same lower paid individual would receive benefits under the plan equivalent to 20 percent of final average pay, so that the combination of Social Security and plan benefits would amount to 74 percent of his or her final pay. We believe that results of this type would represent a substantial step forward from the point of view of both tax policy and the overall interests of society.

Arguments will be made against our proposal. Some persons will agree with our basic premises but will contend that there are better ways to achieve our goals. We believe that our proposal is a sound way to attain both equity and increased simplicity, although we recognize that there is room for differences about its details. We are open to discussions concerning the details, but we are very firm in our position that substantial changes are necessary so that meaningful benefits will be provided for lower paid employees.

In light of our stand, we are not persuaded by two common arguments which would result in no changes at all. The first of these is that our proposal would cause a significant increase in costs for many employers. This will not be the case for those employers which now set as a goal retirement security for workers at all income levels. For employers who do not and who may be primarily interested in a tax shelter for a selected few, this argument supports the very reason for our proposal. It shows that qualified plans are being used by many of those employers primarily or solely for the benefit of highly paid employees. We recognize that if employers are required to share the benefits of a qualified plan among a wider group of workers, some will choose to terminate the plan instead. This is the dilemma we must face if we attempt to utilize tax relief to modify behavior. Sometimes the tax savings are not sufficient to cause the result we seek. However, it is no excuse for continuing tax relief to those plans that do not significantly further the goals of public policy. For those plans, the distortion of the tax burden is too great a price to pay for the additional level of retirement security obtained.

The second argument is that plans have just gone through the process of complying with the requirements of ERISA, and they should not again be put through the wringer of new amendments so soon. However, Congress recognized that it had left the integration issue unsettled and recommended a twoyear study. Thus, Congress contemplated in 1974 the possibility

of legislative changes in the integration rules not much more than two years after the passage of ERISA. It is now 3-1/2 years since the passage of the Act. Moreover, for many plans any amendment necessary to comply with our proposal should be relatively easy to devise. In any event, the recent changes in the Social Security Act will cause a reexamination of the integration rules. This may ultimately require the modification of many plans independent of the Administration's integration proposal.

Furthermore, it is important to recognize that the existing set of serious problems will become worse rapidly. The Social Security wage base for 1978 will increase by more than two-thirds by 1981, with a coordinate increase in the integration level for many plans. By 1981, it is estimated that 94 percent of all employees will earn less than the wage base and could be entirely excluded by integrated plans. We believe that rapid action is necessary to prevent an expanding pattern of abuse of the qualified plan provisions of the Code. We are willing to accept a somewhat delayed effective date so that employers and their advisors can digest the new law and amend their plans in an orderly manner, but early enactment is important to prevent this abuse from taking root.

I will be pleased to answer any questions which members of the Subcommittee might have.

Table 2

Effect on Employees: Benefits as Replacement of Earnings at Retirement ·
Selected Private Pension Plans Under Present Law and

Office of Tax Analysis

January 25, 1978

Table 3

Effect on Employees: Benefits as Replacement of Earnings at Retirement,
Selected Private Pension Plans Under Present Law and
Under the Integration Proposal

3/

Replacement of Earnings at Retirement
(Percent of Final Average Pay) 1/ for
Employees with Final Average Pay 2/ in 1982-of--
$5,000: $15,000: $30,000 $50,000 $75,000: $100,000

Plan under Proposal: 20% up to $11,004

of compensation;

1/ Assumes employees retire at age 65 in 1982 with 35 years of service with employer.
2/ Final average pay is assumed to be average over the last 5 years, earnings are assumed
to increase at 6 per year.

3/ The Social Security amounts shown do not reflect the special transition minimum benefits
available for retirees in the early 1980's. Thus, the numbers reflect patterns of replace-
ment which will be in effect under the Social Security Amendments of 1977 after the
transition period.

Table 4