October 19, 1999

Pension Provisions of Vetoed Tax Bill
Likely to Exacerbate Inequities in Pension Benefits

Provisions Could Erode Coverage for Ordinary Workers

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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:

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.