i f lOa 12a Table 2 lla inclusion of contributions and investment earnings for public-sector plans I0in Introduction II 5 13 12 EBRI the tax expenditure calculations. Public-sector plans are properly included How Much of Pension-Related Tax Deferrals is Lost to the Treasury? ' T-43 in the calculation since pension participants pay taxes even though their Every major tax reform proposal offered to date has significant employers may not. Evaluating Pension-Related Tax Expenditures Table 3 Taxes First: Employee benefits should CEOs Individuals emphasis federal distributions new Conclusion deficit, Public The study Support surveys government of lower by"How paid Korczyk For marginal much indicate Employee before could are assesses tax retirement we ultimately that Benefits rates willing these these ortoto incentives make find individu employee spend the itself alsand tax in benefits who how having acode lifetime ch should ange simpler. are tojobs. wecontext. make important spend While Lump-sum up it?" the She 56 to THREE: employer. implications (4) It TheAsis U.S. foramore economic the result, cost-effective tax the security treatment only system toattention of provide employer-provided is successful given them for to because date most employee groups toof actual the benefits. through public per Method Used Taxes Lost Deferred retain their 0ta mx-favored ........ Submission Agree On 81 85 The 1985 budget saw someBy drop Sophie inM.tax Korczyk expenditures due in part to the status to provide employees Disagree 17 II performance of the economy in that year. In the 1986 budget, tax expenditures Employee difference distributions finds Each,Public therefore, thatand benefits through the support private would economic would increased for have beaffect partnership, employee vdiscouraged--by alue become social the to benefits the economic something program government the imposing and expenditures. security employer totheisbeexcise implicit significantly ofand managed millions taxes, individual nation and of agreater leliminating active carefully economic worker than and employee percent employees MoreSummary of tax-preferred than cost and workers of employers variation 162Cost million saidFactors alike. private they has indi been by think viduals Ninety-three Age sector undertaken the for in current Useprograms this percent invery Costln_ tax nation recently rate system than Benefit gain health isto through added Plans unfair assess: insurance economic and direct (I) as 71 with additional economic Don't Know 2 4 Tax Reform dropped even below their 1984 level. This drop was due to two factors. I Treasury Method security and to contribute 83% 17% First, The the Congressional performance of Budget financi Actal of markets 1974 requires in 1984that along the with Administration's uncertainty scrutinized. retired workers. ten-year percent vtax security ery In eximportant; penditure determining want partnership. forward policyitnumbers 84 averaging, they simplified, tax percent represent reform The alone etc. rate system priorities, would 56 is pension This percent imply. strong. isis flexible, plans the not said Asacharacteristics Surveys much defined asthey very accommodating asoppose taken 72 benefit important; percent of in taxing versus each late of changes 72 employee employee the 1984 percent defined real by in security approaches governmental from to employer-provided health ecare xpenditures. cost containment employee benefit and (2) programs. possible For disincentives example, more to to their well being. over annual thebudget regulatory submission futureto ofCongress pension include plans estimates led to a of decline tax expenditures. in employer Lifetime Method: contributions. These are personal Second,and Treasury corporate staff income changed tax the revenues tax expenditure lost to the calculfederal ation benefit benefits contribution hiring rate Roper (i.e., In Although life recent asked orinflation-adjusted) and tokeeping and reduce why issue: the years, chief disability itproposals onmarginal exists executive employers It older is protection must aworkers. seek rates, value question have officers beto61 analyzed expended ofprovide As as percent oftaxes illustrated (the Cvery EOs) great carefully. method the oppose deferred important. andsame effort in ofindividuals taxing overall Table payout. during The toSignificantly, benefits contain purpose 3, level these The the to the implicit of to pension express of recent cost make this tax 61 than 60 percent