October 19, 1999
Pension Provisions of Vetoed Tax Bill
Likely to Exacerbate Inequities in Pension Benefits
Provisions Could Erode Coverage for Ordinary Workers
To view entire report
The tax bill Congress approved in August and the President subsequently vetoed ("The Taxpayer Refund and Relief Act of 1999") includes a number of pension tax provisions, including provisions related to employer-provided pensions and to individual retirement accounts. Most or all of the tax provisions related to employer-provided pensions are expected to be included in minimum wage legislation soon to be considered by the House of Representatives.
These provisions are ostensibly intended to expand pension coverage among working Americans. A new Center on Budget and Policy Priorities' analysis finds, however, that while the pension provisions in the vetoed tax bill include several beneficial reforms, their principal impact would be to institute a major expansion of pension-related tax preferences for high-income individuals. Furthermore, some of the provisions could lead to a reduction in pension coverage among lower-income workers and those employed by small businesses.
The analysis also finds that 80 percent of the tax benefits from the pension provisions of the vetoed bill would go to the 20 percent of Americans with the highest incomes. Nearly half of these pension tax breaks - 45 percent - would go to the five percent of the population with the highest incomes. By contrast, the bottom 60 percent of Americans would receive only 3.8 percent of these tax benefits.
The report finds that the pension provisions of the vetoed bill would confer an array of pension-related tax preferences on very highly paid individuals, the group that already has the most generous pensions. One such provision would increase the maximum tax-favored contribution an employee can make to a 401(k) plan from $10,000 to $15,000 annually. This change would benefit the fewer-than-five percent of individuals covered by a 401(k) plan who make the maximum $10,000 contribution today, a group that receives average pay of $130,000.
Another provision would increase the maximum pension benefit payable under a defined benefit pension plan from $130,000 to $160,000 annually, a change that would be beneficial only to those at the top of the income scale whose salaries are so large that they qualify for pension payments of more than $130,000 a year when they retire.
Such changes would do little to increase pension coverage for the half of the workforce not covered by a pension plan. Moreover, the provisions of the tax bill could lead to a reduction in pension protection for workers at lower and middle-income levels.
The analysis, by University of California economist Peter Orszag and Iris Lav and Robert Greenstein of the Center, identifies the following provisions of the vetoed tax bill, among others, as provisions that could lead to an erosion in pension coverage:
- Provisions raising pension contribution limits for highly paid individuals, which would enable employers and top executives to maintain contributions for their own pension plans while reducing contributions for other employees. Under current law, a firm may make pension contributions on the first $160,000 in salary. A provision of the vetoed bill would raise this to $200,000. As a result, if business owners seek pension contributions of $10,000 for themselves (as well as for top executives of the firm), the firm now must make a pension contribution of 6.25 percent of wages (6.25 percent of $160,000 equals $10,000). If the $160,000 limit is raised to $200,000, however, employers can maintain the $10,000 contribution level for themselves and their top executives while lowering the pension contribution rate to five percent. Such an action would keep pension contributions constant for highly-compensated executives and owners, but save money for the firm by reducing pension contributions by one-fifth for the firm's other employees.
- Provisions relaxing anti-discrimination and other rules. The pension provisions in the vetoed bill also would relax pension anti-discrimination rules and other rules barring firms from treating highly-compensated employees more generously than average workers. The report finds that these and other provisions in the vetoed tax bill could induce further erosion in coverage among low- and moderate-paid workers.
- Provisions raising the limits on contributions made to individual retirement accounts. Current law limits a taxpayer and his or her spouse to contributions of $2,000 each to an individual retirement account. The pension provisions of the vetoed bill would more than double this limit to $5,000. A small business owner, who currently offers a retirement plan for his or her employees, and is motivated in no small part by a desire to secure $10,000 in tax-favored retirement savings for himself or herself and a spouse, could now make this $10,000 contribution to an IRA. This could remove the need to provide a pension plan through their business. The Treasury Department has warned that this provision could induce a drop in pension coverage.
The analysis explains that these proposed changes in pension and retirement tax preferences would likely aggravate the tilt already reflected in pension coverage. Today, only half of America's workforce has pension coverage, and coverage is heavily skewed by income. Just 27 percent of those earning $10,000 to $15,000 currently have such coverage, compared to 81 percent of those with earnings exceeding $75,000. The report also explains that there is no empirical evidence to support claims by proponents of these proposals that these generous new benefits for highly-paid executives would induce more firms to offer pension plans and result in a trickle-down effect benefitting workers with lower incomes who currently lack adequate pension coverage.