Pension Plans at Risk: A Potential Hazard of Deficit Reduction and Tax Reform.

The most widely used pension plans in the United States are defined-benefit plans under which employers pay workers a fixed pension, usually a percentage of their final salaries. Defined-contribution pension plans, under which employers and employees set aside funds that are invested for the employees, are growing in popularity and are particularly common in colleges and universities. Profit-sharing plans, voluntary savings plans, and individual retirement accounts are types of defined contribution plans. Pension plans commonly receive advantageous tax treatment, but efforts are currently being made to eliminate these advantages for defined-contribution plans. This report reviews the operational differences between the two types of pension plans and notes the levels of performance achieved by each. The problems posed by defined-benefit plans are analyzed. These include severe losses to employees changing employers, the potential for manipulation of defined-benefit plans by employers to their own advantage, the underfunding of the plans, their low rates of return, and their susceptibility to the effects of inflation. The report concludes that eliminating tax advantages for defined-contribution plans would be a serious mistake, hindering labor mobility, restricting retirement income, and decreasing funds available for investment. (PGD)