industryof taxpayers structure, have family employer-provided structure, health labor insurance. force, and age Second: Nominal dollars Employee a/benefits should 14 86 CEOs Individuals For the United States Senate to government attribute due a toshare provisions of fundin investment the tax codeearnings that allow to retirees. special treatment That share for Defined Benefit Life Insurance Real dollars retainb/ their tax favored 28Agree 7278 81 Committee on Finance receives tax benefits that should be valued at the retirees' tax rate, which certain sources or uses of income. These estimates are published in an percent statement participants' Treasury of studies agreement revenue providing show said Department asor is very that disagreement currently benefits to working Medical analyze significant itquestion would to career exists, Cost the with their beis cost very reasons is four this: employees. each variation Cost ultimately difficult statements. for plan Will Factor the by there This treats toas age. repaid current afford The has be employee afirst as meant the Cost check employee income purchase two as changes inbenefits _were the benefit of tax ofmail commonly induring health pl very box tax an the The Role systemOf demographics. fairer Employeeand Benefits 60 The percent system In Providing oppose is working, taxing Economic benefits with Security the torole reduce of employers the deficit.and Our system of employee benefits has taken decades to build. Tax X C Ld - 0 Discountedstafor tus interest: to encouragec/ employers Disagree 21 13 is lower than the tax rate used for active workers. attempt to achieve a symmetry of treatment in the budget process between Factor as % of % of Average Pay for One to provide certain benefits at pension rate 40 60 Hearing on Tax Reform direct retirement. expenditures and the tax expenditures or subsidies that are perceived incentives along incentives, designs, used differently. insurance In Does arguments with addition this new individuals ifhave thediscuss it types Acost Social for been were comparison to modifying variation of the not agrowing their Security vital plans, initial provided of effectiveness, element the make atnew the check apurposes tax-favored by anet various cost-sharing tax when or thesavings force. policy employer. the ofprovisions and status employee individu to difference? arrangements, explain theof al and taxpayers. benefit employee retires? why bills Theeven and, programs, benefits. is answer The outlined though in economic will extreme there the be in Ase Group Averase Cost Cost Times Pay at federal for rate their employees that 36 64 to flowEven to these certain improvements taxpayers through do not ,Maythe take 9,tax 198 into 5code. account the fact that pensions otherwise would come from result in a deferral, not a permanent loss of tax revenues. Because the Attachment i (EBRI Issue Brief number 38, January 1985). public Effectiveness cases,Finally, Table supports total security 2 shows there Of elimination tax Existin system that would reform -5_Treasury _-_ should Tax beof in_ aIncentives general, protection. result o_ only tax be expenditure th public changed at The can't opinion great ifstatistics, yet it surveys be is expansion quantified--loss essential, calculated register of and flexible strong on then ofa yes are some if employee other principles benefits that were can to be be used subjected to guide to future income assessments tax or FICAby tax. the Many of these programs meet basic needs. As we seek to reform the tax Under 30 80.0% 23.0% 0.1% public monies. o o_ __ budget While processthe offsets budget current process tax attempts deferrals to provide against equivalent taxes paid measures by currentof ........ _ -.,_ _rj r--. (-.,i r-- (N SOURCE: Sophie M. Korczyk, Retirementof Security and Tax Policy retirees, direct30-34 expenditures it ignores 80.0% and the tax taxes expenditures, current 33.0% workersthis will equivalence pay when 0.1% is they farretire. from economic The The differences tax security incentives through amongnow loss theinofbills the employee law indicate have benefits. made that asome difference members to of economic Congress Implications compensation opposition cash-flow basis, toOf has theTaxleave been taxation Proposals driven the ofimpression employee forward by benefits. thatthis a very urge large to cont proportion ain and reallocate of current public Employeesandonly would private aftercome sectors. careful to recognize evaluation the of all