8 wr l 0 II 23 I0 21 51522 416 13 12 19IZ Mr. Chairman, I am pleased to submit this statement on tax policy issues 14 2O6 TABLE 3 2 7 3 18 9 D.C.: EBRI, forthcoming). For a wide-ranging discussion of T-theoretical 37 and capital financing needs are emerging throughout the economy, the fact that higher-paid persons. The longer-term repercussions could be much broader, in pensions and flexible benefits programs. TABLE 1 Tax provisions governing pensions particular Recentrequires tax-reform a long debates term have commitment centered from around both thethecomemployer prehensive andincome the still share retirement welfare,of overstates total andincome. "fringe" compensation. the Ifrevenue benefits, public costs This policy however, would TABLE ofcontinues penslon-related would 5mean that to no encourage longer a constant tax bepolicy. increased taxshare deductible Taxpayers ofpension totalas become InThe the general, distribution sole Netguarantor basic Lifetime tax of penslon-related Pensi reform of post-retirement on-Rel proposals ated Tax tax would Benefit living benefits lowerShares standards marginal among income across tax rates groups the Cafeteria plans, as they Tableareofalso Contents called, have grown considerably since practical issues in basic tax reform, see U.S. Department of the Treasury, provide a private source of retirement security. The tax treatment accorded not the only factor. Employee compensation also depends on income growth, deductions more than 40 for percent home mortgage of the interest, labor force charitable reported deductions, no savings state incomeandinlocal 1983 Blueprints for Basic Tax AmongReform Employees (Washington, Aged 25 toD.C.: 34 Government Printing pension funds provide long-term capital gives them an important role in however. As many as 20 percent of younger pension participants could be and flexible compensation plans have figured prominently in Congressional employee tax and iftheit consumption is to delivertax.a 8meaningful The basicretirement premise benefit. behind theEmployers comprehensi will ve have an employer access to cou-pensatlon many other expense. tax-favored Employees investmentwouldvehicles not be that taxedcould on the be value used compensation coverage income reflectsspectrum. and thewould benefit distribution be levels, received of the coverage in pension a taxable andsystem participation. form. could Stabilizing reduceThe the labor largest pressure costs, sharefor inof and expand the income tax base. 7 Basic tax reform proposals offer ways to they Office,were197Z). first authorized. In a recent TABLE variation 2 of these plans, about a more recently developed retirement and capital accumulation vehicles such as property employer cost and considerations, income taxes, and and employer some medical and employee and business preferences. expenses. All (table 4). This group's average income was $9,651, just under half the Lifetime Tax Lifetime Pension Trends in Employee Benefits 1 economic policy. debates over the last three tax bills. In my statement today, I will address directly affected, and many more could be affected indirectly by the not income make tax this iscommitment How that Much individ if of uPension-Related they als exshpect ould the be Tax terms taxed Deferrals ononwhich theisvit alueis delivered of what they to restructure--not for turn, of employer retirement can contribute contributions saving lower--the to in reduced place nation's for prod nonpension ofuction employer tax bill. costs benefits pensions. Most throughout proposals since In the the the do economy. absence employer not envision ofwould tax ever-increasing third Flexible lifetimecont Compensation apension-related in reimbursement Social Plans Security tax accounts benefits benefits. or accrues flexible to middle-income spending accounts employees. (FSAs).In 9 Employer This argument Contributions is advanced and Treasury in Robert PensiDepartment onE. Hall and Tax Shares Alvin Expenditure byRabushka,Estimates Benefit Low Tax, Tax Shares What individu Does al Pension retirement Policy accounts Cost? (IRAs), simplified employee pension 3 plans What Does Pension Policy Cost? employer contributions for benefits other than pensions would be included in average income of those reporting some asset income. Some 55 million workers, II All Persons Participants Income Class c by Income Class Who SimpleReceives Tax, Flat Employee Tax (New Benefits? York: McGraw-Hill Company, 1983), p. 90. 