NASHUA, N.H. - The flat tax proposals espoused by Republican presidential candidates Patrick Buchanan and Malcolm S. "Steve" Forbes Jr. would, if enacted, almost certainly wipe out employer-sponsored pension plans.
Experts say the proposals would force employees to be responsible for retirement saving without any help from employers.
While Mr. Forbes, the strongest proponent of the flat tax, apparently lost ground in the Iowa caucuses last week, Mr. Buchanan gained strength, coming in a close second to Kansas Sen. Bob Dole.
While both proponents claim their flat tax plans would slash income taxes for many Americans to 17%, Mr. Forbes' version would give people the opportunity to park money anywhere without the double taxation on investment income conservatives say is the reason for the nation's pitifully low savings rate.
Probably the first kind of employer-sponsored retirement plans to go would be 401(k) plans, where employers typically match employee contributions to encourage employee participation. Because lower-paid employees would ask for bigger paychecks now, instead of having their money tied up in retirement plans until they turn 591/2, employers would have little motivation to keep them going, notes Dallas Salisbury, president of the Employee Benefit Research Institute, Washington.
By elevating all forms of investment income to the same preferred tax treatment as pension funds, libertarian economists and informal advisers to Mr. Forbes' campaign say his flat tax proposal would jump-start the nation's economy, create more jobs and boost the national savings rate.
But Mr. Buchanan, arguing that exempting investment income from taxes would give "lounge lizards in Palm Beach" a free ride, would maintain the current tax treatment on dividends, interest and the sale of investments, lumping them with salaries as part of taxable income.
Mr. Forbes' plan provides a more generous exemption for lower income families - earning up to $36,000 - from federal income taxes; Mr. Buchanan sets the bar at $25,000.
Moreover, under Mr. Forbes' plan, older residents would not pay taxes on employer-provided pensions or on Social Security benefits. What he did not make clear, however, is if workers would have to include the present value of employer-provided pensions in their taxable income. A Buchanan spokesman could not provide any details of his plan.
On the stump in New Hampshire last week, Mr. Forbes said his flat tax plan "would get the country moving again." Ordinary people, he said, "can do extraordinary things when they take responsibility for themselves, " he said in a speech in Milford.
That includes saving for retirement.
Mr. Forbes pooh-poohed the notion that most Americans are not savvy enough to make proper investment decisions and could fall prey to investment scams, or risk losing their retirement nest eggs playing the stock market.
"You underestimate the ability of the American people to save. We've always been a nation of savers and when you get the tax impediments out of the way, the pool of savings will increase," he said in response to a question from Pensions & Investments.
Not true, economists and pension experts argue.
Take away the special tax status for pension funds and the nation's savings rate would tumble further, they say. After all, the growth in pension assets, taking inflation into account, outpaced the increase in the nation's wealth in the 1980s, according to a 1991 study by John B. Shoven, a Stanford University economist. What's more, assets of employer-sponsored pension plans grew from 2% of the nation's wealth in 1950 to 17% in 1990, Mr. Shoven found.
Employer-sponsored pension plans might disappear under both flat tax proposals because lower-income families would pay no income tax and would ask their employers for fatter tax-free paychecks today, instead of taking pension benefits payable years later when they might be taxable.
"People would want to take the money and run," warns Randolph H. Hardock, partner at the Washington law firm of Davis & Harman, and a former benefits tax counsel at the Treasury Department. And that, he says, would have repercussions on the nation's retirement policy.
Worse, if lower-income people squander their money now, it would put more pressure on the already-strained Social Security system when baby boomers begin hitting retirement.
In fact, either version of the flat tax proposal could prompt some employees to cash out of their employers' pension funds now. Employers, too, would have to reshape their retirement plans to create individual accounts for benefits accrued by employees and to give them the choice to withdraw the money.
Under a doomsday scenario, this could set loose "a consumption binge" and deplete the more than $5 trillion in assets in the nation's pension funds, according to C. Eugene Steuerle, a senior fellow at the Urban Institute, a Washington think tank, and a former deputy secretary for tax analysis at the Treasury during the Reagan administration.
"Individual freedom is nice, but when it comes to something like saving for their retirement, it's a very hard thing for people to do when they are living from paycheck to paycheck and every penny is needed for survival," said Robert E. Heitzman Jr., senior pension fellow at the American Academy of Actuaries in Washington.
What's more, lower-income people tend not be as savvy in making financial decisions; those who lack investment skills would pay dearly in retirement with a smaller nest egg.
But libertarian economists, who espouse a smaller government, believe individuals are perfectly capable of saving for retirement.
"Choice doesn't cause confusion," said Stephen Moore, director of fiscal policy at the Cato Institute, a Washington libertarian think tank that has influenced Mr. Forbes' thinking. Mr. Moore and others sympathetic to the flat tax say individuals would be prompted to save the extra money in their paychecks, accelerating the pace of investments in stocks, bonds and other investment vehicles.
"If you make savings more attractive to people, they will save more. That's just an article of faith," Mr. Moore said.
But, others say tax incentives are of little consequence to lower-income people.
Give them more money and they will spend, not save, past studies have shown. In fact, data collected by the Joint Committee on Taxation shows that before tax law changes in the mid-1980s restricted the ability of Americans to save for retirement with individual retirement accounts, only 13.8% of those with adjusted gross incomes of less than $50,000 took advantage of IRAs, while 61.8% of those with adjusted gross incomes of more than $50,000 made full use of the accounts.
Apart from lower-income individuals, midcareer employees also would suffer greatly if companies pull the plug on pension plans. That's because many pension plans are designed to speed up accumulations in an employee's last few working years.
While Messrs. Buchanan and Forbes have made few details of their flat tax plans available, both are variants of a plan unveiled by House Majority Leader Richard Armey, R-Texas, and Sen. Richard Shelby, R-Ala., in 1994, and probably would also eliminate all federal pension law, except for the worker protection provisions.