inequity the long-term involved costs in paying of changetaxes in system we must attempt to draw lines based upon the social and economic value The public believes that employee benefits help their economic security in (Washington, DC: Employee Benefit Research Institute, EBRI perfect. estimates Directsuggest expenditures that workers can benowadded beginning to arrive theirat pension a grand careers total, will they ,..) First: Employee benefits should be CEOs Individuals 35-39 80.0% 48.0% 0.2% 1984). repay can befrom tracked $0.60 over to $0.82 time for to every determine Dallas dollar L. Salisbury* their of currently-deferred trends, and they can taxes. be defined costs. security, tax believe The deferrals Treasury's there as taxed indicated ois ,,are -w permanently toways and add byother 0 to to economic the reform lost fundamental general to statistics the the tax Treasury. Agree taxand code, - ,..reform L_taxpayer and Treasury proposals maintain 20 attitudes. statistics the would 19And, current imply make as without ONE: reference The terms government of to economic the taxes true security, many economicoffederal value the benefits spending, of the benefit atandtheintergenerational being time provided they are . of each current tax preference. Hopefully this statement will help you in areas where they would otherwise demand government programs and therefore have President fairly clearly (although controversies persist over whether or not certain 40-44 80.0% 69.0% 0.3_ revenues of the federal Disagree 77 75 ,._, ,. o ...., o_ = ---, a/ Before adjusting for inflation. items, Taxlikeexpenditures, federal loanin guarantees, short, are complex should be and included controversial. in the budget They rely rather on tensions. Employee Benefit Research Institute The significant that This Economic might thatThe Role task. 83 could begovernment cents Of Implications expected, lead Employee changes government, outtoof has demands the Benefits every inbeen most thus thedeferred afor In reducing pwidespread tax artSociety taxing of treatment dollar thbased atemployee effort--both is Don't of upon permanently Know employee benefit the actual in lost, programs 3its benefits. dollar own withright are the value Surveys 6 as other those an of aggregate actually revenue paid levels,to without the individual. necessarily This taxing approach all or most assuresemployee that to pay 45-49 for them with 100.0% higher tax payments.100.0% The complementary 0.6% nature of Social some than b/ being difficult After treated adjusting andseparately imprecise for inflation. asconcepts. they are now). At the same time, the statutory federal budget deficits. c/ Interest rate used to discount taxes paid in retirement to requirement A number that of such studies estimates have be beenpublished done toguarantees assess horizontal that they and will vertical play an indicate that tax reform would affect employer decisions. The November 1984 employer FOUR: the that 17 benefits. Concern cents 50-54 benefit have Evaluation and individuals accounted been Forin for provided example, its encouraged therole of 112.5% have for or economic economic the asby athe by legislator provisions move current financial thesecurity security totax and tax tax of 146.0% code resources regulator. the tax of the payments for Kemp-Kasten workers preferences benefits the tomade longest pay and paid tax by the should 1.0% their proposal period retirees. instead taxesinclude dependents of onattempt oftheir time. When the an Security and employer-sponsored retirement programs and Medicare, Medicaid, important the In year contrast, role ofinretirement. tax tax and expenditures budget policy are not debates. additive,Boththey policymakers cannot be and tracked the Second: Employee benefits should be CEOs Individuals 55-59 125.0% 216.0% 1.5% public over time should assessment consistently, therefore of: and be aware their that identification tax expenditures is far more may be problematic an unreliable than motivated Treasury equity premium. examined to accomplish Employee ofbenefits in reform This the theataxed benefit this. tax lifetime would government proposal provisions. when to require force programs context, they to would, employees a encourage are total The are thefor Treasury levied, frequently restructuring proportion to example, theAgree Department rather development of lumped eliminate of deferred than thetogether conducted of way 25 taxing Section taxes employee in which with such lost them125, 20 benefit working abenefit to on study the the a These programs: and employer-provided health insurance support this sentiment. 