Mr. CLAY. Mr. King.

STATEMENT OF JAMES A. KING, DIRECTOR OF INDUSTRIAL RELATIONS, BORDEN CO., REPRESENTING THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. KING. Thank you, Mr. Chairman.

I am James King, assistant general counsel for Borden, Inc. I am appearing here today in my capacity as chairman of the Pension Subcommittee of the National Association of Manufactur

ers.

Accompanying me is Victoria Caldeira, NAM's associate director of employee benefits.

We are pleased you are holding this hearing on retirement income policy. We too have grown increasingly concerned about the way pension policy is currently being developed, seemingly only as a matter of immediate tax and budget considerations.

The goals you have proposed are valid and a positive step in efforts to enhance retirement income security.

However, the actual provisions of RIPA, much like the pension provisions in H.R. 3838, will do little, in our opinion, to foster these goals. Instead these provisions represent a significant departure from the thinking about current pension policy, which recognizes the need to provide optimum flexibility and favorable tax treatment in order to encourage and expand pension plan coverage and participation by both employers and employees.

To the extent that flexibility and favorable tax treatment are reduced, so too will incentives to provide pension and to participate in them.

RIPA also reduces incentives for individual retirements savings by similarly reducing tax incentives.

To not encourage growth in individual retirement savings seems equally unwise, since this Nation tends to be consumer oriented with a low propensity for savings. In the 1950's, Americans saved an average of 6.8 percent of income annually. This low number has decreased to an average 5.6 percent in the 1980's, going as low as 2.5 percent in September 1985 according to the U.S. Department of Commerce, Bureau of Economic Analysis.

In light of this trend, it is unrealistic to expect individuals to save enough to adequately meet their individual retirement needs without providing incentives.

And by actually legislating disincentives for retirement savings, such as the 20-percent excise tax on all withdrawals from individual retirement accounts, even less savings can be expected.

Lack of incentives to provide and participate in employer sponsored pension plans, combined with a lack of incentives for individuals to save for retirement, would upset the balance of the present three-legged stool pension policy of employer sponsored pension plans, individual retirement savings, and Social Security.

The implications of RIPA, as well as H.R. 3838, need to be looked at from a long-term viewpoint.

We cannot afford to erode two of the three legs supporting pension policy, as we cannot afford to inordinately rely upon Social Se

Congress needs to be aware that what seems in the short run to help solve the deficit problem may in the long run only compound

it.

The distributions rules, section 415 limits, and special rules for savings plans set forth in RIPA would all result in a dramatic reduction in voluntary plan participation, particularly among the young. This bill is likely to result in less personal savings for retirement, less employer provided pensions, and more dependence on Federal Social Security.

Some specifics. The distinction between retirement and nonretirement plans. While the NAM believes there may be some merit in separating plans in to primary and secondary retirement plans, we believe the distinction between retirement income plans and nonretirement savings plans, as defined, is unduly restrictive and undermines the goal to expand present plan coverage.

In speaking of coverage, there is really no empirical evidence to demonstrate that the present coverage rules are not working.

The present rules are designed to ensure nondiscrimination in the work force, not total work force coverage. And the rules appear to be working.

Before they are changed, we should determine if there are abuses and, if so, how best to remedy them.

As presently written, RIPA's coverage rules represent a direct challenge to the voluntariness of the private pension system.

For smaller employers or startup ventures, the cost of compliance with the rules would be prohibitive. The impact on the cost of doing business for such concerns must be considered, especially in view of the current unfavorable economic climate in certain industries.

Large employers, too, must make choices by balancing the needs of the work force with the need to be competitive in the world marketplace.

Layoffs, and plant closings, and early retirement packages are all evidence of this. Therefore, we are opposed to such restrictive coverage rules which would decrease an employer's flexibility in both pension planning and overall corporate planning.

We are currently examining Retirement USA, sponsored by Congressman James Jeffords.

This bill seems to increase coverage by promoting the use of defined contribution plans in a way that is consistent with the principles of current policy.

We urge this committee to likewise seriously consider this bill, as it seems to be one appropriate way to solve pension coverage as well as the portability problems.

Vesting; to mandate 5 year vesting is likewise restrictive, costly, and extremely unfair to small employers.

Vesting levels directly relate to benefit levels. Such decisions should be left with those in a position to understand the factors unique to each particular company and the needs of a particular work force.

We firmly believe that whatever standards apply to single employer plans should also apply to multiemployer plans as well. Companies with single employer plans often compete with compa

that the compensation wage package offered by these employers be as comparable as market forces will allow, without undue restraint being placed on employers involved in single employer pension plans.

