[169] COSTS AND BENEFITS Each year the Federal Government loses about $4 billion in tax revenues because of the special tax treatment which is allowed for pension, profit sharing, and related plans designed to provide Americans with retirement benefits. These tax benefits are intended basically to induce corporations, including professional organizations, and other businesses to set up retirement plans for their employees. However, Mr. Frederic Hickman, Assistant Secretary of the Treasury for Tax Policy, admits that pension and profit-sharing plans have in fact become "the quintessential tax shelter." He calculates that the upper 8 percent of workers (including executives) receive 50 percent of the tax benefits involved, while the bottom 50 percent of wage earners receive only 6 percent of the benefits. Mr. Hickman also indicates that the tax shelter features of these retirement plans are particularly valuable to higher income persons, who would normally pay high rates of income tax. Following is a chart (chart 1) that indicates how important tax benefits are in the formation of a pension. CHART 1 Tax Subsidy Element in Pensions IF THE EMPLOYER CONTRIBUTES 15% OF SALARY STARTING TAXABLE SALARY ENDING TAXABLE SALARY AFTER-TAX PENSION "TAX SUBSIDY" 53% $30,000 $34,500 $10,000 $11,500 Assumptions: Participation age 35 to age 65; 6% interest; 22% inflation; joint retums; executive has Prepared by the Treasury Department. Obviously, the $4 billion a year which is lost in pension-related tax breaks must be made up by increased tax burdens on other taxpayers. It should also be noted that the coverage of pension plans extends to only something like 42 percent of the private, non farm work force, so that many workers receive no benefit at all from these tax losses to the Government. [170] It's clear that one of the greatest reasons for excessive executive salaries is the tax avoidance which can be managed by earmarking large portions of these salaries for pension or profit-sharing plans. With some executive salaries hovering at the $100,000 to $300,000 level, it's easy to see why these executives put up such a strong resistance to any limitation on tax deductible contributions to their pension funds. This is an area ripe for immedate remedy. There is absolutely no justification for as generous a limit on these tax deductible contributions as is contained in H.R. 12855. No candidate for public office could possibly defend the U.S. Government for subsidizing a $75,000 a year pension for corporate executives, and we certainly should not be enacting laws that we cannot defend in public. Unfortunately, a motion to reduce this limitation to the still-generous sum of $60,000 a year lost in committee on a rollcall vote of 14 nays to 9 yeas. Another effect of our special tax treatment of retirement plans is to create a huge reserve of investment assets which operate outside of our tax system. The book value of these assets was $154 billion in 1972. By 1980, their value is expected to increase to $225 billion. The implications of this fact for our economy, especially for our stock market and our capital markets, should not be taken lightly. It is essential that we monitor the effects of H.R. 12855, including the results of our tax incentives to pension plans, very closely. Careful analysis of the costs and benefits of this legislation is needed if we are to be able to judge the prudence of our efforts in this area. Also, we should be especially sensitive to any Federal measures which may prove unduly hard on small businesses or may further aggravate the trend toward bigness and concentration in our economy. In addition, if we are to continue to use our tax system to subsidize private pension benefits, we'll need a lot more progress in distributing the tax benefits involved more equitably among all workers. It is claimed that the new individual retirement account provided for in this bill will advance us toward this goal. This new creation should be watched very carefully to see whether it will in fact benefit low- and middle-income workers without pension plan protection-or whether it will become another tax shelter for those with high incomes who are well able to provide for their retirement without any additional help from the Federal Government. We look forward to further consideration of the tax issues relating to pension reform when the committee takes up tax issues in the near future. THE ROLE OF SOCIAL SECURITY It became clear during the committee's consideration of H.R. 12855 that sufficient thought had not been given to the respective roles that will be played in the future by the social security and the private pension systems in providing retirement income security for working Americans. This is a general problem in that further decisions are going to have to be made on how Federal tax dollars, or tax benefits, can best be used for this purpose, if they are to be so used. [171] The committee did not take action on the thorny issue of "integration," but instead postponed further consideration of the problems of fairness which are involved until social security issues are taken up later in the year. It cannot be stressed too strongly that remedial action is needed in this area. Integration is a particularly disturbing equity problem. Often involved are the attempts of those in charge of pension plans to exclude from the coverage of these plans those who earn less than the social security wage base which is now $13,200 a year. Chart 2 illustrates how integration can be used to eliminate or drastically reduce the private pension base for lower paid employees. Prepared by the Treasury Department. (1973 social security wage base was used.) Chart 3 shows how integration affects the amount of employer contributions to a pension plan. Prepared by the Treasury Department (December 1973). Admittedly, the social security system provides basic retirement benefits for American workers. However, well over half of the work force makes less than $13,200 a year. If the purpose of our special tax benefits for pension plans is to induce businesses to operate pension plans for the benefit of their employees, is it appropriate to provide these full generous tax benefits to those who exclude their lowest paid employees from the protection of their pension plans-while reaping the tax benefits involved for themselves? Should taxpayers be called upon to finance increased social security benefits to keep up with inflation and also be made to bear the tax loss which results from our special tax treatment for such "integrated" pension plans? Studies by the Joint Economic Committee have shown that it is sometimes the person who pays the least in social security taxes who gets the most favorable treatment under present social security formulas. In view of this double inequity, it is time that Congress stopped letting the Internal Revenue Service regulate "integration" and made a thorough investigation of the problem. We look forward to early action by the Ways and Means Committee on this. JAMES C. CORMAN. Congressional Record-March 29, 1974 Proceedings and Debates of the 93d Congress, Second Session Vol. 120-No. 44 Senate Friday, March 29, 1974 (Legislative day of Thursday, March 28, 1974) [Bracketed numerals indicate Congressional Record page numbers.] [S 4749] PENSION REFORM Mr. JAVITS. Mr. President, the Congressional Research Service at the Library of Congress has completed a comparative analysis of the Senate-passed and House-passed versions of H.R. 2, the pension reform bill. In view of the tremendous interest in this legislation I ask unanimous consent that the text of the Congressional Research Service analysis be printed in the RECORD. There being no objection, the analysis was ordered to be printed in the RECORD, as follows: PRIVATE PENSION REFORM LEGISLATION, 93D CONGRESS, MARCH 1974COMPARISION OF SENATE-PASSED AND HOUSE-PASSED VERSIONS OF H.R. 2 (By Peter Henle, Senior Specialist, Labor Economics Division; Raymond Schmitt, Analyst in Social Legislation, Education and Public Welfare Division; and Ann M. Marley, Analyst in Taxation and Fiscal Policy, Economics Division) INTRODUCTION The following tabulation compares the major provisions of the Senate-passed and the House-passed versions of H.R. 2, private pension reform legislation. Action on this legislation was taken first in the Senate, culminating with passage of H.R. 4200 on September 19, 1973. This bill was the |