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Buckle Up For Bush 2.0

December 30, 2004

President Bush’s inauguration at the U.S. Capitol on January 20 should come with this warning for anyone involved in workforce issues: Buckle up, because his second term could be quite a ride. If the president gets what he wants, companies will find themselves scrambling to keep up with an array of administration initiatives, including the partial privatization of Social Security and the expansion of consumer-driven health care plans. Executives should also expect political solutions for imperiled private pension guarantees, as well as medical malpractice insurance reform and stepped-up enforcement efforts by the Labor Department’s wage-discrimination cops.

    Fresh off his hard-fought victory over John Kerry and reinforced by stronger Republican majorities in the House and Senate, Bush is expected to move swiftly to push forward his "ownership society" legislative agenda.

    At a time when companies are struggling to find answers to rising health care costs, troublesome pension regulations and sometimes cynical younger workers who wonder if the Social Security system will be drained dry by the time they retire, Bush’s legislative agenda offers potential solutions.

    Issues that employers found problematic with Kerry, such as the Massachusetts senator’s support for tax increases, a promised rollback of Medicare prescription drug benefits and a cool posture toward malpractice limits, are no longer on the table.

    Bush’s central theme of an ownership society would establish a new set of core relationships among the government, employers and workers. That could be good news for employers if, as promised, it brings health care costs under control and eases the stress on the Social Security system.

    But big problems remain. With federal budget deficits already weighing down the government, Bush still must find ways to pay for his programs. Last month, during a White House meeting with Social Security trustees, Bush reiterated that he would not raise payroll taxes to finance his Social Security proposals. Both Social Security and Medicare face huge increases in costs as baby boomers get closer to retirement.


"There is going to be a need for Bush to use these Republican majorities, but it has to be done on a bipartisan basis. You can’t browbeat the minority."


    PricewaterhouseCoopers Health Research Institute says that retiring baby boomers, increases in national health expenditures and sizable federal budget deficits "will challenge the stability of the Medicare program and could prevent enhancements to other programs unless Congress curbs spending, raises taxes, or both."

    Jim O’Connell, vice president of government relations and human resources policy at Ceridian, says Bush is clearly in a position of strength and that should help in passing issues defeated in the past by slim margins.

    "During the last four years, the margins on a lot of the issues were very close, often decided by a few votes," he says. "There are a lot of issues that need to be addressed but were bottled up for one reason or the other."

    Bush should reach out to Democrats to pass big-ticket items, says James Klein, president of the American Benefits Council. "There is going to be a need for Bush to use these Republican majorities, but it has to be done on a bipartisan basis," he says. "You can’t browbeat the minority."

    Working in the president’s favor is a widely shared view that health care and retirement issues related to the aging population will only get worse if there is a political standoff and nothing gets done. Social Security is approaching the day when contributions won’t be enough to cover benefits.

    Health care is increasingly unaffordable for both employers and individuals, as evidenced by the 45 million Americans without insurance. Government-backed private pension guarantees are shaky, with the agency responsible for them running out of money.

    "We expect 2005 to be a very active year," says Frank McArdle, manager of the Washington, D.C., office of Hewitt Associates.

    Here are the domestic issues that are at the top of the president’s agenda and what to expect as they wend their way through Congress:

Social Security
    This is a cornerstone issue for Bush’s ownership society. The president has not presented a specific plan, but what he and others have been discussing is allowing 2 percent to 4 percent of workers’ contributions to be deposited into private savings accounts. Individuals would control the investments.

    Supporters of the partial privatization plan say that individuals are better able to invest and grow their retirement dollars than the government. Opponents say that the inherent risks of the stock market and other investments mean that some workers could ultimately end up losing money.

    Those issues aside, estimates are that it will take $1 trillion to $2 trillion over 10 years to keep the system afloat during the transition. "It’s not at all clear how the problem of paying transitional costs will be solved," says Stan Panis, a consultant with Deloitte & Touche. "It does nothing to fix the overall solvency of the system."

    As it stands, Social Security estimates that tax revenues will fall below payouts by 2018 and that trust funds will be exhausted by 2047, requiring a reduction in benefits.

    The privatization plan does not address the longer-term funding problems of the system.


"Consumers’ unwillingness to hold themselves accountable for health care costs is a stumbling block for proponents of health care savings accounts and the new breed of high-deductible consumer-directed health plans," says Brad Holmes, a vice president and research director for Forrester. "Until consumers accept their share of responsibility, even the financial incentives inherent in HSAs and CDHPs will be a tough sell."


    One straightforward fix would be to raise payroll taxes on workers and employers. Bush has vetoed that, and Ceridian’s O’Connell doesn’t see that changing. "There is no sentiment for higher taxes," he says.

    Given the problems, not everyone expects Bush to be successful. "It surprised me that he made Social Security a signature issue," says Gretchen Young, vice president of government affairs for Aon Corp. Given the estimated transition costs, Young adds, "I don’t understand how he can get that through."

    Among the early opponents is the AARP, the lobbying group for older Americans.

Health care
    Health insurance is getting prohibitively expensive for individuals and represents a growing, unwelcome cost for employers. It is often cited as one of the leading contributors to the increasing number of Americans without insurance--45 million at last count.

    "Affordability is probably the No. 1 health policy issue for 2005," O’Connell says.

    Without action, the problem of Americans being priced out of the health insurance market will only get worse, according to the Lewin Group, a nonpartisan health care and human services research and consulting firm. The Lewin Group estimates that 49.5 million Americans will be without health insurance by 2006 unless there is some kind of intervention.

