, Editorial director
Here's a great idea: Why doesn't the government provide pensions for the poorest Americans? And here's a painless way to finance them: Impose a 5% tax on the earnings of qualified pension plans.
That's what Daniel Halperin, a Harvard University law professor, and Alicia Munnell, professor of economics at Boston College, proposed at a Brookings Institution conference on ERISA. We have some problems with that idea.
As reported in the Oct. 18 issue of P&I, the professors argue that since excluding those earning $20,000 a year or less from corporate plans would save employers money, it would be appropriate to help offset the government's costs by the tax on investment earnings.
Building on President Clinton's Universal Savings Account proposal, Mr. Halperin and Ms. Munnell propose that the government make an automatic contribution in the form of a refundable tax credit deposited directly into the USAs of workers earning $20,000 a year or less.
The government's contribution alone, when combined with what the worker would receive from Social Security, would provide full replacement for pre-retirement earnings.
But the plan has a few more wrinkles: only those earning $20,000 or less a year could be excluded from a company pension plan for any reason, and all employees would have to be covered by the same provisions; full vesting would be required after no more than one year; and all lump-sum payments would have to be rolled over into an IRA, with all plans required to offer an inflation-indexed annuity.
To encourage employers to adopt these provisions, they propose boosting the maximum benefit payable under a defined benefit plan to $190,000 a year from $130,000 and boosting the maximum includable compensation to $255,000 from $160,000.
These proposals are problematic. A 5% tax on corporate defined benefit plan investment earnings would increase their costs and accelerate their decline. If the tax also applies to the investment earnings of defined contribution plans, as seems likely, then it becomes a far more complex collection problem. Would the tax apply to unrealized as well as realized earnings?
We suspect it would. That means plan administrators might have to liquidate holdings to pay the tax, or individuals would have to pay it in cash. Either way, the tax would give employees another excuse not to participate in their 401(k) plan.
Finally, a 5% tax on investment earnings is just the camel's nose under the tax-exempt tent. The professors estimate it would raise about $15 billion of the estimated $80 billion cost of the USA proposal. How long would it be before that tax went to 10% or 15%?
In addition, the proposed incentive is unlikely to provide any incentive to top management in big companies. They already have taken care of themselves through non-tax-exempt top-hat plans. And management at small companies generally doesn't earn enough to take advantage of the higher limit.
But perhaps the professors' real agenda is to kill off the private pension system. Ms. Munnell in the past has made no secret of being no fan of the system and has proposed taxing it before.
Be that as it may, lower-paid workers do need better pensions to supplement Social Security. But rather than risk harming the private pension system by taxing it, why not find the money by asking government to be more efficient? Surely the government can find $80 billion somewhere in its trillion-dollar-plus budget. For a start, how about cutting back on research programs at places such as Harvard and Boston College?
Let's look at a bunch of possibilities, not just tax of the private pension system.
