BNA Pension & Benefits Reporter - Retirement Plan Reform Proposals Would


Volume 27 Number 34 Tuesday, August 29, 2000	Page 2008
ISSN 1522-5976
News

Plan Contributions Retirement Plan Reform Proposals Would Primarily Benefit Highly Paid, Study Finds

The proposed increases in contribution limits to defined contribution pension plans set forth in H.R. 3081 primarily would benefit higher-income individuals who could afford to save more under the raised limits, according to an Urban Institute study published Aug. 18.

The legislation also would fail to provide incentives to those who can afford to save more for retirement but do not and those who can save only a little or nothing at all, the study found.

H.R. 3081, the Small Business Tax Fairness Act, links an increase in the minimum wage with several tax breaks including expanded incentives for retirement savings. The initiative has faced procedural hurdles in Congress because the Senate passed the provisions as part of a bankruptcy reform package (S. 833), while the House passed the wage and tax measures as a stand-alone bill (27 BPR 711, 3/14/00).

The study, The Limits of Saving, conducted by Pamela Perun, used a model of hypothetical lifetime savings to predict how the proposed contribution limits would affect lifetime savings and tax subsidy amounts -- in contrast to current limits -- of individuals who would both turn 35 and begin retirement savings in 2001, and retire 30 years later.

The model created hypothetical patterns of retirement contributions, earnings, and distributions for six identical individuals, each enrolled in only one of six sample plans, and analyzed the effects on those who save the maximum amount permitted under each plan year and those who save 5 percent of pre-tax compensation per year.

Effects of the increased contribution limits were evaluated at initial income levels from $10,000 to $240,000. The model assumed that the six individuals save for retirement exclusively through one private pension plan.

Proposals included in H.R. 3081 would increase the maximum:

Tax code Sections 401(k) and 403(b) contributions to the lesser of $15,000 (by 2005) annually or 100 percent of compensation;

Section 457 contributions to the lesser of $15,000 (by 2005) annually or 50 percent of compensation;

simplified employee pension plan contributions to the lesser of $40,000 (by 2005) annually or 13 percent of compensation; and

money purchase plan contributions to the lesser of $40,000 (by 2005) annually or 50 percent of compensation.

The reform proposals also would raise the cap on compensation to $200,000.

Maximizers

The reform proposals would allow "maximizers" -- those who save the most allowed in a plan year -- to benefit from a money purchase plan by contributing up to 50 percent of compensation. Even those who earn $10,000 annually can increase lifetime contributions by $100,000, the study found. The proposals also would make tax code Sections 401(k), 403(b), and 457 plans more uniform and low-paid individuals (under $40,000 annually) especially would benefit from increased contribution limits as a percentage of income and the absence of the maximum exclusion allowance in Section 403(b) plans, Perun said.

However, the reform proposals would decrease the tax subsidies received by low paid maximizers: participants in those simplified employee pension plans receive no additional subsidies while those in other plans actually receive negative subsidies under a 10-year distribution schedule, the study said. Higher paid maximizers in more generous plans -- money purchase plans and simplified employee pension plans -- would receive greater subsidies from the higher contribution limits: maximizers with initial incomes of at least $110,000 would receive over $100,000 in additional subsidies, Perun said.

"There are instances when some maximizers would be better off contributing less," the report said. Perun concluded that it is undesirable and unrealistic for low-paid employees to take advantage of increased contribution limits because they will be giving up a large proportion of their income and most likely will receive a negative subsidy. "Few people wish to save, or are even capable of saving, the maximum amount permitted under the private pension system each year," she said.

Steady Savers

"Steady savers," who save 5 percent of pre-tax compensation per year, would benefit from the reform proposals -- specifically the increase in the flat dollar limit -- only if they were among the highest paid and enrolled in tax code Section 457, 403(b), or 401(k) plans, Perun said. Under current regulations, "relative uniformity across plan types" allows for similar maximum contributions by age 65 among those with similar incomes, Perun said.

The study found that steady savers in all plans who earn at least $160,000 annually will have about the same maximum account accumulation of about $1 million. Similarly, total real, average, and marginal subsidies among steady savers would be increased under the reform proposals only for those who earn more than $160,000 annually and have Section 457, 403(b), and 401(k) plans.

Conclusions

While this study only tested the effects of reform proposals on a "very simple model" of saving through the private pension system, Perun said it did provide evidence that the reform proposals would "primarily benefit those individuals who wish to and are capable of saving a large portion of their incomes," which the current system can accommodate.

Perun said the reforms will increase the absolute amount of tax dollars devoted to the private pension system but the pattern of distribution of those dollars across income groups will largely remain the same. "These proposals do not attempt to make fundamental changes in the structure or operation of the system, both of which are needed," Perun said.

Although the reform proposals may make the system more consistent, they do not address inconsistencies based on employer tax attributes nor "attempt the long-overdue rationalizing of the employee savings system," Perun said. She said plans differ in important aspects not addressed in the reform proposals -- fiduciary responsibility standards, ability to offer loans, hardship distributions, rollovers to individual retirement accounts -- that, if regulated, may add to administrative burdens but encourage more employers to provide retirement plans.

Perun cited evidence that the non-discrimination rules for Section 401(k) plans are effective in getting low-income workers to save. Thus, "It might be worthwhile to extend those rules to all employee savings plans," she said. "Providing plans that promote participation by low-income workers is critical."

The report is available on the World Wide Web at http://www.urban.org/retirement/reports/7/retire_7.html.