5 Increased Retirement Income. The availability of a pension often means TABLE 4 adjustments plan sponsors could be forced to make. the change produce following , with as questions: reevery presentedchange by income. in the Apolitic comprehensi al veand ta budgetary x attempts environment. to tax both Recent Legislative Actions andLost Prospects to the Treasury? For the Future alreadyThehave labor paidforce tax on is these changingcontributions. rapidly. Census Since data cash show compensation that over would the provisions widespread Alternative 1979, 34 favo percent tax Ways ringcuts, to pensions, Accomplish of for but employees Selected would tathe xpayers Goals aged instead Voluntary would of 25 Pension to change Benefits probably 34 Policy earned theamake / distribution between more use$20,000 ofofthese tax and Income a (Percent) (Percent) b (Percent) (Percent) FSAs allow employees to pay for unreimbursed medical expenses and some other What (SEPs), Does section Societ Distribution y 401(k) Get in plans, Return? of Employees and quwith alified Pension voluntary and Health employee Coverage contributions 9 Tax expenditures are commonly used in public policy debates as a measure the employee's taxable income. The Section 415 limits on pension benefits and including almost half of the group reporting little or no savings income on I0 Actual revenue gained from removing tax preferences for employee Increased savinss 9 the difference between subsistence and the ability to maintain pre-retirement o What is the revenue cost of pensions and flexible benefits plans? These proposals, therefore, would change the relative attractiveness of Therefore, actual andMr.impu Chairman, ted income. we askComprehensive that the Congress income recognize tax proposals how much include it hasin vehicles. continue Employee toThis bebenefits awould tax-deductible issues increase havecost theplayed of revenue doing a major business loss role attributable in to recent the employer, tax to policy these the last decade, Some have the proportion suggested that of single-adult the goals households of employerwith pensions children should increasedbe liability benefits $50,000. would among These beindividuals. lower employees because (inThis will billions taxwould rates receive of bewould dollars) done53 bebylower percent expanding and because ofthe the taxemployers base group's to benefits Increased with pre-tax retirement dollars. incomeSuch accounts are used to cushion the II impact contributions (QVECs) indicates would be continued made muchCongressional more by Earnings restrictive interest than under in increasing current law. voluntary of the social cost of federal pension policy. The Treasury estimates that the CPS, were covered by employer pensions in 1983. Pensions thus constituted $20,000 or less 61 53 42 24 Alternative and employees Ways would to Accomplish change theirthebehavior Goals oftoPension avoid taxes. Policy 12 living standards in retirement. Recent EBRI research projects that over the o Who receives Savings, these tax Pension benefits? Coverage, and Income, 1983 cash and benefits as forms of compensation. They would Taxes also change the taxable income not only cash wages but also all other items of value received already achieved in safeguarding the economic security of the American worker debates. alternative employer would For investments. example, presumably inhavthe e anTaxincentive Reform to Actoffer of more 1984, compensation the Congress in made cash eliminate accomplished many using tax preferences other policy in current approaches. law, including Two ofthose the governing alternatives the bypension-related one-third. Over tax benefits half of (table married 3).womenThose are employees now in the age labor 25 to force. 34 who of a change in the employer's health insurance plan that might otherwise be Flexible Compensation Plans 13 individual retirement savings. A pension-related Senator Marktax Hatfield provisions(R-OR) cost has the also federal introduced government a comprehensive over $50 billion tax a net increase in savings for these workers. Assessments of pension-related Method Used Taxes Lost Deferred $20,001 to $50,000 34 41 42 53 II See Retirement Security and9 Tax Policy, Chapter VII. Recent Legislative Actions and Prospects For the Future 15 Statement on next forty years real retirement incomes will more than double. The average by the employee as compensation. relativeo What attractiveness does society of get various for the benefits. foregone revenue? In general, tax policy under th and an that in benefit it renew contits ributions. commitment