Some high-profile observers of the retirement planning scene are taking issue with a recent Government Accountability Office (GAO) report which suggests that retirement plans like 401(k)s disproportionately benefit higher income workers.
“The facts say otherwise,” says Brian Graff, executive director and CEO of The American Society of Pension Professionals & Actuaries (ASPPA) in Washington. Graff says that based on the Internal Revenue Service’s own data, 74% of workers participating in defined-contribution (DC) plans come from households earning less than $100,000. Only 5%, he says, come from households earning more than $200,000.
The GAO study, “Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits,” found that the percentage of workers participating in employer-sponsored plans has remained at about 50% of the private sector work force for most of the past two decades. “Many employers—often those of lower income workers—continue to choose not to offer a pension or other retirement savings plan to their employees,” the study reports. “For those fortunate enough to be covered by a pension, there is a concern that much of the tax benefits flow to higher income employees, and in many instances the financial constraints on lower wage workers limit their ability to contribute to tax-qualified plans and thus, to benefit from those subsidies.”
But Graff argues that “when you measure who gets the tax benefits from these plans, the impact on moderate income workers becomes clearer.” Households making less than $50,000 pay only 8% of all income taxes, he continues, “but receive 30% of all the tax incentives associated with defined contributed plans.”
In other words, Graff says that for every dollar of income taxes paid by lower income workers, they get almost four dollars back in tax incentives. “That’s a good deal by any measure,” Graff argues, saying it shows that tax incentives are effectively and efficiently targeted at low- and moderate-income families. The reason, he says, is that these plans are subject to stringent nondiscrimination rules that are a part of the tax code and were designed by Congress to make sure these plans provide benefits fairly to everyone.
Graff cites research from the Employee Benefits Research Institute (EBRI), which found that 401(k) plans have proven to be “incredibly successful” at getting moderate-income workers to save. According to EBRI, he says, more than 70% of workers making between $30,000 and $50,000 save when covered by a workplace savings program, whereas less than 5% of those same workers save on their own when not covered by a plan. Of course, Graff concedes that more does need to be done to expand retirement plan coverage, which is why ASPPA supports proposals like the Auto-IRA proposal that would “give more workers access to these plans.”
As Congress currently reviews the nation’s tax system “toward a process of reforming it,” Graff says, “let’s make sure we get the facts straight. When the retirement security of American workers is at stake, we can’t afford to be getting things wrong.”
Dallas Salisbury of EBRI’s Conclusions
If anyone understands the benefits—and drawbacks—of 401(k) plans, it’s Dallas Salisbury, president of EBRI. He gave me a detailed explanation of the GAO report, and says that it’s important to note that the GAO was being asked to answer two questions in its study: First, can we get from a half-full glass (50% participation) to a full glass (100%)? Second, how are low- and moderate-income workers doing?