Table 2 I @ Appendix am Conclusion: pleased to appea Effect r befo of re IRA you today Deduction to discuss Eligibility individual Tabl Extension reti erement 1 account (IRA) deduction eligibility. My name is Employers retain full eli and gibilindividuals ity, compared have witsaved h 64 per a great cent of deal. those Pension who di an ddno individual t participater.etirI ement f TRA 'plans 86 washave, intend as eda result, to stophad those a majo who r restrictions only for workers earning less than $2,000 annually. In 1982, the number of taxpayers claiming an IRA deduction Statement Summary Change_ InIRADedu;tlon Eligiblity Re0ulting fromDentc_n/Roth _;ivilion _ Work_0AgedZ1-Z4 Dallas Salisburyand Iamaccompaniedby J0_eph Dalla I'iacentini _ L, _ .Iali amsthe bury presidentofthe EmployeeBenefitR¢_earch Institute impacton capitalmarkets.At theend of 1990empl , 0yment-based retirementplansheld$2.5trillionin assetsand individual increar_=td o 12.0million,and thetotalamountdeductedreached$28.3billion.In1985,IRAdeductionspeakedat$58.7billion weredeductingIlL4contribu P tion_ are6from nt_o6 doing ef Civilinn do,Cen_u_ Wsrksra Bureau Ao6dr) data 1-_4indicate byI:li0il_ itility wa_ fovery r IRAeffo Dadueti etive. sn EBRI Employee Benefit Research Institute Eligibility Increases Eligibility Unchanged Percentage Legislation introduced in March by Senators Lloyd Bentsen and William a Roth would extend IRA deduction eligibility to all retirement All (EBR est I), imates a non accounts of prof IRA it, d and n ed on uc p Keoghs tartisan, ion eligi held b p ility ubli an c a additional nd poliIc RA y resear use$564 cc on htained billion. organization inThis the tabl represents based es provi indmore ed Washin wthan ith gton, this $3 testimo trillion D.C. ny Ein BRI patient arehas baselo d capital ng onbeen U.S. to from 16.2 million taxpayers (chart 1). Percent Percent Percent Eligibility Under EligibilityUnder Distribution of All Percent of All Percent of All TRA '86 IRA Bentsen/RothIRA of All • Today's retirees are at an historic high in cash and non-cash income. Social Security and Medicare have played a significant workers. This provision would increase the proportion of all workers who are currently eligible for a $2,000 IRA deduction Census finance committed the Burto eau nati the onCu 's accurate rrgrowth ent Population stat and istical , overanaly Su time rvey si,s the of (CP p economic S) ublidata. c policy Estima security bene tes fitoffo issues. retirees. r 1987 Tha rrou e gbased h our on resear 198 ch, 7 income we strive and topension contributedatto a Worker Full s Partial Gaining None Gainers Full Partial Unchanged None Unchanged Workers Higher-income workers are more likely to be covered by employer-sponsored plans and to have AGIs above the TRA '86 role in providing this economic security. Employment-based pensions and individual retirement savings have also made 1991 (Proiected) T-79 from 58 All perWorkers cent to 94 percent (table 100% 2). It would imp 37 r% ove IRA ded 100% uction eligibility 63% for 37 percent 100% of all workers in 1991 and contain the formulation ed in the o Ma f effe rchctive 1988 C and PS responsible income supplemen health,t welfare and 198 , 7 and 1 IRA 987 reda tirement ta contained policies. in the In May keepin1988 g with CPS E employee BRI's mission benefiof t Effective in 1987, TRA '86 restricted IRA deductions for taxpayers with employer-sponsored qualified retirement plan a large difference. Social Security (OASDI) paid $227.3 billion in retirement and disability benefits and pension plans paid thresholds and therefore are less likely to be eligible for the full IRA deduction. Just 21 percent of workers aged 21-64 with Family Type Government tax and social policy has encouraged the development of these programs, but this support has not been $244.4 billion in 1989, compared with $1.4 billion and $652 million, respectively, in 1950. AllWorkers 65% 16% 20% 95% 4% 2% 100% Single 37 20 21 80 46 fo providin r 43 per g cent objective of all and worke im rspartial in 1995. analysis, our work does not contain recommendations. Joe