to encouraging private provision for economic significant Tax expenditure changes instatistics at least are sixteen also areas misleading of employee because benefits. they imply These that seen tax frequently Single- earned treatment aas dult$20,000 a suggested benefit andof otwo-earner remployee less are takeback. will expanding benefits. households receive An the estimated With have 24allowable percent adifferent broader 1.5deductions ofmillion tax benefit theirbase, group's needs employees formarginal individu than lifetime anow tax the l Benefit Employer Cost b/ Federal Tax Comprehensive The federal Income taxTaxsystem is Employees the most with important factor Employees influencing with 17 benefit each year in lost revenues. Persistent federal deficits have called attention proposal tax policies (S.2158). should consider Under this the proposal, net increase mostanddeductions, redistributioncredits, of wealth and Employees Employees Average Annual $Contributions 50,001 or more 5 (1982) 6 Expenditures 16 (1982) 22 Consumption Tax 18 annual Earningsretirement income forPension those Coverage, reaching age 1983 sixty-five Health Coverage, in the 1980s 1982 is Tax Incentives For Pensions and Flexible Compensation Plans Savingso Are tax incentives Covered bmore effective Not Covered or less effective Income in achieving The basic pFemlse behind the consumption tax is that individuals should included: these security.- proposals would continue to provide some encouragement for benefits that retirement accounts (IRAs) and increasing benefits under the Social Security rates only traditional Comparin_ advance-funded on income Major single-earner, Basic could plans be Tax lowered. Reform impose two-parent Proposals socialfamily. costs. ManyTax ofdeferrals these households are measured need Treasury pension-related Method tax benefits, while 22 percent 83% will go to those0%earning over Total Percent Total Percent participate in plans with flexible spending accounts alone, and as many as Comparing growth. Major The tax Basic code Tax Reform makes benefits Proposals cost-effective as compensation 19 and to Internal Revenue Code provisions that appear to subsidize select groups of exemptions would be repealed, and many items currently excluded from adjusted Status thai results a from(Millions) expanded pension (Percent)coverage. (Millions)(Percent) (Dollars) (Percent) Health insurance $65.7 $16._ Conclusions 21 (in millions) (in millions) For Inclusion in the Written Record of the projected to be $13,376 per household in 1983 dollars. It is expected to constitute certain goalscapital than other accumulation, policy devices but benefits aimed atthat the provide same goals? current protection be taxed At the notheart on theof economic the basicvalue tax reform they generate movement butis rather the widespread on what they beliefuse Lifetimeemployee AllMethod: three stock proposals ownership discussed plans;above, cost-of thoughliving they adjustments are based onindifferent pension only child $50,000 oncare, . contributions and may have and earnings different actually health- received and life-insurance by plans, which needs means than Life program. insurance 7.2 2.0 five Notes million may be participating in cafeteria plans as a whole. 22 encourages taxpayers. the broad coverage of employees. The tax code makes benefits gross What Does income Societywould Get in be Return? included. The Hatfield proposal would retain Sour Nominal ce: EBRI dollars calculations a based on PRISM simulation14 results. 86 Accident and disability Less than $20,000 27.9 59.0 83.7 74.3 increase to $26,802 for those retiring between 2010 and 2019.3 Average United States House of Representatives would No savings be cut back. 18.2 19.0 NOTES20.6 21.5 $ 9,661 40.5 o What are the implications for upcoming policy debates? up--or the share of income that is not saved. The consumption tax would that either taxRealprinciples, aplan pension dollars traditional limitations; bplan would families must result beindividual or advance-funded single in similar persons. retirement to treatment result 28accounts; infortaxmany expenditures. group benefits. 