This paper provides an initial analysis of the potential financial impact on private-sector retirement benefits of the retirement savings account cap included in the Obama administration’s FY 2014 budget proposal. This cap would limit the amounts accumulated in specified retirement accounts to that necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan under current law. The budget proposal is targeted at a wide range of retirement plan vehicles; and, if enacted by Congress, the Obama administration’s proposal would be effective with respect to contributions and accruals for taxable years beginning on or after Jan. 1, 2014. This analysis finds that although a very small percentage of current 401(k) participants with IRA accounts have combined balances sufficient to be immediately affected by the proposed limit, over time (and depending on the applicable discount rates, whether a defined benefit pension is involved, and the size of the 401(k) plan) the impact could be much greater.
Simulation results for 401(k) participants assuming no defined benefit accruals and no job turnover show that more than 1 in 10 current 401(k) participants are likely to hit the proposed limit sometime prior to age 65, even at the current historically low discount rate of 4 percent. When the simulation is rerun with discount rate assumptions closer to historical averages, the percentage of 401(k) participants likely to be affected by these proposed limits increases substantially: For example, with an 8 percent discount rate, more than 20 percent of the 401(k) participants are simulated to reach the limit prior to retirement.
When the impact of stylized, defined benefit account assumptions are added to the analysis, the percentage of 401(k) participants simulated to reach the proposed limits increases even more: In fact, for 401(k) participants assumed to be covered by a 2 percent, three-year, final-average plan with a subsidized early retirement at 62, nearly a third are assumed to be affected by the proposed limit at an 8 percent discount rate. Additional analysis is performed for small plans (those with less than 100 participants) to assess the potential impact of eventual plan terminations if and when the owners and/or key decision makers of the firms reach the cap threshold. Depending on plan size, this may involve as few as 18 percent of the firms (at a 4 percent discount rate) or as many as 75 percent of the firms (at an 8 percent discount rate).
This paper presents results from the latest Survey of Income and Program Participation (SIPP) data on retirement plan participation. SIPP is conducted by the U.S. Census Bureau to examine Americans’ participation in various government and private-sector programs that relate to their income and well-being. These latest data are from Topical Module 11 of the 2008 Panel, fielded from December 2011-March 2012. The SIPP data have the advantage of providing relatively detailed information on workers’ retirement plans, but they also have the drawback of being fielded only once every three to five years. By comparison, the Census Bureau’s Current Population Survey (CPS) provides overall participation levels of workers on an annual basis but does not provide information on the specific types of plans in which the workers are participating. The Bureau of Labor Statistics’ (BLS) National Compensation Survey annually surveys establishments’ offerings of employee benefit programs, including retirement plans; however, it has limited information on worker characteristics.
The latest SIPP data show that 61 percent of all workers over age 16 had an employer that sponsored a pension or retirement plan for any of its employees in 2012, up from 59 percent in 2009. Workers participating in a plan increased to 46 percent in 2012, up slightly from 2009 (45 percent) but below 2003 (48 percent). The vesting rate (the percentage of workers who say they were entitled to some pension benefit or lump-sum distribution if they left their job) stood at 43 percent in 2012, up from 24 percent in 1979. This increase is largely due to the increased number of workers participating in defined contribution retirement plans (such as 401(k) plans), where employee contributions are immediately vested, and faster vesting requirements in private-sector pension plans.
Defined contribution (401(k)-type) plans were considered the primary plan by 78 percent of workers with a plan. Defined benefit (pension) plans were the primary plan for 21 percent of workers. Primary plan is the plan type -- defined benefit (DB) versus defined contribution (DC) -- that retirement plan participants regard as their most important. The last section of the paper examines participation in, and contributions to, salary-reduction plans (401(k)-type plans). The workers in this study include those from both the private and the public sectors.
The PDF for the above title, published in the August 2013 issue of EBRI Notes, also contains the full text of another August 2013 EBRI Notes article abstracted on SSRN: “Satisfaction With Health Coverage and Care: Findings from the 2012 EBRI/MGA Consumer Engagement in Health Care Survey.”
"RRSPs and an Expanded Canada Pension Plan"
Fraser Institute Studies in Economic Prosperity, June 2013
CHARLES LAMMAM, Fraser Institute
MILAGROS PALACIOS, Fraser Institute
JASON CLEMENS, Fraser Institute
After their meeting in December 2012 at Meech Lake, Quebec, the federal and provincial-territorial finance ministers decided to put expansion of the Canada Pension Plan (CPP) and its sister program, the Quebec Pension Plan (QPP), back on the policy agenda. The idea of expanding the CPP is not new and, over the years, various individuals and groups have called for a more generous mandatory public pension system as a way to boost the overall retirement income of Canadians. With the global financial crisis of 2008-2009 and attendant decline in the value of retirement-savings portfolios, these calls have been renewed.
Recent proposals to expand the CPP call for an increase in the mandatory CPP contribution rate (payroll tax) to help fund larger benefits. Unfortunately, the debate about expanding the CPP has downplayed the basic economic insight that increasing mandatory contributions to the CPP could displace voluntary savings. Failure to account for this tendency could lead one to overestimate the increase in overall retirement savings that would result from an expanded CPP.
To find out if increases in mandatory contributions tend to displace voluntary savings, in RRSPs and an expanded Canada Pension Plan we provide a preliminary investigation of readily available historical data from the Canada Revenue Agency (CRA) on contributions to the Canada Pension Plan (CPP) and also to Registered Retirement Savings Plans (RRSPs), an important voluntary retirement savings vehicle in Canada. The period examined is 1993 to 2008, which includes several increases to the CPP contribution rate. Indeed, the CPP contribution rate nearly doubled between 1993 and 2003.
This preliminary investigation suggests that mandatory increases in CPP savings result in reduced voluntary savings in RRSPs. If the preliminary analysis is validated by more detailed microanalysis, the discussion about the efficacy of increasing the CPP contribution rate for all Canadian workers should then include the costs of reduced RRSP savings compared to increased CPP savings. Other aspects of this trade-off, such as the comparative benefits of the CPP (defined benefit in retirement) compared to the benefits of RRSPs (flexibility and choice), also need to be assessed and discussed.
The key to a successful system for providing retirement income through savings is a set of rules that allow for an optimal mix of savings for different people in different stages of their lives and with different preferences. There may be benefits to a compulsory expansion of the CPP. However, these benefits need to be weighed against the costs, which, as our analysis shows, likely include a reduction in voluntary RRSP savings.
FRANCESCO FIGARI, ISER - University of Essex
MANOS MATSAGANIS, Athens University of Economics and Business
HOLLY SUTHERLAND, University of Essex - Institute for Social and Economic Research (ISER)
This study analyses the financial well-being of elderly people across Europe. Using the European microsimulation model EUROMOD, which facilitates the identification of minimum pension schemes in a comparable way across countries, we gather together new empirical findings on the redistributive effects of the minimum pension schemes in a range of European countries. In particular, we quantify the extent to which these schemes contribute to alleviate elderly poverty across Europe. Nevertheless, the financial well-being of older people depends crucially on the pension system as a whole. Countries with generous minimum pension schemes seem to allocate relatively fewer resources to other pillars of the pension system. On the one hand, they are more effective in reducing elderly poverty rates. On the other hand, they fail to ensure a level of financial well-being of older people in line with the overall population