    Based on the proposals Bush presented during the campaign, his plan would cover 8.2 million new people by 2006, dropping the number of uninsured down to 41.3 million, the Lewin Group’s research indicates.

    Bush attacks the problem from a variety of directions. He is proposing to bring large numbers of low-income children into the Medicaid system. He believes high-deductible, low-premium insurance designed to cover major medical expenses would help provide an alternative for individuals priced out of the current market.

    He supports legislation to create association health plans that would allow employers to join insurance pools in order to negotiate less expensive insurance plans. The president also believes that limits on malpractice awards will help bring down costs. One issue that Bush so far has not embraced--opening the door to the reimportation of lower-cost medicines from Canada--may also be part of the mix.

    Bush believes that granting tax credits and other tax benefits will encourage the use of enhancements such as health savings accounts and high-deductible plans. He would give low-income families a $1,000 direct contribution to help them purchase HSAs. He also proposes allowing income tax deductions to defray the cost of premiums paid for major medical policies and has talked about giving a refundable $3,000 tax credit to individuals to buy standard medical coverage instead.


"The president’s victory and the larger Republican majority in the Senate and House means that the overtime rules are here to stay. In general, the new Congress will be even less sympathetic to mandates on employers than the previous one."


    Consumer-driven health care, so much a part of the Bush plan, is still struggling to find acceptance. Changing the health care spending habits of Americans is a must.

    "Consumers’ unwillingness to hold themselves accountable for health care costs is a stumbling block for proponents of health care savings accounts and the new breed of high-deductible consumer-directed health plans," says Brad Holmes, a vice president and research director for Forrester. "Until consumers accept their share of responsibility, even the financial incentives inherent in HSAs and CDHPs will be a tough sell."

    Bush is expected to once again put his muscle behind medical malpractice insurance legislation that would cap pain-and-suffering damages at $250,000. He contends this would reduce the number of frivolous lawsuits that he says are driving up the costs of health care.

    "The most likely thing to pass is tort reform--putting limits on damages because of medical malpractice," Aon’s Young says.

    The malpractice proposal was passed by the House last year, only to be blocked in the Senate by Democrats. A pre-election survey of workforce managers shows that they believe Bush was the candidate best able to control health care costs. In the survey of U.S.-based human resource and benefit managers, Aon found that 48 percent of the respondents felt that Bush would be more effective than Kerry in controlling company health plan costs.

Private pensions
    Private pension funding shortfalls are another problem that will land on Bush’s desk during his second term. The Pension Benefit Guaranty Corp., the federal agency that insures pension plans for 35 million Americans, announced in November that it lost $12.1 billion during the 2004 budget year, doubling its deficit to $23.3 billion in just 12 months. The announcement came with a warning from Bradley Belt, the agency’s executive director, that Congress must "act expeditiously so that the problem doesn’t spiral out of control."

    Contributing to the problem is the fact that Americans are living longer. But terminations of pension plans by troubled companies that are sinking into bankruptcy and defaulting on their pension obligations present a much bigger problem.

    Since September, the agency has assumed pension obligations for more than 12,000 employees of Lumbermans Mutual Casualty Co., a property-casualty insurer and parent of Kemper Insurance Corp.; 3,700 former employees of Fruehauf Trailer Corp.; and 9,600 hourly employees covered by the Kaiser Aluminum Pension Plan.

    Potential pension plan terminations by United Airlines and US Airways loom on the horizon. The PBGC has promised to guarantee the basic pension benefits of the airline workers. Should United terminate its pension plan, it would add an estimated $6.4 billion to the agency’s deficit.

    Such things as premium increases paid by employers or changes in interest rate assumptions could make it more costly and cumbersome for companies–even those with well-funded plans--to continue to sponsor fixed-benefit pensions. If that happens, then the American Benefits Council’s Klein fears that the dramatic termination of fixed-benefit pension plans will intensify. From 1999 to 2003, 25 percent of the nation’s pension plans were terminated.

    Klein says Congress must adopt new rules clarifying and updating accounting standards and liability measurements that employers can live with well into the future.

Labor department
    Just weeks after the election, the Office of Federal Contract Compliance Programs unveiled new guidelines that put employers on notice that they could face more aggressive enforcement of anti-discrimination laws.

    The new guidelines come on the heels of a mid-November announcement by the OFCCP that there was a 31 percent increase in financial recoveries for workers victimized by unlawful workplace discrimination during the 2004 budget year. Nearly 11,000 workers split $34.5 million in back-pay settlements.

    "The administration has been very forceful in going after workplace discrimination," says attorney Matthew Halpern of the Jackson Lewis law firm. "This is a decidedly business-friendly administration, but it is also a very tough law-and-order administration. Even though you think they will cut business a break, that is not the case when it comes to civil rights enforcement agencies."

    A hot issue during the campaign was enforcement of the Fair Labor Standards Act and overtime rules interpretations by the Bush Administration, which have been criticized for reducing the number of workers eligible for overtime pay. Kerry vowed to overturn the rules.

    "The president’s victory and the larger Republican majority in the Senate and House means that the overtime rules are here to stay," McArdle says. "In general, the new Congress will be even less sympathetic to mandates on employers than the previous one." But he says Bush can be counted on to put teeth into such regulations as anti-discrimination statutes.

    In the end, the success of Bush’s second-term workforce management initiatives could hinge not on how well he pushes his proposals through Congress, but how well he sells his ideas to Democrats.

    "People are hoping that a new spirit of cooperation takes hold," Aon’s Young says. "If not, it could get real ugly in Congress."

Workforce Management, January 2005, pp. 35-39 -- Subscribe Now!