72 term life The Tax that insurance the Employer-provided Employee tax system benefitsis pension unfair are nowand coverage a inefficient. mainstay NA is ofmore the The widespread middle-income proliferation 0.I than worker's of tax IRA The Congress and the Administration have recently become concerned about cost-effective $20,000 to $49,999 by providing a tax 18.1 deduction for38.0 employers 26.2 and preferential 23.2 tax current-law There treatment is wide disagreement, for employer-provided however about pensions,the but proper all way otherto employer measure Tax benefits are Committee not theon Ways only andadvantage Means received by pension Some savings c 36.9 38.4 20.3 21.1 19,209 59.5 Discounted for interest: c aTotal 1979 income in 1983 dollars. Other employer-provided benefits: $50,000 and over 1.4 2.9 2.7 2.4 employer pension benefits will increase from $5,315 for those retiring in the Total 55.1 57.4 40.9 42.6 15,338 I00.0 Conclusions exclude all forms of saving from taxable income until the funds were used for Trends in _nployee Benefits insurance purchased for employees; funded welfare benefit plans; preferences Flexiblefor compensation most employer-provided plans have benefits emerged would as some be eliminated. employers' effort Employerto Employee preferences participation. income child at pension care security, Retirement can ratemean Preliminary providing Income that differences Security hazard EBRI protection results Act in tax of from 1974 liability as 40well (ERISA) the as among HHS-EBRI building established individuals 60 CPSassets. minimum Pension stemAs bIncludes Tables not only those who were pension participants in 1979, but also the potential revenue impacts of flexible compensation programs that contributions treatment for for _mployees. benefits Aswould a result, be included a dollarin in taxabenefits ble income. may beThere worth would more these costs and about who benefits from the incentives provided in these participants. Whatever the revenue cost of the pension-related tax-code Hearing on the Taxation of Employee Benefits at federal rate 36 64 educational Total a/ aid 47.4 I00.0 73.0 I00.0 those in this age group who are projected to acquire pension coverage later in 1980s to $12,417 for those retiring betweeen 2010 and 2019. The proportion of CEmployer ritics ofcontributions employee benefits for employee allege benefits that benefit-related have increasedtax steadily provisionsas Iconsumption. For unfunded furtherdeferred The analysis consumption benefits; of these taxdistributions issues, would ta see x all Sophie in employer qualified M. Korczyk, copension ntributi Retirement onsplans;for contributions for nonpension benefits would be treated as taxable income. Had their funding as much careers. from standards the ability for prlv to amanipul te-employer ate the defined-benefit tax system as from plans, differences enhancingin Supplement respond much asto asuggest thefifth needsthat ofofmiddle- all a diverse spending and higher-income workon force healthwithout individuals care adding is now were to made compensation the primary through incorporate Table 1 HowFSAs. Much of Estimates Pension-Related of the Tax federal Deferrals revenue is effects of FSAs differ tolegal the employee services than plans a dollar in cash wages. NA 0.6 provisions. Tax-expenditure measures used in the federal budget process are be provisions, six tax sound brackets, retirement rangingpolicy from design 6 percent requires to that 20 percent. this cost The be measured current Source: EBRI calculations September based on 17 preliminary and 18, 1984 data from the Bureau of the Security and Tax Policy (Washington, D.C.: EBRI, forthcoming). See also Issue CThe share of lifetime taxes paid by those with base-year incomes below Lost to the Treasury? 4 new retiree households receiving 2 pension income will grow from 37 percent in Census, Current Population Surve Z (May 1983). are aBrief share regressi "Pension-Related of ve, compensation providingTax overtax Benefits," theshelters last no. thirty for 25 years. (December the wealthy According 1983) and and little to Issue Department orBrief no beneficiaries costs such benefits atop-heavy to provision accomodate thatof plans; been do the nobroadening in teach effect estate-tax resuadditional lt in of in1982, IRA sa trveatment ing. eligibility. group. an estim 6This aof ted Mostincl qualified An $7u2.9 flexible des estimated billion various pension compensation 31 would percent employee plan have benefit ability SOUR employer-sponsored CE: security. to Sophie pay. M.Energy InKorczyk, plans. contrast, is spent Retirement the Pensions utilizing Civil Security Service atax lso preferences and Retirement result Tax Polic inand System y aloopholes (Washington, (CSRS) progressive that and $50,000 widely. is Thishigher divergence than of theirestimates share of stems current-year from differing taxes,assumptions because their about Table SOURCE:2The EBRI Distribution tax code tabulations encourages of Employees of U.S. employers with Census Pension to Bureau extend and Current Health their benefit Population coverage Survez, to str calculated ucture ofonexeamptions cash-flowand or deductions cross-sectional would bebasis, replacedwithby the fiveamount tax credits of the against the social benefit of increasedbysavings and higher benefit levels. 