House Overhauls Pension Laws,
Raises Wages, Cuts Estate Taxes
Bills Face Tough Test in Senate Before Recess
The Wall Street Journal
Friday, July 29, 2006
WASHINGTON -- The House approved an ambitious overhaul of the
nation's pension laws late Friday, then voted in the early hours
Saturday to raise the minimum wage and slash estate taxes before
heading to recess. The Senate will take up the legislation next
The House, in a 279-131 vote, passed legislation aimed at
prolonging the traditional employer-based pension plans relied
upon by millions, while also promoting new savings options and
protecting the government from future taxpayer bailouts. The
reforms "represent the most sweeping changes to America's
pension laws in more than 30 years," said House Majority Leader
John Boehner (R., Ohio).
Hours later, Republicans muscled the first minimum wage increase
in a decade through the House by pairing it with a cut in
inheritance taxes on multimillion-dollar estates. Combining the
two issues was sure to cause problems in the Senate, where the
minimum-wage initiative was likely to die at the hands of
Democrats sharply opposed to the costly estate-tax cuts.
Still, Republican leaders saw combining the wage and tax issues
as their best chance for getting permanent cuts to the estate
tax, a top GOP priority fueled by intense lobbying by farmers,
small business owners and super-wealthy families. "This is the
best shot we've got; we're going to take it," said Rep. Boehner
said. The unusual packaging also soothed conservatives angry
about raising the minimum wage over opposition by GOP business
The House passed the bill 230-180 before leaving for a five-week
recess. Senate Minority Leader Harry Reid (D., Nev.) vowed
Democrats would kill the hybrid bill, along with its 10-year,
$300 billion-plus cost. "The Senate has rejected fiscally
irresponsible estate tax giveaways before and will reject them
again," he said. "Blackmailing working families will not change
Thoughts of November
Republicans countered that Democrats opposed the bill to keep
the issue alive for the November elections. But they also
reveled in putting moderate Democrats in the uncomfortable
position of voting against both the minimum wage increase and
the estate tax cut -- and an accompanying bipartisan package of
popular tax breaks, including a research and development credit
for businesses and deductions for college tuition and state
The GOP package would increase the wage from $5.15 to $7.25 an
hour, phased in over the next three years. Under current law,
the estate tax is phased out completely by 2010, but jumps back
to 55% on estates larger than $1 million in 2011.
The bill passed Saturday would exempt $5 million of an
individual's estate and $10 million of a couple's taxes by 2015.
Estates valued at up to $25 million would be taxed at capital
gains rates, currently 15% and scheduled to rise to 20%. Tax
rates on the remainder of larger estates would fall to 30% by
The maneuver was aimed at defusing the minimum wage increase as
a campaign issue for Democrats while using the popularity of the
increase to achieve the Republican Party's longtime goal of
permanently cutting estate taxes.
That left Democrats fuming. "Just think of what it is to have a
bill that says to minimum wage workers, 'We'll raise your
minimum wage but only if we can give an estate tax cut to the
7,500 wealthiest families in America,' " said Minority Leader
Nancy Pelosi (D., Calif.).
'Tilts the Table'
The pension overhaul came only hours before the estate-tax and
wage vote. Opponents, mainly Democrats, said the bill did too
little to prevent employers from eliminating their
defined-benefit plans and favored some industries over others.
"This tilts the table toward the decisions by companies to
terminate or to freeze those plans," said Rep. George Miller
The legislation, which tightens controls on companies that fall
behind in their contributions to defined-benefit plans, gives
special repayment breaks to the airline industry. It is of
particular urgency for several airlines threatening to terminate
The 900-page pension bill, the product of several years of
congressional effort, would force employers that have fallen
behind in their defined-benefit pension payments to catch up
within seven years and close loopholes that have allowed
companies to underfund their plans by an estimated $450 billion.
The measure also promotes pension alternatives, such as 401(k)
plans, through such steps as automatic enrollment. It would give
financial firms greater latitude in steering investors toward
high-earning savings programs.
Lifeline for Carriers
The legislation would give airlines that have frozen their
pension plans, Northwest Airlines Corp. and Delta Air Lines, an
additional 10 years to meet pension obligations. American and
Continental, the only two major airlines with active
defined-benefit plans, would get an extra three years.
The fear is that if they abandon their plans -- Delta is already
seeking to terminate its pilot pensions -- it will add billions
in deficit to the Pension Benefit Guaranty Corp., which already
has amassed a deficit of $22.8 billion. The PBGC now operates on
premiums and interest earnings, but a big jump in the deficit
could shift its burden onto taxpayers. The agency takes over
benefit payments for terminated plans.
The pension bill aims to strengthen and improve the financial
status of single-employer and multiemployer plans covering some
44 million Americans. It also would give legal certainty to
future cash balance and other "hybrid" defined-benefit plans.
Such plans have faced lawsuits over charges they discriminate
against older workers.
Pension plans that are less than 80% funded would not be allowed
to increase benefits during contract negotiations. Companies
with plans that are at risk or in bankruptcy would be restricted
in increasing executive compensation.
The legislation also gives financial firms that manage
investment plans rights to offer advice to people with 401(k)
and IRA plans. Advocates argued that individual investors today
often don't have access to good advice, while critics questioned
whether portfolio managers might give biased advice.
The legislation comes at a time when more companies are opting
to scale back or eliminate defined-benefit plans. The PBGC says
that such plans fell from 114,000 in 1985 to 31,000 in 2004. The
bill, said AARP's David Sloane in a letter to lawmakers, "is
designed primarily to protect the government from financial
exposure" and "does little to address the erosion of the
Rep. Jim McDermott (D., Calif.) also pointed out that deep in
the bill is a provision that gives defense contractors more time
to meet new rules on payments and benefit limitations. The GOP
leaders' decision to bring the pension bill to the House floor
came after House-Senate negotiations on a larger bill linking
pension overhaul with tax breaks collapsed Thursday night.
House Republicans sought to strip the tax measures from the bill
so they could be used, along with the minimum wage hike, as
sweeteners to push a permanent estate tax cut through the