Report to the Ranking Minority

Member, Subcommittee on Oversight,

Committee on Ways and Means,

House of Representatives

United States General Accounting Office

GAO

September 2001 PRIVATE PENSIONS

Issues of Coverage

and Increasing

Contribution Limits

for Defined

Contribution Plans

GAO-01-846
Page i GAO-01-846 Pension Contribution Limit Increases

Letter 1

Results in Brief 3

Background 4

The Majority of Pension Participants Had Low or Moderate

Earnings, but More Than Half of Low and Moderate Earners in

the Workforce Did Not Participate in a Pension Plan 7

Increase in DC Plan Contribution Limits Would Likely Benefit

About 3.1 Million DC Participants Directly 14

“Catch-Up” Provision Was Likely to Benefit Few Participants

Directly 23

Agency Comments 27

Appendix Scope and Methodology 28

Tables

Table 1: Changes in Various DC Plan Contribution Limits, 1998-

2006 7

Table 2: Likely Direct Beneficiaries of Increasing the Three

Contribution Limits in Stages 21

Table 3: Earnings of Likely Direct Beneficiaries of Increasing the

Three Contribution Limits in Stages 21

Table 4: Gender of Likely Direct Beneficiaries of Increasing the

Three Contribution Limits in Stages 22

Table 5: Sampling Errors of 12 Percentage Points or More 29

Figures

Figure 1: Earnings of Pension Plan Participants 9

Figure 2: Pension Plan Participation by Earnings and Gender 10

Figure 3: Gender of Pension Plan Participants 11

Figure 4: Earnings of Participants in DC Plans 12

Figure 5: Gender of Participants in DC Plans 13

Figure 6: DC Plan Participation by Earnings and Gender 14

Figure 7: Increasing All Contribution Limits: Earnings of Likely

Direct Beneficiaries and of DC Participants Who Were Not

Likely Direct Beneficiaries 17

Figure 8: Percent of DC Participants Likely to Benefit Directly

From Increasing All Contribution Limits 18

Contents
Page ii GAO-01-846 Pension Contribution Limit Increases

Figure 9: Increasing All Contribution Limits: Gender of Likely

Direct Beneficiaries and of DC Participants Who Were Not

Likely Direct Beneficiaries 19

Figure 10: Permitting Additional Employee Contributions for

Participants Aged 50 and Older: Earnings of Likely Direct

Beneficiaries and of Eligible DC Participants Who Were

Not Likely Direct Beneficiaries 25

Figure 11: Percent of Eligible DC Participants Likely to Benefit

Directly From Permitting Additional Employee

Contributions for Participants Aged 50 and Older 26

Abbreviations

CPS Current Population Survey

DB defined benefit

DC defined contribution

SCF Survey of Consumer Finances

SIMPLE Savings Incentive Match Plan for Employees
Page 1 GAO-01-846 Pension Contribution Limit Increases

September 17, 2001

The Honorable William J. Coyne

Ranking Minority Member

Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Mr. Coyne:

At $85 billion this year, tax preferences for public and private employersponsored pension plans represent the largest tax expenditure, exceeding

those for either home mortgages or health benefits.1

 The purpose of these

pension tax preferences is to raise private savings for workers’ retirement.

Greater private savings for retirement can enhance income security in

retirement by supplementing Social Security benefits as well as reduce the

need for public assistance. Pension tax preferences are structured to

strike a balance between providing incentives for employers to start and

maintain voluntary, tax-qualified pension plans and ensuring that

participants receive an equitable share of the tax-subsidized benefits. The

Internal Revenue Code places limits on the amounts that workers and

employers can contribute to tax-deferred retirement plans. These limits

exist to prevent partial public subsidies of excessively large retirement

benefits through tax preferences.

Proposals intended to expand pension coverage and promote pension

savings have recently received much attention. In the Economic Growth

and Tax Relief Reconciliation Act of 2001, for example, Congress raised

statutory limits on tax-deferred pension contributions and benefits and

made other changes to the law governing qualified pension plans. Some

assert that increasing these limits will enhance employer incentives to

start new plans and improve existing plan coverage, especially for

employees of small businesses. Others contend that these measures will

primarily benefit higher paid individuals and may not improve pension

 1

Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years

2001-2005” (JCS-1-01), April 6, 2001. “Tax expenditures” are revenue losses attributable to

provisions of federal tax laws and include reductions in income tax liabilities that result

from special tax provisions or regulations that provide tax benefits to particular taxpayers.

Pension contributions that fall within statutory limits, as well as investment earnings on

pension assets, are not taxed until benefits are paid to plan participants. As a result, these

tax preferences largely represent timing versus permanent differences in tax revenue

generation.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-846 Pension Contribution Limit Increases

coverage for low- or moderate-income workers. In this report, we consider

increases in limits on contributions to defined contribution (DC) plans,2

the type of pension plan that covers most pension participants.3 You asked

us to describe: (1) the extent to which workers participate in all pension

plans, the extent to which workers participate in DC plans, and the

earnings and genders of these DC participants; (2) the number, earnings,

and genders of DC participants likely to benefit directly from an increase

in limits on contributions to qualified DC plans; and (3) the number,

earnings, and genders of DC participants likely to benefit directly from

allowing participants aged 50 or older in certain DC plans to make “catchup” contributions in excess of other statutory limits.

To address your questions, we used the 1998 Survey of Consumer

Finances (SCF) to estimate the number, percentage, earnings, and genders

of all workers who participated in pension plans and, separately, in DC

plans.4

 We also used the 1998 SCF to estimate the number, percentage,

earnings, and genders of certain DC participants (referred to below as

likely direct beneficiaries) who may benefit from the increases in statutory

limits on contributions to qualified DC plans we analyzed.5

 We analyzed

increases in contribution limits in isolation from any other enacted or

 2

In a DC plan, pension benefits are based on the contributions to and investment returns on

individual accounts. Our analysis of all pension plan participants includes participants in

both DC and defined benefit (DB) plans. Because most workers who participate in pension

plans are in DC plans, and because data limitations prevent us from analyzing the

maximum DB benefit, this report deals only with DC plan contribution limits. Subject to

data limitations, our analysis of contribution limits is based on all DC plans, regardless of

whether or not they permit employees to make tax-deferred contributions. For additional

information about the scope and methodology of our analysis, see the appendix.

3

We define pension participants as persons aged 18 or older who were working at the time

of the survey, whose earnings could be expressed as an annual amount, and who were

included in a pension plan through their job. Pension participants, under this definition,

exclude workers whose employers offered pension plans but who were not included in

those plans because they were not eligible to be included or chose not to be included.

4

The 1998 Survey of Consumer Finances (SCF) was the most recent triennial survey of

household finances sponsored by the Board of Governors of the Federal Reserve System.

For more information on the SCF—including data availability, survey and sample design

methodology, data documentation, and applications—visit the SCF Web site at

http://www.federalreserve.gov/pubs/oss/oss2/scfindex.html.

5

Our analysis describes who was likely to benefit directly from contribution limit increases

at the time the SCF was conducted in 1998. Individuals we did not classify as likely to

benefit directly from increased contribution limits may benefit in subsequent years if they

are able to contribute at higher levels. Our analysis did not permit us to estimate how many

workers would likely benefit directly from higher contribution limits at any point in their

working life.
Page 3 GAO-01-846 Pension Contribution Limit Increases

proposed statutory changes and did not analyze the specific contribution

limit increases in any specific enacted or proposed legislation. We defined

likely direct beneficiaries of an increase in DC plan contribution limits as

employed DC participants whose employer and/or employee contributions

were equal to or above the contribution limits we analyzed.6

 (Individuals

can make contributions in excess of the specified limits, but these

additional contributions do not receive favorable tax treatment.)