is a research associate with EBRI supplement. Estimates for 1991 and 1995 are based on 1989 income and pension data contained in the March 1990 CPS income coverage and income over certain unindexed thresholds. Specifically, the maximum allowed IRA deduction--S2,000 per AGIs of $50,000 or more are currently eligible for a $2,000 deduction, compared with 55 percent of workers with AGIs between Married, sole worker 11 28 8 72 12 FamilyType consistent. Changes since 1981 in general, and the Tax Reform Act of 1986 (TRA '86) in particular, significantly reduced S Married, ingle spouseworks 4 78 6 14 5010 94 72 5 50 2 42 36 • I_ension and individual retirement plans have also Statement had a major impact on capital markets. At the end of 1990, employment - and supplemen is responsible t. Income for an all d ea ofrni our ngsprim ara ery projec ana ted lysesforof wapension rd from a 1nd 989individual to 1991 andret 1995 ireme ba ntsedacc on ouSocial nt cover Secu agre ity and II-Bparti intec rip ma ed tiiate on. worker--is phased out evenly for single workers with adjusted gross incomes (AGIs) between $25,000-$35,000 and for FamilyPensionStatus Married, sole worker 74 10 16 97 2 1 17 $30,000 and $49,999 and 86 percent of workers with AGIs less than $30,000. based retirement plans held $2.5 trillion in assets, and individual retirement accounts (IRAs) and Keoghs held an incentives. Pension The data indicate that,55in the absence of some 67 of these changes 1O0 , there would33be more pension 28 coverage today, more Married, spouse works 53 18 28 95 4 2 48 assumptions Eligibility gains on g would rowth be in ave grea rage test cove among red Before high-income wages. theAGI Committee iswo assumed rkers. Se to on ven equal tFinance y-eight the repo perrce ted nt to oftal wo per rke sonal rs wiincome th AGIsofof individuals $50,000 or additional $564 billion. This represents more than $3 trillion in patient capital to finance the nation's growth and, over time, ma No rried pension couples filing jointly wi45 th AGIs between $40,000-$50,000. 0 0 These restrictions 1O0 apply to joint 72tilers if either spouse is Family Pension Status Pension 45 22 33 97 2 1 57 Family the Incom econom e(199 ic15) security of retirees. individuals with individual retirement savings today, and hundreds of billions of dollars of more assets in retirement plans. Less than$30,000 43 4 5 96 65 mo or No r the e pwould e combined nsion enjoy repo imp rted roved totalelipe gi 91 rso bilinal ty unde incomes 6r this ofpma rovision 3rried couples. in bo 91 th 1991 Worke arn s' d 6 1995. earnings Because 3 are assumed the TRA 43 to '86 equal thresholds their repo are rted not covered by a pension. (Married individuals filing separa U.S. tely Senate are not affected by their spouses' pension coverage. However, $30,000-$49,999 27 41 30 59 25 Family Income (19915) Because the TRA'86 income thresholds are not indexed for inflation or income growth, between 1987 and 1991 the proportion $50,000-$74,999 18 78 39 22 6 • Less Gove than rnmen $30,000 t tax and social 90 policy has 7 encouraged3 the development 91 of 7 these prog3 rams, but thi 41s support has not been @ Introduction indexed, the proportion of moderate-income workers whose eligibility would improve is expected to increase. Among total income from all employment during the base year. if they are covered by a pension plan, their IRA deduction eligibility is phased out between AGIs of $0 and $10,000.) Workers $75,000 or more 12 78 26 22 4 $30,000-$49,999 75 20 6 97 2 1 29 Hearing on consistent. Changes since 1981 in general, and the Tax Reform Act of 1986 (TRA '86) in particular, significantly reduced of lower- and middle-income workers who were eligible declined, while the proportion of higher-income workers who were Under restrictions imposed beginning in 1987 by TRA '86, 63 percent of all workers aged 21-64 were eligible for a full $2,000 Age $50,000-$74,999 20 34 45 98 1 1 20 worke volunta rs with ry AGIs program between incentives. $30,000-$49,999, The data indicate eligibilitythat, would in the imp absence rove foof r 41 som