FEDERAL FOCUS.

• Position: Pension reform - Statistical Data Included

Pension Reform Piggybacks on Far-Reaching Tax-Cut Law

When President Bush signed a $1.35 trillion dollar tax-cut bill into law on June 7, 2001, he also enacted comprehensive pension reform legislation that significantly alters the operations and management of traditional retirement programs. These reforms received strong bipartisan congressional support in past years but failed to win passage until this year. GFOA strongly supported and advocated these pension-law changes.

The reform recognizes three trends:

* 21st century America is a mobile society: American workers change jobs and careers more frequently than in years past. Pension reform advocates cite estimates that the average worker holds nine jobs by the age of 32, and workers typically do not stay in any job for more than five years until age 40. [1]

* Americans do not save: as a percentage of disposable income, Americans saved negative 0.1 percent in 2000. [2] Yet savings not only strengthen the long-term financial security of individuals and families but also produce a number of positive effects (a ready source of investment capital, for example) on the U.S. economy as a whole.

* Social Security is not enough: America's pension system provides a needed backstop to the Social Security System for lower and middle income workers (77 percent of current pension participants). In addition, Social Security's projected insolvency in 2037 suggests future reforms may reduce benefits or alter the retirement age, increasing the importance of employer-sponsored pension plans (see Exhibit 1).

Therefore, the reform addresses specific deficiencies in the old pension system-restrictive pension portability and contribution limits.

Pension Portability

The law liberalizes portability of retirement assets allowing workers to transfer their retirement savings from one job's plan to either another employer-sponsored plan or an Individual Retirement Account (IRA). Past law restricted rollovers of pension assets in 401(k) and 403(b) plans to the same type of plan or an IRA. Past rules governing 457 plan assets restricted rollovers even more, limiting transfers only to other 457 plans. Effective January 1, 2002, the law allows rollovers to and from a 457, 401(k), 403(b) plan, or an IRA. Further, employees participating in state and local government retirement plans may use assets from a 403(b) or 457 plan to purchase service credits for prior years of employment. Improved portability provides plan participants with the opportunity to consolidate their retirement assets as they move between employment in the public, private, education, and nonprofit sectors.

Contribution Limits

The disparity in annual contribution limits between governmental 457 plans and other qualified...