**PRESENT LAW AND BACKGROUND**
**RELATING TO TAX INCENTIVES FOR SAVINGS**
Scheduled for a Public Hearing

Before the

SENATE COMMITTEE ON FINANCE

on February 24, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 23, 1999

JCX-7-99

**CONTENTS**

INTRODUCTION	

I.  SUMMARY

	II.	PRESENT LAW

		A.	In General

		B.	Individual Retirement Arrangements ("IRAs")

		C.	Employer-Sponsored Qualified Retirement Plans and Similar Arrangements

			1.  Employer-sponsored qualified retirement plans

			2.  SIMPLE retirement plans

			3.  Simplified employee pensions ("SEPs")

			4.  Tax-sheltered annuities ("section 403(b) annuities")

			5.  Eligible deferred compensation plans of State and local governments and tax-exempt entities ("section 457 plans")

		D.  Other Tax Incentives for Saving

			1.  Annuity contracts

			2.  Life insurance

			3.  Medical savings accounts

			4.  Education tax incentives

	III.	BACKGROUND INFORMATION RELATING TO TAX INCENTIVES FOR SAVING

		A.	Role of Saving in the National Economy

		B.	Tax Incentives for Saving

		C.	The Adequacy of Retirement Savings

			1.  Economic status of the elderly

			2.  Expected retirement income and needs of current workers

			3.  Increased retirement costs

**INTRODUCTION**

	The Senate Committee on Finance has scheduled a public hearing on February 24, 1999,on issues relating to retirement savings and the current status, availability, and effectiveness oftax-favored savings vehicles.

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of present-law tax treatment of savings and background information on savings in theUnited States.

	Part I of the document is a summary.  Part II is a description of present law relating to thetaxation of savings.  Part III provides background information on savings in the United States.

**I.  SUMMARY**

**Present law**

	Dividend and interest income is generally taxable under present law.  However, presentlaw also contains a number of provisions that permit individuals to save on a tax-favored basis. These include provisions relating to individual retirement arrangements ("IRAs"), tax-qualifiedretirement plans and similar employer-sponsored arrangements, annuity contracts, life insurance,medical savings accounts, and various education savings vehicles.  These tax-favored vehiclesgenerally increase the rate of return on investments compared with after-tax investment vehicles.

**Role of saving in the national economy**

	National saving is important to the economy because of its relationship to investment.The sources for investment are national saving and foreign investment. Increased investmentincreases the capital stock, which leads to greater productivity, higher wages and salaries, andincreases in a nation's standard of living. Because of the possibility of foreign investment in theUnited States, a low saving rate does not necessarily mean a low investment rate. However, whenforeign saving finances domestic investment, the profits from such investment are transferredabroad.

	Net national savings declined through most of the 1980's, and is lower than that of othercountries. Investment has declined as well over this period; however, foreign investment hascompensated for some of the decline in domestic saving.

**Issues related to tax incentives for saving**

	Some argue that tax incentives for saving are appropriate because the income tax systempenalizes saving by taxing the return to income that is saved. This can affect both the nationalsaving rate, as well as the assets taxpayers accumulate for particular purposes. Tax incentives forsaving could be designed to encourage saving for particular purposes, e.g., retirement, educationor first-time home purchase, or to increase national saving generally.

	Tax incentives for saving may have a number of attributes that may affect a taxpayer'ssaving decision.  First, investments in tax-advantaged assets or accounts earn a higher after-taxrate of return than investments in other assets.  Second, a targeted savings incentive may providean incentive for a specific form of saving relative to other forms of saving.  Third, a tax incentivefor saving may provide a psychological incentive to save.  Forth, advertising by financialinstitutions may influence people's saving decisions. 

	It is unclear whether tax benefits for saving which increase the rate of return on savingactually increase saving levels.  Some studies have argued that one should expect substantialincreases in saving from increased rates of return, while others have argued that large behavioralresponses may not occur.  Empirical investigations of the responsiveness of personal saving toafter-tax returns provide no conclusive results.

**Adequacy of retirement savings**

	Many tax incentives for saving are intended to encourage people to save for retirement. Currently, Social Security is the largest source of retirement income (39 percent in 1996),followed by earnings (22 percent in 1996), private and government employee pensions andalimony (18 percent in 1996), and income from assets (17 percent in 1996).

	The adequacy of retirement income is commonly measured by the replacement rate, thatis, the ratio of retirement income to income during working years.  Available data indicate thatSocial Security and pension benefits replace roughly 33 percent of career high earnings and 50percent of earnings over the last 5 years of employment for current retirees. When spousalbenefits are taken into account, replacement rates are higher. Some recent research has estimatedthat, for workers retiring over the next 10 years, replacement rates for the median 10 percent ofhouseholds (45th to 55th percentiles ranked by income) may approach 97 percent in nominaldollars and 66 percent in real (inflation adjusted) dollars.  These replacement rates are higher forindividuals who had lower earnings.

	It is not clear what an appropriate replacement rate is. A rate lower than 100 percent maybe adequate. For example, people may desire to have more income during working years becausesome of that income is saved for retirement. People may also have lower expenses in retirement;for example, they may no longer be making payments on a home. On the other hand, areplacement rate of 100 may be too low. For example, a retiree may face much higher medicalexpenses than a younger person.

	Although coverage by employer pension plans and Social Security is expected to behigher for current workers than for current retirees, the saving rate of current workers is lowerthan the rate at which current retirees saved during their working lives. Also, it is possible thatthe need for retirement income is increasing over time because of increases in life expectancies,trends toward early retirement, and rapid rises in medical costs.

**II.  PRESENT LAW**

**A.  In General**

	Dividend and interest income generally is taxable under present law.  However, presentlaw also contains a number of provisions which permit individuals to save on a tax-favored basis. These include provisions relating to individual retirement arrangements, tax-qualified retirementplans and similar employer-sponsored arrangements, annuity contracts, life insurance, medicalsavings accounts, and various education savings vehicles.

**B.  Individual Retirement Arrangements ("IRAs")**

**In general**

	There are 3 types of IRAs under present law: deductible IRAs, Roth IRAs, andnondeductible IRAs.  The economic benefits of deductible and Roth IRAs are similar,(2) althoughthe rules applicable to each type of IRA vary.

**Deductible IRAs**

	Under present law, an individual may make deductible contributions to an individualretirement arrangement ("IRA") up to the lesser of $2,000 or the individual's compensation if theindividual and the individual's spouse are not active participants in an employer-sponsoredretirement plan. In the case of a married couple, deductible IRA contributions of up to $2,000can be made for each spouse (including, for example, a homemaker who does not work outsidethe home), if the combined compensation of both spouses is at least equal to the contributedamount.  If the individual (or the individual's spouse) is an active participant in an employer-sponsored retirement plan, the $2,000 deduction limit is phased out for taxpayers with adjustedgross income ("AGI") over certain levels for the taxable year.

	The AGI phase-out limits for a single individual who is an active participant in anemployer-sponsored retirement plan are as follows: for 1999, $31,000 to $41,000; for 2000, 2001and 2002, the limits increase by $1,000 each year, so that the limits by 2002 are $34,000 to$44,000; for 2003, $40,000 to $50,000; for 2004, $45,000 to $55,000; and for 2005 andthereafter, $50,000 to $60,000.

	The AGI phase-out limits for a married individual filing a joint return who is an activeparticipant in an employer-sponsored plan are as follows: for 1999, $51,000 to $61,000; for 2000, 2001 and 2002, the limits increase by $1,000 each year, so that the limits by 2002 are$54,000 to $64,000; for 2003, $60,000 to $70,000; for 2004, $65,000 to $75,000; for 2005,$70,000 to $80,000; for 2006, $75,000 to $85,000; and for 2007 and thereafter, $80,000 to$90,000.

	If the individual is not an active participant in an employer-sponsored retirement plan, butthe individual's spouse is, the $2,000 deduction limit is phased out for taxpayers with AGIbetween $150,000 and $160,000.

	Amounts held in a deductible IRA are includible in income when withdrawn (except tothe extent the withdrawal is a return of nondeductible contributions). Includible amountswithdrawn prior to attainment of age 59-1/2 are subject to an additional 10-percent earlywithdrawal tax, unless the withdrawal is due to death or disability, is made in the form of certainperiodic payments, is used to pay medical expenses in excess of 7.5 percent of AGI, is used topurchase health insurance of an unemployed individual, is used for education expenses, or isused for first-time homebuyer expenses of up to $10,000.

**Roth IRAs**

	Beginning in 1998, individuals with AGI below certain levels may make nondeductiblecontributions to a Roth IRA. The maximum annual contribution that may be made to a Roth IRAis the lesser of $2,000 or the individual's compensation for the year. The contribution limit isreduced to the extent an individual makes contributions to any other IRA for the same taxableyear. As under the rules relating to IRAs generally, a contribution of up to $2,000 for eachspouse may be made to a Roth IRA provided the combined compensation of the spouses is atleast equal to the contributed amount. The maximum annual contribution that can be made to aRoth IRA is phased out for single individuals with AGI between $95,000 and $110,000 and forjoint filers with AGI between $150,000 and $160,000.

	Taxpayers with modified AGI of $100,000 or less generally may convert a deductible ornondeductible IRA into an Roth IRA.  The amount converted is includible in income as if awithdrawal had been made, except that the 10-percent early withdrawal tax does not apply and, ifthe conversion occurred in 1998, the income inclusion may be spread ratably over 4 years.

	Amounts held in a Roth IRA that are withdrawn as a qualified distribution are notincludible in income, nor subject to the additional 10-percent tax on early withdrawals. Aqualified distribution is a distribution that (1) is made after the 5-taxable year period beginningwith the first taxable year for which the individual made a contribution to a Roth IRA, and (2)which is made after attainment of age 59-1/2, on account of death or disability, or is made forfirst-time homebuyer expenses of up to $10,000.