In addition to analyzing SCF data, we analyzed a small sample of planspecific data and obtained analyses conducted by the Department of the

Treasury and by a large financial services firm. We also interviewed

federal agency officials, pension experts, and representatives of

nongovernmental organizations to obtain their views on the effects of

raising various contribution limits. We conducted our work between

January and August 2001 in accordance with generally accepted

government auditing standards.

According to data from the most recent (1998) SCF, 47 percent of all

workers participated in a pension plan, and 36 percent of all workers

participated in a DC plan. (“All workers” includes both full-time and parttime workers.) More than half of pension plan participants, like more than

half of all workers, had low or moderate earnings (less than $40,000 per

year) and were men. When we categorized pension participants by their

earnings, we found that more than half of pension participants had low or

moderate earnings. For example, 57 percent of all pension participants

earned less than $40,000 per year. However, when we examined the

percentages of workers at different earnings levels that participated in

pension plans, we found that workers with low or moderate earnings were

less likely than higher earners to participate in a pension plan. For

example, 38 percent of workers who earned less than $40,000 per year

participated in a pension plan, while 70 percent of workers who earned

between $40,000 and $74,999 per year participated in a plan.7

 In addition,

when we characterized pension participants by their gender, we found that

 6

The appendix provides a more detailed explanation of this definition. Likely direct

beneficiaries, defined in this way, are in a position to increase their contributions (or their

employers are in a position to increase employer contributions) if contribution limits are

raised. However, this does not mean that all likely direct beneficiaries (or their employers)

will actually increase their contributions if contribution limits are raised.

7

Similarly, workers who earned under $40,000 per year were less likely to participate in

pension plans than higher earning workers whose annual earnings were $75,000-$149,999

or $150,000 or higher.

Results in Brief
Page 4 GAO-01-846 Pension Contribution Limit Increases

more than half of pension participants were men. When we examined the

percentages of male and female workers participating in pension plans, we

found that men were more likely than women to be plan participants. In

most cases, the earnings and gender characteristics of DC participants

resembled those of all (DC and DB) pension plan participants.

About 8 percent of all DC participants, or 3.1 million people, were likely

direct beneficiaries of an increase in all the statutory contribution limits

we analyzed. Higher earners were more likely than low and moderate

earners, and men were more likely than women, to benefit directly from

such an increase. When we analyzed increases in each of the three

contribution limits sequentially, we found that increasing the percentage

limit on combined employer and employee contributions first accounts for

half of the 3.1 million likely direct beneficiaries of an increase in all three

contribution limits. Increasing DC plan contribution limits could also

indirectly benefit some additional low- and moderate-earning workers.

Those workers could benefit indirectly if employers found higher limits

attractive enough to form new plans that would extend pension coverage

to more employees, expand pension coverage in existing plans, and/or

increase their contributions for low- and moderate-earning participants in

existing plans. These expansions of coverage or increases in contributions

for low and moderate earners are very difficult to measure. They occur at

the individual, employer, and pension plan levels, and how widespread

they would be is unknown.

About 721,000 DC participants, or 11 percent of eligible DC participants,

were likely to benefit directly from a so-called “catch-up” provision

allowing persons aged 50 or older to make additional contributions to

certain DC plans. Higher earners were more likely to benefit directly from

this option than low and moderate earners. However, there is no

significant difference between the percentage of eligible male DC

participants likely to benefit directly and the percentage of eligible female

DC participants likely to benefit directly.

Total retirement income comes from Social Security, pensions, personal

savings and other assets, and postretirement earnings. Depending on the

individual, an adequate retirement income may be achieved with different

combinations of these sources. For example, Social Security provides

near-universal coverage and provides proportionally larger benefits for

lower earning participants. That is, Social Security replaces a higher

percentage of preretirement income for lower earning workers than for

higher earners. In contrast, the U.S. employer-sponsored pension system is

voluntary and tax-subsidized and provides proportionally larger benefits

Background
Page 5 GAO-01-846 Pension Contribution Limit Increases

for higher earning participants. To the extent that it is deemed desirable

that the total percentage of preretirement income replaced by Social

Security and employer-sponsored pensions together is reasonably

constant, private pensions would tend to play a larger role in the

retirement income of higher earning workers.

The two types of employer-sponsored pension plans are defined benefit

(DB) and defined contribution (DC). DB plans promise to provide a level

of retirement income that is generally based on salary and years of service.

The employer, as the plan sponsor, is responsible for funding the promised

benefit, investing and managing the plan assets, and bearing the

investment risk. Under DC plans, employees have individual accounts to

which employers, employees, or both make periodic contributions. DC

plan benefits are based on the contributions to and investment returns on

the individual accounts. The employee bears the investment risk. In some

types of DC plans, including 401(k), 403(b), 457, and Savings Incentive

Match Plan for Employees (SIMPLE) plans, employees may choose to

make tax-deferred contributions instead of receiving the same amount as

taxable salary.8

A fundamental requirement for tax-qualified pension plans of taxable

private employers is that contributions or benefits be apportioned in a

nondiscriminatory manner between a top group of highly paid employees

and owner-employees and workers outside the top group. There are

standard plan designs that allow employers to comply with this

requirement. Alternatively, employers can develop a custom-tailored plan

design and apply general testing methods (as required by law) to a plan’s

apportionment of contributions or benefit accruals each year. These

methods for custom-tailored plan designs are complex, but they generally

require the employer to provide both coverage and contributions (or

benefits) for workers outside the top group at rates that do not differ too

greatly from the rates at which the employer provides coverage and

contributions (or benefits) for members of the top group.

Tax-deferred contributions to defined contribution plans by employers

and employees are constrained by legal limits. The purpose of these limits

 8

A private employer may establish a 401(k) plan (26 U.S.C. 401(k)). A tax-exempt employer

or public educational organization may establish a 403(b) plan (26 U.S.C. 403(b)). A state or

local government employer may establish a funded 457 plan (26 U.S.C. 457(g)). A taxexempt employer may establish an unfunded 457 plan (26 U.S.C. 457 (b)(6)). An employer

with 100 or fewer employees may establish a SIMPLE plan (26 U.S.C. 408(p)). A SIMPLE

plan is a simplified retirement plan for small employers that is not subject to some of the

requirements that the Internal Revenue Code imposes on qualified pension plans.
Page 6 GAO-01-846 Pension Contribution Limit Increases

is to prevent tax preferences from being used to subsidize excessively

large pension benefits. The Employee Retirement Income Security Act of

1974 imposed dollar and percentage-of-compensation limitations on

combined employer and employee tax-deferred contributions.9

 The Tax

Reform Act of 1986 introduced a dollar limitation (i.e., a maximum dollar

contribution) on employees’ tax-deferred contributions to DC plans.10 The

Economic Growth and Tax Relief Reconciliation Act of 2001 increases all

three of these limits beginning in 2002; the scheduled increases are to be

fully implemented by 2006. The same law also allows a so-called “catchup” provision, where persons aged 50 or older are permitted to make

additional tax-deferred contributions, in excess of other applicable

statutory limits, to 401(k) and similar DC plans. Such a provision permits

older workers to make larger contributions and may help those who had

not previously been able to save sufficiently to “catch up” to more

adequate levels of retirement savings. (See table 1 for a summary of these

limits.)

