9 14ii IS 12 1 73 I0 16 EBRI L .i EMPLOYEE BENEFITS: EQUITY, TRENDS AND FEDERAL REVENUE IMPLICATIONS tax Tax Preferences expenditure andestimates Federal Revenue for pension Loss and group health insurance plans own. AData Section collected 401(k) plan by allows householdemployers and insurer to contain surveys their retirement indicate that plan SectionThe 401(k) emergence plans may of nontraditional particularly benefit benefits young warrants workers morewith careful high Federal distribution. coverage Summary Revenue and lossConcluding Implications suggests In 1979,Remarks that 71 percent tax preferences of all nonelderly for employer persons (workers health insurance and their Equity: The GrowthTheofIncome Bnployee Distribution Benefits of Major Benefits Statement of Table 4 continue to draw the public's attention and appraisal of these plans' insurance costs by Private Taxencouraging coverage lawsretirement favoring for employee major specific program health retirement tax employer care expenditures expenses, savings. retirement and In formgeneral, access and the health to single Section health insurance largest 401(k) care scrutiny labor-force Many than observers mobility it hasofand the been women emerging given. who may changes These leavein benefits the employee labor generally force benefit forplans protracted servehave the dependents) contributions In part cov strongly ered as abyresult benefit an employer oflow-income tax group incentives, health workers plan participation reported and their adjusted in dependents, emplogross yer Employee benefits can be considered in three groups: Table 1 D. Chollet, Ph.D., tax-favored status. Measurement of current or lifetime tax loss, however, is RATES OF EMPLOYERGROUPHEALTH INSURANCE COVERAGE services, has risen steadily among the population since 1950. In 1979, claimed plans category periods. planswere that probably ofenacted the tax represent development expenditures under theapremise net ofinnew reduction the that forms federal wide in ofcoverage employer employee budget. pension of They benefits workers arise contributions and merely fromtheir the provide interests important of employers security , S. who forKorczyk, workers are seeking Ph.D., with fragmented and to contain employment benefits histories, costs, and pension family oincome andlegally health less insurance than required $30,000. plans benefits Theismedian high. (including adjusted In 1979,employer gross 48 percent family contributions ofincome the total amon to g AND EMPLOYERCONTRIBUTIONS TO COVERAGEAMONGNONELDERLYPERSONS E.S. Andrews, Ph.D.* Social Security, unemployment insurance and workers compensation AVERAGE ANNUAL GROWTH RAT Table ES OF3 MAJOR EMPLOYEE BENEFITS BY FAMILY INCOME, 1979 (in percents) dependents o nearly deferral relative nly part 61 percent ofto ounder fthe taxes the level ofthese task paid the that ofU.S. plans on evaluating would pension population is desirable be and required tax retirement received preferences social to ensure health policy. saving for adequate insurance contributions empl The oyer growth retirement , coverage pensioand no£ representsThe further growth taxof basecafeteria erosion. (or TheseSection claims,125) however, planshave also beenreflects made workforce and employees reduce , participated the whopublic demandcost in a an more of employer health diversified care pension entitlement package plan; of74 programs. percent benefits were thancovered ever persons covered insurance); by an employer group health plan in 1979 was less than $25,000 AS A SHARE OF TOTAL COMPENSATION, 1950-1983a COMMII_FEEON WAYS AND MEANS, DISTRIBUTION OF EMPLOYEES WITH PENSION AND HEALTH COVERAGE contributions, retirement saving, and employer-sponsored health insurance. from worker earnings income an coverage with employer on these lowerby group contributions. employee pension health retirement and health plan. The saving. tax insurance Among deferral all since persons of pension 1950 withhasprivate and been retirement strongly health lightly before. and The Nontraditional tax with deferral no supporting benefits of employer may evidence. serve pension bestThere contributions those are workers several whose andreasons individual needs to are by (see emplo antable y The ers' employer growth 4). efforts ofgroup to employee U.S. control health HOUSE benefits insurance the OF REPRESENTATIVES cost as a plan. tax-fa of employee vored Among form full-time benefits. of compensation full (Cafeteria year o fully taxable benefits (primarily, payment for time not worked); Distribution of BY EARNINGS, 1979 and The benefits thatPersons derive with from taxCovered preferences Persons fPersons or thesewith plans All mustPersons also be saving insurance encouraged contributions Section covby eragethe 401(k) tax in represent 1979, advantages plans Aat veraGe also least current accorded Annual reduce 82 percent Rate revenue these theofplans, employer's