pe ercen of tthese in 1991 changes and, fo the r 54 re pe would rcent be in mo 1995. re who Under are35 not eligible for the full IRA 43 deduction are per 25 mitted to make 29 nondeductible con 75 tributions. Combin 51 ed deductible and $75,000 or more 22 a 78 98 1 a 10 Savings and Individual Retirement Accounts 35-54 46 47 59 53 38 pension coverage today, more individuals with individual retirement savings today, and hundreds of billions of dollars eligible Age remained nearly the same. This trend is expected to continue through 1995. Among workers with AGIs of less than IRA deduction in 1987, and 58 percent are eligible today. By 1995, 52 percent will be eligible. 55or older 11 38 12 62 11 Among Tod Under ay's 35 wo retirees rkers a with re at wo anrking historic s74 po hi uses, gh ineligibili ca 14 sh aty nd would non-c 12 ash incr iea ncome. se94forSoci 50 a per l Sec cen 4 u t rity in 1a 991 nd 2 M and edifo carre58 42 hper ave cen played t in 1995 a signific (table an3). t Because CPS data do not provide for a reasonable determination of tax filing status, all married couples are presumed to file nondeduc of mo ti rble e asse cont ts in ribu reti tions remengene t plans. rally must not exceed the lesser of $2,000 (unindexed) or 100 percent of earnings. 35-54 56 17 26 96 3 1 46 by $30,000 (in constant 1991 dollars), the proportion eligible for a $2,000 deduction declined from 90 percent in 1987 to 86 percent 55or older 64 14 22 1995 (Pro 94 jected) 4 2 11 role in providing this economic security. Employment-based pensions and individual retirement savings have also made a jointly. The effect of this limitaion on the estimates is probably very small due to the small number of married couples who All Workers 100% 43% 100% 570/0 100% • Under restrictions imposed by TRA '86, 65 percent of all workers aged 21-64 were eligible for a full $2,000 IRA deduction T inhe 1991; Bentsen it is /Rot expected h Super to fall IRAtopr 83 oposal percent would in 1995. extenWorkers d eligibiliwith ty for AGIs deduct ofib $30,000-$49,999 le contributions aretofacing IRAs tthe o all sharpest workers. decline TRA '86 in Family Type 1991 (Projected) in 1987, and 58 percent are eligible today. By 1995, 52 percent will be eligible. la IRA rge deduc differti ence. on eli Social gibilitySecu does rity no paid t gua $22 rant 7.3 ee billion that wo in rke reti rs rement will make benefits IRA and conpen tribu sion tions.plans Mos paid t eligi $244.4 ble wo billion rkers in do1989 not, file separately. IRS reports that in 1987 no more than 3 percent of married couples filed separately. However, some married Primarily as a result of TRA '86, use of the IRA deduction fell sharply. In 1987, 7.3 million taxpayers claimed $14.1 billion in Single 37 25 22 75 49 Dallas L. Salisbury AllMarried, Workerssole worker 58% 11 15% 3627% 94% 9 5% 64 1% 100% 12 restricted eligibility, that fromeligibility 75 percentfor inworkers 1987 to 55 with percent pensions in 1991 andtoincomes an estimated over 43 certain percent thresholds, in 1995. Among beginning workers in 1987. with This higher testimony AGIs, President cont compa workers---particularly ribu red te, with and some $1.4 billion ineligible those and with wo $652 employer-sponsored rkermillion, s makeres nondeduc pectively, ti plan blein coverage 1950. contributions. only through Amongtheir worke spouses--- rs whocould were fully gain eli IRA gible eligibility for the IRA Married, deductions spouse ; works in 1988, 6.4 million 53 taxpayers claim 58 ed $11.9 billion 70 (chart 1). 