Private Pensions and Public Policies

Private Pensions and Public Policies

William G. Gale
John B. Shoven
Mark J. Warshawsky
Copyright Date: 2004
Pages: 376
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  • Book Info
    Private Pensions and Public Policies
    Book Description:

    The private pension system, together with Social Security, has provided millions of Americans with income security in retirement. But over the past thirty years, pension coverage has stagnated, leaving behind some vulnerable groups. Defined contribution plans have exposed workers to greater investment risk, while cash balance and other hybrid plans may have adverse effects on older workers caught in the transition. Pension regulations, infamous for their complexity, can be bewildering to policy analysts and policymakers. Private Pensions and Public Policies sheds timely and much-needed light on specific issues within the broader context and framework of pension reform. Contributors focus on topics that must be addressed in any reform effort, including the effects of the shift in emphasis toward defined contribution plans (after the 1974 Employee Retirement Income and Security Act) and hybrid plans (from the 1990s); regulatory issues such as nondiscrimination rules and contribution limits; how to increase the information available to participants and improve financial education; how participants in defined contribution plans make choices on questions such as asset allocation, back-loaded versus front-loaded saving, and annuities versus lump sum distributions; and the interaction of the private pension system with Social Security. Contributors include Robert L. Clark (North Carolina State University), Sylvester J. Schieber (Watson Wyatt Worldwide), Richard A. Ippolito (George Mason University School of Law), Alan L. Gustman (Dartmouth College), Thomas L. Steinmeier (Texas Tech University), John Karl Scholz (University of Wisconsin), Dean M. Maki, (JPMorgan Chase), William Even (Miami University of Ohio), Jagadeesh Gokhale (American Enterprise Institute), Laurence J. Kotlikoff (Boston University), Mark J. Warshawsky (TIAA-CREF Institute), Annika Sunden (Boston College), Andrew A. Samwick (Dartmouth College), David A. Wise (Harvard University), Joel Dickson (The Vanguard Group), Peter Merrill (PriceWaterhouseCoopers), Kent Smetters (Wharton School), Yuewu Xu (TIAA-CREF Institute), Janemarie Mulvey (Watson Wyatt Worldwide), Peter Orszag (Sebago Associates, Inc.), James M. Poterba (Massachusetts Institute of Technology), John B. Shoven (Stanford University), Clemens Sialm (University of Michigan), Leslie E. Papke (Michigan State University), Jeffrey R. Brown (Harvard University), and Michael Hurd (RAND Corporation).

    eISBN: 978-0-8157-9642-8
    Subjects: Political Science, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Foreword
    (pp. vii-viii)
    Strobe Talbott

    The creation of a lengthy, well-funded period of retirement at the end of most working lives has been one of the most striking economic transitions over the past century. In 1900, nearly two out of every three men aged 65 or older were in the work force. By 2000, the comparable figure had fallen to less than one in five. This is a historic achievement, but it also creates new challenges for public policy.

    The long-term financial shortfalls facing Social Security and Medicare, the two cornerstones of public policy directed to the elderly, have received substantial attention over the past...

  4. 1 Introduction
    (pp. 1-10)

    The private pension system is an intriguing combination of successes and failures. In conjunction with Social Security, private pensions have helped provide millions of Americans with adequate and secure retirement income. Pensions help employers manage their work force and provide incentives to employees. Pensions also help employees plan and save for retirement.

    Yet pension coverage has stagnated over the last thirty years, and certain groups appear to have fallen between the cracks of the pension system. Pension regulations are notoriously complex. Shifts toward defined contribution plans in recent years have exposed workers to more investment risk and required them generally...

  5. 2 The Transition to Hybrid Pension Plans in the United States: An Empirical Analysis
    (pp. 11-56)

    Over the past three decades, pension coverage rates have remained fairly constant, but the composition of pensions has changed dramatically. Plan sponsors have shifted away from defined benefit plans and chosen to offer defined contribution plans instead, especially 401(k) plans. This change has occurred primarily among smaller employers, but according to a recentFortunelist, sixteen of the largest one hundred publicly traded corporations in the United States had a defined contribution plan as their only retirement plan.

    During the past decade, another significant change emerged: the conversion of traditional benefit plans to so-called hybrid plans, which take on some...

  6. 3 What People Don’t Know about Their Pensions and Social Security
    (pp. 57-125)

    The role of employer-provided pensions and Social Security in shaping employees’ retirement and saving behavior has attracted an enormous amount of attention from both researchers and policymakers over the past twenty-five years.¹ In the research literature, the almost universal assumption is that workers are fully informed about the rules governing their employer- and government-provided pensions. However, to the limited extent that researchers have been able to test that assumption, results suggest that workers are less than fully informed (Bernheim 1988, Mitchell 1988, Gustman and Steinmeier 1989) and that providing information can affect their behavior (Clark and Schieber 1998; Bayer, Bernheim,...