0 L4 the identification of direct federal spending. Tax expenditures should not be basis for making retirement policy decisions. more carefully use their Disagree 72 72 60-64 160.0% 323.0% 2.3% added to arrive at a total because ..... they I are $ I interactive. c_ 0 That C is, removing a benefits. Don't Know 3 8 in 1982, The revenue the results loss of or which tax expenditure were confirmed estimates by a usually study recently identified completed with the by programs- Treasury condition programs section ofare (I) ranges public "fringe the run. HowInternal from and the benefits"--parking, private, benefit 14 Revenue centsvoluntary enhances out Codeof that merch economic every andandise amandatory. llows dollar security; for discounts, toplans 40 cents, giving business depending employees lunches,ona hypothetical value of benefits they have not received. The public also, however, supports tax reform, and have certain attitudes Table65-69 1 225.0% * 2.3% provision costing $5 billion might not add $5 billion to federal revenues o provide protection against the loss of income or unexpected FEDERAL REVENUE LOSS ESTIMATES DUE TO NET EXCLUSION because it could encourage more intensive use by taxpayers of another EBRI economist Sophie Korczyk. Table I shows that the tax value of employee etc.--and choice whether TWO: Recent These among or The (2)responses termed surveys not benefits The national onedegree fringe indicate adjusts indicate withcommitment benefits to salary for that which that inflation reduction. employee executives as to the well. economic benefit and benefit That interest and While propos reduces security those programs this aon l, who deferred claims and might has continue work others, been have on taxes fordirect to would been very them and be repeal Present of employee approaches expenses benefit intothe health tax eventprovisions insurance of illness; pricing must be and viewed delivery with were great developed caution. regarding specific approaches that would affect employee benefits. CEOs favor OF PENSION CONTRIBIUTIONS AND EARNINGS IN provision aimed at encouraging similar behavior. Tax expenditures cannot be o loss of income in the event of retirement or disability, and °< _ - ,_ SELECTED FEDERAL BUDGETS tracked over time because, unlike direct expenditures, there is no process for benefit the believe interest incentives that factor deficitsused. parallels and cost tax containment payments, with are low not income sufficient personsreasons gettingto provided appropri tax Attachment at o aleast teby successful. 2, employers inthe agovernment portion the "Evaluating loss 1930s, It of out of support should health it of expenditures Pension-Related is concern not beinsurance by maintained appropriate dependents for inthe premiums. Tax areas economic in intoday. Expenditures," atheform where event security thatthe ofallows death. written of nation employees, persons byhasEBRI ataa in the present tax environment. A major change in that environment will have a modified flat tax to the current system by a margin of 58 percent to 31 determining what actual totals were for a given year, and because the SOURCE: _e Costs of F_p]oying O/der l_'orkers (l_hshington, Y_: U.S. Fiscal Year measurement of tax expenditures changes over time. Even determining which tax more of the value of the tax reductions than their share of tax payments and desire change research While Employee Datathe forfrom associate both tax good benefits, commitment the Roper treatment employee Bureau Sophie and as to Mercer-Meidinger of ofM. relations, distinguished economic employee Labor Korczyk, Statistics security; benefits, the briefly from found needonfringe and discusses thto the at that retire about extent benefits, these why 60workers, ofpercent these coverage incentives have estimates and of certain under CEOs the for a major One factor all effecteathat rnings on has those le not velsgenerally approaches to particip been and ate.considered structures. Employers, in discussing Nearly for example, allchanges of now the in Special Committee on Aging and the _p]o)'ee Benefit Research percent, while_oindividuals _favor ...... it by 44 opercent o oto 37: percent. code provisions lead to tax expenditures is controversial, since it requires a Institute, forthcoming). judgment about which tax code provisions constitute the basic tax system and competitive the