FOR IMMEDIATE RELEASE:
October 8, 1999
PENSION CHANGES THAT MAY BE ADDED TO MINIMUM WAGE BILL
FAVOR HIGH-PAID EXECUTIVES, COULD JEOPARDIZE PENSION COVERAGE FOR ORDINARY WORKERS
Pension reform proposals that may be included in minimum wage legislation soon to be considered by the House of Representatives not only tilt heavily toward the most highly compensated executives and business owners in the workforce, but may actually result in reduced retirement benefits for many low- and moderate-income workers, according to a new analysis the Center on Budget and Policy Priorities issued today.
Some Republican leaders and Members of Congress of both parties have indicated strong interest in writing into minimum wage legislation many of the pension changes included in the tax bill Congress approved in August and President Clinton subsequently vetoed. These proposals expand an array of pension-related tax breaks.
"Members of Congress debating this proposal should be aware it provides tax incentives that could have the overall effect of reducing the pension protection ordinary workers rely on," Robert Greenstein, the Center's executive director, said "rather than broadening pension coverage for those now lacking an adequate retirement plan. They also should be cognizant of the degree to which it showers pension-related tax breaks on the most highly compensated executives."
The Center's analysis 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. In fact, the analysis finds, the provision 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, among others, as provisions that could lead to an erosion in pension coverage:
- 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, could now make this $10,000 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.
- 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.
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 pension provisions in the vetoed tax bill could induce further erosion in coverage among low- and moderate-paid workers.
The Center's analysis explains that these proposed changes in pension 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.
"Most of the pension tax provisions under consideration would not be of direct help to most low- and middle-income workers. Nor is it reasonable to assume that generous new benefits for highly-paid executives will trickle down to those with lesser incomes who today lack adequate pension coverage. Indeed, these provisions may indirectly work to their detriment," Peter Orszag, the analysis' principal author, said. Orszag is president of Sebago Associates, an economics consulting firm, as well as being a member of the economics department at the University of California at Berkeley. He is a former Special Assistant to the President for Economic Policy and a former Senior Economist on the Council of Economic Advisers
The Center on Budget and Policy Priorities is a nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.
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