Theodore Groom, The Groom Law Group
How the Pension System Should be Reformed
Theodore Groom and John Shoven (Stanford University) advocate significantly deregulating pensions to encourage employer provision of pension plans, individual choice, and consumer sovereignty. Their plan would liberalize and level contribution limits. Based on the principle that all workers in a firm should have an equal opportunity to participate in the firm's pension plan, the plan would not mandate equal participation, but simply equal opportunity to participate. It would eliminate the minimum distribution requirement leaving people free to choose their own pattern of pension withdrawals. The anticipated result would be more pensions, more saving and a stronger economy.
How the Pension System Should be Reformed:
Significantly Deregulating Pensions
The employer-sponsored pension system is one of the big successes for the U.S. economy in the second half of the Twentieth Century. Pensions now represent almost 25 percent of total household wealth in the country and account for most of the aggregate private saving. Approximately two-thirds of households nearing retirement have a pension asset. Average pension assets at retirement exceed the average value of homes. They also exceed the average present value of future Social Security benefits.
Despite this generally rosy picture, there are serious problems with our pension system. Employer-provided pensions are faced with incredibly complex and expensive regulation imposed by at least four separate government agencies. Partly as a result of this overregulation, firms are abandoning traditional defined benefit pension plans in favor of the simpler and less-regulated 401(k) and defined contribution plans. Nondiscrimination tests, intended to assure that rank and file participants participate on a fairly even footing with highly compensated employees, are so complex and difficult to comply with that they discourage pensions altogether. Pension coverage in the workforce (currently about 50 percent) has stalled for the past two decades. Pension contribution limits are extremely uneven across workers and across plan types. These limits have been sharply reduced in real terms over the past twenty years in a misguided attempt to balance the budget by curtailing the mismeasured and exaggerated tax expenditure associated with pensions.
We advocate significantly deregulating pensions. We support liberalizing and leveling contribution limits. We document that the U.S. tax system is already closer to a consumption tax than it is to a comprehensive income tax and we feel that this is a good thing. A consumption tax is economically preferable particularly because it allows people to allocate their resources over their lifetimes without distortionary taxes. In the consumption tax framework, pensions do not represent a tax expenditure at all. We would base pension regulation on the principle that all workers in a firm should have an equal opportunity to participate in the firm's pension plan.
We would not mandate equal participation, but simply equal opportunity to participate. We would eliminate the minimum distribution requirement leaving people free to choose their own pattern of pension withdrawals. In general, we would radically liberalize and simplify pension regulation. The likely result would be more pensions, more saving, and a stronger economy.
Our prescription for future pension policy is based on individual choice and consumer sovereignty. Our consumption-tax orientation is consistent with this philosophy. We strongly reject calls for making the bottom quintile of retired Americans completely dependent on government support. Further, we oppose the introduction of a new tax on the earnings of pension assets. Such policies would move the country in the direction of a welfare state.