	Distributions from a Roth IRA that are not qualified distributions are includible inincome to the extent attributable to earnings, and subject to the 10-percent early withdrawal tax(unless an exception applies).(3) The same exceptions to the early withdrawal tax that apply toIRAs apply to Roth IRAs.

**Nondeductible IRAs**

	To the extent an individual cannot or does not make deductible contributions to an IRA orcontributions to a Roth IRA, the individual may make nondeductible contributions to an IRA. Distributions from a nondeductible IRA are includible in income and subject to the 10-percentearly withdrawal tax to the extent attributable to earnings.

**Legislative history**

	The IRA provisions were originally enacted in the Employee Retirement Income SecurityAct of 1974 ("ERISA"). Individuals who were active participants in an employer-sponsoredretirement plan were not permitted to make contributions to an IRA. The limit on the deductionfor IRA contributions was generally the lesser of (1) 15 percent of the individual's compensationfor the year, or (2) $1,500.

	The Economic Recovery Tax Act of 1981 increased the deduction limit for contributionsto IRAs and removed the restriction on IRA contributions by active participants in employer-sponsored retirement plans. Beginning in 1982, the deduction for IRA contributions wasgenerally the lesser of (1) 100 percent of the individual's compensation, or (2) $2,000. Anindividual was entitled to make a deductible contribution to an IRA even if the individual was anactive participant in an employer-sponsored retirement plan.

	The Tax Reform Act of 1986 ("1986 Act") added restrictions on deductible IRAcontributions if the individual (or the individual's spouse) was an active participant in employer-sponsored retirement plan. For years 1987 through 1997, if a single taxpayer or either spouse (inthe case of a married couple) was an active participant in an employer-sponsored retirement plan,the maximum IRA deduction was phased out between $25,000 and $35,000 of AGI. For marriedtaxpayers, the maximum deduction was phased out between $40,000 and $50,000 of AGI. Inaddition, the 1986 Act added the present-law rules permitting individuals to make nondeductiblecontributions to an IRA.

	The Small Business Job Protection Act of 1996 modified the rule relating to themaximum deductible IRA contribution by permitting deductible IRA contributions of up to$2,000 to be made for each spouse (including a spouse who does not work outside the home) ifthe combined compensation of both spouses is at least equal to the contributed amount.

	The Health Insurance Portability and Accountability Act of 1996 extended to IRAs theexception to the early withdrawal tax for medical expenses in excess of 7.5 percent of AGI andadded the exception for health insurance expenses for unemployed individuals.

	The Taxpayer Relief Act of 1997: (1) increased the AGI phase-out limits for deductibleIRAs; (2) modified the AGI phase-out limits for an individual who is not an active participant inan employer-sponsored retirement plan but whose spouse is; (3) provided exceptions from theearly withdrawal tax for withdrawals for education expenses and first-time home purchase (up to$10,000), and (4) created the Roth IRA.

**C.  Employer-Sponsored Qualified Retirement Plans and Similar Arrangements**

**1.  Employer-sponsored qualified retirement plans**

**In general**

	A plan of deferred compensation that meets the qualification standards of the InternalRevenue Code ("a qualified plan") is accorded special tax treatment under present law.Employees do not include qualified plan benefits in gross income until the benefits aredistributed, even though the plan is funded and the benefits are nonforfeitable. The employer isentitled to a current deduction (within limits) for contributions to a qualified plan even thoughthe contributions are not currently included in an employee's income. Contributions to a qualifiedplan are held in a tax-exempt trust.

	Employees, as well as employers, may make contributions to a qualified plan. Employeesmay, subject to certain restrictions, make both pre-tax and after-tax contributions to a qualifiedplan. Pre-tax employee contributions (e.g., contributions to a qualified cash or deferredarrangement (section "401(k) plan")) are generally treated the same as employer contributions fortax purposes.

	The tax treatment of contributions under qualified plans is essentially the same as that ofdeductible IRAs. However, the limits on contributions to qualified plans are much higher thanthe IRA contribution limits, so that qualified plans provide for a greater accumulation of fundson a tax-favored basis. The policy rationale for permitting greater accumulation under qualifiedplans than IRAs is that the tax benefits for qualified plans encourage employers to providebenefits for a broad group of their employees. This reduces the need for public assistance andreduces pressure on the social security system.

	Present law imposes a number of requirements on qualified plans that must be satisfied inorder for the plan to obtain tax-favored status.  For example, minimum participation andcoverage rules and nondiscrimination rules are designed to ensure that qualified plans benefit anemployer's rank-and-file employees as well as highly compensated employees.(4)   Under theminimum coverage rules, a plan must satisfy one of the following requirements: (1) the planbenefits at least 70 percent of employees who are nonhighly compensated employees(5); (2) theplan benefits a percentage of nonhighly compensated employees that is at least 70 percent of thepercentage of highly compensated employees benefitting under the plan; or (3) the plan satisfiesan average benefits test which compares the benefits received by highly compensated employeesand nonhighly compensated employees.  Present law also contains a general nondiscriminationrequirement which provides that plans may not discriminate in favor of highly compensatedemployees.  This requirement generally applies to all benefits, rights and features, not just tocontributions and benefits.  Special rules apply to plans that primarily benefit key employees(called "top-heavy plans").

	The plan qualification standards also define the rights of plan participants andbeneficiaries and provide some limits on the tax benefits for qualified plans.(6) Certain of the rulesrelating to qualified plans are designed to ensure that the amounts contributed to qualified plansare used for retirement purposes. Thus, for example, an early withdrawal tax applies to prematuredistributions from such plans, and the ability to obtain distributions prior to termination ofemployment from certain types of qualified plans is restricted.

**Types of qualified plans**

	Qualified plans are broadly classified into two categories, defined benefit pension plansand defined contribution plans, based on the nature of the benefits provided.

	Under a defined benefit pension plan, benefit levels are specified under a plan formula.For example, a defined benefit pension plan might provide an annual retirement benefit of 2percent of final average compensation multiplied by total years of service completed by anemployee. Benefits under a defined benefit pension plan are funded by the general assets of thetrust established under the plan; individual accounts are not maintained for employeesparticipating in the plan. Benefits under a defined benefit pension plan are guaranteed (withinlimits) by the Pension Benefit Guaranty Corporation ("PBGC"), a Federal corporation within theDepartment of Labor.

	Benefits under defined contribution plans are based solely on the contributions (andearnings thereon) allocated to separate accounts maintained for each plan participant.Profit-sharing plans and qualified cash or deferred arrangements (called 401(k) plans after thesection of the Code regulating such plans) are examples of defined contribution plans.

**Limits on contributions and benefits**

	Under present law, limits apply to contributions and benefits under qualified plans. In thecase of a defined benefit pension plan, present law limits the annual benefits payable under theplan to the lesser of (1) 100 percent of the participant's average compensation for his or her high3 years, or (2) $130,000 (for 1999).(7)   In general, the $130,000 dollar limit is increased forretirement after the social security retirement age, and decreased for retirement before the socialsecurity retirement age.  Under a defined contribution plan, the qualification rules limit theannual additions to the plan with respect to each plan participant to the lesser of (1) 25 percent ofcompensation or (2) $30,000 (for 1999). Annual additions are the sum of employer contributions,employee contributions, and forfeitures with respect to an individual under all definedcontribution plans of the same employer. The dollar limits are increased for cost-of-livingadjustments in $5,000 increments.  In some cases special, increased limits apply in the case ofState and local government plans.

	An overall limit applies if an individual is a participant in both a defined contributionplan and a defined benefit plan of the same employer. The Small Business Job Protection Act of1996 repealed this overall limit for years beginning after December 31, 1999.

**Taxation of distributions**

	Under present law, a distribution of benefits from a qualified plan generally is includiblein gross income in the year it is paid or distributed, except to the extent the amount distributedrepresents the employee's investment in the contract (i.e., basis). Special rules apply to lump-sumdistributions, distributions rolled over to an IRA or another qualified plan, and distributions ofemployer securities.

	Early distributions from qualified plans generally are subject to the same additional10-percent early withdrawal tax that applies to early distributions from IRAs.  The earlywithdrawal tax does not apply to distributions from a qualified plan made to an employee afterseparation from service after attainment of age 55.  The exceptions to the early withdrawal taxfor medical insurance expenses of unemployed individuals, education expenses, and first-timehomebuyer expenses do not apply to qualified plan distributions.

**Qualified cash or deferred arrangements**

	As mentioned above, a qualified cash or deferred arrangement is a type of qualified plan.Thus, such arrangements are subject to the rules generally applicable to qualified plans. Inaddition, special rules apply to such arrangements.(8)

	A profit-sharing or stock bonus plan, a pre-ERISA money purchase pension plan, or arural cooperative plan may include a qualified cash or deferred arrangement (section 401(k)plan). Under such an arrangement, an employee may elect to have the employer make paymentsas contributions to a qualified plan on behalf of the employee, or to the employee directly incash. Contributions made at the election of the employee are called elective deferrals. Themaximum annual amount of elective deferrals that can be made by an individual is $10,000 for1999. This dollar limit is indexed for inflation in $500 increments. An employee's electivedeferrals must be fully vested. A special nondiscrimination test applies to elective deferrals undercash or deferred arrangements. Employer matching contributions and after-tax employeecontributions under qualified defined contribution plans are also subject to a specialnondiscrimination test.

	Under a safe harbor, a cash or deferred arrangement is deemed to satisfy the specialnondiscrimination test if the plan satisfies one of two contribution requirements and satisfies anotice requirement. A plan satisfies the contribution requirement under the safe harbor rule forqualified cash or deferred arrangements if the employer either (1) satisfies a matchingcontribution requirement or (2) makes a nonelective contribution to a defined contribution planof at least 3 percent of an employee's compensation on behalf of each nonhighly compensatedemployee who is eligible to participate in the arrangement without regard to the permitteddisparity rules (sec. 401(1)). A plan satisfies the matching contribution requirement if, under thearrangement: (1) the employer makes a matching contribution on behalf of each nonhighlycompensated employee that is equal to (a) 100 percent of the employee's elective deferrals up to3 percent of compensation and (b) 50 percent of the employee's elective deferrals from 3 to 5percent of compensation; and (2), the rate of match with respect to any elective contribution forhighly compensated employees is not greater than the rate of match for nonhighly compensatedemployees.  Certain alternative matching arrangements also can be used to satisfy the safeharbor.

