Daniel Halperin, Harvard Law School
Assuring Retirement Income for All Workers
This proposal is designed to promote additional savings for low and moderate earners in two ways. First, direct grants or refundable tax credits would fund retirement accounts for the lowest earners, in addition to the current level of Social Security benefits. This program could be financed by general revenue. Second, a higher level of retirement benefits for the highly paid would be permitted only if the plan provided equivalent coverage for all employees, in a given line of business, and rank and file workers actually receive a significant percentage of plan benefits.
The proposal would promote additional savings for low and moderate earners in two ways. First, direct grants or refundable tax credits would fund retirement accounts for the lowest earners, in addition to the current level of Social Security benefits. Second, a higher level of retirement benefits for the highly paid would be permitted only if the plan provided equivalent coverage for all employees, in a given line of business, and rank and file workers actually receive a significant percentage of plan benefits.
The retirement account, when combined with Social Security, should be sufficient to provide full replacement of pre-retirement earnings for workers who earn, approximately, $20,000 or less. Employees earning below this level could be excluded from qualified plans and employers could reduce coverage for higher earners who benefit from the automatic contribution. This proposal is responsive to the fact that Social Security benefits, alone, are inadequate to prevent workers, with a history of low wages, from living below the poverty line in retirement, nor, is increased coverage in private plans for the bottom 20% or so of the workforce likely. Moreover, given the low level of earnings of these workers, additional savings for retirement would not be desirable if it were achieved at the cost of a reduction in current earnings.
This program could be financed by general revenue. In light of the substantial tax benefits now enjoyed by the 50% of the work force that participates in tax-favored plans, it would be possible to place a somewhat greater share of the cost of financing direct government contributions to retirement accounts on this favored group. This is particularly sensible since the provision for direct contributions will relieve a burden on existing plans by permitting the exclusion of lower earners. The enhanced contribution, perhaps, could be achieved by imposing a small tax on investment income, which should be viewed not as an additional burden on participants, but rather as a reduction in the tax relief that they now enjoy.
The second part of the proposal is aimed at increasing coverage in employer plans for rank and file employees at a higher level of income, who can afford to set aside a portion of their earnings for retirement. Initially, it is important to maintain the incentive to establish traditional plans that provide for non-elective contributions. Thus, the permitted level of elective contributions under section 401(k) should be frozen and so-called catch-up contributions and Roth 401(k) s should not be allowed. Further, actual participation at all income levels should be required in all section 401(k) plans and so-called design-based safe harbors prohibited. In addition, it is proposed that the limits on contributions and benefits from traditional plans, for high-income workers, be substantially greater for plans that actually substantially benefit rank and file workers.
To achieve this goal, for plans that seek to take advantage of the higher limits, the complex regulations, which seek to measure whether there is sufficient coverage of the rank and file, should be, generally, replaced by the simple requirement that all employees in a given line of business (including those part time workers who work at least 10 hours per week), who are age 21 and have one year of service, be provided with equivalent coverage. The only exception would be for low earners who are adequately protected under the first prong of the proposal. Further, benefits would be required to vest after no more than one year of service. In addition, the rules for "integrating" private pension plans with Social Security would require equivalent benefits at all income levels, without regard to Social Security, until the combined benefit, from the plan and Social Security, is sufficient to provide full replacement for workers whose entire earnings are covered by Social Security. Furthermore, in order to protect older employees who change jobs or whose employers change plans, the norm should be equal contributions as a percentage of pay for all employees, regardless of age or earnings. Testing for discrimination on the basis of benefits should be available only for those defined-benefit plans that are aimed at replacement of a portion of final pay, and which take steps to protect employees from a job change, or, from a plan change, which reduces contributions for older employees.
Finally since the goal is increased coverage for the rank and file, it is sensible to deny the increased limits to any plan that that primarily serves business owners and other highly compensated individuals. This limitation could be modeled on the current treatment of dependent care, which cannot be excluded from income when more than 25% of the benefits go to 5% shareholders. In short, the second part of the proposal trades a dramatic increase in the subsidized benefits for the highly paid in exchange for comprehensive coverage and extensive benefit protection for the rank and file.
