Beware: The Rich Are Getting Richer

When the siren song of pension reform emanates from our nation’s capital, beware: The rich are likely to get richer, and almost everyone else will get poorer.

As a nation, we have invested hundreds of billions of dollars--more than $80 billion last year alone--in tax subsidies aimed at encouraging employers to offer pension plans that would help their employees save for retirement.

Despite this massive national investment in retirement security, fewer than half of the employees in the private-sector work force participate in a pension plan--about the same percentage covered in 1974 when Congress overhauled the private pension system. Seventy million people--mostly low- and moderate-income employees--currently work for employers who don’t have pension plans or who have pension plans that fail to cover them.

What’s the answer? For House Ways and Means Committee Chairman Bill Archer (R-Texas) and the other committee members who sent pension “reform� measures to the House floor, where they passed overwhelmingly, it is more pension tax breaks for the affluent. The idea, according to the legislation’s sponsors, is to dangle juicy tax-shelter carrots in front of business owners and managers who do not currently have retirement plans. When employers take the bait and adopt pension plans, all workers supposedly benefit because all, high and lowly, will be covered.

But look at the imbalance. One provision in the House bill would jack up limits on annual benefits from traditional pension plans, allowing the most affluent employees and entrepreneurs to look forward to more than $160,000 per year at retirement. Other provisions would increase the amount that some of these same people can salt away, tax-free, in profit-sharing or 401(k) plans to more than $45,000 each year--this includes employer contributions--and would create Roth 401(k)s in which a fortunate few could effectively shelter even more.

These provisions are aimed directly at the wealthiest Americans, the only ones who could possibly afford to use them. Little in the bill would directly do any more than existing law to help low- or moderate-income employees save for retirement.

In any case, this misguided trickle-down pension policy is unlikely to result in many new pension plans. According to a study by the Washington-based Employee Benefits Research Institute, the two leading reasons that businesses give for not sponsoring pension plans are not enough business profit and not enough employee interest. So raising the effective annual shelter limits as high as $45,000 and the maximum traditional pension benefits to $160,000 will do little more than lighten the tax burden for the wealthiest Americans, who already participate in pension plans and, in any event, don’t need government paternalism to encourage them to save for retirement.

Even worse, some of the changes virtually invite businesses that already have pension plans to reduce benefits for both low- and middle-income employees.

For example, one obscure and seemingly innocuous measure would increase to $200,000 the maximum amount of salary (currently $170,000) that can be taken into account under a retirement benefit formula.

Here is how it works. For a wealthy business owner (perhaps a doctor) to shelter income in a defined contribution plan, special “nondiscrimination� laws require her to contribute a proportionate part of her employees’ income. If she wants to shelter the current maximum contribution of $30,000 for herself (17.65% of the current limit of $170,000), then she also may have to set aside 17.65% of the income of each of her employees. But if the salary limit is raised to $200,000, the percentage contribution required for her to shelter $30,000 drops to 15%. This means that if she is satisfied with her own $30,000 contribution, she can correspondingly reduce the percentage contribution for all of her other employees. An employee earning $50,000 a year could lose more than $1,000 in contributions the first year alone. Over the course of a 30-year career, assuming average investment performance, the employee could lose more than $100,000 in retirement savings.

Another provision in the legislative package would gut the “top-heavy rules,� a special set of rules requiring certain plans to provide minimum benefits for rank-and-file employees. If enacted, some lower-income people who now get some benefits from their plan will receive smaller benefits or even none at all. Still another provision whittles away at the core of the nondiscrimination tax principle that bars employers from adopting plans that give a handful of wealthy employees enormous pension benefits while providing everyone else with trivial benefits.

What is needed are new ideas. The Clinton administration’s plan last year for “USA accounts,� in which the government would make direct and matching contributions for moderate- and lower-income workers, is one such idea. And what about conditioning new tax breaks on how well a pension plan actually treats moderate- and low-income workers? With some imagination, we can help all Americans in their quest for retirement security.