**2.  SIMPLE retirement plans**

	Under present law, certain small businesses can establish a simplified retirement plancalled the savings incentive match plan for employees ("SIMPLE") retirement plan. SIMPLEplans can be adopted by employers who employ 100 or fewer employees who received at least$5,000 in compensation during the preceding year and who do not maintain anotheremployer-sponsored retirement plan. A SIMPLE plan can be either an IRA for each employee orpart of a section 401(k) plan. If established in IRA form, a SIMPLE plan is not subject to thenondiscrimination rules generally applicable to qualified plans (including the top-heavy rules)and simplified reporting requirements apply.  If established as part of a 401(k) plan, the SIMPLEdoes not have to satisfy the special nondiscrimination tests applicable to 401(k) plans and is notsubject to the top-heavy rules. The other qualified plan rules continue to apply.  Within limits,contributions to a SIMPLE plan are not taxable until withdrawn.

A SIMPLE retirement plan allows employees to make elective contributions whichcannot exceed $6,000 (for 1999). The $6,000 dollar limit is indexed for inflation in $500increments. The employer is required to satisfy one of two contribution formulas. Under thematching contribution formula, the employer generally is required to match employee electivecontributions on a dollar-for-dollar basis up to 3 percent of the employee's compensation. Undera special rule applicable to SIMPLE IRAs, the employer can elect a lower percentage matchingcontribution for all employees (but not less than 1 percent of each employee's compensation). Inaddition, a lower percentage cannot be elected for more than 2 out of any 5 years.

Alternatively, for any year, an employer is permitted to elect, in lieu of making matchingcontributions, to make a 2 percent of compensation nonelective contribution on behalf of eacheligible employee with at least $5,000 in compensation for such year, whether or not theemployee makes an elective contribution.

	No contributions other than employee elective contributions, required employer matchingcontributions or employer nonelective contributions can be made to a SIMPLE plan. Allcontributions to an employee's SIMPLE account must be fully vested.

	Contributions to a SIMPLE plan generally are deductible by the employer and excludablefrom the employee's income. Early withdrawals from a SIMPLE plan generally are subject to the10-percent early withdrawal tax. However, in the case of a SIMPLE IRA, withdrawals ofcontributions during the 2-year period beginning on the date the employee first participated in theSIMPLE IRA are subject to a 25-percent early withdrawal tax.

**3.  Simplified employee pensions ("SEPs")**

	A simplified employee pension ("SEP") is an IRA to which employers may makecontributions up to the limits applicable to defined contribution plans. The employee is always100-percent vested in employer contributions.   All employees who satisfy certain participationrequirements must be eligible to participate in the SEP.  An employee satisfies the participationrequirements if the employee (1) has attained age 21, (2) has performed services for the employerduring at least 3 of the immediately preceding 5 years, and (3) received at least $400 (for 1999)in compensation from the employer for the year.  Contributions to a SEP generally must bear auniform relationship to compensation.  An employee can participate even though he or she is alsoa participant in one or more other qualified retirement plans sponsored by the employer.However, SEP contributions are added to the employer's contribution to the other plans on theparticipant's behalf in applying the limits on contributions and benefits.

	Effective for taxable years beginning before January 1, 1997, certain small employerscould maintain a salary reduction SEP ("SARSEP") under which employees could elect to havecontributions made to the plan or to receive the contributions in cash.  The SARSEP rules weregenerally repealed with the adoption of SIMPLE plans.   However, employers may continue tomake contributions to SARSEPs that were established before 1997 (in accordance with the rulesin effect before 1997). In addition, employees hired after December 31, 1996, may participate inSARSEPs established by their employers prior to January 1, 1997.

**4.  Tax-sheltered annuities ("section 403(b) annuities")**

	Tax-sheltered annuities ("section 403(b) annuities") are another form of employer-basedretirement plan that provide the same tax benefits as qualified plans and IRAs. Employers maycontribute to such annuities on behalf of their employees, and employees may contribute on apre-tax basis through salary reduction. Tax-sheltered annuities are subject to rules similar tosome of the rules applicable to qualified plans. Tax-sheltered annuity plans may be maintainedonly by certain types of organizations, in particular, tax-exempt charitable organizations andeducational institutions.

	The annual contribution to a tax-sheltered annuity generally cannot exceed the lesser ofthe exclusion allowance or the limit applicable to defined contribution qualified plans.  Theexclusion allowance for a year is equal to 20 percent of the employee's includible compensation,multiplied by the employee's years of service, minus excludable contributions for prior yearsunder qualified plans, tax-sheltered annuities or section 457 plans of the employer.  In addition tothis general rule, employees of nonprofit educational institutions, hospitals, home health serviceagencies, health and welfare service agencies, and churches may elect to have one of severalspecial rules apply that increase the amount of the otherwise permitted contributions.  Theelection of a special rule is irrevocable; an employee may not elect to have more than one specialrule apply.

	Employer contributions to a section 403(b) annuity are generally subject to the samenondiscrimination rules as contributions to qualified plans.  Contributions made by the employeeunder a salary reduction agreement (i.e., contributions that are comparable to employee electivedeferrals under a section 401(k) plan) are not subject to nondiscrimination rules similar to thoseapplicable to section 401(k) plans.  Instead, all employees generally must be eligible to makesalary reduction contributions.  Certain employees may be disregarded for purposes of this rule.(9)

**5.  Eligible deferred compensation plans of State and local governments and tax-exemptentities ("section 457 plans")**

	Compensation deferred under an eligible deferred compensation plan (a "section 457plan") of a tax-exempt or State or local governmental employer is includible in income whenpaid or made available. The maximum annual deferral under such a plan generally is the lesser of(1) $8,000 (for 1999) or (2) 33-1/3 percent of compensation (net of the deferral).

	In general, amounts deferred under a section 457 plan may not be made available to aplan participant before the earlier of (1) the calendar year in which the participant attains age 70-1/2, (2) when the participant is separated from service with the employer, or (3) when theparticipant is faced with an unforeseeable emergency. Amounts that are made available uponseparation from service are includible in gross income in the taxable year in which they are madeavailable.

	Amounts deferred under a governmental section 457 plan must be held in trust.  Amountsdeferred under a section 457 plan of a tax-exempt entity must remain the property of theemployer, subject only to the claims of the employer's general creditors.

	With certain exceptions, section 457 generally applies to all deferred compensation ofemployees of tax-exempt and State and local governmental employers other than compensationdeferred under a qualified plan (or a tax-sheltered annuity).  Section 457 does not apply to anybona fide vacation, sick leave, compensatory time, severance pay, disability pay, or death benefitplan.  In addition, section 457 does not apply to qualified governmental excess benefit plans thatprovide benefits in excess of those that are provided under a qualified plan maintained by thegovernmental employer.

	Section 457 plans are not qualified retirement plans; rather, such plans have traditionallybeen more like unfunded, nonqualified deferred compensation arrangements of private, taxableemployers.  Present law does not limit the amount of deferred compensation payable undernonqualified deferred compensation plans of taxable employers because there is tension betweenthe employer and the employee-employers generally want a current deduction for compensation,whereas deferred compensation is not deductible until includible in employees' income.  Thistension is not present in the case of deferred compensation plans of tax-exempt and governmentalemployers.  Thus, section 457 limits the amount that can be deferred under such plans andprovides other rules regarding such plans.

	Section 457 plans do not benefit from all the favorable tax rules applicable to qualifiedplans because section 457 plans generally have not been subject to all of the same restrictionsand rules as qualified plans (e.g., the maximum permitted annual deferral is lower).  However,recent changes in the rules relating to section 457 plans of governmental employers have blurredthe distinction between governmental section 457 plans and governmental qualified plans.  Inparticular, assets of governmental section 457 plans must now be held in trust, and governmentalqualified plans are not subject to nondiscrimination rules.

**D.  Other Tax Incentives for Saving**

**1.  Annuity contracts**

	Present law provides that income credited to a deferred annuity contract generally is notcurrently includible in the gross income of the owner of the contract.   No deduction is providedfor, and no dollar limits are imposed on, amounts used to purchase annuity contracts. No incomecap limit applies to individuals purchasing annuity contracts.  In general, amounts received bythe owner of an annuity contract before the annuity starting date (including loans under orsecured by the contract), as well as lump sum distributions after the annuity starting date, areincludible in gross income as ordinary income to the extent that the cash value of the contractexceeds the owner's investment in the contract. A portion of each annuity payment received afterthe annuity starting date is treated as ordinary income based on the ratio of the investment in thecontract to the total distributions expected to be received.

	A 10-percent additional income tax is imposed on certain early withdrawals under anannuity contract. This additional tax does not apply to any distribution made after the owner ofthe contract attains age 59-1/2, dies or becomes disabled, made in the form of certain periodicpayments, or that satisfies certain other requirements.

**2.  Life insurance**

	No Federal income tax generally is imposed on a policyholder with respect to theearnings under a life insurance contract ("inside buildup").  Further, death benefits paid under alife insurance contract are excluded from income, so that neither the policyholder nor thepolicyholder's beneficiary is ever taxed on the inside buildup if the proceeds of the policy arepaid to the policyholder's beneficiary by reason of the death of the insured.  In addition, certainamounts received under a life insurance contract on the life of a terminally ill or chronically illindividual are treated as being received by reason of the death of the insured and therefore areexcludable from income.  This same favorable tax treatment applies to amounts received fromthe sale or assignment to a viatical settlement provider of a life insurance contract on the life of aterminally ill or chronically ill individual.  The favorable tax treatment for life insurancecontracts is available only if the policyholder has an insurable interest in the insured when thecontract is issued and if the life insurance contract meets certain requirements designed to limitthe investment character of the contract. 