4 "Employee Benefits and the 1985 Reagan Budget," no. 27 (February 1984). D.C.: EBRI, forthcoming). lifetime incomes are higher than their current-year incomes. In 1982, SOURCES: Employer cost data from table 6.15 in U.S. Department 1983 Coverage and EBRI-HHS by Earnings, Current 1983 Population Survey Pension Supplement.7 the 1980s to 71 percent by 2019. Dr. Sophie M. Korczyk* of Commerce estimates, cash outlays for employee benefits beyond wages and benefits for anyone else. EBRI research, using data collected by the federal been redistribution benefits benefits; added that to that ppension of rovide wealth year'sin plan sur that ta ance xable rules favors protection, employee for those affiliated compensation but at the does service lower not(Table include end groups, of5).the pension employee Federal incomeor the of couldhouseholds Military be spent Retirement reporting on moreSystem incomes productive (MRS), of the $15,000 activities. two major or higher H_gh federalmarginal hold retirement IRA tax accounts, plans, rates plans allow employees to trade benefits in one area for increases in other ta the Table xpayers design 3 of Net with of Commerce, Lifetlme these incomesprograms, Pensi Survey overon-Related $50,000 distribution of Current paid Tax Business 35.4 Benefit of participants percent Shares vol. of63,total among no. income various taxes. types lower- and moderate-income employees. The preferential tax treatment accorded for taxestheIncreased defetaxpayer, rred bysavings. cuspouse, rrent pensi and Pensions on dependents; plan both participants increase and for offset portions and against reallocate of charitable the amtotal ount alndividuals are classified as having some savings or no savings based on 2 Unpublished estimate, EBRI. aBefore adjusting for inflation. U.S. Department of the Treasury, Internal Revenue Service, Statistics of 7 (July 1983), p. 74. Tax expenditure data from a/ Detail Among may not Employees add to Aged totals25 dto ue 34to rounding. Totals include only 8 those Tax payments by retirees will reflect this income growth. Pension 5hether or not they reported any asset income in response to the survey government salaries capital acc have and umulation grown projections from plans,4.9 based since percent onthey these of result total data,in compensation savin shows K.conclusively in 1950that to this 15.8 scale who do not tend to save much out of current income. have tax benefits. revenues, little leasing Aimpact arrangements, two-earner as measured on tax couple, expenditures and by collective the for iU.S. example, because Treasury's bargaining can they trade are calculations agreements; largely redundantunfunded. cash ofhealth tax or encourage compared with taxpayers 9 percent to seek ofout households tax-favored with sources incomes of income--capital below $15,000.gains, By DAfter Executive adjusting officefor inflation. of the President, Office of Income of programs, Bulletin, and the Winter elections 1983-1984 that participants (Washington, make. D.C.: FSAs Internal instituted Revenuein Tbenefits health able 4 and Savings, is pension contingent Pension planupon Coverage, participants compliance and Income, with who the reported 1983 tax code's their nondiscrimination earnings I0 in the of taxes paid by current beneficiaries. Measured this way, about $0.83 out of contributions, savings. If pension home mortgage contributions interest,weretaxes received paid, as andcash medicaincome, l expenses. total saving uestions. Asset income includes interest, dividends, rents, and royalties. 