deferral; were Growth coand v(in eredtaxes by projected percents) by thean are growth employer paid costof on of believe least that adequately Thethedistribution growth met of by nontraditional of moreIRAtraditional savingsbenefits among benefits income -- ingparticular, roups -- young alsoworkers suggests Section andthe hasworkers, retirement plans dominated mayrates include saving theof debate provides coverage a reimbursement over are important federal very HEARING account high. tax incentives policy ON orInflexible for 1979, for sev employers eral more spending than years.and 74 account; percent workers Many who they of to Employees with Employees with Adjusted Gross Employer Group with Employer Employer with Employer o tax-favored benefits (including employer contributions to pension withdrawals from the funds after the worker retires. In a lifetime context, appraised. real Family indexing marginal Income retirement atax rates. Coverage benefits. Although Contribution pension Contribution benefit increases Contribution are seldom 401(k) plan. Earnings Empl effectiveness are onot yee 5plans Recent sBenefit ynonomous and and Congressional cafeteria wide with,distribution 19or 5plans 0-1980 dependent concern --Pension mayof on, over actually IRA flexible Covera 1970-1980 health tax reduce gespending advantages insurance further Health accounts.) erosion loss at 1980-1983 Coverage every among of income arefull-time emplo concerned yed full-year parents. about workers the Further federal , participated the deficit growth , in an of andemployer nontraditional many obser pension vers plan, benefits of Social andmay 89 provide for and retirement healthADMINISTRATION insurance income. plans). The AND increasing OTHER PROPOSALS importance of pensions as a Total Percent Total Percent CONCELNING TAX SHELTI_S, ACCOUNTING ABUSES, Federal tax preferences for pensions, retirement saving, and health unemployed automatic, Employee workers most benefits employers and their are families provide widelysuggests addistributed hoc that cost-of-living the among Congress workers adjustments continues and their for to the howe actually payroll ver, Generally, contribute and grossindividual the federal toprimary income the revenue pamotive yroll tax bases. and ofloss employers income (excluding taxinbases establishing , public to the entitlement a extent cafeteria that Security's percent source level. ofwere In income financial 1982, covered projected 18problems percent by among ,anofemplo see all futureyIRA the erretirees accounts, health growth isplan. ofand the tax-favored 14 7direct percent Participation resultof employee ofall past in IRA ANq_CORPORATE Ahq)SECURITIES REFORMS Total Benefitsb 2.5 2.3 1.9 Lossb 3.1 (in 80.0 millions) 2.5 (in millions) 0.3 In 1983, tax-favored employee benefits (excluding federal, state and families at all income levels. Like all workers, most workers who insurance current retirees. have encouraged Under current high rates law, osponsors f participatiof on defined-benefit in these plans pension among perceive high rates of private health insurance coverage as a public policy tax-favored expenditures While I- 4,999 employer individual that contributions would 11.6retirement result to from saving 85.3 traditional lower planslepension is velsmore 9.9ofplans modest. privateareIn entirely retirement 2.21982, 15 benefits contributions, plan they supplant is as the an erosion containment traditional were ofmade , theofby tax-exempt tax employer households base contributions or and fully with a threat adjusted tax-deferred to health togross the benefits. insurance. income government's less These than In growth in pension plan participation among workers. The projected rate of February 28, 1984 Less Legally thanRequired $20,000 27.8 75.3 58.3 79.8 5,000- 7,499 34.5 88.7 30.6 3.2 local government contributions to public employee pensions) represented just workers Benefits and their families at 3.2all income levels. 3.3 Widespread coverage 1.5 under participate $20,000 to $49,999 in employer pension8.7and health23.7 insurance13.9 plans are low- 19.1 and tax-deferred, goal. fact, income) plans 7,500- cannot '_ature" are9,999 employee significantly reserve cafeteria 47.8 against contributions lower plans future than can 90.5 ad tohoc Section measures be characterized cost-of-living 401(k) of43.2 current plans asincreases, those are revenue taxable which 4.4 deferral even by have in ability pension percent implications to recipiency of maintain all of emerging households services among nontraditional today's andthat honor young filed past workers benefits a committments. federal (ages merit income 25-34) further tax return isattention. nearlyreported twice $20,000. More than a third of all IRA contributions--34 percent--were made by $50,000 and over 0.3 0.9 0.8 i.i 10,000-14,999 63.0 92.1 58.0 13.0 Statement of under 30 percent of all employee benefits and 8 percent of total Social middle-income Fully broken these Security. plans Taxable the automatic proworkers. misesEmployers tlink o In enhance have between 1979,favored more federal inflating than Section tax 75 health percent revenues 401(k)care of plans inall costs future as workers aand means years, employer covered of and suggest. that cases 15,000-19,999 ofwhere Widespread workers Asthe much who plan health are 75.6 ashasretiring 75a percent clear insurance today history of92.6 the (see and real of table pension providing value 2).70.0 of coverage taxes those deferred increases. 