Tax-deferred pension contributions may also be limited by the application

of other statutory limits that we do not analyze in this report because of

data limitations.11 In addition to the legal limits, some plans set their own

limits on contributions. In DC plans with plan-specific contribution limits,

tax-deferred contributions are limited to the statutory limit or the planspecific limit, whichever is smaller. Employers set plan-specific limits, in

part, to ensure that the plans they sponsor pass statutory and regulatory

requirements such as the requirement that contributions or benefits not be

skewed too heavily in favor of highly paid employees or owner-employees.

 9

26 U.S.C. 415(c)(1). The dollar limit was initially indexed for inflation but was reduced

during the early 1980s and did not increase again until 2001. The percentage limit had not

changed since it was first enacted, but an increase is scheduled to take effect in 2002.

1026 U.S.C. 402(g)(1). The Tax Reform Act of 1986 limited employees’ tax-deferred

contributions to a dollar amount that is indexed for inflation.

11There is a statutory limit on the amount of compensation that can be taken into account

in determining qualified pension plan contributions or benefits (26 U.S.C. 401(a)(17)).

There is also a statutory limit on the total amount of tax-deductible contributions that an

employer may make to certain types of plans (26 U.S.C. 404(a)(3)).
Page 7 GAO-01-846 Pension Contribution Limit Increases

Table 1: Changes in Various DC Plan Contribution Limits, 1998-2006

Limit on tax-deferred

contributions

Level of limit in 1998

(in 1998 dollars)

Level of limit in 2001

(in 2001 dollars)

Level of limit in 2006

(in 2006 dollars)

Dollar limit on employee

contributionsa

$10,000 $10,500 $15,000, indexed for inflation

after 2006b

Dollar limit on combined

employer and employee

contributionsc

$30,000 $35,000 $40,000, indexed for inflation

currently and to continue to be

indexed

Percentage limit on combined

employer and employee

contributionsc

25% of compensation 25% of compensation 100% of compensation

Persons aged 50 or older

allowed to make “catch-up”

contributionsa

Provision did not existdProvision did not existd$5,000 additional contribution in

excess of other applicable

statutory limits, indexed for

inflation after 2006

Note: This table includes recent changes in each of the DC plan contribution limits analyzed in this

report. We include the level of each limit in 1998, the year to which our analysis pertains, as well as

the levels in 2000 and 2001 and the scheduled level in 2006.

a

These limit increases are scheduled to be phased in between 2002 and 2006, as provided in the

Economic Growth and Tax Relief Reconciliation Act of 2001.

b

The dollar limit on employee contributions is the same for 401(k) and 403(b) plans. In 2001, this limit

is $8,500 for 457 plans and $6,500 for SIMPLE plans. Beginning in 2002, the dollar limit on employee

contributions for 457 plans will be the same as the limit for 401(k) and 403(b) plans. For SIMPLE

plans, this limit will increase to $10,000 by 2005 and will be indexed for inflation thereafter.

c

Under section 415(c) of the Internal Revenue Code, combined employer and employee contributions

are limited to the lesser of $35,000 or 25 percent of compensation in 2001. Increases in the dollar and

percentage limits on combined employer and employee contributions are not phased in. The

increases take effect in 2002. The value of the percentage limit is not scheduled to change after

2002. Beginning in 2006, combined employer and employee contributions will be limited to the lesser

of $40,000 or 100 percent of compensation.

d

Catch-up provisions more restrictive than the one enacted as part of the Economic Growth and Tax

Relief Reconciliation Act of 2001 already exist for 403(b) and 457 plans.

About 51 million workers, or 47 percent of all workers, participated in a

pension plan in 1998. (“All workers” includes both full-time and part-time

workers.) When we categorized pension participants by their earnings, we

found that more than half of pension participants, like more than half of all

workers, had low or moderate earnings. However, when we examined the

percentages of workers in various earnings groups that participated in

pension plans, we found that participation rates were lower for low and

moderate earners than for higher earners. When we categorized pension

participants by their gender, we found that more than half of pension

participants, like more than half of all workers, were men. When we

examined the percentages of male workers and of female workers that

participated in pension plans, we found that participation rates were lower

for women than for men. The patterns of participation by earnings and

gender for DC plans were generally similar to those for all pension plans.

The Majority of

Pension Participants

Had Low or Moderate

Earnings, but More

Than Half of Low and

Moderate Earners in

the Workforce Did

Not Participate in a

Pension Plan
Page 8 GAO-01-846 Pension Contribution Limit Increases

In 1998, about 51 million workers, or 47 percent of all workers,

participated in a pension plan. Workers who did not participate either

worked for employers that did not offer pension plans, were not eligible to

participate in their employers’ plans, or chose not to participate in their

employers’ plans.12

When we estimated the percentages of pension participants that were in

different earnings groups, we found that more than half of pension

participants, like more than half of all workers, had low or moderate

earnings.13 Of the 51 million workers who participated in a pension plan, 57

percent had annual earnings of less than $40,000. (See fig. 1.) Our analysis

of pension participation by household income detected a similar pattern.

About 28 percent of pension participants had household incomes of less

than $40,000 per year, while another 41 percent had annual household

incomes above $40,000 but below $75,000.

 12According to our prior work, 14 percent of the employed labor force did not participate in

pension plans offered by their employers because they were not eligible to participate or

chose not to participate. Also, 39 percent of the employed labor force did not participate

because their employers did not offer pension plans. Pension Plans: Characteristics of

Persons in the Labor Force Without Pension Coverage (GAO/HEHS-00-131, Aug. 22, 2000).

13According to our analysis of 1998 SCF data and Current Population Survey data from the

March 1999 Annual Demographic Supplement, at least 70 percent of all workers earned less

than $40,000 in 1998.

Fewer Than Half of All

Workers Participated in

Pension Plans
Page 9 GAO-01-846 Pension Contribution Limit Increases

Figure 1: Earnings of Pension Plan Participants

Note: “Workers participating in pension plans” includes both full-time and part-time employees.

Percentages do not total 100 percent because of rounding.

Source: GAO tabulations of 1998 SCF data.

However, higher earners were more likely to participate in pension plans

than low and moderate earners. Specifically, 38 percent of workers who

earned less than $40,000 per year participated in a pension plan, while 70

percent of workers who earned between $40,000 and $74,999 per year

participated in a plan. (See fig. 2.)
Page 10 GAO-01-846 Pension Contribution Limit Increases

Figure 2: Pension Plan Participation by Earnings and Gender

Note: There are no statistically significant differences at the 0.05 level among the percentages of

workers that participated in pension plans in the $40,000-$74,999, $75,000-$149,999, and $150,000+

earnings categories. Categories include both full-time and part-time employees. Our sample includes

persons 18 years of age and older who work, including persons who may be self-employed. We did

not include contributions to IRAs for any person in our sample, including the self-employed nor did we

consider Keogh plans in our analysis. See appendix.

Source: GAO tabulations of 1998 SCF data.

A similar pattern of lower participation rates for low- and moderateincome workers exists when individual workers are classified by their

household incomes rather than by their individual earnings. Of workers

with household incomes of less than $40,000 per year, 30 percent

participated in a pension plan. Of workers with annual household incomes

between $40,000 and $75,000 per year, 57 percent participated. Among the

reasons for low-income workers’ lower pension plan participation rates

are that low-income workers are more likely to work for small employers

(who are less likely to offer pension plans than larger employers), are

more likely to work in part-time positions (which are less likely to be
Page 11 GAO-01-846 Pension Contribution Limit Increases

covered by pension plans than full-time positions), are less likely to be

able to afford to save for retirement through employer-sponsored plans,

and depend more heavily on Social Security as a source of retirement

income.

