Posted: 6 Nov 2002
Professor David A. Pratt, in his article, Pension Simplification, has described the rules for traditional defined benefit pension plans as especially complex. He states that, given the well-documented financial problems facing the Social
Security system as the "baby boomer" generation begins to retire, a strong private pension system, to supplement
Social Security, is extremely important. The current federal pension rules, he notes, are largely the product of the
Employee Retirement Income Security Act of 1974 (ERISA), a statute which made many worthwhile changes, but
was enacted in response to the very different economic and social conditions of the mid-1960's. Pratt opines that subsequent pension legislation has rarely represented good pension policy and that generally, such legislation has been revenue-driven or inspired by a desire to thwart the selfish machinations of highly compensated business owners and executives.
Pratt notes that Congress's Joint Committee on Taxation, in a major study of tax simplification generally, included numerous recommendations for simplification of the rules governing qualified pension plans. Pratt discusses those issues covered in the study, and suggests that the new rules stemming from its recommendations, though less complex, are still very difficult to work with in certain respects, even for participants and beneficiaries who have access to expert advice. He also discusses simplification proposals not included in the J.C.T study, such as the number of different types of defined contribution plans, minimum funding rules, and the need for all retirement plans and IRAs to be subject to a uniform set of distribution rules.
Pratt also outlines recent proposals to simplify or reform the federal pension laws, emanating from legislators, interest groups, practitioners, economists and others, which he feels include many promising ideas. These proposals include the implementation of voluntary investment choices, a "universal pension", reforms to employer sponsored plans, government financed plans, matching credits, the jettisoning of complicated Treasury Regulations, a requirement that a qualified pension plan must cover all employees, and various combinations of the above.
In conclusion, Professor Pratt suggests that private pension systems in the United States, and in all other industrial nations, will face unprecedented challenges during the next thirty years. These challenges, resulting from the aging of the population and the resulting financial pressures on Social Security and Medicare, heighten the need for pension simplification.
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