Finally, 5-year vesting would do little to increase retirement income, as the benefit accrued between 5 and 10 years of service would be quite small.

Paid out in a lump sum as an employee terminates, this amount, in reality, would become little more than a severance benefit.

Contribution and benefit limits-a reduction in section 415 limits will present employers from designing a compensation and benefit package that most ideally meets the needs of a particular work force.

At a time when we should be offering every incentive to save for retirement, we shouldn't be reducing these limits.

The defined benefit plan limit would, in many cases, not meet the needs of upper and even middle-income management. Therefore, nonqualified pension plans would be established to cover these individuals. Such plan would not have to comply with the standards set forth in ERISA.

The establishment and cost of such nonqualified plans may well be at the expense of a tax qualified plan. There would also be no incentive to create a tax qualified plan in order to extend pension benefits to the lower paid.

The reduction in the limits for defined contribution and 401(k) plans to $21,000 and $10,500 in 1986, respectively, indicate to us that they are not considered-that these are not considered appropriate retirement vehicles.

Yet these are precisely the types of retirement vehicles large and small companies are increasingly relying upon.

Distribution requirements—this is the most disturbing provision in RIPA. The elimination of hardship withdrawals, 10 year forward averaging, and capital gains treatment, as well as the increase in the IRA withdrawl penalty to 20 percent are all opposed by the NAM.

These provisions totally disregard the need for the greatest possible flexibility with respect to an individual's retirement income planning. Individual retirement choices are not made by whim, and should be respected, not restricted.

These provisions, to us, smack of a paternalism of the worst sort. Most retirees are adults, fully able to understand that it is in their own best interest-or what is in their own best interests. They should not all be forced in to a single mode of retirement planning.

Hardship withdrawals must be permitted for there to be any incentive at all for low, middle income, and younger workers to participate in retirement plans.

Our experience has been that young people, particularly lower paid young people, will not voluntarily participate in plans where they do not have access to their funds.

Curiously, when hardship withdrawals are permitted, there is more of a willingness to participate, yet the incidence of withdraw

The NAM has great concern with any legislation which seeks to make sweeping changes that might very well have a detrimental impact on this Nation's long-term retirement income policy.

Our defined benefit plan system has been largely a success, and ought not be tampered with before the effect of changes are fully considered.

In addition, the increasing role of defined contribution plans in retirement income planning should be recognized. These plans should be encouraged rather than restricted through the provision of incentives for plan participation rather than through disincentives for participation.

While it may not have articulated in legislation or been articulated in legislation, we have had a national retirement income policy for many years, and it's been a good one. Encourage personal savings, encouraging employer provided pensions, and the Federal Government's Social Security Program. We acknowledge it can be improved.

Our concern, however, is that H.R. 3594, which intends to improve this policy, would, in its present form, do just the opposite. It would discourage personal savings, discourage employer provided pensions, particularly among small employers, and burden Social Security.

We hope our comments have been helpful. We look forward to working with the subcommittee in an effort to discover ways of enhancing retirement income security that will be beneficial for meeting the long and short term retirement needs of all Ameri

cans.

Mr. CLAY. Thank you.

[Prepared statement of James King follows:]

PREPARED STATEMENT OF JAMES A. KING, ASSISTANT GENERAL COUNSEL, BORDEN, INC., ON BEHALF of the NATIONAL ASSOCIATion of ManufACTURERS

Mr. Chairman and members of the House Labor-Management Subcommittee, I am James A. King, Assistant General Counsel for Borden, Inc. I am appearing today in my capacity as Chairman of the Pension Subcommittee of the National Association of Manufacturers. Accompanying me is Victoria Caldeira, NAM's Associate Director of Employee Benefits. The NAM is an organization of over 13,000 corporations of every size and industrial classification, located in every state. Our members employ 85 percent of the workers in manufacturing employment and produce over 80 percent of the nation's manufactured goods. also has an affiliation with 158,000 businesses through its Associations Council and National Industrial Council.

NAM

Chairman Clay and Members of the House Labor-Management Subcommittee, we are pleased you are holding this hearing on The Retirement Income Policy Act of 1985 (RIPA). We have grown increasingly concerned about the way pension policy is currently being developed. We commend you, Mr. Chairman, the House Labor-Management Subcommittee, Senator Heinz and the Senate Finance Committee, for your efforts to prevent pension policy from being looked at solely in terms of immediate tax and budget policy considerations. We commend you also for

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