3 Sylvester J. Schieber, Social Security: Perspectives on Preserving the Clnterest rate used to discount taxes paid in retirement to the Service, 1984), Management p. 20. and Budget, The Budget of the United Table Survey.5 Employer When thoseContributions not reportingand their Treasuryearnings Department are Tax added, coverage totals beneficiaries retiring in the 1980s will pay an average of $15,808 in taxes Coverage refers to public- and private-sector pension plans and includes is percent not the in case. 1982. Rather, Over a third the distof ribution this amount of employee finances benefits employer-sponsored follows the Systemdeferred Th (Washington, ree recent arrangements; D.C.: legislative EBRI, treatment 1982), proposals p. of I00. certain implementmedical these and principles. other benefits .These Underfunded expenditures This orredis attributable unfunded tribution plans, tocanthese however, be demonstrated benefits, can costcould the by comparing have taxpayer been much da as ta much more on in as pension the $19 for comparison, coverage example--and for almost other tax-favored benefits five timessuch uses as asmany ofdependent income, workers such care, earning asincreased housing. less than lifeAs$15,000--43 insurance, a result, conjunction year of retirement. with a leaner health plan probably contribute to slowing down the States, Fiscal Year 1982, Special Analysis G. provisions are higher. governing Expenditure coverage Estimatesof the for employer's Selected Voluntary work force. Benefits 20 . every tax-deferred dollar appears to be lost to the Treasury (see table I). Consumption Tax -. would decrease. The drop, moreover, would be relatively greater among lower- holders of IRA or Keogh accounts. I0 (1983 dollars) on their benefits over the course of their retirement. 5 CIncludes individuals reporting negative asset income (i.e., decreases in proposals illustrate some of the tradeoffs in basic tax reform. All of them opension 4verall Ibid.,distribution plans. p. 90. Pensionof income contributions very closely; increasedthe frmiddle om 1.8 class percentgainsof the empioyee most billion in orvestment added under higher, vacation and section other assuming time. 415; economic the current-law stadecisions tutory taxtreatment are rates.oftenofdriven certainby employee tax needsbenefits; as much percent--are long coverage run. and In covered sum, income pension-related from by savings employer as tax pensions. reported policy isinSince not the as1983 IRAs costly Health by astheir avaiiable and Human very growth of benefits as a share of compensation because health care costs are a/ Voluntary benefits are those not mandated by law. Examples Historically, the tax code has also worked with inflation to encourage Such estimates overstate the amount of revenue lost due to such provisions, and moderate-income Senator Dennis employees. DeConcini While (D-AZ)nonpension has introduced saving isa concentrated consumption among tax asset values). of mandatory benefits are Social Security benefits and Pension beneficiaries retiring between 2010 and 2019, in contrast, will pay an from compensation combine employee tax rate benefits. in 1950 reduction to 5.3 withpercent tax basein expansion, 1982. This with growth implications appears forto most be revenue-loss 5 Unpublished The primary estimates EBRIdifferences tabulations would suggest. among of PRISM these simulation proposals results. are in their treatment of definition pension-plan do notterminations; have any voluntary nondiscriminaemployee tion benefits standards associations; protecting and the asServices by Flexible economic (HHS)compensation returns and Employee and plans productivity Benefit are a relatively considerations. Research newInstitute development An advantage (EBRI) in employee Current often the fastest-growing employee benefit. unemployment compensation. benefit growth as protection against inflation-driven increases in real however. Because today's pension-plan participants will have higher proposal relatively(S.557). high-income Under individuals, this proposal,pensions all incare ome distributed other than th broadly at used among for b/ Totals cover both private- and public-sector employees. employee benefits. average of $44,672 in taxes (1983 dollars) on pension benefits during their slowing, however. Between 1980 and 1982, for example, employee benefits grew interests 6 ForThere background of isthose much on atunfinished flexible the lower benefits bend usiness of the plans in income employee and their scale, benefits, relevance expandinghowever. to IRAchanging limits The retirement rules governing income programs. multiemployer The plans. DeConcini and Hatfield proposals would Who cited benefits Population Receives for that expanding Em_loyee Surveyis (CPS) now Benefits? thebecoming Pension tax baseSupplement, fully and delineated. reducing the best marginal While available tax some rates source flexibleisof Employers with flexible compensation plans have found that the ability marginal tax rates. During the past twenty years, inflation has pushed most retirement