16.8 contribute duringAd households The emergence with adjusted of newgross forms income of tax-favored less thanemployee $30,000.9 benefits In short, -- such there asis participation in an Individual Retirement Account (IRA).8 Benefits 1.4 0.8 0.8 20,000-24,999 81.8 94.4 77.2 16.7 compensation. Since 1950, tax-favored employee benefits as a share of minimize Totala current and future reliance36.9on public entitlement I00.0 73.0 programs. I00.0 reducing pension importantly by support hoc 25,000-29,999 an increases, the participants employer forlevel to health thetherefore, ofpension income insurance contributions 83.2 t working plan security are coverage. careers under funded of they 94.8 ERISA current is Cafeteria ultimately might from standards, workers have current plans 78.9 to paid and and make contributions, in their 80 encourage if retirement. percent they families, 14.2 offered employees o£ 1offset and all deferred no evidence ]_nployee compensation that tax benefits plans preferences are and widely cafeteria for employee distributed plans benefits -- alarms amongor those workers private who and see retirement their the Deborah J. Chollet, Ph.D., Tax-Favored 30,000-34,999 84.8 94.8 80.4 9.8 compensation have grown at an average annual rate of 4.5 percent, compared to Sophie Korczyk, Ph.D., and workers to Benefits, the covered income Totalby b security an employer of 4.5future group retirees. health plan, 4.2 Tax preferences earned less for than4.1 employer $20,000. only Co families to against 35,000-39,999 veraGe aelect traditional ]_ployer actuarial Growth atless all incontributions generous gains, Tax-Favored income pension 84.4 or levels. health added plan. E_ployee to insurance to Reflecting group 94.9 If the Bene Section plan's health fits coverage, theunfunded concentration 401(k) 80.1 insuraand nceplans liability. substitute aredo, of alsoin workers 6.1afact, other largeat savings plans favor only highly paid workers. growth of employee benefits only as erosion of the tax base. This appraisal Emily S. Andrews, Ph.D.* SOURCES: Pension distribution based on Retirement Income Opportunities in an 40,000-49,000 83.1 94.5 78.5 6.8 somewhat slower growth in legally required benefits and taxable benefits (see Private Tax Pension laws favoring employer retirement and health insurance plans were health insurance contributions, employer pension contributions and individual substitute benefits--both Contrary source 50,000-59,999 Section ofAging for tofederal the America: the tax-favored 401(k) perceptions growth 82.8 taxplans--and Coverage expenditures and of fully more of,other and man 92.8 taxable--for traditional yBenefit ,defined-contribution fourth there Entitlement in is pension 76.8 generous the no evidence list benefits, (Washington, health plans--represent of 4.0 that insurance alltheyD.C.: tax tax low and middle incomes, most workers who participate in employer pension and of employee benefits is naive. The growth and redefinition of tax-favored Trends in Employee Benefits and Profit EBRI,-Sharing 1981). Health 3.7 distribution Table 2 from 4.5 EBRI tabulation the 5.7May 1980 60,000-74,999 76.0 91.3 69.4 1.7 table i). enacted retirement unde Current r saving the Population premise are a that critical Survey wide(U.S. factor coverage Department in of determining workers of Commerce, andparticipation their Bureau dependents of andthe a way to provide employees with some inflation protection in retirement, at represent expenditures preferences health coverage. 75,000insurance an or addition Like over forbyemployee Section plans size. to 74.4the 401(k) benefits are current Thelowplans, exemption favor payroll or86.0 middle-income only cafeteria taxhighly ofbase. employer 63.9 plans paid workers. This workers. enable health seems In employers 0.6 1979, to insurance be75.5 ato employee benefits The growth must of be new evaluated tax-favored in a employee broader, benefits more sophisticated has alarmed context those who Census). Group Health ESTIMATED 6.3 PERCENTAGES OF 5F_IILIES .1 7.0 Employer contributions to group health insurance are the fastest- under contributions these plans fromisSocial desirableSecurity, socialcorporation policy. income In fact,and individual between 1950 income and Total, meet coverage. the All Thebenefits past Nondiscrimination RECEIVING