economic ch the should aracteristics highest taxnot(3) security treatment be pressure paid The the thgetting ashould degree tsole of are frombasis be employee implicit to less. other maintained. which forIn employers. inbenefits, any the other thisreform program structure: words, For however, ofbenefits aemployees, the change taxthat persons system in economic the couldtax as(workers) involve it treatment security affects ata government opposed these programs the provide and health academic among protection tax those cap, research to more employed moredone than thanby 40 on 162 percent firms thismillion subject with saidpersons more their to date than response through assumes 250 voluntary employees tothat a taxa Yet, support for tax reform may fall apart when individuals focus on the Budget which provisions 1980 constitute 1981 departures 1982 from 1983 that system 1984 and therefore 1985 1986 result in subsidies. A further complication arises from the fact that tax of andNote: benefits tax (I) effectiveness They Samewould all provide lifelevels have insurance arefor of aprimary an regressi theemployer's cost basic concerns: ve is result. soci assumed payroll alTax and More is for on not aphysical 65-69 nondiscriminatory recent paid as, until studies well-being for an60-64 economic bybasis; EBRI and change indicate significant cap employer-provided wouldinprograms. the betaxshift toprograms policy offer benefits. in According athe will "choice" are incidence not very to the among change widespre Social of plans. the athe d.Security method This income The comp Administration, ofsame tax ares providing is isto the 16 truepercent or increasing more for pricing than the now details. For example, Roper found that 58 percent of CEOs oppose a health tax expenditures, like direct expenditures, are sensitive to the actual and because ° it ..=is _g_ assumed that the benefits ,-, owill o=be reduced to (dollar amounts in billions) projected performance of the economy. benefits. The social and economic value of core employee benefit programs such as benefit economists doingResponses so.isfinanci (4)actually Twenty-two Korczyk The to al the number security and received. next percent Deborah oftwo ofpersons would working statements Cholletsimply whose men confirmed and indicate economic reduce womenthese the why security andhealth findings, they their favor insur isfamilies; enhanced aas nce thedidpresent offered aasCBOa population cost---and, 50 therefore, as percent a whole, ofvalue-of new withretiree more benefits households than as162workers million have age. employer individuals This pension would benefiting represent income, cap; Pen & Schoen found that 77 percent of voters oppose it. This aspect of equal cost; regulations allow a 30% reduction. 1981 $ 12.9 $ 14.7 Pension-related tax expenditures in the last six federal budgets were analysis system economically health, (2) a of cap life They ofemployee imposed. theand result from have health disability benefit employer-provided of As the care recei a potential result, economic tax ving insurance capthe consultants proposal security employee to benefits. andpro pensions vprograms. published idebenefit; argue Ninety-eight widespread th isain tand of1983. aparamount tax percent benefits cap would importance ofon cause thea a major Finally, Mandatory effect and econometric the and of tax voluntary number policy estimates grows tax-favored change. eachof year private benefits as health the cost system about insurance 5 matures. percent suggest of Health wages that 0 _ 0 t. public opinion regarding tax reform and employee benefits may not yet have 1982 19.8 23.6 $ 27.9 illustrate some of the problems in measuring, tracking, and interpreting *The views expressed in this statement are solely those of Dallas Salisbury oOOooOoooo o .._,_ ) _ 1983 23.4 25.8 $ 27.5 federal tax expenditure statistics. In the 1981 budget, pension-related tax and "choice" individuals to Priv asalaries majority atenondiscriminatory plans surveyed retirement in of to1950. become taxpayers. byByRoper program the 1984 basis rule had Voluntary this C_ oo to tax ...... health rather oo had o large oexpenditures grown employer-provided insurance; than numbers to _the o_ just exception. of7form e1 over persons percent _ the benefit 16 percent, at They of single all programs firms argue economic with largest andthat and 40 63 significant Employee insurance, (5) numbers benefits Relativeofaccording such persons cost asand now defined-benefit to administrative covered the Congressional would pensions notburdens choose Joint andof tohealth purchase Tax changeCommittee, insurance health versus If benefits are not reduced, assume costs at 65-69 are about and should not be attributed to the Employee Benefit Research Institute, its been closely focused upon by advocates of reform. 