	Except as described above, distributions from a life insurance contract (other than amodified endowment contract) that are made prior to the death of the insured generally areincludible in income only to the extent that the amounts distributed exceed the taxpayer'sinvestment in the contract; such distributions generally are treated first as a tax-free recovery ofthe taxpayer's investment in the contract, and then as income.  In the case of a modifiedendowment contract, distributions are treated as income first, loans are treated as distributions(i.e., income rather than basis recovery first), and an additional 10-percent tax is imposed on theincome portion of distributions made before age 59-1/2 and in certain other circumstances.  Amodified endowment contract is a life insurance contract that does not meet a statutory "7-pay"test, i.e., generally is funded more rapidly than 7 annual level premiums.

	No deduction is provided for, and no dollar limits are imposed on, amounts used by anindividual to purchase life insurance contracts.

**3.  Medical savings accounts**

	Under present law, eligible individuals covered under a high deductible health plan mayhave a medical savings account ("MSA").  In general, eligible individuals are individualsemployed by a small employer and self-employed individuals.  Within limits, contributions madeby an individual to an MSA are deductible, and contributions made by the individual's employerare excludable from gross income.  Earnings on amounts held in an MSA are not currentlyincludible in income.  Amounts withdrawn for medical expenses are not taxable.  Amountswithdrawn for nonmedical purposes are includible in income and subject to an additional 15-percent tax unless the distribution is made after death, disability, or age 65.

	While MSAs are not available to all individuals, when used for nonmedical purposes,MSAs provide the same tax benefits as IRAs and qualified plans.  When used for medicalpurposes, they provide greater tax benefits, because both contributions and withdrawals are taxfree.

**4.  Education tax incentives**

	Present law contains a number of provisions intended to assist individuals to save foreducation.

**Exclusion for interest earned on savings bonds**

	Interest earned on a qualified U.S. Series EE savings bond issued after 1989 is excludablefrom gross income if the proceeds of the bond upon redemption do not exceed qualified highereducation expenses paid by the taxpayer during the taxable year (sec. 135).  "Qualified highereducation expenses" include tuition and fees (but not room and board expenses) required for theenrollment or attendance of the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer atcertain colleges, universities, or vocational schools.  The exclusion is phased out for certainhigher-income taxpayers, determined by the taxpayer's modified AGI during the year the bond isredeemed.  For 1999, the exclusion is phased out for taxpayers with modified AGI between$53,100 and $68,100 ($76,650 and $109,650 for joint returns).  To prevent taxpayers fromeffectively avoiding the income phase-out limitation through issuance of bonds directly in thechild's name, present law provides that the interest exclusion is available only with respect toU.S. Series EE savings bonds issued to taxpayers who are least 24 years old.

**Qualified State tuition programs**

	Present law provides tax-exempt status to "qualified State tuition programs," meaningcertain programs established and maintained by a State (or agency or instrumentality thereof)under which persons may (1) purchase tuition credits or certificates on behalf of a designatedbeneficiary that entitle the beneficiary to a waiver or payment of qualified higher educationexpenses of the beneficiary, or (2) make contributions to an account that is established for thepurpose of meeting qualified higher education expenses of the designated beneficiary of theaccount (sec. 529).  "Qualified higher education expenses" are defined as tuition, fees, books,supplies, equipment and certain room and board expenses required for the enrollment orattendance at a college or university (or certain vocational schools).  Present law also providesthat no amount is included in the gross income of a contributor to, or beneficiary of, a qualifiedState tuition program with respect to any distribution from, or earnings under, such program,except that (1) amounts distributed or educational benefits provided to a beneficiary (e.g., whenthe beneficiary attends college) will be included in the beneficiary's gross income (unlessexcludable under another Code section) to the extent such amounts or the value of theeducational benefits exceed contributions made on behalf of the beneficiary, and (2) amountsdistributed to a contributor (e.g., when a parent receives a refund) will be included in thecontributor's gross income to the extent such amounts exceed contributions made by that person.

**Education IRAs**

	Present law provides tax-exempt status to "education IRAs," meaning certain trusts (orcustodial accounts) which are created or organized in the United States exclusively for thepurpose of paying the qualified higher education expenses of a named beneficiary.  Annualcontributions to education IRAs may not exceed $500 per designated beneficiary (except in casesinvolving certain tax-free rollovers, as described below), and may not be made after thedesignated beneficiary reaches age 18.(10)  The $500 annual contribution limit is phased out ratablyfor single contributors with modified AGI between $95,000 and $110,000 ($150,000 and$160,000 for joint returns).

	Amounts distributed from education IRAs are excludable from gross income to the extentthat the amounts distributed do not exceed qualified higher education expenses of an eligiblestudent incurred during the year the distribution is made (provided that a HOPE credit orLifetime Learning credit is not claimed with respect to the beneficiary for the same taxable year). If a HOPE credit or Lifetime Learning credit is claimed with respect to a student for a taxableyear, then a distribution from an education IRA may (at the option of the taxpayer) be made onbehalf of that student during that taxable year, but an exclusion is not available for the earningsportion of such distribution.

	Distributions from an education IRA that exceed qualified higher education expenses areincludible in the distributee's gross income, and subject to an additional 10-percent tax (unlessthe distribution is made on account of the death, disability, or scholarship receipt of thedesignated beneficiary).

**III.  BACKGROUND INFORMATION RELATING TO TAX INCENTIVES FOR SAVING**

**A.  Role of Saving in the National Economy**

**Investment and economic growth**

	When an economy's rate of investment increases, the economy's stock of capitalincreases. A larger capital stock permits greater production of goods and services. Because alarger capital stock leads to more productive workers, investment also leads to higher real wagesand salaries. Thus, increases in investment lead to future increases in a nation's standard ofliving.

	It is important to distinguish gross investment from net investment. Gross investmentincludes investment in new capital as well as investment that is undertaken to replace depreciatedor worn out capital. Net investment measures increases to the capital stock. (Net investment isequal to gross investment less depreciation).

	In the short run, increases in gross investment will increase the capital stock. As thecapital stock increases and worker productivity increases, the economy will experience a higherrate of growth. In the long run, any given rate of investment will just be sufficient to replace theexisting, though larger, capital stock as it depreciates. Thus, in the long run, an increase in thelevel of investment increases a nation's standard of living, but may not increase a country's long-run rate of growth.

	It is possible that a higher investment level can lead to a higher growth rate even in thelong run. Even if there is no growth in net investment, investment to replace depreciated capitalmay still enhance economic growth to the extent that the replacement capital embodies improved(and more efficient) equipment and technologies. The higher the gross investment rate, the morenew capital is purchased each year, and thus the rate at which new technologies get adopted maybe higher.

**Sources of investment funds**

	Investment involves a trade-off between consumption today and consumption tomorrow.Investment can either be financed by national saving, or by foreign borrowing (saving byforeigners). A basic accounting identity of the national income and product accounts states that:(11)

Investment = Private Saving + Government Saving + Net Foreign Borrowing

	Many analysts in the past ignored the foreign sector, primarily because at the time it wassmall relative to the U.S. economy. These analysts interpreted this basic relationship as sayingthat national investment must equal national saving, where national saving is the sum of privatesaving and public saving.

	However, national investment need not equal national saving if foreigners can invest inthe United States. The experience of the 1980s, when investment in the United States greatlyexceeded national savings, demonstrates how important this source of funds can be. Whendemand for investment funds in the United States outstrips the supply of national savings,interest rates rise in response. Increases in interest rates attract foreign capital to the UnitedStates, and the excess of investment over national saving is financed by foreigners' saving.

	Foreign investment in the United States also is related to the value of the dollar and thetrade deficit. To take advantage of higher interest rates in the United States, foreign investorsfirst must convert their currencies to dollars. This increases demand for the dollar, therebyincreasing the dollar's exchange rate relative to the foreign currency. A stronger dollar makesimported goods relatively cheaper and our exports relatively more expensive. As a consequence,net exports fall and the trade deficit increases. A further accounting identity states that:(12)

Net Foreign Borrowing = (Imports-Exports)
	When net foreign borrowing increases, the trade deficit (the difference between importsand exports of goods and services) also increases. Thus, many people have blamed the U.S. tradedeficits of the 1980s on the low national savings rate during that period.(13)

**Is the United States' saving rate too low?**

Consequences of a low saving rate

	The consequences of a low saving rate depend on the mobility of international capital. Ifcapital is not mobile, then, as discussed above, investment is equal to national savings. When thesaving rate is low, so is the investment rate. Historically, there has been a strong relationshipbetween a country's rate of investment and its rate of saving.(14) Although this relationship hasbecome weaker over time,(15) it is still true that countries with high saving rates also generallyhave high investment rates.

	If capital is mobile (that is, if foreigners can invest in the United States at low cost andwithout a lot of added risk), then investment will not decline as much when the saving rate falls.Instead, investment will be financed by foreigners, either by direct foreign investment in theUnited States or by foreign lending to U.S. investors. When domestic saving rates are low,foreign financing of domestic investment results in a higher rate of investment than would bepossible if investment were financed by domestic saving. Foreign investment in the United Statesdoes increase the productivity of U.S. workers. However, the profits generated by foreigninvestment flow abroad, since the United States has to pay interest on the funds it borrows.Furthermore, eventually the debt will have to be repaid, so the net wealth that is left to futuregenerations of U.S. residents is smaller than it would be if the investment were financed bydomestic saving.

