Tax Policy and Retirement Income: Are Pension Plan Anti-Discrimination Provisions Desirable?

Abstract

Federal tax law strongly encourages retirement saving through employee pension plans. Employers may immediately deduct the amounts they contribute to such plans. Employees, on the other hand, are not taxed on either the contributions or the interest earned on the contributions until they retire, when their tax rates are often lower. This favorable tax treatment is conditioned, however, upon compliance with certain rules. A plan will meet the requirements of those rules only if rank-and-file employees receive pension benefits at a rate comparable to that offered to highly compensated employees. This article examines the social utility of the pension plan anti-discrimination provisions. Part I discusses tax and other characteristics of private pensions, and provides an overview of the pension plan anti-discrimination provisions. Part II examines the history and prior scholarly analysis of the anti-discrimination requirements. The anti-discrimination provisions were enacted without significant discussion; only a handful of articles have explored the rationale for these provisions. Parts III through VI explore a number of possible justifications for the requirements. Part III uses a partial equilibrium model to examine the argument that the anti-discrimination provisions increase employee welfare. This model suggests that the antidiscrimination provisions generally will reduce both the amount of cash compensation and the perceived value of the compensation