1984 45.3 49.7 $ 56.6 °_°°°o°o° _ o_ _ expenditures for fiscal year 1981 were projected at $14.7 billion (table I). officers, trustees, sponsors or other staff. 30% higher. 1985 46.6 50.5 $ 56.3 In that year, several personal income tax provisions resulted in larger percent under percent category mandatory these being of levels; ofsocial individuals proposals tax mandatory, expenditures programs employers had 30 work percent pensions; in would together the being be99 federal compelled voluntary effectively. percentbudget. of bytax-exempt, firms their IfThey changes and employees arise and 73 percent in 30from topercent theoffer the tax of are insurance almostprovides ifalways itrevwas enue hediscussed anot lthgains available protection as of a treating flat-dollar from worth an $i00 employer a benefit cost billion per and differently largely employee for a "tax paid or subsidy" than as forabyunder level the of A recent survey conducted by Hamilton & Staff for the ERISA Industry 1986 ,_== ..,:5o5: o_ 44.1 ,o . 44.3 $ 55.1 revenue losses, but by the 1982 budget, pensions accounted for the single Dallas Salisbury is President of the Employee Benefit Research Institute, a largest tax expenditure for individuals. Pension-related tax expenditures current law. deferral being percentage aindividuals treatment choice (3)voluntary They of onofof had taxes group employee are pay tax-deferred. life sufficiently paid life perinsurance; benefits on: employee. and other (I)As important such and pension these benefits Employee as 85 costs he percent and th alth atmade representatives, retirement have government and offully grown, retirement firmstaxable saving programs plan and employees, were 61contributions sponsors--the andpercent have to a health reduce been and of employer. I Employer less Attitudes than $30 billion. Toward Direct Employee provision Benefitsof health and Tax benefits Change, by thea _o_oOoOoOoO -. non-profit, Committee and non-partisan the Association public ofpolicy Privateresearch Pension organization. and Welfare Plans Beforeindicates joining grew in the 1982 and 1983 budgets, but jumped precipitously in 1984 with the Mercer-Meidinger Defined contribution survey, September costs 1984, are the of same 502 by CEOs; age.a Roper survey of 150 =o : ..... ooo :_ ,Co.=_ EBRI he served in senior career policy research positions at the U.S. and (2) earnings on these contributions. The dollar value of the tax government, employers CEOs, option individuals the benefits Nobelow vember enhave acted had the private received 1984; been disability tax to provide content cap a Roper corporations, byamount. ainsurance. protection with survey significant this of 500 approach to and Forty-one number some individuals, others--have groups since ofpercent workers the and December of that actual shifted and firms these 1984; retirees, distribution hadprogr from athrift Pen amsthe a& government would require $i00 billion in new taxes. Other employee Department American workers of Labor oppose and the taxing U.S. employee Pension Benefit benefits--whether Guaranty Corporation. to reduce the The SOURCES: Special Analysis G of the Budget of the United States Government Schoen Associates survey of 1,000 voters, January 1985. statement draws heavily from research studies conducted and published by EBRI. for Fiscal Years 1981-1986 (Washington, D.C.: Office of Management would have to be extended to additional groups in the absence of of expenditure gratification cost The tax doesdemands reform not emphasis affect pl that ans of equity either would "Whatand also the benefits efficiency taxes begin to toshould be respond questions paid we by to have?" beathe explored. newemployee totrend a planning Athat ormajor the is savings plans; benefits--parts 33 percentof of the firms economichad security 401(k) plans; commitment--provide and 16 percent similar had and Budget). reimbursement accounts. troubling private cost to/benefit many sectorinreturns progr the ams; feder to the aand l federal government--incre government. ased use of lump-sum 05/16/85 EMPLOYEE BENEFIT RESEARCH INSTITUTE fill K Street, N\V_Suitc _60,'%%'a,hint4ton, D<_" /L\_7,'Tclcphonc (._Ol) 659-0670