EBRI Issue Brief

Pension Tax Expenditures: Are They Worth The Cost?

Feb 1, 1993 28  pages


  • The provision of tax incentives to encourage pension coverage reflects a longstanding policy of the U.S. government. Any individual who participates in a pension plan, whether he or she works for the federal government, a state or local government, or a private nongovernment organization, receives a deferral on income tax as the benefit accrues.
  • The tax expenditure estimates for pensions are calculated on a cash flow basis. This is significant because it has the effect of placing no value on the pension promise itself, only on the advance funding of that promise. According to the FY 1993 federal budget, the pension tax expenditure was $56.5 billion for FY 1993: $27.9 billion (49.4 percent) for public-sector defined benefit pension plans; $19.3 billion (34.2 percent) for private-sector defined contribution plans (such as 401 (k) plans); $8.2 billion (14.5 percent) for private-sector defined benefit plans; and $1.1 billion (2 percent) for public-sector defined contribution plans. This compares with the tax expenditure for IRAs of $7.1 billion and $24.5 billion for the exclusion from taxation of a portion of Social Security and railroad retirement benefits.
  • Taxpayers with income between $30,000 and $50,000 (29 percent of taxable returns) paid 18 percent of taxes, received 28 percent of the pension tax incentive value, and could experience an 18 percent tax increase if the incentives were removed. One percent report income above $200,000; these taxpayers pay 26 percent of all individual income taxes, obtain 7 percent of the value of total pension tax expenditures, and could experience a 3 percent tax increase if pension tax incentives were removed./li>
  • Eighty-nine percent of those covered by pensions and 86.7 percent of participants had earnings below $50,000 in 1991. Among those earning less than $25,000 per year, 33.9 million were covered and 21.7 million participated in pension plans—51 percent of all covered persons and 41.9 percent of all participants. Among those earning between $25,000 and $49,999 per year, 25.3 million were covered and 23.3 million participated—38 percent of all those covered and 44.8 percent of all participants. Above $100, 000, 71,728 individuals participated, or 0.1 percent of all participants.
  • Advance-funded pension plans expand total savings even though the magnitude has been debated. Pensions translate into billions of dollars being saved each year, with total pension assets exceeding $4 trillion in 1991. However, more money needs to be set aside: federal pension plans have combined unfunded liabilities of more than $1.6 trillion, private pension plans $51 billion.