growth demands ofPEprivate of NSION provisions anBENEFITS pension increasingly AT in plan AGE the participation 65, diverse tax ANDcode AVERAG workforce--including make Eamong tax workers, benefits favorable substantially development lowerforcost thosetoconcerned employers. aboutDefined near-term contribution budget deficits. plans are to percent see design the emergence efficient of all workers of long-run these benefits who publicwere policy. covered simply asbyfurther an employer erosion pension of the plantaxunder base. aPersons Detail Group Life may not add60.0 to totals 2.1 because 93.1 of rounding. -1.7 56.4 I00.0 --- REAL BENEFITS, BY CURRENT AGE AND MARITAL STATUS growing component of employee benefits. The expansion of worker and * The authors are research associates of the Employee Benefit Research taxation contingent and 1979, the the is current rate onanthe of important growth worker breadth ofsource of participation worker theofparticipation plan's current in federal coverage, employer in Section revenue that pensions is, 401(k) loss. both grew plans higb-by and and 25 ERISA young automatically The workers standards, growthand indexed, ofwomen--while and cafeteria 80since percent the plans controlling of asset all also value workers implies total of covered the benefits potential planbygenerally costs. an growth employer rises of group the with Tax expenditures for employee benefits must be considered in terms of The growth of new benefits -- in particular, Section 401(k) plans and cafeteria Institute. The views expressed in this statement are those of the authors Other ......... dependents coverage under employer group plans, the enhancement of benefits and do not necessarily reflect the views of the Employee Benefit Research low-income workers must be included in tax-qualified plans. percent; SOURCE: inflation. EBRI in absolute Inflation tabulations numbers, reserves, of the employee therefore, March 1980 pension accumulate Current participation Population automatically. Survey rose by (U.S. 263 IRAs represent Tax Cafeteria expenditure private plans estimates have savingemer are for gedaretirement poor and guide maturefor dincome. despite settingConsidering either the fact federal that the payroll healthandplan, incomeearned tax bases. less than Cafeteria $20,000 plans (seetypically table 5). include The distribution a menu ofof theplans social-- howe benefits ver,Allgenerally Families that result. represents TheMarried an emergence effortCouples by of new employers forms oftoSin employee contain gle Persons the Institute, its trustees, members or other staff. Cohort Department Percentagof e Commerce, Average Bureau Percenta of gthe e Census). Average Percentage Average under these plans, and persistent high inflation in health care costs have SOURCE: Calculations from Chamber of Commmerce data for 1951-1981, and the taxable percent. increasing The and Section 5 Econometric cost tax-favored removal of 401(k) Social ofestimates plans benefits. Security tax preferences also suggest andCafeteria meet the that,projected the for plans since demand employer encourage decline 1960,for 20 health retirement to in employees 50 thepercent insurance ratio income toof tax policy or federal retirement or health policy.2 Nevertheless, the high benefits employer Age regulations, in represents health toorRecei even coverage vedetailed employer Amount by legislation, family o£ efforts to Receive income to have reduce (reflecting Amount not been benefits of provided. the to Receive costs prevalence Alleged and Amount , of of cost of employee benefits. National Income and Product Accounts, U.S. Department of Commerce. 1979 Benefit Benefit Benefit Benefit Benefit Benefit a Includes earnings, interest, dividends, other property income and pension all contributed to the growth of employer contributions to health insurance of the increase in employer pension contributions as a share of compensation contributions workers income. securityExcludes toamong retirees, might mobile income dramatically private from workers public saving reduce andinsurance for workers ratesadequate oand fwith cotransfer verage intermittent incomeamong programs. replacement labor low-income force in elect abuses lessin generous the design health insurance of some cafeteria coverage,plans, and substitute providing significant spending fortax subseque multiple-earner ntly, The total growth households compensation of employer andpension costs. dependents costs The coverage) has growth prompted of some shows sevnew eral atypes inno similar vof ations a Data Resources, Inc. projections for 1983 total compensation. Estimates 25-34 71 $12,417 75 $14,541 65 $8,701 as a share of compensation. Since 1950, employer health insurance can be attributed to favorable tax incentives and the growth of real marginal for 1983 assume continuation of 1980-1982 growth rate. other benefits -- both taxable and tax-favored -- for tax-exempt health wretirement orkers and has theiremerged families,as aam public ong wogoal. rkers and Private their pensions, dependents 401(k) who experience plans and b35-44 1participation. Includes S. Korczyk, some persons Employee 65 The Tax reporting Treatment contributions 11,190 no of income Pensions to 67 Section in 1979. and12,563 401(k) Deferredplans Compensation 60are, by law, 8,823 benefits advantages may represent to participants a net addition that are to not the payroll availabletaxto base workers , if without they in the design of retirment income plans. Section 401(k) plans, authorized by 45-54 52 8,656 58 9,621 41 6,496 contributions Programs (Washington, as a percentD.C.: of total Employee compensation Benefit have Research risen at an Institute, average tax rates. 4 b Excludes the Federal Civilian Retirement System, Railroad Retirement unempl fully oyment and immediately during the vested. year, and Short-tenure among persons workers, who are eligible therefore, for are Medicaid better insurance forthcbming). cafeteria 55-64 7IRAs S.J.appear Schieber spending. plans, to serve and These 37As have P.M. athat simulation result, George, recently 5,315 segment these Ibid., come results of plans pp 44to the38 do are the population and not consistent attention 54; unambiguously 5,548 and who D. with ofChollet, this will 26 calculations represent Committee. beIbid. least 4,718 supplant the Revenue the growth Act ofofmore 1978, traditional have become benefits.an increasingly popular tool for System, state and local retirement systems and military pensions. Since reported by R.A. Ippolito, "Public Policy Towards Private Pensions" Pension coverage rates for full-time full-year workers include only annual rate of 6.3 percent. Reflecting continued high inflation in health erosion of the tax base. oadequately these served r Medicare systems by 401(k) served c are overage. nplans otbygo 6verned Social than An EBRI by Security bysimulati more the otraditional same n-- middle-income o funding f theplans. standards probable workers These that pattern workers, and determine their ofand Where nonagricultural the Congress workers, believes ageabuses 25-64,exist, with one limits yearorofguidelines service andfor working the usemore of Contemporary controlling Policy employer Issues, pension no.costs. 3 (AprilEmployees 1983), are pp. able 53-76. to supplement employer than private half-time. employer Health pension insurance contributions, coverage the rates growthinclude rates ofall private full-time and care costs since 1980, employer contributions to health insurance have 3 S.J. Schieber and P.M. George, Retirement Income Opportunities in an 2workers See: D. with Chollet, intermittent '_ackgroundlabor on force the Taxparticipation, Treatment of are Employee protected Benefits: because families, public emplas oyer well contributi as onshigher-income are incomparable. workers. Conversely, these persons benefits contributions withintocafeteria a Sectionplans 401(k) should plan be withset. tax-deferred However, contributions examples of possible of their Thenonagricultural authors are workers research whoassociates worked 50 weeks of theor more Employee duringBenefit 1979. Research An Overview of the Issues" in D.L. Salisbury, ed., Why Tax Employee Benefits? Aging America: Coverage and Benefit Entitlement (Washington, D.C.: Employee Institute. The views expressed in this statement are those of the authors Source: continuedSocial to grow Security: in excessPerspectives of total compensation on Preserving at an theaverage System annual (Washington, rate D.C.: Benefit Research Institute, 1981), pp. 54-55. continue 5 EBRI tabulations to be theofmost theimportant March 1980 sourceCurrent of funding Population for the Survey Social Security (U.S. (Washington they can ,"roll D.C.:over" Employee the accumulated Benefit Research contributions Institute, and 1984). earnings of the plan abuses within cafeteria plans do not mitigate the overall efficiency of these and8 do U.S. notDepartment necessarily EBRI, 1982), of re the p. flectTreasury, 90. the views Internal of Revenue the Employee Service, Bene Statistics fit Researchof Department of Commerce, Bureau of the Census). Institute Income , (SOI) its trustees Bulletin , (Winter members 1983-84), or other staff. p. 62. of 7 percent. into a tax-deferred individual retirement savings account. As a result, 4 S. Korczyk, Ibid. system Note: 9 EBRI and Real tabulations the dollars public of aresector Internal calculated atRevenue large. usingService 1982 asdata thefor basetaxyear. year 1982. plans and their cost advantages for both employers and employees. 6 D. Chollet, F_loyer-Provided Health Benefits: Coverage, Provisions and Policy Issues (Washington, D.C.: Employee Benefit Research Institute, 1984). EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, N\V r Suite 800 \Vashington, DC 20_ _7 Telephone (202) 65'9-0670