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Pension Funding and Taxation: Implications for Tomorrow.

This book collects 11 papers that were originally prepared for a 1993 policy forum of the Employee Benefit Research Institute Education and Research Fund (EBRI-ERF) held in Washington, DC, on "Pension Funding and Taxation: Achieving Benefit Security." Three sections address the following questions: Where Is the Pension System Today? What Are the Implications of Tax Policy Change? What Do People Think It All Means?

An introductory essay by Paine pulls together the primary issues that need to be considered in the area of retirement income policy. Paine is successful in challenging conventional wisdom as two major questions are considered. The first is whether the private retirement system delivers enough results to be worthy of receiving the tax breaks the law provides. If such plans are deserving, what changes in rules might be considered to maximize their contributions to old-age security.

Section one of the book begins with an overview of public and private pensions by EBRI research analysts Silverman and Yakoboski. The paper includes 22 tables and 8 charts that analyze participation trends in defined benefit and defined contribution plans. This overview is followed by a description of the present tax treatment of pensions, by Hubbard. The paper is a readable summary of the complex and ever-changing pension tax laws, including the treatment of retirement plan contributions and funding by the employees and employers, taxation of distributions, and special retirement arrangements. Next, VanDerhei deals with the funding requirements of private and public defined benefit pension plan sponsors. Appreciation for the complexity of pension funding is increased after delving into this treatise of the numerous demographic and economic assumptions made by sponsors, along with the actuarial cost methods used. VanDerhei compares the six actuarial cost methods in an easy-to-follow format. An engaging sensitivity analysis of alternative actuarial assumptions is discussed in this paper as well.

The subsequent report in this section addresses the costs and benefits of pension tax expenditures. According to Salisbury, the primary value of pensions accrues to middle- and lower-income taxpayers. Elimination of the tax expenditure by taxing individuals would place the greatest burden on these individuals. Section one concludes with a paper by Schieber and Goodfellow. Their observation regarding the distribution of the pension tax preferences is that more than one-half of the tax preferences are accruing to less than 10 percent of the work force, namely public-sector workers.

The book's second section assesses how changing tax policy might affect pensions and benefit security. Gulotta begins with an essay on recent tax and funding rules changes, including an evaluation of the Omnibus Budget Reconciliation Act of 1987 and its effect on funding behavior. Various proposals that attempt to realign the interests of pension plan decision-makers with those of plan participants are advanced and should effectively stimulate debate.

Two papers by Liston and LaBombarde challenge public pension funding rules and the decrease in the compensation cap. The authors present strong arguments for state and local governmental units to fund pension benefits in advance, with intergenerational taxpayer equity being the focal point. Liston and LaBombarde point out that understanding whether a particular public pension plan is being adequately funded - a projection that closely coordinates the pension plan's net cash flow with the jurisdiction's overall budget, including future anticipated tax receipts - is necessary. The pension side of this projection should examine the degree to which the plan's past funding practices have transferred the funding for previously accrued benefits into contributions expected for future periods; the overall budget side of the projection should gauge the ability of the emerging tax base to support that transfer.

Their second essay examines the implications of the cap-lowering provision in the Omnibus Budget Reconciliation Act of 1993. Liston and LaBombarde contend that the objectives of this legislation are lost because any gains for nonhighly compensated employees will be negligible or nonexistent: as some pension plans are terminated, other plans are amended to approximate the pre-1994 balance, While any "lost" benefits for highly compensated employees are simply paid in other forms of compensation. Meanwhile, the costs in permanent damage to national pension policy - for example, by delaying funding of benefits - may within a short period of time exceed the very temporary jolt of revenues the provision might raise.

The final paper in this section scrutinizes income versus consumption tax treatment. Ippolito points out that, as long as low discounters accept the responsibility of financing part of the old-age consumption for those who do not save, they have a stake in the "free market" savings decisions of high discounters. Ippolito suggests two alternatives to the current special tax policy toward pensions: extend consumption tax treatment to all forms of savings or strip pensions of their special tax status. An appendix mathematically models the impact of eliminating special tax policy on retirement savings.

Section three offers opinions and suggestions from the EBRI-ERF Policy Forum. Selected interactions and comments from the proceedings are presented in an interview type format. This section discusses such topics as pension taxation, implications of tax and funding rules on plan sponsorship (401(a)(17) and 415 limits), private and public pension plan funding, economically targeted investments, and saving for retirement.

This interesting collection of essays comprehensively examines the status of the pension system as of 1993 and also examines how changes to pension funding and taxation rules might affect benefit security. Although certain aspects of the book are slightly dated due to the ever-changing regulatory environment of pensions, overall it provides a valuable insight into the policy debates and hearings occurring in Washington today. The editors have successfully compiled a series of papers that will be a useful resource in a graduate or advanced undergraduate employee benefits course.
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Author:Query, J. Tim
Publication:Journal of Risk and Insurance
Article Type:Book Review
Date:Dec 1, 1995
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