The provision of tax incentives to
encourage pension coverage reflects a longstanding policy
of the U.S. government. Any individual who participates
in a pension plan, whether he or she works for the
federal government, a state or local government, or a
private nongovernment organization, receives a deferral
on income tax as the benefit accrues.
The tax expenditure estimates for
pensions are calculated on a cash flow basis. This is
significant because it has the effect of placing no value
on the pension promise itself, only on the advance
funding of that promise. According to the FY 1993 federal
budget, the pension tax expenditure was $56.5 billion for
FY 1993: $27.9 billion (49.4 percent) for public-sector
defined benefit pension plans; $19.3 billion (34.2
percent) for private-sector defined contribution plans
(such as 401 (k) plans); $8.2 billion (14.5 percent) for
private-sector defined benefit plans; and $1.1 billion (2
percent) for public-sector defined contribution plans.
This compares with the tax expenditure for IRAs of $7.1
billion and $24.5 billion for the exclusion from taxation
of a portion of Social Security and railroad retirement
benefits.
Taxpayers with income between
$30,000 and $50,000 (29 percent of taxable returns) paid
18 percent of taxes, received 28 percent of the pension
tax incentive value, and could experience an 18 percent
tax increase if the incentives were removed. One percent
report income above $200,000; these taxpayers pay 26
percent of all individual income taxes, obtain 7 percent
of the value of total pension tax expenditures, and could
experience a 3 percent tax increase if pension tax
incentives were removed./li>
Eighty-nine percent of those
covered by pensions and 86.7 percent of participants had
earnings below $50,000 in 1991. Among those earning less
than $25,000 per year, 33.9 million were covered and 21.7
million participated in pension plans—51 percent of all
covered persons and 41.9 percent of all participants.
Among those earning between $25,000 and $49,999 per year,
25.3 million were covered and 23.3 million
participated—38 percent of all those covered and 44.8
percent of all participants. Above $100, 000, 71,728
individuals participated, or 0.1 percent of all
participants.
Advance-funded pension plans expand
total savings even though the magnitude has been debated.
Pensions translate into billions of dollars being saved
each year, with total pension assets exceeding $4
trillion in 1991. However, more money needs to be set
aside: federal pension plans have combined unfunded
liabilities of more than $1.6 trillion, private pension
plans $51 billion.