incomes than today's retirees, they will pay more taxes in investment income groups. would be taxed at a marginal rate of 19 percent. This tax employee needs, see Dallas L. Salisbury, ed., America in Transition: retirement. Comprehensive Income Tax The views expressed in this statement are solely those of the author and recent 1.6 percent recession, annuallycombined as a share with long-term of compensation, interindustry compared shifts with in an employment, annual rate continue Implicationsthe forcurrent-law Employee Benefits treatment(Washington, of pensions. D.C.: EBRI, The 1982); Bradley-Gephardt Issue Brief The The importance expansion of of employee employee benefits benefits inhastax primarily policy promises helped to thecontinue middle would eliminating compensation information provide this on plans nothing pension effort existed for coverage. these by as making households. early the Direct as tax 1972, information code Section more 125 neutral on savings of the in economic would Internalbe to choose increases employees' satisfaction with their benefits even when the taxpayers into higher marginal tax brackets, despite legislation lowering retirement. Over their lifetimes, those employees now at the beginning of structurePensions would also be financed change the by eliminating distribution neof arlysav_ng all current among investment law tax should not be attributed to the Employee Benefit Research Institute, its "Flexible Compensation and Public Policy," no. 24; and Chapter XXII, "Flexible Retirees not only receive larger retirement incomes as a result of officers, trustees, sponsors or other staff. of over _ percent between 1970 and 1980. appears to have reduced pension coverage rates from pre-recession levels. as propos decisions. Revenue Compensation the al,Senator Congress Code however, Plans" was Billtries enacted would Bradley in Fundamentals to impose de in(D-NJ) al 1978 with more and to ofprojected Represent Employee extend restrictive athe tivBenefit federal e statutory benefit Richard Programs deficits. and protection Gephardt contribution (Washington, Both(D-M0) from the income preferable Expanding worker.to the Among the dataSocial employees on income Security whofrom wereprogram savings, covered atbut by the pensions it is expense notinavail 1983, of able employer nearly on a dollar value of the benefits package is unchanged. This can reduce _the nominal tax rates for the different income levels. This "bracket creep," the preferences. their pension All careers incomewillwould repaybe all taxed but once, $0.25 and to $as 0.40close of every to thetax-deferred source as vehicles. Nonpension saving consists primarily of liquid saving deposits and D.C.: EBRI, 1983). employer pensions, but their benefits are more secure due to legally mandated Sophie Korczyk earned her Ph.D. in economics from Washington University (St. The tax-favored treatment of qualified pensions predates even the While limits the undereconomy Section is415now ofrecovering, the Internalthe Revenue damage Code. done to Limits benefit on allowable coverage have currentintroduced basis. a comprehensive income tax proposal (S.1421/H.R.32FI). It C28 ongress millionand (or the 59.0 Administration percent) have earned expressed less than considerable $20,000 (Table interest2).in Among basic pensions taxationThe would that" arguments applies presentfortobroadening a other different employee the settaxbenefits ofbase problems. have to pl attracted ans Most that researchers agive wide employees range agree of pressure on employers to increase benefits to maintain a competitive gradual dollar. increase As the in pension real marginal system matures, tax rates,the hasnumbers promptedand the income use oflevels noncashof pinvestments ossible. Advo incates owner-occupied of such a homes tax stror ucture otherargue consumer that it durables. would eliminate Pension Louis). Dr. Korczyk is presently a research associate at the Employee Benefit 7 For a detailed discussion of the mechanics of basic tax reform, see EBRI advance funding. This security is all the more important as debates over the Research Institute. Her previous positions include appointments at the establishment of the Social Security system in 1935. Statutes enacted in 1921 levels will take longer to repair. Employers in low-coverage sectors and in reform benefits would Issue raise Brief ofin the defined-benefit the "Basic personal same Taxamount Reform: income plans of re Implications tax. would venue At be as reduced current least for aEmployee from