws. But the provisions of H.R. 3594 likely will not resolve the root causes of the coverage problem. Changing the percentages of employees below the Social Security wage base who must be covered by a pension plan or denying tax-favored treatment for employee contributions to plans deemed to be "non retirement" will not increase substantially retirement plan coverage. Rather, for employers without plans, a new set of rules will serve only as a disincentive to establish them.

B. Expanding Coverage

EBRI calculates that if coverage in firms with fewer than 100 workers were similar to that of larger firms, approximately 7.6 million more workers would be covered. In light of this, we need to determine how best to

encourage this expanded coverage.

Both H.R. 3594, RIPA and H. R. 3098, Retirement-USA, contain an element that is likely to expand retirement coverage among smaller firms. For this,