The Changing Role of Employer Pensions : Tax Expenditures, Costs and Implications for Middle Class Elderly

By any measure, pension coverage should be at an all time high: the nation is richer and workers are older. However, the pension world is a paradox, as pension security falls for middle class workers and pension spending increases. The United States government directly and indirectly spends over half a trillion dollars on the elderly each year. Direct spending is mainly through Social Security and indirect spending through the tax code's special treatment of employer and personal retirement plans. The tax favoritism is an astonishing one fourth of the direct spending. But the nature of the tax subsidy is changing. The tax subsidy for 401(k) plans, which are beneficial to employers and higher income workers, is overtaking that for traditional pensions, which both cover lower income workers and help expand pension coverage. Since tax policy is designed to meet a public purpose, perhaps over $100 billion dollars per year spent indirectly on pensions could be better spent? Using tax expenditure data from the federal budget, data from employers' surveys - the Chamber of Commerce and the National Compensation Survey - and from workers' survey from the Bureau of Census's Current Population Survey, this study reflects on alternative pension polices that transforms the tax subsidy and expands Social Security and traditional pensions. Such a sharp change in federal policy may stem the loss of pension security of middle class workers and expand it for lower income workers