ladozen w by $90,000 using bBenefits," asic under only tax current ano. reform three 28 that some choice the Social over Security the mix of payroll employer-provided tax as it is benefits currentlythey constituted receive. The is political employed Accumulated persons support.with pension Conservatives employer-provided benefits support constitute health broadening coverage the major the 83.7 tax formmillion base of as savings (or a way74.3 for of compensation package. The ability of employers and employees to use flexible benefits to stem the erosion of real income. Up to 30 percent of the benefit allowing pension-plan funds, in income contrast, participants to escapeare ta and xinvested ation retirees entirely, in will securities while differ other less that income than finance they is taxed productive do today. more Congressional Budget Office and university teaching and research positions. (March 1984). fiscal stability of the Social Security system continue. Social Security Portions of this statement are taken from Sophie M. Korczyk, Retirement small firms will need time and a secure economic environment to establish and later, covering income from trusts and pension plans, were designed to bracket tax-rate structure: 14, 26, and 30 percent. The reduced rate proposals law to $60,000; were introduced contributionin thelimits 97th Cin ongress defined-contribution and more were introduced plans would in the be percent) regressive. elimin statutory more ating thanearned authority half the Theless income-earning ofAmerican afor ll than persons these $20,000, peopleplans disincentives with would andhas pension 23.2 abeen lmost percent acoverage. in ndsurely plmarket ace earned demand for According interference between sixthat years, $20,000 to the the of but taxhigh Cand the PS, be compensation to contain benefit cost growth suggests that these plans can have th growth an once. over this twenty-year period may be attributed to attempts to alleviate As capacity a result, and employment. in the future,Pension pension-related funds have ta grown x expendit to be uresthe single measured largest using Security and Tax Policy (Washington, D.C.: EBRI, forthcoming). 8 Both tax systems would require detailed judgments about the treatment of benefits and employer pension benefits complement each other. As pension encourage various sources the expansion and usesof of pension income. coverage Both and wouldincreased also cresaving ate some levels formidable and to employee benefit plans. A secure economic environment means 1not only a 98th lowered restructured Congress. from if $30,000 President it to wereReagan $20,000; to hincrease as and also indexing asked significthat antly. of the theseTreasury It limits is department unlikely, would be marginal $50,000. Administration structure tax wFewer ouldrates. issued be thanfinanced 3Liberals preli percent minary by elimin support of regulations pension atingbroadening orandcutting governing health theback insurance tax theapproximately base implement as participants ation a way forty of of important macroeconomic effects by stabilizing benefit growth and labor inflation's impact on employee compensation. the Treasury's approach will be much closer to lifetime estimates. supplier of investment funds to financial markets. At a time when unmet Contributions and benefits in retlrement-income programs would retain implementation and transition problems. These problems and issues are treated benefits increase, Social Security benefits become a smaller share of hecurrent-la althy economy w tax but preferences. also a stable Tax regulatory preferences environment. that would beA retained pension plan include in an eliminated. earn furthermore, in alyze detail morebasic than elsewhere. The tthat ax $50,000. immediate reform the feder options For effects ala discussion and budget of prepthis asystem re ofchange a employer report would would by be pensions December able be felt to 1984. in prim tolerate basic arily the tax by .... eliminating these plans in tax-code May ofprovisions this year. perceived to benefit primarily the rich. costs. Stabilizing benefit growth will keep wages and salaries a constant While the tax code is a major factor encouraging benefit growth it is their Even currentthis taxmore -law reatreatment. listic lifetime The employer's measure of contribution tax expendituresfor probabl health,y reform, see Sophie Korczyk, Retirement Security and Tax Policy (Washington, spending and tax increases that would be necessary if Social Security were to