Trends in national saving and investment

	National saving is generally divided into private saving and public saving. Private savingis comprised of household or personal saving and business saving. Households save by notspending all of their disposable income (i.e., after-tax income). In the tables that follow, personalsaving is measured as the difference between household income and household consumption. Inaddition, the National Income and Product Accounts attribute all corporate pension contributionsand earnings on accumulated pension balances as saving by the household sector and, hence, partof personal saving.  Personal saving does not include changes in values of household assets, suchas have occurred over the past few years as stock market values have increased. Businesses saveby retaining some of their earnings. Tables 1 and 2 present net saving, which equals gross savingless capital consumption (depreciation). Public saving reflects the extent to which the Federal,State, and local governments run budget surpluses or deficits. The National Income and ProductAccounts also adjust government surpluses for depreciation of government assets. Hence, publicsaving, like business saving, is measured as net saving. Table 1 presents data on the componentsof net national saving in the United States.

	Table 2 presents net saving by component as a percentage of gross domestic product("GDP"). As the table demonstrates, net business saving, net private saving, and public savingwere all lower during the 1980s then in any of the three previous decades. Net national savingdeclined through most of the 1980s, and has fallen to lower levels in the 1990s.

	Some analysts suggest that because households save out of their disposable income (i.e.,after-tax income), it is more appropriate to examine personal saving relative to disposableincome than to examine personal saving relative to GDP. Table 3 presents personal saving as apercentage of disposable income. Generally, the same trends observed in Table 2 are evident inTable 3.

**TABLE 1**

**TABLE 2**

**TABLE 3**

	Prior to 1980, domestic saving generally financed domestic investment as well asproviding funds for the United States to be a net investor abroad (negative net foreigninvestment). During the 1980s, net savings fell short of domestic investment as a share of GDP.Domestic investment declined from its 1984 peak and net foreign investment provided for thedifference in domestic savings and investment. Thus, although the decline in U.S. saving wascoincident with a decline in investment, this decline was not as severe as it might have been hadthere not been foreign investment.

Comparison between the saving rates of the U.S. and other countries

	The United States' national saving rate is low when compared to that of other nations.Table 2 shows that the United State's net national saving averaged approximately 6 percent ofGDP in the 1980s and approximately 5 percent thus far in the 1990s. The net national saving rateof Canada during the 1980s averaged 7.3 percent of GDP. For Japan, the comparable rate was17.9 percent; Germany, 9.2 percent; Italy, 8.3 percent; France, 6.7 percent; the United Kingdom,4.5 percent; and Australia, 3.4 percent.(16) Table 4 presents a comparison for household or personalsaving. As Table 4 indicates, the household saving rate of the United States during the pastdecade was below the household saving rates of Canada, Germany, Japan, and the UnitedKingdom.(17)

**Table 4.--Net Household Saving as a Percentage of Disposable Household****TABLE 4**
	Generally, saving rates of all nations have declined from the rates of the late 1960s. Inpercentage terms, the decline in the national saving rate of the United States between 1967 and1995 is greater than the decline of the saving rates of Japan and Germany, but comparable to thedecline of some other western, industrialized countries.

	Although many people have pointed to the low saving rate in the United States as a causeof declining productivity, others argue that the United States has long been a relativelylow-saving nation, and yet has enjoyed substantial economic growth. They note that many of thenations with higher saving rates were nations which needed to rebuild after the destruction of waron their own territory.

	Furthermore, some argue that the low saving rate in the United States may be a product ofdemographics, and that the saving rate will increase as the baby boomers continue to enter theirforties and fifties, typically the years during which people do much of their retirement saving.However, others note that in the past, demographic changes have not been very successful atpredicting saving rates.

	In general, the decline in private saving rates is not well understood. It is likely thatdemographic changes, capital market liberalization, increased insurance availability, andincreased social security benefits have all contributed to the decline. However, these factors havenot proved significant enough to account for the total decline in the saving rate. Similarly, thereis no convincing explanation for why saving rates have declined in other nations as well.

**B.  Tax Incentives for Saving**

**Goals of tax incentives for saving**

	Some argue that tax incentives for saving are appropriate because the income tax systemtaxes the return to income that is saved, thereby lowering the return to saving. This lower returnon saving affects both the national saving rate, as well as the assets that taxpayers accumulate forparticular purposes. There is some disagreement about whether the goal of tax incentives forsaving should be to encourage saving for particular purposes or to increase national saving.These purposes are not mutually exclusive; if effective, incentives to save for particular purposeswill increase national saving. However, general saving incentives will not necessarily fulfill morespecific goals. Whether new tax incentives for saving should be aimed at increasing nationalsaving in general, or increasing retirement saving, depends on the perceived adequacy of eachtype of saving.

**Efficacy of tax incentives for saving**

Overview

	Tax incentives for saving may have a number of attributes that may affect a taxpayer'ssaving decision. First, investments in tax-advantaged assets or accounts earn a higher after-taxrate of return than investments in other assets which may lead to an increase or decrease insaving. Second, a targeted savings incentive may provide an incentive for a specific form ofsaving relative to other forms of saving. Third, a tax incentive for saving may provide apsychological incentive to save. Fourth, advertising by banks and other financial institutions oftax-benefitted savings vehicles may influence people's saving decisions. The followingdiscussion focuses on each of these attributes.

Rate of return

	Tax exclusions or deferrals for the income earned from saving increase the rate of returnto saving. When the return on saving increases, the price of future consumption decreases,because the taxpayer has to forgo fewer dollars today to consume a dollar's worth ofconsumption in the future.

	This price decrease can affect saving in two ways. Since future consumption is nowcheaper, taxpayers may choose to substitute future consumption for current consumption. Thiseffect increases saving. When the price of future consumption falls, though, the amount ofinvestment necessary to achieve any particular level of income in the future decreases. Forexample, a taxpayer in the 28-percent marginal tax bracket may set aside $1,300 today to helpdefray tuition expenses of his child 15 years from now. If the taxpayer's investment earns 8percent annually and those earnings are taxed annually at a 28-percent tax rate, in 15 years theinvestment will be worth $3,000. If the taxpayer instead invested in a Roth IRA, an investment ofonly $946 today would be worth $3,000 in 15 years (assuming the same 8-percent return). Thiseffect decreases saving because the tax benefit permits the taxpayer to save less to accumulatethe same amount of money in the future.

	Substantial disagreement exists among economists as to the effect on saving of increasesin the net return to saving. Some studies have argued that one should expect substantial increasesin saving from increases in the net return.(18) Other studies have argued that large behavioralresponses to changes in the after-tax rate of return will not necessarily occur.(19) Empiricalinvestigation of the responsiveness of personal saving to after-tax returns provides no conclusiveresults. Some find personal saving responds strongly to increases in the net return,(20) while othersfind little or a negative response.(21)

	Even if increasing the rate of return on all saving does increase saving generally, it is stillpossible that increasing the rate of return on qualified plans or IRAs would not affect saving. Forincreased rates of return to influence taxpayers to substitute future consumption for currentconsumption, the marginal rate of return on savings must increase so that if the taxpayerincreases saving, that saving receives a higher rate of return. In order for a savings incentive toincrease the marginal return to saving, taxpayers must not be able to finance the tax-preferredsaving profitably by borrowing, must not have other similar assets that can be easily shifted intotax-preferred assets or accounts, and must (in the absence of the saving incentive) intend to saveless than the maximum contribution allowed.

Type of saving

	The above discussion focused on saving in general. Many authors have noted thatqualified plans and IRAs may provide incentives for retirement saving, as opposed to saving forother purposes.(22) For instance, consider the effect of a qualified plan, distributions from whichare subject to additional tax unless held until retirement or used for other qualified purposes. Anindividual who is saving only for a "rainy day" may not have much saving that is expected to lastuntil retirement. When offered a higher rate of return on retirement saving, that individual maychoose to increase the total amount of saving by maintaining the rainy day saving and addingretirement saving.

Psychological factors and effects of increased advertising

	Several observers have observed that factors other than rates of return, or what might betermed "non-economic" factors, are important in motivating saving through qualified plans andother saving incentives.  Researchers have found that both participation in and contributions tovoluntary savings plans, such as qualified pension plans, are significantly higher when employersoffer retirement seminars.  These analysts found that the effect was stronger for nonhighlycompensated employees than for highly compensated employees.  Moreover, the frequency ofsuch seminars was an important correlate to saving behavior, but the provision of writtenmaterials in the absence of seminars appeared to have no effect.(23)  Other research suggests thathigh school level education in financial decision-making appears to raise asset accumulation bythe students once they reach adulthood.(24)

	Some observers have noted that IRAs may have a larger impact on saving than standardeconomic analyses would predict.(25) These observers suggest that the immediate reward of the taxdeduction and the active marketing campaigns in the mid-1980s contributed to the high IRAparticipation rates observed; in fact, IRA participation was larger than was expected. The sharpdecline in advertising after 1986 may explain the decline in IRA contributions among taxpayerswho are still eligible.

	Furthermore, there may also be a psychological factor that contributes to the impact ofIRAs on saving. One study found that taxpayers who owed money to the IRS in excess of taxeswithheld were significantly more likely to make IRA contributions than were other taxpayers.(26)One might expect this psychological factor only to induce deductible IRA contributions, whichwill have an immediate effect on taxes paid. However, another author(27) noted that taxpayers whoowe the IRS money generally have higher incomes and this may be why they are more likely tocontribute to IRAs, rather than any psychological factor.

**C.  The Adequacy of Retirement Savings**

**1.  Economic status of the elderly**

**Sources of retirement income**

	Social Security is the largest source of retirement income (39 percent in 1996), followedby earnings (22 percent in 1996), employee pensions, annuities, and alimony (18 percent in1996), and income from assets (17 percent in 1996).(28)  (See Figure 1.)  Many researchers haveattempted to measure whether people have adequate savings for retirement. A common measureof retirement savings adequacy is called the replacement rate, which is defined as the ratio ofretirement income to income during the working years.