When we estimated the percentages of pension participants that were

male and female, we found that more than half of pension participants,

like more than half of all workers, were men. Of the 51 million workers

who participated in a pension plan, 56 percent were men. (See fig. 3.) In

1998, about 53 percent of all workers were men.

Figure 3: Gender of Pension Plan Participants

Note: “Workers participating in pension plans” includes both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

As in our earnings analysis, we tested the possibility that even though

most pension participants were men, there could be many men who did

not participate in pension plans and many women who did participate. To

test this possibility, we examined the percentages of female and male

workers who participated in pension plans. We found that women were

Women Were Less Likely

to Participate in Pension

Plans Than Men
Page 12 GAO-01-846 Pension Contribution Limit Increases

less likely than men to participate in a pension plan. Specifically, half of all

male workers and 44 percent of all female workers participated in a plan.

(See fig. 2.) Women workers’ lower wages, greater concentration in parttime jobs, and greater concentration in industries where few employers

offer pension plans may be among the reasons why women were less

likely than men to participate in plans.

The earnings and gender patterns of DC plan participation resembled

those of participation in all pension plans. About 38.9 million workers, or

36 percent of all workers, participated in DC plans. Of these 38.9 million

workers, 54 percent had annual earnings of less than $40,000, and 57

percent were men. (See fig. 4 and fig. 5.)

Figure 4: Earnings of Participants in DC Plans

Note: “Workers participating in pension plans” includes both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

DC Plan Participation

Patterns Were Generally

Similar to Those of All

Pension Plans
Page 13 GAO-01-846 Pension Contribution Limit Increases

Figure 5: Gender of Participants in DC Plans

Note: “Workers participating in pension plans” includes both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

When we estimated the percentage of workers in each earnings group that

participated in DC plans, we found that low and moderate earners were

less likely to participate than higher earners. Of all workers who earned

less than $40,000 per year, 28 percent participated in DC plans; of those

who earned between $40,000 and $75,000 per year, 55 percent participated

in DC plans. (See fig. 6.) Likewise, workers with low or moderate

household incomes were less likely to participate than those with higher

household incomes. When we estimated the percentages of men and

women workers that participated in DC plans, we found that a higher

percentage of male (39 percent) than female workers (32 percent)

participated in DC plans.
Page 14 GAO-01-846 Pension Contribution Limit Increases

Figure 6: DC Plan Participation by Earnings and Gender

Note: There are no statistically significant differences at the 0.05 level between the percentages of

workers that participated in DC plans in the $40,000-$74,999, $75,000-$149,999, and $150,000+

earnings categories. Categories include both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

About 8 percent of all DC participants were likely to benefit directly if all

three DC plan contribution limits discussed in this report increased at the

same time. The 3.1 million DC participants who were likely to benefit

directly from these limit increases generally had higher earnings than the

35.7 million who were not likely to benefit directly. When we examined the

percentages of workers in various earnings categories that were likely to

benefit directly from these limit increases, we found that higher earners

were more likely than low and moderate earners to benefit directly. When

we compared the gender of likely direct beneficiaries with that of DC

participants not likely to benefit directly, we found that men made up a

higher percentage of likely direct beneficiaries than of DC participants not

likely to benefit directly. When we examined the percentages of male and

female DC participants that were likely to benefit directly, we found that a

Increase in DC Plan

Contribution Limits

Would Likely Benefit

About 3.1 Million DC

Participants Directly
Page 15 GAO-01-846 Pension Contribution Limit Increases

higher percentage of men than women were likely to benefit directly.

When we analyzed the effects of increases in each of the three

contribution limits sequentially, we found that increasing the percentage

limit on combined employer and employee contributions first accounts for

half of the 3.1 million likely direct beneficiaries of an increase in all three

contribution limits. In addition to likely direct beneficiaries, some low and

moderate earners might benefit indirectly from increases in DC plan

contribution limits if they resulted in extra pension coverage or

contributions for those workers, but the number of workers who might

benefit in this way is unknown.

Few DC participants were likely to benefit directly from increasing all

three DC plan limits we analyzed.14 We define likely direct beneficiaries as

employed DC participants whose employer and/or employee contributions

were equal to or above the statutory limits we analyzed.15 About 8 percent

of all DC participants, or 3.1 million people, were likely to have benefited

directly if all the contribution limits analyzed in this report had been

increased.

The results of our analysis of the SCF are consistent with plan-specific

data we analyzed. A New York state law firm that administers DC plans

provided us with data on a sample of 1,831 participants in 15 DC plans.16

About 6 percent of these 1,831 participants had employer and/or employee

contributions at or above one or more of the three contribution limits we

analyzed. An additional 4 percent of these participants made the maximum

contributions allowable under plan-specific contribution limits or

 14In addition to likely direct beneficiaries, some workers could benefit indirectly from DC

plan contribution limit increases. We were unable to estimate the number of indirect

beneficiaries, including DC participants who could benefit from additional employee or

employer contributions, nonparticipants who could be included in existing DC plans if they

expanded their coverage, and nonparticipants who could be included in new DC plans.

15The appendix provides a more detailed explanation of this definition. Note that

participants whose contributions exceed statutory limits on tax-deferred contributions are

subject to tax on amounts contributed in excess of the limits.

16This sample of DC participants is not nationally representative and covers the year 2000

rather than 1998. We analyzed it because we were not able to obtain nationally

representative plan-specific data.

Few Workers Were Likely

to Benefit Directly If All

DC Plan Contribution

Limits Increased
Page 16 GAO-01-846 Pension Contribution Limit Increases

nondiscrimination rules.17 Therefore, between 6 and 10 percent of these

participants would likely have benefited directly if all three contribution

limits we analyzed had been increased. This is generally consistent with

our finding that 8 percent of DC participants were likely direct

beneficiaries of an increase in all three contribution limits we analyzed.

Likely direct beneficiaries of an increase in all three contribution limits

generally had higher earnings than DC participants who were not likely to

benefit directly from such an increase. Of the 3.1 million likely direct

beneficiaries, 24 percent earned less than $40,000 per year, while 22

percent earned more than $150,000 per year. Of the 35.7 million DC

participants who were not likely direct beneficiaries of limit increases, 57

percent earned less than $40,000 per year, and 1 percent earned more than

$150,000 per year. (See fig. 7.) We found a similar pattern when we

analyzed individual DC participants by their household incomes rather

than by their individual earnings. Likely direct beneficiaries of an increase

in all limits analyzed in this report generally had higher household incomes

than DC participants who were not likely direct beneficiaries.

 17DC participants who made the maximum contribution allowable under plan-specific

contribution limits should be considered likely direct beneficiaries of increases in statutory

contribution limits only if their plan limits increased to enable participants to take

advantage of at least some of the extra contributions allowed by law. Participants who

made the maximum contribution allowable under nondiscrimination rules should be

considered likely direct beneficiaries of increases in statutory contribution limits only if

their plans would still satisfy nondiscrimination rules when those participants made

additional contributions. Our analyses of 1998 SCF data do not include participants who

made the maximum contribution allowable under plan-specific contribution limits or

nondiscrimination rules as likely direct beneficiaries of limit increases because the 1998

SCF does not contain the plan-specific information that would be necessary to identify

such participants.