42 39 Family Type • TRA '86 restricted IRA deduction eligibility for workers with pensions and incomes over certain thresholds. Workers least Family Pension Status Single 74 15 11 94 6 a 37 quantifies the extent of IRA deductionEmployeee eligibility under Benefit current Research law for workers Institute today and in the near future. It documents between likely20 topercent remain and fully22 elipercent gible forremained a $2,000 IRA eligible deduction from 1987 in 1991 to 1991, include and those the number with wois rking expected spouses to remain (45 percen in tthat eligible) range Pension 55 79 100 21 20 Married, sole worker 69 11 20 97 3 1 11 by IRA filing deduction separately. in 198 A7,separate IRA cont set ributions of EBRI estimates were moresuggests commonthat, among if all married workers workers in higherchose -income theirfamilies. filing status Likewi tose maximize among and those with family incomes in excess of $50,000 (21 percent eligible). Workers with working spouses are dispropor- No pension 45 0 0 100 80 Married, spouse works 45 16 39 94 5 1 53 the use of deductible and nondeductible IRAs following TRA '86. Finally, it examines the proportion of workers in different Family through Income 1995. (19915) Family tioPension nately Status affected by the restrictions because dual employment increases the likelihood of family pension coverage and ineli the Americans combined gible families like IRA retirement. , deduction nondeductible So available much, cont in ributions tofact, themselves thatwe Washington threeyand most toldtheir the common ,E spouses BRI DC /G ,a at llu the highe p proportion poll r income that, on of levels. av all era workers ge, Thethey se pa eligible wo tteu rns ld for lo sugges ve a full tot retire IRA that @ Current IRA Deduction Eligibility Pension Less than $30,000 40 31 21 849 97 7 3 92 a 55 66 higher family income. $30,000-$49,999 26 5416 May 1991 33 46 21 income No pension groups and family types91 that would8 gain IRA1deduction 91 eligibility under 8 this 1 provision of 45the Bentsen/Roth bill. increased IRA deduction eligibility under repeal of the TRA '86 restrictions would be disproportionately concentrated among by deduction age 61. in In r 1991 ecentwould years,beas63 a percent result of rather retiremen than t the savi 58 ngs, percent indivireported duals have above. been However, able to reti under re eathis rlier.approach, Americans 16 percent like the $50,000-$74,999 19 78 34 22 8 Family Income (19915) $75,000 or more 14 78 25 22 5 • The income thresholds associated with IRA deduction restrictions are not indexed. Therefore, as incomes rise due to Less than $30,000 86 13 1 90 9 1 43 T high-income wo-earner co families, uples have and been actualdisprop tax benefits ortionately flowing affect from ed tby he r th epe e al TRA might '86 IRA be even deducti mo on re concen restricti tro ated. ns, in part because the Age p of rog $30,000-$49,999 married rams that couples havewould made file retirseparately ement 55 possible, in35 orderbuto t timprove hey 10 are conce their 96 rned IRA deduction about 3the eligibility---a future. a proportion 27 far larger than the New EBRI research quantifies changes in workers' IRA deduction eligibility resulting from the TRA '86 restrictions for inflation or real income gains, the proportion of workers who are eligible declines. While all higher-income workers with Under 35 43 31 31 69 52 $50,000-$74,999 21 1 78 98 2 a 18 35-54 46 54 57 46 37 pensions are already ineligible for deductible IRAs, an increasing proportion of moderate-income workers are ineligible. • Background $75,000 or more 21 1 78 98 2 1 12 presence 3 percent of reported two workers by IRS.increases Moreover,themany likelihood of the of couples coverage whounder actually an employer-sponsored file separately may not pension improveplan. their Moreover, IRA deduction many different income groups and family 55or older 11 45 12 55 11 Age The proportion of workers with family incomes between $35,000 and $49,999 (in constant 1991 dollars) who are eligible Under 35 69 15 16 94 6 a 43 ### for a $2,000 IRA deduction fell from 75 percent in 1987 to 55 percent in 1991, and will drop to 43 percent in 1995. Americans like Medicare. But 71 perccent tell the EBRI/Gallup poll that they believe Medicare will provide a lower level of eligibility by doing so. For these reasons, assuming that all married couples file jointly should provide reasonable estimates t two-earner ypes. The rcouples esearch ' al combined so measurearnings es IRA and other income already exceeds the TRA 'C 86 hathresholds. rt 1 Given expected inflation 35-54 Source: EBRI estimates and 48projections 15 based on Census 37 Bureau data 95 and Social 4 Security Administration 1 assumptions. 