**FIGURE 1
	The issue of what replacement rate should be called adequate depends on a number offactors. A replacement rate of 100 percent means that the person's income during retirement isequal to their income during working years. There are a number of reasons that a replacementrate of 100 percent may not be optimal. First, people may desire to have more income during theworking years because some of that income is saved for retirement. If people choose to haveconstant consumption over time, they save during their working years and dissave duringretirement. Thus, if a household has a 10-percent saving rate during their working years, a 90-percent replacement rate would be sufficient for the household to maintain constant consumptionin retirement. Second, most elderly own their own homes (in 1996, more than 81 percent of thosehouseholds headed by an individual aged 65 to 74 and 75.3 percent of households headed by anindividual age 75 or over(29)) and most of these have paid off their mortgages. Only 25 percent ofhouseholds headed by a person aged 65 to 74 years old had any mortgage or home equity debt.Among households headed by a person aged 75 years or older, only seven percent had anymortgage or home equity debt.(30)  Thus, most elderly receive housing without incurring anyexpenses beyond maintenance, property taxes, insurance, and utilities, whereas during theirworking years, they were likely to have been making mortgage payments. Third, few elderlyhouseholds care for children, and therefore household expenses are likely to be lower. Fourth, theelderly are generally covered by Medicare, which provides insurance against large medicalexpenses and pays for most expenditures on health. Fifth, retirement income generally bears alower tax burden than does wage income.  Salaries and wages are subject to the payroll tax. Retirement benefits are not.  Also, Social Security benefits, which represent the major source ofretirement income, are largely untaxed.(31) Thus, Social Security benefits can be smaller thanincome earned during the working years and still provide the same after-tax income. For thelowest income groups, this effect is not large since earned income is subject to the payroll tax,but may not be subject to the income tax.

	These arguments suggest that the appropriate replacement rate for the elderly to haveadequate retirement savings is less than 100 percent. However, there may be some factors whichdictate that the replacement rate should be higher than 100 percent. First, although the elderly arecovered by Medicare, they are also more likely to incur large medical expenses which may not becompletely covered by medicare. Similarly, Medicare generally does not cover nursing homecare or the costs of care in other long-term care facilities, and only those elderly poor enough toreceive Medicaid or eligible through veterans' assistance are covered.  Second, the elderly mayfind it necessary to hire service providers for tasks that younger households provide forthemselves.  For example, elderly households may contract for home repair work that younghouseholds self-provide.

	Replacement rates for Social Security and pension income for retired workers arecalculated using two methods. The first method calculates the ratio of Social Security andpension benefits relative to a worker's highest career earnings.(32) The second method calculatesbenefits relative to the average earnings in the five years preceding retirement.(33) It seems likelythat the career high earnings overstate average earnings, and earnings during the five yearspreceding retirement understate average earnings. Thus, these two replacement rates may be seenas upper and lower bounds of estimates of the replacement of average career earnings. Thesereplacement rates measure the replacement of income through retirement benefits, and do notinclude any income earned during retirement or any income from savings. Such calculationsindicate that Social Security and pension benefits replace roughly 33 percent of the career highearnings and 50 percent of earnings over the last five years for individuals. When spousalbenefits are taken into account, replacement rates are slightly higher, averaging 30 to 33 percentof highest earnings but 60 to 70 percent of last earnings. Such calculations also demonstrate thatreplacement rates are highest for the poor. For the lowest income quartile, individual replacementrates varied between 34 and 39 percent of highest earnings, and 72 to 94 percent of lastearnings.(34)

	Analysis of more recent retirees suggests similar outcomes.  A recent study calculatedreplacement rates for families with at least one individual between the ages 52 and 61 years oldin 1992.  Such individuals generally would be expected to retire between 1993 and 2006.(35)  Thisstudy attempted to account for all sources of non-earnings income of retiree households: socialsecurity benefits; pension benefits; private saving; equity in personal residences; and equity inbusiness assets.  The authors calculate that in 1992, prior to actual retirement, these households,on average, held assets sufficient to produce income in retirement that would replace 86 percentof their pre-retirement income.  For households in the median 10 percent of the population (i.e.,those with incomes between the 45th and 55th percentiles of the income distribution), thereplacement rate was 97 percent.  The bottom 10 percent of earners had the highest replacementrates and the top five percent of earners had the lowest replacement rates.(36)  However, otheranalysts reviewing the same data suggest a less optimistic outlook.  They conclude that, if themedian household intended to retire at age 62, it would need to save 16 percent of future annualearnings to preserve pre-retirement consumption.  The authors observe that a saving rate of 16percent exceeds the median household's observed saving rate of approximately 5 percent.(37)

	Finally, Social Security benefits have increased over time. Social Security benefitsrelative to the income of the elderly have increased substantially over the past 40 years.  On theother hand, a current concern is whether the Federal Government will be able to continue payingthe promised benefits.  If benefits were to be reduced for future retirees, the replacement ratesreported above would overstate likely future replacement rates.

**Poverty**

	Another method used to examine the economic status of the elderly is to compare theirrates of poverty to those of the general population. Poverty among the elderly has declineddramatically over the last 30 years, from over 35 percent in 1959 to 12.6 percent in 1985. By1985, the poverty rate of the elderly was less than the poverty rate of the general population. In1996, the poverty rate of the elderly was 10.8 percent and the poverty rate of elderly personsliving in families (with a spouse or children) was 5.6 percent, lower than for any other group.(38)The major explanation for this decline in poverty is the increase in Social Security benefits andcoverage described above.

**2.  Expected retirement income and needs of current workers**

	The above discussion demonstrates that, as a group, the elderly are as well off as the restof society, indicating that, given Social Security and pension benefits, savings were adequate.However, to determine whether the savings of current workers are enough to provide adequateretirement income, it is necessary to examine how this group might differ from current retirees.

**Social security and employer-provided pension plan coverage**

Social security coverage.--Because social security coverage of workers has increased overtime,(39) and because the labor force participation of women has also been increasing, currentworkers are more likely to be covered by social security than current retirees.  In 1996, out ofmore than 150 million workers, 6.6 million workers were not in employment covered by SocialSecurity.  Most of these were Federal, State, and local government employees.  The percentageof uncovered workers will further decrease in the future as all Federal employees hired after 1983are covered and beginning in 1991 all State and local employees who are not members of apublic retirement system were mandatorily covered under Social Security.

Current pension coverage.--Similarly, pension coverage of current workers is alsosubstantially larger than that of current retirees.(40)  The term "covered," as used here, means thatan employee is accruing benefits in an employer pension or other retirement plan. The bestcurrent comprehensive evidence on pension coverage comes from a supplement to the April 1993Current Population Survey conducted by the Bureau of the Census.  The data referred to belowcome from that survey unless otherwise noted.

	As of April 1993, 63 percent of full-time wage and salary workers employed in theprivate sector reported that they worked in firms with an employer-sponsored pension plan. Halfof the full-time wage and salary workers employed in the private sector were covered by anemployer-sponsored pension plan. Most of these workers were covered by basic defined benefitor defined contribution plans (23 percent), and another 10 percent had both a basic plan and a401(k) type contributory plan (see Table 5).(41) For another 17 percent, the 401(k) type plan wastheir only retirement plan.

	Pension coverage varies substantially among full-time, privately employed workers.Differences depend on the age of the worker, job earnings, the industry of employment, and thesize of the firm.  Younger workers are much less likely to be covered by a pension than middleaged and older workers. Coverage rates rise steadily from 21 percent for those under age 25 toabout 60 percent for those between ages 40 and 60 before falling off somewhat. This patternholds for both men and women. However, the jump in coverage for middle aged men is slightlylarger than the increase for middle aged women (see Table 6).

	Higher paying jobs are more likely to offer pensions. Just 8 percent of full-time privatewage and salary workers earning less than $10,000 per year in 1993 were covered compared to81 percent of those earning $50,000 or more (see Table 7). Coverage may be higher for higherpaying jobs because of the greater value of the pension tax benefits to workers in higher taxbrackets and because of the declining replacement rate of Social Security at higher earningslevels.

**TABLE 5
**TABLE 6
**TABLE 7
	Significant differences in coverage also are apparent between full-time private wage andsalary workers and other wage and salary workers. Coverage is much lower among part-timeworkers and much higher among public employees. Among part-time, private wage and salaryworkers, 12 percent are covered. Seventy-seven percent of public sector wage and salary workersare covered including 85 percent of those who are full-time workers (see Table 8).

	Coverage is much lower for smaller firms. Smaller firms are less likely to offercomprehensive fringe benefit packages as part of total compensation. Only 13 percent offull-time private wage and salary workers in firms with fewer than 10 employees are covered.The rate rises with employer size but does not reach 50 percent (the average across all firm sizes)until firms have 100 or more employees.

	The data above report pension coverage of individuals.  When assessing the effectivenessof pensions in providing retirement income, it is more relevant to think of pension coverage ofhouseholds.  Thus, if both the husband and wife work and only the wife accrues pension benefits,the tables above would record that 50 percent of individuals are covered by a pension.  However,in this example, 100 percent of the households (the married couple) receive pension retirementbenefits.  A recent study highlights the importance of this distinction.  It found that in 1992, halfof all individuals aged 51 to 61 years old, that is on the verge of retirement, had rights to apension from a current or prior job, but two-thirds of all households with at least one memberaged 51 to 61 years old owned the rights to a pension from a current or prior job.(42)

Trends in pension coverage.-- At the outset of World War II, private employer pensionswere offered by about 12,000 firms. Pensions spread rapidly during and after the war,encouraged by high marginal tax rates and wartime wage controls that exempted pensionbenefits. By 1972, when the first comprehensive survey was undertaken, 48 percent of full-timeprivate employees were covered. Subsequent surveys found that coverage reached 50 percent in1979, but by 1983 had fallen back to 48 percent. The decline continued in the 1980s, reaching 46percent in 1988.(43) By 1993, coverage had returned to 50 percent.

