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The federal government encourages pensions, other employer retirement plans, and Individual Retirement Accounts through preferences in the federal income tax. These arrangements have been major focuses of legislation in recent years. This paper reviews the evolution of these tax-advantaged means of retirement saving and appraises their impact on saving and on retirement incomes. Senator Robert Dole requested the study while Chairman of the Senate Finance Committee. In accordance with the mandate of the Congressional Budget Office (CBO) to provide objective analysis, the report offers no recommendations.
Larry Ozanne and David Lindeman of the Tax Analysis Division prepared
the paper under the direction of Rosemary Marcuss and Eric Toder. Many
people inside and outside CBO reviewed drafts and provided valuable criticism
and suggestion. They include Robert Hartman, Rudolph G. Penner, Pearl Richardson,
Sylvester Schieber, Raymond Schmitt, Stuart Serkin, William Shear, Eugene
Steuerle, Lawrence H. Thompson, Barbara Boyle Torrey, Bruce Vavrichek,
and James Verdier. Earlier studies of employer pensions by Alicia Munnell
and Richard Ippolito provided important background for the paper. Assistance
in quantitative analysis was provided by Fritz Maier, Nancy O'Hara, Richard
Kasten, and Frank Sammartino at CBO. David Kennell and John Sheils of ICF
Incorporated simulated future retirement incomes. Responsibility for the
finished product, however, rests with CBO. Francis Pierce edited the manuscript.
Shirley Hornbuckle typed the many drafts of the paper and prepared it for
publication. All members of the Tax Analysis Division contributed advice
and support.
Edward M. Gramlich
Acting Director
April 1987
SUMMARY AND INTRODUCTION
CHAPTER I - THE TAX ADVANTAGES OF SAVING IN QUALIFIED PLANS AND THEIR EFFECT ON REVENUES
CHAPTER II - EMPLOYER PLANS AND IRAS
CHAPTER III - USE OF THE TAX ADVANTAGES
CHAPTER IV - INCENTIVES, INCIDENCE, AND UNINTENDED USES
CHAPTER V - RECENT CHANGES IN QUALIFIED PLANS
CHAPTER VI - THE SIZE AND DISTRIBUTION OF GAINS FROM QUALIFIED PLANS: OPTIONS FOR FURTHER LEGISLATION
APPENDIX A - THE ORIGIN AND EVOLUTION OF TAX ADVANTAGES FOR RETIREMENT SAVINGS
APPENDIX B - REQUIREMENTS FOR PLAN QUALIFICATION
APPENDIX C - THE PROJECTIONS TO 2019
| TABLES | |
| 1. | TAX ADVANTAGES OF A $1,000 CONTRIBUTION TO A QUALIFIED RETIREMENT PLAN |
| 2. | PROJECTED TAX RATES ON WORKERS AND PENSIONERS IN 1988 UNDER THE TAX REFORM ACT OF 1986 |
| 3. | PROJECTION OF REVENUE LOSSES FROM QUALIFIED PLANS UNDER PRE-1986 LAW |
| 4. | DISTRIBUTION OF PLANS AND PARTICIPANTS BY SIZE OF PLAN |
| 5. | DISTRIBUTION OF PLANS BY SIZE AND TYPE |
| 6. | EFFECT OF LENGTH OF SERVICE ON DEFINED BENEFIT PENSIONS |
| 7. | PENSION PARTICIPATION OF FULL-TIME EMPLOYEES, BY AGE GROUP |
| 8. | PENSION PARTICIPATION OF FULL-TIME EMPLOYEES BY AGE AND EARNINGS GROUPS |
| 9. | PENSION PARTICIPATION OF FULL-TIME EMPLOYEES BY INDUSTRY |
| 10. | PENSION PARTICIPATION OF PRIVATE-SECTOR, FULL-TIME EMPLOYEES, BY UNION CONTRACT STATUS AND NUMBER OF EMPLOYEES PER ESTABLISHMENT |
| 11. | PARTICIPATION IN PENSIONS BY FULLTIME EMPLOYEES IN MANUFACTURING AND SERVICES |
| 12. | CHANGES IN PENSION PARTICIPATION FROM 1972 TO 1983, BY SEX AND BY SECTOR OF EMPLOYMENT FOR FULL-TIME EMPLOYEES |
| 13. | TAX RETURNS REPORTING CONTRIBUTIONS |
| 14. | INCIDENCE OF IRA CONTRIBUTIONS BY ADJUSTED GROSS INCOME IN 1982 |
| 15. | IMPACT OF TAX REFORM ON TAXPAYERS WITH IRAs IN 1988 |
| 16. | PENSION AND IRA PARTICIPATION OF FULLTIME EMPLOYEES, BY AGE |
| 17. | PENSION AND IRA PARTICIPATION OF FULLTIME EMPLOYEES, BY AGE AND EARNINGS GROUPS |
| 18. | PENSION AND IRA PARTICIPATION, BY AGE AND EARNINGS GROUPS |
| 19. | SPOUSE BENEFITS AMONG FULL-TIME EMPLOYEES AGE 45 TO 64 NOT PARTICIPATING IN A PENSION OR IRA, BY EARNINGS GROUPS |
| 20. | SPOUSE BENEFITS AMONG FULL-TIME EMPLOYEES AGE 45 TO 64 PARTICIPATING IN A PENSION OR IRA, BY EARNINGS GROUPS |
| 21. | 401(k) USAGE (MAY 1983) AND IRA USAGE (1982) AMONG PRIVATE NONAGRICULTURAL WAGE AND SALARY WORKERS, BY EARNINGS AND AGE GROUPS |
| 22. | GAINS IN AFTER-TAX INCOME IN THE YEAR 2019 |
| 23. | GAINS IN AFTER-TAX INCOME BY PLAN TENURE IN THE YEAR 2019 FOR SINGLES |
| 24. | GAINS IN AFTER-TAX INCOME BY PLAN TENURE IN THE YEAR 2019 FOR RETIRED COUPLES |
| 25. | GAINS IN AFTER-TAX INCOME BY PLAN TENURE IN THE YEAR 2019 FOR WORKING COUPLES |
| 26. | REVENUE GAIN FROM LOWER SECTION 415 LIMITS |
| 27. | REVENUE GAIN FROM TAXING ASSET INCOME OF QUALIFIED PLANS |
| 28. | NET REVENUE LOSS FROM UNIVERSAL SALARY REDUCTION PLANS AND NO IRAs |
| 29. | GROWTH OF PRIVATE PENSION PLANS, 1950-1980 |
| FIGURE | |
| 1. | EFFECTS OF THE TAX REFORM ACT OF 1986 ON THE TAX ADVANTAGES OF PEOPLE IN QUALIFIED PLANS WHO PAY TOP INCOME TAX RATES AND OF THOSE WHO PAY AVERAGE RATES |
The federal government helps increase retirement incomes through the tax advantages it gives to employer-sponsored retirement plans and to Individual Retirement Accounts (IRAs). The advantages given to these arrangements--generally called "qualified plans"--constitute one of the largest preferences in the federal income tax. Along with Social Security and other measures, they are intended to help assure adequate retirement incomes for as many workers as possible. They are also intended to stimulate national saving and economic growth.
Who uses the tax advantages? How large are they in the aggregate and how are they distributed across income classes and among those with similar lifetime incomes? Do they raise saving? What are the strengths and weaknesses of the variety of employer plans and IRAs in advancing retirement income objectives? What alternative policies could be pursued to ensure adequate incomes for retirees or to reduce the revenue losses of the tax advantages? These are the questions addressed in this paper.
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