“After” Math: The Impact and Influence of Incentives on Benefit Policy

August 2012
EBRI Issue Brief #374
Paperback, 24 pp.
PDF, 1,307 kb
Employee Benefit Research Institute, 2012

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Executive Summary

Whichever political party prevails in November 2012, it is likely that the next Congress will, of necessity, address issues of the federal deficit, entitlements, and tax policy—specifically, proposals to modify or reduce existing tax preferences for health and retirement benefits.

In that context, EBRI’s 70th policy forum focused on the "’After’ Math: The Impact and Influence of Incentives on Benefit Policy.” The May 2012 symposium brought together a range of national experts who explored various implications of changes to benefits tax policy.

Among the key points made at the policy forum:

  • As important as retirement and health benefits are to Americans’ short- and long-term economic security, the sheer size of their tax preferences makes them vulnerable in the battles over deficit reduction and tax reform. Private-sector health benefits alone rank as the largest single “tax expenditure” in the federal budget.
  • Retirement benefits are a tax deferral rather than an exclusion from income—meaning the federal government will eventually recoup the forgone revenue. This distinguishes retirement plan deferrals from other tax exclusions.
  • Because the tax expenditure on 401(k)-type plans is a deferral, rather than an exclusion, reducing the tax expenditure in the current period also reduces the positive stream of revenue in the future.
  • The biggest difference between tax-expenditure estimates and revenue estimates for scoring tax reform is that the latter incorporates taxpayer behavior; tax expenditure estimates do not.
  • Ten percent or fewer of those ages 55–60 are making withdrawals from their IRA, compared with 80 percent of those 71 and older.
  • On a historical basis, depending on the period measured, pre-retiree balances in defined contribution retirement plans double about every eight to nine years.
  • Employer match levels seemed to have a bigger impact on older workers, but automatic enrollment seems much more significant in terms of getting younger employees to participate in retirement plans.
  • Common challenges for underfunded retirement systems worldwide include the need to increase the state pension age and/or “normal” retirement age for full benefits; to promote higher labor-force participation at older ages; to encourage or require higher levels of private saving; to increase retirement coverage of employees and/or the self-employed; and to reduce savings “leakage” prior to retirement.