**TABLE 8
	The decline in coverage in the 1980s was concentrated among younger men. Thecoverage rate among older men has fallen less dramatically, and among women it has risen atsome ages and fallen at others.

	The decline in pension coverage has occurred at the same time that employers have beenshifting from defined benefit plans. Defined benefit plans provided basic plan coverage for 87percent of private wage and salary workers in 1975.(44)  This proportion dropped to 83 percent by1980 and to 71 percent by 1985. This shifting composition has largely been the result of rapidgrowth in primary defined contribution plans. Employee stock ownership plans and 401(k) planshave been among the most rapidly growing defined contribution plans.  

	Figures 2 and 3 utilize data from the Federal Reserve Board's Flow of Funds Accounts toshow the value of assets accumulated in defined benefit and defined contribution pension plans. At the end of 1997, the value of assets in each type of plan was equal to approximately $1.8trillion.  The figures also document the rapid accumulation in assets in defined contribution planscompared to that of defined benefit plans over the past 10 years.

**FIGURE 2**
**FIGURE 3**
**Personal saving**

Aggregate saving.--Although coverage by pensions and Social Security is expected to behigher for current workers than it is for current retirees, the saving rate of current workers may belower than the rate at which current retirees saved during their working lives. This would implythat although two sources of retirement income, Social Security and pension benefits, areexpected to be higher for current workers, another source, income from savings, may be lower.

	The measure of personal saving used in the National Income and Product Accountsattributes all corporate pension contributions and earnings to the household sector. Thus, theincreased pension coverage is already included in the measure of household saving. Table 2,above, and Figure 4, show that personal saving has been declining over the past 15 years. Privatesaving, which includes the saving of business, and which may provide a better measure of totalhouseholds saving since businesses are ultimately owned by household, exhibits the samedownward trend. Thus, the saving of the current generation of workers for their retirement seemsto be low relative to the past.  On the other hand, the National Income and Product Accountsmeasures of saving measure only cash flows not consumed.  The purpose of saving for retirementis to accumulate wealth which can be drawn upon in retirement.  If, as in the past few years, themarket value of assets increases, adequate wealth accumulation may be attained with relativelylow saving rates.

**FIGURE 4**
Retirement saving of individuals.--It is difficult to determine how much saving outside ofqualified plans is "retirement saving."  Contributions to IRAs represent one measure of such non-pension plan retirement saving.  Assets within IRAs have grown substantially over the past 10years.  Figure 5 below shows that IRA balances, approximately $1.6 trillion in 1996, are nearlyequal in size to the asset balances in both defined benefit and defined contribution plan. (SeeFigures 2 and 3 above.)

Figure 5

	The growth of these balances is impressive in its magnitude, particularly given therelatively modest contributions of recent years.  Table 9, below, reports IRA contributionsbetween 1979 and 1996.  Deductible IRAs have been very popular with taxpayers. As Table 9reports, contributions to IRAs increased significantly when eligibility restrictions wereeliminated in 1982. At the peak in 1985, over $38 billion was contributed to IRAs. Thisrepresented almost 20 percent of personal saving for that year.

	In addition to annual contributions, the current value of IRA balances, as reported inFigure 5, is comprised of balances rolled over into IRAs from qualified plans and increases in themarket valuation of IRA investments.

**Table 9**
	As with pension coverage, IRA coverage is not universal.  Tables 10 and 11 summarizeinformation on IRA participation in 1985 and 1996.  Some have expressed concern about thedistribution of taxpayers who contribute to IRAs.  The concern is two-fold.  First, unequalparticipation may lead to some taxpayers having accumulated substantial wealth for retirementwhile other taxpayers have accumulated little wealth.  Second, because IRA contributions receivepreferential tax treatment, the distribution of the tax expenditure may be viewed as inequitable.In 1985, 71 percent of all returns reporting IRA contributions had AGI below $50,000, and 29percent had AGI of $50,000 or above. However, taxpayers with AGI of $50,000 or aboverepresented only 8 percent of all returns eligible for IRAs. Thus, although many lower-incomeindividuals contributed to IRAs, most did not, whereas most taxpayers with AGI of $50,000 orabove did contribute when eligible. Taxpayers with AGI of $50,000 or above were more thanfour times as likely to contribute to an IRA than were taxpayers with AGI below $50,000--61.8percent of eligible returns with AGI of $50,000 or above reported contributions to an IRA, whileonly 13.8 percent of eligible returns with AGI below $50,000 reported IRA contributions. On theother hand, the data for 1985 or 1996 represent one-year snapshots of IRA contributions.  If theearning power of young individuals increases over time, an individual who did not contribute toan IRA when earning $20,000 per year may later contribute when earning $40,000 per year.

	Higher income taxpayers made larger contributions as well. Taxpayers with adjustedgross incomes of $50,000 or more constituted approximately 29 percent of all IRA contributorsin 1985, but accounted for more than 35 percent of IRA contributions. In 1996, taxpayers withadjusted gross incomes of $50,000 or more constituted approximately 25 percent of all IRAcontributors, but accounted for approximately 34 percent of IRA contributions. 

	Because the value of the IRA is the effective exemption of the earnings from tax, thehigher a taxpayer's marginal tax rate, the more valuable the ability to invest through an IRA.Because people in higher income classes generally have higher tax rates, the value of their IRA islarger than the value of IRAs for taxpayers in lower income classes. However, the value of theIRA depends on tax rates throughout the period the IRA is held, and not just the marginal tax ratein the year the contribution is made.

**Table 10**
**Table 11**

It is too soon to assess the effects that the Taxpayer Relief Act of 1997 may have on IRAparticipation and retirement asset accumulation.  Table 12, below, presents the Joint Committee onTaxation staff estimates of the eligibility of taxpayers to make deductible IRA contributions underpresent law for 1999.  The percentage of taxpayers eligible to make deductible IRA contributionsdiffers modestly by filing status.  Among married couples filing joint returns, 58 percent are eligiblefor up to a $4,000 deductible contribution, an additional 15 percent are eligible for up to a $2,000deductible contribution, and approximately 20 percent are ineligible to make a deductiblecontribution.  Among single filers and head of household filers, only 14 percent are ineligible to makea deductible contribution.  
**Table 12a**
**Table 12b**
	Other authors have noted that even the taxpayers with low income who did contribute to IRAsowned more financial assets than other low-income taxpayers and that, therefore, IRA contributorsmay not be representative of taxpayers in general. Table 13 presents information on the assets ofhouseholds with IRAs compared to the assets of households without IRAs.  For each incomecategory, the table reports the gross financial asset holdings and non-retirement asset holdings of themedian (50th percentile) household.(45) As the table details, families with IRAs have larger holdings offinancial assets than do families without IRAs.  However, it is also the case that families with IRAshave larger holdings of financial assets than do families without IRAs even when all IRA and pensionassets are excluded.  Part of the reason that IRA contributors have larger holdings of assets thannoncontributors is that contributors to IRAs tend to be older than noncontributors, and oldertaxpayers have been accumulating assets longer.
**TABLE 13**
Estimates of saving rate adequacy.--The Congressional Budget Office ("CBO") reported thatwhile the saving rate of current workers appears low relative to the past, this may not imply that thelevel of savings is inadequate for retirement. That CBO study concludes that the so-called "babyboom" generation appears to be accumulating assets at a rate equivalent to that of their parents whoare currently retired. The CBO concludes that the continued increase in real wages, the fact that babyboomers are more highly educated than their parents, and the increased participation of women in thelabor force portend "increases in household incomes of baby boomers in retirement."(46)  Some havecriticized the conclusion of this study as too optimistic. Critiques note that finding that baby boomershave accumulated approximately the same amount of assets as had their parents at a similar age doesnot bode well for retirement income. Having the same amount of assets would imply only thepotential for the same amount of income as experienced by current retirees, and as incomes grow thiswould imply future retirees would be less well off compared to the rest of society than are currentretirees. Critics also note that current retirees benefitted from increases in Social Security benefits andunexpected capital gains on housing that the baby boomers may not reasonably expect toexperience.(47)  All studies of this question have emphasized the important difference within the so-called baby boom generation.  Most studies note that those with the least education appear to be leastwell prepared for retirement in terms of accumulating private assets.  Some studies suggest that thefirst cohort of the baby boom generation is likely to be better prepared for retirement than the lastcohort of the baby boom generation.(48)

**3.  Increased retirement costs**

	Finally, it is possible that the need for retirement income is increasing over time. Increases inlife expectancies and trends toward earlier retirement increase the number of years in retirement andtherefore increase the need for saving. Furthermore, the normal retirement age for social security waschanged in 1983. For those born in 1937 or earlier, the normal retirement age is 65 years old.  Thus,in 1999, the normal retirement for Social Security (the age at which retirees receive full benefits) is65.  For those individuals born in 1960 or later, the normal retirement age is 67 years old.  That is, by2027, the normal retirement age will be 67 years. If the increase in the normal retirement age meansthat individuals will be working more years, then current saving need not adjust. However, if thehistorical trend toward earlier retirement continues, then the increase in normal retirement age forreceipt of full social security benefits means that individuals should increase their retirement saving.

	Similarly, increased life expectancies and rapid medical cost inflation increase the probabilityof large medical expenses. Out-of-pocket medical expenditures for the elderly have been steadilyincreasing over the last 15 years. Also, many people have noted that the probability of an individualrequiring long-term care some time in their lifetime has been increasing.

