II. WORK AND OLDER AMERICANS
DISCUSSION
There is nothing surprising in the basic
conclusion of Wial's paper, that those most likely to benefit from an
increase in defined-contribution plan limits are high income earners--that
is, those who are most likely to be contributing the maximum to their
401(k) plans now are likely to increase their contributions when the limits
are increased. This is a conclusion that supports what the cynical among
us have thought all along, that the proposal to increase plan contribution
limits was always intended as a means of allowing greater tax deferral
by those in higher-income tax brackets.
It is similarly not surprising that increasing
plan contribution limits will not lead to an increase in 401(k) plan contributions
by lower-income earners. Many of them are not now contributing the maximum
to their plans; the average plan contribution rate is in the range of
seven percent (Madrian and Shea 2000). There are several possible explanations
for this, including both that the benefit of tax deferral means less to
lower-income workers and that such workers have other demands on their
dollars. Given those realities, increasing plan limits will have no effect
on such workers.
As Wial notes, increasing contribution
limits might indirectly improve the lot of lower-income workers by causing
employers either to adopt new plans (increasing the number of employees
eligible to participate in plans) or to increase their matching contributions
(inducing eligible employees who do not currently participate in plans
to participate). These are important points to consider because they address
the important issue of coverage. Many of us spend a lot of time talking
about how to make life better for those who are already plan participants.
It is important to recognize, as the GAO numbers show, that almost half
of the American workforce has no pension at all (GAO 2001). Many of those
are low-income workers, precisely those who will lack adequate retirement
income in the absence of an employer-sponsored retirement plan because
they are unlikely to have significant savings and are unlikely to have
large amounts of Social Security coming to them.
If increasing contribution limits prompts
employers to adopt new plans, the number of plan participants would increase.
There is little reason, however, to believe that increasing the limit
will have that effect. Wial reports that some industry groups have indicated
that some small employers might find increased limits attractive enough
to form new plans, but does not indicate why this is the case. There is
a complete lack of evidence that the contribution limit is a factor causing
employers not to adopt plans now. Indeed, as the paper cites, Employee
Benefits Research Institute (EBRI) data suggests that contribution limits
do not rank high on a list of reasons employers choose not to adopt plans
(EBRI, n.d.).
If employers are prompted by increased
contribution limits to increase matching contributions, participation
would also increase. In this context is it important to realize that not
all workers who are eligible to participate in a 401(k) plan choose to
do so; only between two-thirds and three-fourths of eligible employees
participate in their employer's 401(k) plans (Madrian and Shea 2000).
One GAO study found that the effect of an employer match is to increase
participation by about 20 percent, depending on the rate of the match
(GAO 1997). Research by the EBRI also found that matching contributions
increase participation rates particularly among lower-income workers (EBRI
1999). Thus, if increasing contribution limits induces increased matching
contributions, participation would increase.
There are, however, no data to suggest
that increasing contribution limits will result in increased matching
contributions. Presumably that is likely only if the increased limits
will create problems in satisfying nondiscrimination requirements because
of increased plan contributions by higher-income employees. We do not
know from Wial's paper, however, whether this is the case.
As Wial recognizes, ultimately increasing
contribution limits has nothing to do with the fundamental difficulties
of ensuring retirement security--that many employees are not covered by
pension plans and that many of those that are covered do not contribute
enough to them.
References
Employee Benefits Research Institute (EBRI). 1999. "Are
Workers Taking Full Advantage of Their 401(k) Plans?" EBRI news release
(February 24).
Employee Benefits Research Institute (EBRI). n.d. The
2001 Small Employer Retirement Survey (SERS) Summary of Findings.
Available at www.ebri.org/sers/2001/01serses.pdf.
Madrian, Brigitte C., and Dennis F. Shea. 2000. "The
Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior."
NBER Working Paper no. 7682, p. 10.
United States General Accounting Office (GAO). 1997.
401(k) Pension Plans: Loan Provisions Enhance Participation but May
Affect Income Security for Some. GAO/HEHS-98-5 (October), p. 5.
United States General Accounting Office (GAO). 2001.
Private Pensions: Issues of Coverage and Increasing Contribution Limits
for Defined Contribution Plans. GAO-01-846 (September), p. 3.
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