46 55 or older 54 15 13 Use 92 of the IRA 6 Deduction1Responds to 11Eligibility Law With the enactment of the Employee Retirement Income Security Act of 1974 (ERISA), Congress established IRAs, effective be ofnefits IRA deduction when theyeligibility. retire than it does today. Over one-half would willingly pay higher payroll taxes tomorrow to secure the use by both eligible and ineligible and income growth, more two-earner couples will become ineligible in the near future as more of their incomes surpass these (continued • The Be onnnext tsen/page) Roth bill would improve IRA deduction eligibility for 37 percent of all workers in 1991 and 43 percent of all Table 3 workers in 1995. While higher-income workers would be most likely to gain eligibility in the near term, many moderate- in 1975, to provide workers without employer-sponsored pensions an opportunity to save for retirement on a tax-deferred workers. 40 - program. They have reason to be concerned. The program is projected to move to negative cash flow in 1996 and run out of thresholds. Among all workers whose spouses also work, the proportion eligible for the full IRA deduction declined from income workers would also gain. Among workers with incomes in excess of $50,000, 78 percent would gain eligibility in IRA Sue Rates: Percentage of Civilian Workers Aged 21-24 Contributing to an IRA in 1987 1995 (Projected) 35 both 1991 and 1995; among those with incomes between $30,000 and $49,999, the proportion gaining eligibility would be basis. In general, ERISA allowed workers without pensions to contribute the lesser of $1,500 (unindexed) or 15 percent of investment earnings in 2001. To maintain benefit levels, the program will grow from 2 percent of GNP in 1990 to 6 percent in Some workers would remain eligible for less than the full IRA deduction under the Bentsen/Roth proposal because they do 53 All Workers percent in 1987 to 45 percent 52% in 1991; it 12% is expected 36% to drop to 95% 38 percent in 4%1995 (table 1% 1). 100% IRA deduction eligibility 41 percent in 1991 and 54 percent in 1995. 3O Allworkp.r._ Full PArtial NonP. Family Type earnings annually to an IRA on a tax-deductible basis. As ERISA originally provided, investment earnings on IRA All not 2060. Workers report Far mo enough re Ameearnings ricans beto lieve qualify 13%that for employe the full rs12% will deduction. provide health 13% insurance in r19% etirement than is the case. Seventy-three Single 69 14 17 95 5 a 37 Under pre-TRA '86 law, 95 percent of all 25 Family Type Married, sole worker 61 10 28 97 2 1 11 • IRA deduction eligibility does not guarantee that workers will make IRA contributions, nor does ineligibility preclude contributions are also tax deferred, and IRA withdrawals in retirement are taxable. IRA eligibility restrictions were basically per Single10 cent believe employers should 9 be required to 13provide health insu 16 rance in retirement. In the future, Americans will need Married, spouse works 38 12 50 95 4 1 53 workers aged 21-64 would have been 2o such contributions. Following TRA '86, IRA participation remained higher at higher income levels. Including both One other issue at the center of legislation and regulation in the 1980s was non-discrimination, that is, the desire to have Married, sole worker 17 15 22 22 Family Pension Status deductible and nondeductible contributions, in 1987, 7 percent of workers with incomes below $30,000 contributed, Married, Pension spouse works 15 19 17 13 64 12 97 2 20 a 55 unchanged from 1975 through 1981. In 1975, 1.2 million taxpayers claimed $1.4 billion in IRA deductions, according to the to increase savings for retirement to retire when they want to and in order to afford health care expenses in retirement. In the preceding analysis, "improved" eligibility status refers to a change from partial eligibility to full eligibility or from no eligible for a $2,000 IRA deduction in 15 Family Pension Status Nocompa pension red with 14 percent of92 those with 7 incomes bet 1 ween $30,000 92 and $49,999 7 , 19 pe1 rcent of those 45 with incomes between individuals at all income levels participate in programs. TRA '86 also had an interesting impact on this objective, according 10 Pension 15 12 16 20 Family Income (19915) Internal $50,000 Revenue and $7Service 4,999, and (IRS). 