  7. 4 Financial Education and Private Pensions
    (pp. 126-145)

    Because of the shift in the United States over the past two decades from defined benefit pension plans to defined contribution plans, American households increasingly shoulder the responsibility of planning for retirement.¹ To take full advantage of the opportunities now available, households must possess sufficient financial knowledge to make wise decisions. Bernheim (1998) raises concerns about whether households are financially literate enough to make wise decisions with regard to participating in and contributing to a pension plan.

    A related concern is the amount of personal saving by households in the United States. Starting with the third quarter of 2000, the...

  8. 5 Life-Cycle Saving, Limits on Contributions to DC Pension Plans, and Lifetime Tax Benefits
    (pp. 146-188)

    It is now more than a quarter of a century since the Employee Retirement Income Security Act (ERISA) was passed. ERISA regulates employer-sponsored tax-favored vehicles for retirement saving, including defined contribution (DC) pension plans; a key element of the law’s provisions governing DC plans is to limit the amount of tax-deductible contributions. In both nominal and, especially, inflation-adjusted terms, those limits have been tightened over the years. Rules current in 2000 allow workers and their employers to contribute a combined total of 25 percent of a worker’s earnings or $30,000, whichever is less, to a DC plan each year; of...

  9. 6 The Effects of Social Security Reform on Private Pensions
    (pp. 189-220)

    Over the past decade, two primary factors transformed the Social Security program from the “third rail” of American politics to a leading reform issue of the day. The first was the report of the 1994–96 Advisory Council on Social Security,¹ which focused renewed attention on the financial crisis in the Social Security system.² Though unable to agree on a single proposal to resolve the crisis, three subgroups of members of the council devised plans with varying degrees of benefit cuts and tax increases. A common element of all the plans was to invest a portion of Social Security funds...

  10. 7 Pension Choices with Uncertain Tax Policy
    (pp. 221-236)

    Traditionally, almost all pension plans and tax-preferred saving incentive vehicles in the United States contained what has become known as front-loaded tax incentives. In particular, the initial contribution was deductible from income, and the investment returns generated no tax liability until they were withdrawn, when they were taxed as ordinary income. Examples of front-loaded plans include defined benefit pensions, 401(k) plans, Individual Retirement Accounts (IRAs), and Keogh plans.

    Recently, the United States has experimented with back-loaded saving incentives. The canonical back-loaded plan is the Roth IRA. Like traditional saving incentive plans, Roth IRAs feature tax-free buildup of investment returns in...

  11. 8 The Design and Cost of Pension Guarantees
    (pp. 237-258)

    The U.S. Social Security system faces a substantial long-term financial shortfall. Some have advocated using personal accounts to help resolve the problem. Others support increasing the extent to which the existing system is prefunded by contributions that are made in advance of benefit payments. It is also possible to combine the two approaches. Much of the academic and policy discussion of these alternatives has proceeded under the assumption that each approach is riskless. Under that assumption, the alternatives generate roughly the same outcomes, so that whichever reform is taken, the results will be similar.

    But public pension outcomes are not...

  12. 9 Effects of Nondiscrimination Rules on Pension Participation
    (pp. 259-289)

    One of the central reasons policymakers provide tax subsidies for pensions is to raise pension coverage and benefit levels, especially among low- and moderate-income workers.¹ To achieve this goal, Congress has established and periodically revised nondiscrimination standards that pension plans must meet in order to qualify for tax subsidies. In broad terms, the nondiscrimination rules require that coverage and benefits for low-wage employees maintain at least minimal levels relative to what is available for highly compensated workers.

    The central policy question surrounding nondiscrimination rules is whether they are effective in raising coverage and benefits for low-wage workers. The rules may...

  13. 10 Asset Location for Retirement Savers
    (pp. 290-331)

    Deciding how much of a portfolio to allocate to different types of assets is one of the fundamental issues in financial economics. For taxable individual investors, the proliferation of tax-deferred vehicles for retirement saving, such as individual retirement accounts (IRAs), 401(k) plans, Keogh plans, and 403(b) plans, has added a new dimension to the historical asset allocation problem. A taxable investor needs to make choices not just about the amount to hold in various assets but also aboutwhereto hold those assets. If there are two asset classes, broadly defined as riskless and risky, the asset allocation problem facing...

  14. 11 Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues
    (pp. 332-382)

    The method of funding retirement in the United States is in the midst of a major transition, one that is placing greater responsibility on individuals for managing their own retirement assets. The past two decades have witnessed a large shift away from defined benefit to defined contribution pension plans, a trend that appears likely to continue for the foreseeable future. According to some estimates, the average retiree’s balance in 401(k) plans alone will rise tenfold over the next thirty years and will rival Social Security as the major source of retirement wealth.¹

    While defined benefit and defined contribution plans differ...

  15. Glossary
    (pp. 383-392)
  16. Contributors
    (pp. 393-394)
  17. Acknowledgments
    (pp. 395-396)
  18. Index
    (pp. 397-406)
  19. Back Matter
    (pp. 407-407)