Likely Direct Beneficiaries

of Increasing All

Contribution Limits

Generally Had Higher

Earnings Than DC

Participants Not Likely to

Benefit Directly
Page 17 GAO-01-846 Pension Contribution Limit Increases

Figure 7: Increasing All Contribution Limits: Earnings of Likely Direct Beneficiaries and of DC Participants Who Were Not

Likely Direct Beneficiaries

Note: Analysis based on 402(g) limit and 415(c)(1) dollar and percentage limits. The difference in

percent with earnings of $40,000-$74,999 between likely direct beneficiaries and DC participants who

were not likely to benefit directly is not statistically significant at the 0.05 level. Categories include

both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

We also estimated the percentage of DC participants, within each earnings

category, who were likely to benefit directly from increasing all three

contribution limits. We found that higher earning DC participants were

more likely than low- or moderate-earning DC participants to benefit

directly from an increase in all three DC plan contribution limits.

Specifically, among DC participants with annual earnings over $150,000, 58
Page 18 GAO-01-846 Pension Contribution Limit Increases

percent were likely to benefit directly. In contrast, 4 percent of DC

participants with annual earnings of less than $40,000 were likely to

benefit directly. (See fig. 8.)

Figure 8: Percent of DC Participants Likely to Benefit Directly From Increasing All Contribution Limits

Note: Analysis based on 402(g) limit and 415(c)(1) dollar and percentage limits. Categories include

both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data
Page 19 GAO-01-846 Pension Contribution Limit Increases

When we compared the gender of likely direct beneficiaries of an increase

in all three limits with the gender of DC participants who were not likely

to benefit directly from such an increase, we found that likely direct

beneficiaries were more likely to be men. About 74 percent of the 3.1

million likely direct beneficiaries were men, and 56 percent of the 35.7

million DC participants who were not likely to benefit directly were men.

(See fig. 9.)

Figure 9: Increasing All Contribution Limits: Gender of Likely Direct Beneficiaries and of DC Participants Who Were Not

Likely Direct Beneficiaries

Note: Analysis based on 402(g) limit and 415(c)(1) dollar and percentage limits. Categories include

both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

If All DC Plan Contribution

Limits Increased, Male DC

Participants Were More

Likely to Benefit Directly

Than Female Participants
Page 20 GAO-01-846 Pension Contribution Limit Increases

As we did for earnings, we also did a second set of analyses for gender, in

which we examined the percentages of male and female DC participants

who were likely direct beneficiaries of an increase in all three contribution

limits. In doing so, we found that 10 percent of male and 5 percent of

female DC participants were likely direct beneficiaries of an increase in all

these limits. (See fig. 8.) Women workers’ lower earnings might be a

reason why women were less likely to benefit directly from these limit

increases.18

Although 3.1 million DC participants were likely direct beneficiaries of

increasing the three contribution limits, many of the 3.1 million likely

direct beneficiaries could have benefited because only one of the three

limits was increased. Other likely direct beneficiaries could have benefited

only from increasing at least two of the contribution limits.

To determine how each of the three limits contributes to the total number

of likely direct beneficiaries, we analyzed the effects of increasing the

three contribution limits sequentially. Because the effects of the three

separate limit increases interact, this sequential analysis is preferable to an

analysis in which each limit is increased while the other two are held

fixed.19 First, we increased the percentage limit on combined employer and

employee contributions, while holding the other dollar contribution limits

fixed. Next, we increased the dollar limit on employee contributions, while

holding the dollar limit on combined employer and employee

contributions fixed. Finally, we increased the dollar limit on combined

employer and employee contributions. For each stage in the analysis, we

asked two questions: (1) how many DC participants were likely to benefit

directly at this stage and (2) what were their earnings and gender.

Increasing the percentage limit first accounts for half of all the 3.1 million

likely direct beneficiaries of increasing all three contribution limits. Also,

likely direct beneficiaries of increasing the percentage limit generally had

lower earnings and were more likely to be female than likely direct

beneficiaries of increasing the dollar limits. Specifically, we found that

 18According to the 1998 SCF, women who participated in DC plans had median earnings of

$29,000; i.e., half earned more than $29,000 and half earned less. Male DC participants had

median earnings of $43,193.

19The sequence in which the limits were increased did not substantially affect the results of

our sequential analysis. See the appendix for more information on the methodology for this

analysis.

Different Earnings and

Gender Groups Were

Likely to Benefit from

Increasing Percentage and

Dollar Contribution Limits
Page 21 GAO-01-846 Pension Contribution Limit Increases

• Increasing the percentage limit on combined employer and employee

contributions first accounts for 1.5 million of the 3.1 million DC

participants who were likely direct beneficiaries of increasing all three

contribution limits. (See table 2.) Forty-eight percent of these 1.5 million

likely direct beneficiaries earned less than $40,000 per year and 44 percent

earned between $40,000 and $75,000 per year. (See table 3.) Forty-four

percent of these 1.5 million likely direct beneficiaries were female. (See

table 4.)

• Increasing the dollar limit on employee contributions second accounts for

1.1 million of the 3.1 million likely direct beneficiaries of increasing all

three contribution limits. Fifty-four percent of these 1.1 million likely

direct beneficiaries earned between $75,000 and $150,000 per year and 91

percent were male.

• Increasing the dollar limit on combined employer and employee

contributions third accounts for 519,000 of the 3.1 million likely direct

beneficiaries of increasing all three contribution limits. Seventy-four

percent of these likely direct beneficiaries earned $150,000 or more per

year and 92 percent were male.

Table 2: Likely Direct Beneficiaries of Increasing the Three Contribution Limits in Stages

Sequence of contribution limit increases

Number of likely

 direct beneficiaries

Percent

of total

Stage #1–Percentage limit on combined employer

and employee contributions 1.5 million 50

Stage #2–Dollar limit on employee contributions 1.1 million 34

Stage #3–Dollar limit on combined employer

and employee contributions 519,000 17

Total number of likely direct beneficiaries 3.1 million 100

Note: Percentages do not total 100 percent because of rounding.

Table 3: Earnings of Likely Direct Beneficiaries of Increasing the Three Contribution Limits in Stages

Percent of likely direct beneficiaries in each earnings category

Sequence of contribution limit

increases

Under

$40,000

$40,000-

$74,999

$75,000-

$149,999 $150,000+

All earnings

categories

Number of

likely direct

beneficiaries

Stage #1–Percentage limit on combined

employer and employee contributions 48 44 7 0 100 1.5 million

Stage #2–Dollar limit on employee

contributions 0 16 54 30 100 1.1 million

Stage #3–Dollar limit on combined

employer and employee contributions 0 7 19 74 100 519,000

Note: Percentages may not total 100 percent because of rounding.
Page 22 GAO-01-846 Pension Contribution Limit Increases

Table 4: Gender of Likely Direct Beneficiaries of Increasing the Three Contribution Limits in Stages

Percent of likely direct beneficiaries in each gender category

Sequence of contribution limit

increases Male Female Both genders

Number of likely

direct beneficiaries

Stage #1–Percentage limit on combined

employer and employee contributions 56 44 100 1.5 million

Stage #2–Dollar limit on employee

contributions 91 9 100 1.1 million

Stage #3–Dollar limit on combined

employer and employee contributions 92 8 100 519,000

In addition to participants who would likely benefit directly from raising

DC plan limits, some low and moderate earners who do not now

participate in DC plans might benefit indirectly from increases in those

limits. Some industry groups told us that some employers, especially small

employers, could find higher limits attractive enough to form new DC

plans that would extend pension coverage to employees not previously

covered. Other employers, these groups told us, could find higher limits

attractive enough to expand coverage and/or increase their contributions

for low- and moderate-earning participants in their existing DC plans.

