Government policies keeping a lid on pension savings.

GOVERNMENT POLICIES KEEPING A LID ON PENSION SAVINGS

While doing tax planning this year, CPAs should keep an eye on federal government efforts to stimulate the savings rate. President Bush's attempt to cut the capital gains tax rate is one example; Senate Finance Committee Chairman Lloyd Bentson's decision to hold hearings on an array of tax incentives to encourage savings is another.

The personal savings rate plummeted from an average of 8% of disposable income in the 1970s to a low of 3.2% in 1987, before recovering a bit to 4.2% in 1988. The 1985 U.S. personal savings rate of 4.4% compared to 11.9% for the United Kingdom, 13% for West Germany and a whopping 22.5% for Japan.

Pension contributions play an important role in determining the personal savings rate, according to an Employee Benefit Research Institute report. Employer and employee contributions in 1988 added $109 billion to national savings, and employer pensions paid the nation's retirees more than $222 billion in benefits, compared with $148 billion from Social Security.

Yet, despite the size of private pension contributions, recent government policy appears to have contributed to a slower-than-normal rate of growth in reserves.

First, the Omnibus Budget Reconciliation Act of 1987 drastically reduced the full-funding limitation, or the maximum tax-deductible contribution businesses can make to pension plans. Combined with the strong stock and bond market, this reduced or eliminated deductible contributions for many overfunded pension plans for several years. Indeed, the full impact may not have been felt yet.

Also, for years, the Social Security system taxed the working population to pay the increased benefits of the elderly. According to Michael Boskin, chairman of the Council of Economic Advisors, this transfer of resources was "capable of producing a major drop in the national savings rate." More recently, Social Security was partially funded and is building a trust fund to help pay for the retirement of the baby boom generation.

Time will tell whether the present funding level will be sufficient to cover the baby boomers and whether the net impact of the Social Security program will stimulate or deter saving.

Individual retirement accounts and 401(k) plans have also been curbed by recent tax law changes, but employee contributions to 401(k) plans exceeded $25 billion in 1988. Figures for IRAs were not available but were estimated to be well below 1986 levels, when they were estimated to account for 25% of all personal savings. [Graphs Omitted]