28 per Bycent 1981,of 3.4 tho million se withtaxpayers incomes ove claimed r $75,000. $4.8 billion IRA deduction in IRA deductions eligibility (chart improvements 1). under eligibility to partial or full eligibility. Increases in partial eligibility are not included. 198 No 7.pension As a result of TRA '86, 6511 percent 12 5 3 a Less than $30,000 83 16 1 91 8 1 43 to analysis the Benof tsen the /Roth statistics bill would of income be somewhat from the Internal concentrated Revenue among Service highe (IRS). r-income In 1986, worthe kers. proportion Actual tax of ben all efits returns from by IRA income use Family Income (19915) 1-=--'----- ......... "" $30,000-$49,999 43 22 35 97 3 a 27 arising from the bill would be more concentrated among higher-income workers. Americ Less than ans $30,000 like Social Security. 7 But 42 percent of7poll respondents 4not currently retired a do not think the system will pay them we$50,000-$74,999 re eligible in 1987, and 58 percen 22t are 1 78 ............. 98 2 a 18 1975 1977 1979 1981 1983 1985 1987 category $30,000-$4 with 9,99 an 9 IRA deduction 1 ranged 4 from a high 14 of 67 percent of 16 those with incomes 14of $75,000 or higher to a low of 7 percent $75,000 or more 21 1 79 98 1 a 12 Theviews expressed in this statement are solely those of the author and should not be attributed to the Employee Benefit $50,000-$74,999 19 26 15 17 The Economic Recovery Tax Act of 1981 (ERTA) extended eligibility for deductible IRA contributions to all workers, including Age a benefit when they retire; 44 percent of those aged 18-34 and 45 percent of those aged 35-54 do not think the system would All estimates are restricted to workers aged 21-64. Estimates for 1991 and 1995 hold pension coverage and work force eligible today. By 1995, 52 percent will ERISA ERTA TRA'86 Research Institute, its officers, trustees, sponsors, or other staff. The Employee Benefit Research Institute is a nonprofit, $75,000 or more 28 38 a 25 Under 35 63 13 23 94 5 a 43 for those with incomes below $30,000. With TRA '86 in effect, 1987 returns showed a high of 15 percent for those earning Age 35-54 42 11 47 96 3 1 46 nonpartisan, public policy research organization. those with employer-sponsored pension plans, and raised the deduction limit to the lesser of $2,000 (unindexed) or 100 percent pay them a benefit. One-half oppose payroll tax reductions, particularly (64 percent) if it would mean an increase in other taxes. demographics constant at 1989 levels. Under 35 7 6 8 12 55 or older 49 13 38 93 6 1 11 be eligible. Looking at the data another ........ AmountDeducted ($billions) between 35-54 16$30,000 and $49,999 and 14 a low of 5 percent 13 for those I earning 20 below Number $30,000. of Returns For with those anIRA atDeducti $75,000on (millions) or higher, J I the rate of earnings. ERTA became effective in 1982. At this time, banks and other investment services vendors began to market IRA The vast majority say employers and the government should do more to encourage them to save and to make it possible 55 or older 28 27 33 28 EMPLOYEE BENEFIT RESEARCH INSTITUTE way, at 1991income levels, 35percent of Source:InternalRevenueService. Source:EBRI estimatesand projectionsbased on Census Bureaudata and Social SecurityAdministrationassumptions. dropped to 10 percent. 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Source: EBRI estimatesand projectionsbased on CensusBureau data and Seciai Security Administrationassumptions. for products those them whoto aggressively. co save. ntribuAnd, ted to th IRA an at Iif R deduction A this in were 1982 done, eligibility they remained would save. nearly universal among workers from 1982 to 1986, with aLess than0.5 percent. Telephone 202-659-0670 FAX 202-775-6312 aSampletoo smallto providereliableestimate, 1 6 8 4 7 5 2 3