These groups told us that many of those who could take advantage of

increased contribution limits were key business decisionmakers who

determine pension plan formation and coverage for their firms. One way

that these key decisionmakers could take advantage of higher contribution

limits would be to start new qualified DC plans. If they chose to do this,

then nondiscrimination rules would require them to include some low- and

moderate-earning employees in those new plans.

We were unable to measure the number or characteristics of workers who

might benefit indirectly from increases in DC plan contribution limits,

including workers who might be included in new DC plans. Whether or not

these indirect effects would occur is specific to the individual, employer,

and plan. How widespread these effects would be is unknown; the effects

are very difficult to measure.

Survey data suggest that limits on tax-deferred pension contributions may

not be among the most important reasons why some small employers do

not offer pension plans. According to the Employee Benefit Research

Institute’s 2001 Small Employer Retirement Survey, insufficient tax

benefits for the firm’s owner ranked 9th out of 12 major reasons that small

Low and Moderate Earners

Could Benefit Indirectly

From DC Plan Limit

Increases
Page 23 GAO-01-846 Pension Contribution Limit Increases

employers who did not offer pension plans gave for their decision not to

offer a plan.20 In that survey, 48 percent of employers who had 5 to 100

employees and who did not offer a plan cited uncertain revenue as a major

reason for not offering a plan, and 18 percent of those employers cited this

as the most important reason. In contrast, 16 percent of employers

surveyed said that “tax benefits for the owner are too small” was a major

reason why they did not offer a plan, while 1 percent said that it was the

most important reason. However, it is difficult to isolate the effects of one

of these explanations in light of the many competing factors small

employers must consider when deciding whether to offer a pension plan.

Some key business decisionmakers may have to expand pension coverage

or contributions in their companies’ existing qualified DC plans in order to

take advantage of increased contribution limits. To enable highly paid

employees to take advantage of the higher limits and still have their plans

pass the nondiscrimination tests, some companies may have to include

more low- and moderate-earning workers in their plans, increase their

contributions for low and moderate earners, or both.

Allowing a “catch-up” provision—permitting persons aged 50 or older to

make additional contributions to DC plans in excess of the statutory limits

we analyzed—would likely have directly benefited 11 percent of all eligible

DC participants, or 721,000 participants. The 721,000 DC participants who

were likely to benefit directly from this option generally had higher

earnings than the 5.9 million eligible DC participants who were not likely

to benefit directly. In addition, when likely direct beneficiaries are

considered as a percentage of all eligible DC participants in various

earnings categories, a larger percentage of participants earning $75,000 per

year or more than of those earning less than $75,000 per year was likely to

benefit directly from this provision. The likely direct beneficiaries of this

provision did not differ significantly in gender from eligible DC

participants who were not likely direct beneficiaries. When likely direct

beneficiaries are considered as a percentage of all eligible male DC

participants and of all eligible female DC participants, there is no

significant difference between the percentage of eligible male DC

participants likely to benefit directly and the percentage of eligible female

DC participants likely to benefit directly.

 20Employee Benefit Research Institute, The 2001 Small Employer Retirement Survey

(SERS) Summary of Findings (n.d.), available at www.ebri.org/sers/2001/01serses.pdf.

“Catch-Up” Provision

Was Likely to Benefit

Few Participants

Directly
Page 24 GAO-01-846 Pension Contribution Limit Increases

Few eligible DC participants were likely to benefit directly if employees

aged 50 or older were allowed to make additional contributions in excess

of other statutory limits. In analyzing this option, we defined eligible DC

participants as workers aged 50 or older who contributed to 401(k) or

similar DC plans. About 11 percent of eligible DC participants, or 721,000

people, were likely direct beneficiaries of this option.

This finding is consistent with other efforts to analyze the effects of

allowing older workers to make additional contributions to DC plans.

Treasury’s analysis of 1998 federal income tax data showed that 8 percent

of workers aged 50 or older who contributed to DC plans made

contributions equal to the employee dollar contribution limit. This is

comparable to our finding of 11 percent of eligible DC participants aged 50

or older who would be likely direct beneficiaries of a “catch-up” provision.

Our finding is also generally consistent with the result of our analysis of

data on a nonrepresentative sample of 367 participants aged 50 or older in

11 401(k) plans administered by a New York state law firm. In that sample,

about 15 percent of participants aged 50 or older made employer and/or

employee contributions at or above one of the three limits we analyzed,

and an additional 8 percent made the maximum contributions allowable

under plan-specific contribution limits or nondiscrimination rules.

Those likely to benefit directly if older workers were permitted to make

additional contributions to DC plans generally had higher earnings than

eligible DC participants not likely to benefit directly. We divided eligible

DC participants into two earnings categories: those who earned less than

$75,000 per year and those who earned $75,000 per year or more.21 About

47 percent of these 721,000 likely direct beneficiaries of this option earned

less than $75,000 per year, while 53 percent earned more than $75,000 per

year. Of the 5.9 million DC participants who were not likely to benefit

directly, 90 percent earned less than $75,000 per year, and 10 percent

earned more than $75,000 per year. (See fig. 10.) We found a similar

pattern when we analyzed individual DC participants by their household

incomes rather than by their individual earnings. Employees who were

likely to benefit directly if older workers were allowed to make extra

contributions to DC plans had higher household incomes than eligible DC

participants who were not likely direct beneficiaries.

 21For the analysis of this option, we used only two categories for earnings and household

income, under $75,000 per year and $75,000 per year and up, rather than the four categories

we used for the analyses of other limit increases. The reason for this difference is that the

use of four categories for earnings and for household income did not produce statistically

reliable results in the analysis of additional contributions by older workers.

Few Eligible DC

Participants Were Likely to

Benefit Directly From

“Catch-Up” Provision

Likely Direct Beneficiaries

of “Catch-Up” Provision

Generally Had Higher

Earnings Than Other

Eligible DC Participants
Page 25 GAO-01-846 Pension Contribution Limit Increases

Figure 10: Permitting Additional Employee Contributions for Participants Aged 50 and Older: Earnings of Likely Direct

Beneficiaries and of Eligible DC Participants Who Were Not Likely Direct Beneficiaries

Note: Eligible DC participants are those aged 50 and older who contributed to 401(k) and similar

plans. Likely direct beneficiaries are eligible DC participants who contributed or received contributions

at or above the 402(g) limit and/or 415(c)(1) dollar or percentage limit. Categories include both fulltime and part-time employees.

Source: GAO tabulations of 1998 SCF data.

We also estimated the percentage of eligible DC participants within each

earnings category who were likely to benefit directly from allowing

persons aged 50 or older to make additional contributions. We found that 6

percent of eligible DC participants who earned less than $75,000 per year

were likely to benefit directly from this option, while 38 percent of eligible

DC participants with annual earnings of $75,000 or more were likely to

benefit directly from it. (See fig. 11.)
Page 26 GAO-01-846 Pension Contribution Limit Increases

Figure 11: Percent of Eligible DC Participants Likely to Benefit Directly From Permitting Additional Employee Contributions

for Participants Aged 50 and Older

Note: Eligible DC participants are those aged 50 and older who contributed to 401(k) and similar

plans. Likely direct beneficiaries are eligible DC participants who contributed or received contributions

at or above the 402(g) limit and/or 415(c)(1) dollar or percentage limit. There is no statistically

significant difference at the 0.05 level between the percent of male DC participants who were likely to

benefit directly and the percent of female DC participants who were likely to benefit directly.

