E.B.R.-I_ UBRARY# presents average contributions for all participating workers and by earnings advantage 401(k) due to Planlower Coverage tax and rates, Participation greater 401(k) Have Grown availability, Significantly and other Employment Based Plans Have The Broadest Reach EBRI level, showing that the overall average was $2,000. The high was $3,500 for factors, may have contributed. In addition, the 1988 survey asked about .O Policy ver 27.5 debates million frequently workers center wereon co indi vered vidualby freedom 401(k)-type of choice arrangements and the I i T-70 those earning over $50,000. The average contribution was 6.5 percent of contributions to an IRA, not only tax deductible contributions. It is certain value of tax incentives for employer sponsored plans relative to incentives (including Mr. Chairman 403(b) and plans members for nonprofit of the Committee, organizations it and is asection pleasure457toplans appearfor earnings, with the greatest concentration at 6 percent, 7 percent, and i0 that most of the nearly six hundred thousand workers earning more than $50,000 for individual effort. Policy debates of recent years have also focused on state and local governments) in May of 1988, up from 7.1 million in May of before you today to discuss the nation's experience with Individual Retirement percent. in 1987 who reported IRA contributions and pension coverage were making the concept of non-discrimination in employee benefit provision (that is, Accounts. 1983. This represented 24.2 percent and 7.1 percent of all workers Thirteen percent of all participants who reported the percentage of pay non-deductible after tax contributions. And, that many at lower earnings trying to deliver benefits to the low earning worker). Table 5 provides a respectively. Participation gE'ew from 2.7 million workers in 1983 to 15.7 The Employee Benefit Research Institute (EBRI) has undertaken research in being contributed had a total contribution of less than $700; 5 percent more levels but above the TEA 86 income limits were as well. This indicates that this comparison million area infor of1988, participation over with a decade. thelevels percentage EBRIamong is athe growing non-profit full from population public 2.7 percent policy in all research employer to 13.8 than $5,000. For those earning more than $50,000, 55 percent contributed the non-deductible IRA has also been more popular than marly expected at the pension percent. plans Coverage (42 percent), and participation employer 401(k) grew significantly plans (13.8 percent), in both the and public IRA's organization located here in Washington, DC. We do not take positions on $2,000 to $4,999, and 19 percent contributed over $5,000. time TRA 86 was enacted. And, since published Internal Revenue Service (12.5 and pri percent). vate wage The and table salaryalso sectors, underlines with actual the significant rates beinggrowth higherof for 401(k) the policy initiatives, but hopefully do provide research that allows others to Testimony of Three points should be emphasized. First, the average contribution of reports on IRA use in 1987 report only deductible IRA contributions, they make informed decisions. plans publicbetween sector. 1983 Am and ong1988. public sector workers 19.3 percent participated, Dallas L. Salisbury $2,000 is the IRA maximum. Second, most of those with 401(k) plans but above significantly understate total actual 1987 contributions. compared to 14.3 percent in the priConclusion vate sector. Our most recent work on IRA's is based upon the May 1988 Census Bureau President, the deductible IRA income limit could apparently have contributed more to IRA Users Have Changed Current Expansion Population of plan Surveycoverage Employee andBenefits participation Supplementwithwhich before was tax released employee to The data indicate that a significant percentage of those who lost the Employee Benefit Research Institute their 401(k) plans without exceeding tax reform limits. Third, all 401(k) Between 1982 and 1987 the number of private sector workers with an IRA and the contributions public on September was experienced 15, 1989.at The all searnings urvey provides levels.IRA More information workers for earning tax ability to make deductible IRS contributions are making non-deductible Before contributions are deductible and for all post 1984 federal employees and over an employer sponsored retirement plan declined from 23.1 percent to 15.0 less than $15,000 participated in plans (1.89 million) than workers earning year contributions 1987. A an___dd similar an evsur enveylarger taken number in Maymay1983be for contributing tax year 1982 funds allows to 401(k pre the half of private workers an employer contribution is also provided. percent, while the number with IRA's decreased in absolute numbers by 21 more than $50,000 (1.86 million). The majority of participants earned less and post tax reform comparisons. Further, since the survey also collected plans that were being contributed to IRAs pre-tax reform. A return to pre-t._. Senate Finance Committee Employee 401(k) Contributions May Have Exceeded $24 Billion in 1988 percent (from 6.8 million to 5.3 million) (Table 4). As a proportion of all than $30,000. However, because only 4.1 million workers earned more than reform IRA rules is not likely, therefore,, to produce either the full saving information on employment based pensions and 401(k) plans, it allows an September 29, 1989 Using the numbers reported in the 1988 CPS EBS we estimate that employees workers without an employer plan, IRA holders declined from 11.8 percent to $50,000 the reported coverage and participation rates were higher than any effect or the full revenue losses that have been suggested in recent weeks. ;, assessment of the overall impact of tax reform on retirement savings. contributed over $24 billion in 1988; $19.3 billion by private workers and 10.4 percent, but increased in absolute numbers by 7 percent from 4.0 million mo other ve togroup rulesatallowing 56.5 percent a 50%and deduction 45.1 percent for a respectively. $2,000 contribution are even l,:_ The growth of 401(k) plans is relevant to an evaluation of IRA's since $4.8 billion from public employees (Table 2). to 4.3 million. The distribution of those with IRA's changed by income level Passage of TRA 86 does not appear to have slowed the growth of 401(k) likely to do so if 401(k) use is an indicator: 37 percent of those who cou they have provided an alternative for pre-tax deductible contributions foc IRA Participation Has Changed Less Than Many Predicted among both groups. The proportion of those earning more than $50,000 and plans through 1988, even though the possibility remains in the future as more millions make a fully of those deductible who "lost"contribution the IRA withtotaxa reform 401(k) changes. plan withAs an a result, emplo>. a The tax changes of TRA 86 reduced or eliminated allowable deductible IRA having an IRA plus an employer plan dropped from 58.9 percent to 22.0 percent; restrictive provisions of that law come fully into effect (e.g., hardship contribution as well do not do so and few that did contribute, contributed full or partial return to pre-tax refot_ IRA rules may produce less new contributions for about 15 percent of the then eligible population. among those with only an IRA from 47.1 percent to 29.1 percent. Among those the tax reform maximum. withdrawals, loans, early distribution penalties, etc.) savings and lower revenue losses than some have argued. The 401(K)-IRA The views expressed are those of Mr. Salisbury and should not ' Interestingly, the number of workers reporting IRA contributions dropped by 15 earning $30,000 to $49,999 IRA use among those with employer plans declined Employee 401(k) Contributions Averaged $2,000 analysis has only been possible since September 15, 1989, when new government attributed to EBRI, its officers, directors, staff or sponsors. percent between 1982 and 1987. Table 3 shows that this decline came from all from 32.8 percent to 17.8 percent, and among those with no employer plan from data TEA were 86released. placed a maximum on allowable employee contributions of $7,000 (to age categories and most earnings levels, possibly meaning that more than the 33.4 percent to 19.8 percent. be indexed beginning in 1988). At the time the limit was controversial, but actual tax law change was at work. Confusion, less advertising, less tax it appears to have been approached by very few workers in 1988. Table i EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, NW / Suite 600 / Washington, DC 20037-2121 Telephone 202-659-0670 FAX 202-775-6312