Categories include both full-time and part-time employees.

Source: GAO tabulations of 1998 SCF data.

The gender of DC participants who were likely to benefit directly from a

“catch-up” contribution provision did not differ significantly from that of

eligible DC participants who were not likely to benefit directly. About 73

percent of the 721,000 likely direct beneficiaries of allowing workers aged

50 or older to make extra contributions to DC plans were men. Of the 5.9

million eligible DC participants who were not likely to benefit directly, 60

percent were men. This percentage did not differ significantly from 73

percent.

As we did for earnings, we also analyzed the percentages of eligible male

and female DC participants that were likely to benefit directly from the

“Catch-Up” Provision

Would Not Likely Have

Directly Benefited Men or

Women Significantly More
Page 27 GAO-01-846 Pension Contribution Limit Increases

“catch-up” provision. In doing so, we found that among eligible DC

participants, there is no significant difference between the percentage of

men likely to benefit directly and the percentage of women likely to

benefit directly.

The Department of Labor had no comment on the report. The Department

of the Treasury provided us with technical comments, which we

incorporated as appropriate.

We are sending copies of this report to the Secretary of the Treasury, the

Secretary of Labor, and interested congressional committees. Copies will

also be made available to others on request. Please call me or Charles A.

Jeszeck at (202) 512-7215 if you or your staff have any questions. Other

major contributors to the report include Howard Wial, Jeremy Citro, Gene

Kuehneman, Edward Nannenhorn, Donald J. Porteous, and Andrew

Davenport.

Sincerely yours,

Barbara D. Bovbjerg

Director, Education, Workforce,

 and Income Security Issues

Agency Comments
Appendix: Scope and Methodology

Page 28 GAO-01-846 Pension Contribution Limit Increases

We used survey data from the 1998 Survey of Consumer Finances (SCF),

sponsored by the Board of Governors of the Federal Reserve System, to

estimate

• the number and percentage of workers that participated in pension plans

and the number and percentage of workers that participated in DC plans,

by earnings and gender;

• the earnings and gender distributions of pension plan participants and DC

participants;

• the number and percentage of DC participants who would and would not

likely have benefited directly from increasing the three contribution limits,

by earnings and gender;

• the number and percentage of likely direct beneficiaries of increasing each

of the contribution limits sequentially, by earnings and gender; and

• the number and percentage of participants in certain DC plans aged 50 or

older who would and would not likely have benefited directly from

allowing "catch-up" contributions in excess of the three contribution

limits, by earnings and gender.

We also interviewed federal agency officials, pension experts, and

representatives of nongovernmental organizations to obtain their views on

the effects of raising DC plan contribution limits.

The SCF is a triennial, nationally representative survey that provides

extensive information on the financial characteristics of households. We

used the 1998 SCF because it is the most recent, nationally representative

data source with information for all age groups on pension plan

participation, DC plan participation, and employer and employee

contributions to DC plans. Data on overall pension participation and

characteristics of pension plan participants obtained from the 1998 SCF

are generally comparable to those obtained for 1998 from the 1999 Current

Population Survey (CPS), a much larger, nationally representative data set

that does not contain as much detail on pensions as the SCF.1

 The SCF

asked a representative sample of 4,309 households questions about their

pensions, incomes, labor force participation, asset holdings and debts, use

 1

A comparison of SCF and CPS data on participation in pension plans shows a 1 percentage

point difference between the two surveys regarding the pension participation rates of all

workers, male workers, and female workers in 1998. The percentage of pension

participants who were male differs by 2 percentage points between the two surveys.

However, the estimated numbers of workers and pension participants derived from the

SCF are smaller than the corresponding numbers derived from the CPS, in part because the

SCF does not include data on more than two workers in each household.

Appendix: Scope and Methodology

1998 Survey of

Consumer Finances
Appendix: Scope and Methodology

Page 29 GAO-01-846 Pension Contribution Limit Increases

of financial services, and demographic information. From the SCF, we

created a sample containing information on 4,776 individual respondents

and spouses (or partners) who were at least 18 years old and working at

the time of the survey and whose earnings could be expressed as an

annual dollar amount. We used sample weights throughout our analysis.

There is a wide range of sampling errors for the estimated percentages

used in this report. All estimated percentages for which the base (i.e., the

denominator) is “all workers” have sampling errors less than plus or minus

3 percentage points at the 95-percent confidence level. All estimated

percentages for which the base is “all pension plan participants” have

sampling errors less than plus or minus 4 percentage points at that

confidence level. All estimated percentages for which the base is “all DC

participants” have sampling errors less than plus or minus 5 percentage

points at that confidence level. Except as shown in table 5, all estimated

percentages cited or relied on in this report had sampling errors less than

plus or minus 12 percentage points at that confidence level.

Table 5: Sampling Errors of 12 Percentage Points or More

Percentage of

Sampling errora

(percentage points)

Likely direct beneficiaries of an increase in all three limits analyzed in this report that were likely direct

beneficiaries of an increase in the percentage limit on combined employer and employee contributionsb

12

Workers with household incomes of $150,000+ that participated in a pension plan 12

Likely direct beneficiaries of an increase in all three limits analyzed in this report that were male 12

Likely direct beneficiaries of an increase in the dollar limit on employee contributionsc with earnings of

$150,000+ 13

Likely direct beneficiaries of an increase in the percentage limit on combined employer and employee

contributionsb

 with earnings of $40,000-$74,999 13

Workers with earnings of $150,000+ that participated in a DC plan 13

Workers with earnings of $150,000+ that participated in a pension plan 14

Likely direct beneficiaries of allowing extra contributions by workers aged 50+ with earnings of $75,000+ 15

Likely direct beneficiaries of an increase in the percentage limit on combined employer and employee

contributionsb

 that were male 16

Likely direct beneficiaries of an increase in the percentage limit on combined employer and employee

contributionsb

 that were female 16

DC participants with earnings of $150,000+ who were likely direct beneficiaries of an increase in all

three limits analyzed in this report 17

Likely direct beneficiaries of an increase in the percentage limit on combined employer and employee

contributionsb

 with earnings under $40,000 17

Likely direct beneficiaries of allowing extra contributions by workers aged 50+ with household incomes

under $75,000 22

Likely direct beneficiaries of an increase in the dollar limit on combined employer and employee

contributionsd

 with earnings of $75,000-$149,999 22

Likely direct beneficiaries of an increase in the dollar limit on combined employer and employee

contributionsd

 with earnings of $150,000+ 25
Appendix: Scope and Methodology

Page 30 GAO-01-846 Pension Contribution Limit Increases

Percentage of

Sampling errora

(percentage points)

Likely direct beneficiaries of an increase in the dollar limit on employee contributionsc that were male 26

Likely direct beneficiaries of an increase in the dollar limit on employee contributionsc with earnings of

$75,000-$149,999 27

Likely direct beneficiaries of allowing extra contributions by workers aged 50+ with earnings under

$75,000 31

Likely direct beneficiaries of allowing extra contributions by workers aged 50+ that were male 33

Likely direct beneficiaries of an increase in the dollar limit on combined employer and employee

contributionsd

 that were male 34

a

At the 95-percent confidence level.

b

First stage of sequential analysis.

c

Second stage of sequential analysis

d

Third stage of sequential analysis.

The SCF uses multiple imputation to estimate responses to most survey

questions to which respondents did not provide answers. The error due to

this imputation procedure is included in the sampling errors described

above.

The SCF and other surveys that are based on self-reported data are subject

to several other sources of nonsampling error, including the inability to get

information about all sample cases; difficulties of definition; differences in

the interpretation of questions; respondents’ inability or unwillingness to

provide correct information; and errors made in collecting, recording,

coding, and processing data. These nonsampling errors can influence the

accuracy of information presented in the report, although the magnitude

of their effect is not known.

In estimating the percentage and characteristics of workers that

participated in pension plans and in DC plans, we defined workers as all

persons aged 18 or older who were working at the time of the survey and

whose earnings could be expressed as an annual amount. This definition

included both public- and private-sector workers and included selfemployed workers. We defined pension plan participants as workers who

were included in any type of pension plan through their job. We defined

DC participants as workers who participated in a plan in which money is

accumulated in an account. We did not include personal contributions to

IRAs for any person in our sample, including persons who may be selfemployed nor did we consider Keogh plans in our analysis because of both

the report’s objectives and limitations in the SCF data. This is relevant for

figures 1, 2, and 3 in the text, where considering IRA contributions and

Definitions of

Concepts Used in Our

Analysis of the SCF
Appendix: Scope and Methodology

Page 31 GAO-01-846 Pension Contribution Limit Increases

participation in Keogh plans by self-employed persons would likely raise

pension participation rates, particularly for the higher income categories.

We defined likely direct beneficiaries of an increase in all three DC plan

contribution limits we analyzed as employed DC participants whose

employer and/or employee contributions were equal to or above one or

more of the three statutory limits.2

 We defined likely direct beneficiaries in

this manner because participants with contributions at the current

statutory limits (or their employers) are in a position to increase their

contributions if the limits are raised. This definition does not imply that all

likely direct beneficiaries (or their employers) will actually increase their

contributions if the limits are raised, only that they are in a position to do

so.

On the other hand, it is not likely that participants with contributions

below the current statutory limits would respond to an increase in the

statutory limits by contributing more than the current limits. We included

participants with contributions above the statutory limits in our definition

of likely direct beneficiaries because the SCF does not distinguish

between tax-deferred and nontax-deferred contributions or between

qualified and nonqualified plans. Therefore, we were unable to identify DC

participants whose tax-deferred contributions were exactly equal to the

statutory limits. The general patterns described in the report were not

sensitive to several alternative definitions of likely direct beneficiaries. In

analyzing the option of allowing workers aged 50 or older to make extra

contributions to DC plans, we limited our analysis to eligible DC

participants. We defined eligible DC participants as workers aged 50 or

older who contributed to 401(k) and similar DC plans. The SCF enabled us

approximately to identify participants in plans of this general type, but did

not enable us to distinguish between particular types of plans within this

category, such as 401(k), 403(b), 457, and SIMPLE plans.

We classified individuals by their gender, individual earnings, and

household income. We defined earnings as the sum of wage and salary

income from a worker’s main job and business income (if any) from that

job. For workers who did not report their earnings as annual amounts, we

used information about hours worked per week and weeks worked per

 2

Our analyses of SCF data do not include participants who made the maximum

contribution allowable under plan-specific contribution limits or nondiscrimination rules as

likely direct beneficiaries of limit increases because the 1998 SCF does not contain the

plan-specific information that would be necessary to identify such participants.
Appendix: Scope and Methodology

Page 32 GAO-01-846 Pension Contribution Limit Increases

year to express earnings as an annual amount. Our analyses excluded

individuals whose earnings could not be expressed as an annual amount.

For all analyses except that of allowing older workers to make extra

contributions, we used four earnings categories: under $40,000 per year,

$40,000-$74,999 per year, $75,000-$149,999 per year, and $150,000 per year

or more. We chose the $40,000 cutoff because $40,000 was slightly higher

than the $36,000 median annual earnings of all pension participants in

1998. We chose the $75,000 cutoff because 90 percent of all pension

participants earned less than $75,000 per year in 1998. We chose the

$150,000 cutoff because more than 95 percent of all pension participants

earned less than $150,000 per year in 1998. For the analysis of allowing

older workers to make extra contributions, we used two earnings

categories (under $75,000 per year and $75,000 per year or more) because

the use of four categories did not produce statistically reliable results in

this analysis.

We used the same dollar cutoffs for household income as for earnings.

Because the 1998 SCF asked respondents about their 1997 household

income, we converted reported household income to 1998 dollars using

the Consumer Price Index.

To understand how each of the three limits contributes to the total

number of likely direct beneficiaries, we analyzed the effects of increasing

the three limits sequentially in a three-stage process. First, we increased

the percentage limit on combined employer and employee contributions,

while holding the dollar contribution limits fixed. Likely direct

beneficiaries at this stage of the analysis are those DC participants whose

contributions are limited only by the percentage limit on combined

employer and employee contributions and those DC participants whose

contributions are limited by both the percentage limit on combined

employer and employee contributions and the dollar limit on employee

contributions. This stage contributes half of the likely direct beneficiaries

of increasing all three contribution limits. Next, we increased the dollar

limit on employee contributions, while holding the dollar limit on

combined employer and employee contributions fixed. Likely direct

beneficiaries at this stage are those DC participants whose contributions

are limited only by the dollar limit on employee contributions. This stage

contributes about an additional third of the likely direct beneficiaries of

increasing all three contribution limits. Finally, we increased the dollar

limit on combined employer and employee contributions. Likely direct

beneficiaries at this final stage are those DC participants whose

contributions are limited by the dollar limit on combined employer and

employee contributions (including those whose contributions are limited

Sequential Analysis of

Likely Direct

Beneficiaries
Appendix: Scope and Methodology

Page 33 GAO-01-846 Pension Contribution Limit Increases

by one or both of the other two limits in addition to the percentage limit

on combined employer and employee contributions). The sequence in

which the limits are raised does not substantially affect the results of the

sequential analysis.

We examined contributions to DC plans as of the time the SCF was

conducted in 1998. Individuals we did not classify as likely to benefit

directly from increased contribution limits may benefit in future years if

they are able to contribute at higher levels. Our single-year analysis did not

permit us to estimate how many workers would likely benefit directly

from higher contribution limits at any point in their working life. Similarly,

because we did not have data on earnings or income for more than 1 year,

we were unable to classify individuals by their lifetime earnings or income.

We conducted our analyses of the effects of increasing DC plan

contribution limits with the individual, rather than the household, as our

primary unit of analysis. Conducting an analysis based exclusively on

household-level data could yield different results. For example, some

households may include two DC participants, in which one is contributing

or receiving contributions at one or more of the limits we analyzed, while

the other has room under these limits for additional contributions. At the

individual level, the contributor constrained by the limit would be included

as a likely direct beneficiary, while the spousal participant not

contributing at the limit would not be included. From a household-level

perspective, such a household might or might not be classified as

benefiting directly from one or more of the limit increases we analyzed.

Depending on how such households would be classified, the results could

differ from an individual-level analysis. We note that our methodology is

consistent with that used by the Department of the Treasury in analyzing

the effects of increasing DC plan contribution limits.

We conducted interviews to obtain the views of federal agency officials,

pension experts, and representatives of nongovernmental organizations on

the effects of raising various DC plan contribution limits. The federal

agencies whose officials we interviewed were the Departments of Labor

and Treasury. Pension experts we interviewed had expertise in pension

tax law and/or pension policy. Nongovernmental organizations whose

views we obtained included pension actuaries and industry associations.

Other Methodological

Issues in the SCF

Analysis

Interviews

(130025)

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