1.   This document may be cited as follows:  Joint Committee on Taxation, *Present Lawand Background Relating to Tax Incentives for Savings* (JCX-7-99), February 23, 1999.
2.   For a detailed comparison of Roth IRAs and deductible IRAs, see Joint Committee onTaxation *Description and Analysis of Tax Proposals Relating to Individual Savings and IRAs*(JCS-2-97), March 3, 1997.
3.   Early distribution of converted amounts may also accelerate income inclusion ofconverted amounts that are taxable under the 4-year rule applicable to 1998 conversions.
4.   Pursuant to the Taxpayer Relief Act of 1997, qualified plans maintained by State andlocal governments are not subject to the nondiscrimination rules applicable to other qualifiedplans.
5.   Under present law, an employee is treated as highly compensated if the employee (1)was a 5-percent owner of the employer at any time during the year or the preceding year or (2)either (a) had compensation for the preceding year in excess of $80,000 (for 1999) or (b) at theelection of the employer had compensation for the preceding year in excess of $80,000 (for1999) and was in the top 20 percent of employees by compensation for such year.  A nonhighlycompensated employee is an employee other than a highly compensated employee.
6.   Qualified plans are subject to regulation under Federal labor laws (Title I of ERISA) aswell as under the Internal Revenue Code. The ERISA rules generally relate to the rights of planparticipants, reporting and disclosure, and the obligations of plan fiduciaries.
7.   Annual benefits may in some cases exceed this dollar limitation under grandfather andtransition rules contained in the Tax Equity and Fiscal Responsibility Act of 1982 and otherlegislation.
8.   State and local governments may not maintain section 401(k) plans, but can maintainsimilar arrangements.  As described below, educational institutions may maintain tax-shelteredannuities, which operate in a manner similar to section 401(k) plans, i.e., they allow employeesto make elective contributions.  Similarly, many State and local governments maintain section457 plans (described below) which in practice operate like section 401(k) plans.  These plans arenot subject to the nondiscrimination rules applicable to section 401(k) plans.
9.   As with qualified plans, State and local governmental tax-sheltered annuities are notsubject to nondiscrimination rules.
10.   In addition, an excise tax applies if a contribution is made by any person to aneducation IRA established on behalf of a beneficiary during any taxable year in which anycontributions are made by anyone to a qualified State tuition program on behalf of the samebeneficiary.
11.   The national income and product accounts measure the flow of goods and services(product) and income in the economy. Two common measures of the size of the economy are thegross domestic product ("GDP") and the gross national product ("GNP"). GDP measures thetotal value of the output of the U.S. economy. GNP measures the total annual value of goods andservices produced by U.S. residents, i.e., their gross income. GDP is greater than GNP by thepayment of factor income to the rest of the world (such as profits to foreign owners of U.S. basedbusinesses), but is less than GNP by the amount of factor income received from the rest of worldby U.S. residents (such as wages paid to U.S. workers who work abroad). Examining the incomemeasure, GNP, is useful in understanding the trade-off between consumption tomorrow andconsumption today. GNP may be measured in several ways. One way is to measure GNP byexpenditure on final product in the economy. By this measure,

	(1) GNP = C + I + G + (X-M).

	Equation (1) is an accounting identity which states that gross national product equals thesum of consumption expenditures (C), investment expenditures on plant, equipment, inventory,and residential construction (I), governmental purchases of goods and services (G), and netexports (exports less imports of goods and services or X-M).

	An alternative is to measure GNP by the manner in which income created in the economyis disposed of. By this measure,

	(2) GNP = C + S + T.

	Equation (2) is another accounting identity which states that gross national product equalsthe sum of consumption expenditures, saving by consumers and businesses (S), and net taxpayments to the government (T) (net tax payments are total tax receipts less domestic transfer,interest, and subsidy payments made by all levels of government).

	Because both measures of GNP are simple accounting identities, the right hand side ofequation (1) must equal the right hand side of equation (2). From this observation can be derivedan additional national income accounting identity,

	(3) I = S + (T-G) + (M-X)

	This is the basis for the statement that national investment equals private saving (S), pluspublic saving (T-G), and net imports (M-X). 
12.   This ignores the relatively small amount of unilateral transfers to foreigners. For amore detailed discussion of foreign trade and domestic saving and investment, see JointCommittee on Taxation, *Background and Issues Relating to the Taxation of Foreign Investmentin the United States* (JCS-1-90), January 23, 1990. 
13.   For instance, see Hatsopoulos, Krugman, and Summers, "U.S. Competitiveness:Beyond the Trade Deficit," *Science*, 15 July 1988, vol. 241, pp. 299-307. 
14.   See, for instance, Martin Feldstein and Charles Horioka, "Domestic Saving andInternational Capital Flows," *Economic Journal*, vol. 90 (June 1980), pp. 314-29. 
15.   See Phillippe Bacchetta and Martin Feldstein, "National Saving and InternationalInvestment," in Douglas Bernheim ad John Shoven (eds.), *National Saving and EconomicPerformance*, (Chicago: The University of Chicago Press), 1991.
16.   Organization for Economic Co-Operation and Development, *National Accounts,1960-1989*, vol. 1, 1991. 
17.   The data on international saving rates in the text and in Table 4 are not directlycomparable to the data in Tables 2 and 3 because such data are not always compiled consistentlyacross nations. For example, in computing household saving rates, the OECD subtractshousehold interest expense from income to determine U.S. household disposable income. TheBureau of Economic Analysis does not make a similar adjustment in defining householddisposable income. Also, while the source of the international comparisons draws on data fromthe OECD, which attempts to provide data on an internationally comparable basis, the data arenot fully comparable. For example, in computing household saving rates, the definition of thehousehold sector is not identical across all countries. In particular, except in Japan, France, andItaly, private nonprofit institutions are included in the household sector. See, Andrew Dean,Martine Durand, John Fallon, and Peter Hoeller, "Saving Trends and Behaviour in OECDCountries," OECD, Economics and Statistics Department Working Paper, No. 67, June 1989. 
18.   See, Lawrence H. Summers, "Capital Taxation and Accumulation in a Life CycleGrowth Model," *American Economic Review*, 71, September 1981. 
19.   See, David A. Starrett, "Effects of Taxes on Saving," in Henry J. Aaron, HarveyGalper, and Joseph A. Pechman (eds.), *Uneasy Compromise: Problems of a HybridIncome-Consumption Tax* (Washington: Brookings Institution), 1988. 
20.   See, Michael Boskin, "Taxation, Saving, and the Rate of Interest," *Journal of PoliticalEconomy*, 86, April 1978. 
21.   See, George von Furstenberg, "Saving," in Henry Aaron and Joseph Pechman (eds.),*How Taxes Affect Economic Behavior* (Washington: Brookings Institution), 1981. 
22.   See the discussion in William G. Gale and John Karl Scholz, "IRAs and HouseholdSaving," *American Economic Review*, 84, December 1994, and Steven F. Venti and David A.Wise, "Tax Deferred Accounts, Constrained Choice, and Estimation of Individual Saving,"*Review of Economic Studies*, 53, August 1996. 
23.   Patrick J. Bayer, B. Douglas Bernheim, and John Karl Scholz, "The Effects ofFinancial Education in the Workplace: Evidence from a Survey of Employers," National Bureauof Economic Research, Working Paper #5655, July 1996.
24.   B. Douglas Bernheim, Daniel M. Garrett, and Dean M. Maki, "Education and Saving:The Long-Term Effects of High School Financial Curriculum Mandates," National Bureau ofEconomic Research, Working Paper #6085, July 1997.
25.   See, Richard H. Thaler, "Psychology and Savings Policies," *American EconomicReview*, 84, May 1984. 
26.   Daniel Feenberg, and Jonathan Skinner, "Sources of IRA Saving," in LawrenceSummers (ed), *Tax Policy and the Economy*, vol. 3, (Cambridge: Massachusetts Institute ofTechnology Press), 1989. 
27.   Jane Gravelle, "Do Individual Retirement Accounts Increase Savings?" *Journal of**Economic Perspectives*, 5, Spring 1991. 
28.   Calculations by staff of the Joint Committee on Taxation based on Social SecurityAdministration, *Annual Statistical Supplement to the Social Security Bulletin, 1998*, November1998, Table 3.E.3.
29. *Statistical Abstract of The United States 1997*, Table 1200, p. 725. 
30. *Statistical Abstract of The United States 1997*, Table 780, p. 513. 
31.   Social security benefit recipients with modified AGI exceeding certain limits have toinclude up to 85 percent of their benefits in income. The Joint Committee on Taxation staffprojects that in 1999, 33 percent of all elderly will include some portion of Social Securitybenefits in taxable income.
32.   Earnings are indexed by the rate of wage growth. Highest career earnings are definedas the average of the highest five years of earnings. 
33.   This measure is calculated only for those individuals who worked a significant amountduring the five years preceding retirement. 
34.   Susan Grad, "Earnings Replacement Rates of New Retired Workers," *Social SecurityBulletin*, 53, October 1990.
35.   Alan L. Gustman and Thomas L. Steinmeiner, "Effects of Pensions on Savings:Analysis with Data from the Health and Retirement Study."  National Bureau of EconomicResearch, Working Paper #6681, August 1998.  Replacement rates in this study are measuredrelative to pre-retirement earnings of the household.
36.   The reported replacement rates measured replacement income in terms of nominaldollars.  If the calculation were to account for future inflation, the authors estimated that real(inflation adjusted) replacement rates averaged 60 percent across all of the households in thesample and 66 percent of the real value of the pre-retirement earnings for the median 10 percentof households.  See, Gustman and Steinmeier, "Effects of Pensions on Savings," pp. 18-19.
37.   James F. Moore and Olivia S. Mitchell, "Projected Retirement Wealth and SavingsAdequacy in the Health and Retirement Study," National Bureau of Economic Research,Working Paper # 6240, October 1997.  Moore and Mitchell estimate that the necessary savingrate falls to 7 percent per year if the household would defer retirement until age 65.  Moore andMitchell measure "pre-retirement consumption" by reference to replacement rates of less than100 percent.  Thus, if a 100-percent replacement rate were the goal, an even greater saving ratewould be necessary.
38.   Social Security Administration, *Annual Statistical Supplement to the Social SecurityBulletin, 1998, November 1998*, Table 3.E.2.
39.   For a discussion of the legislative history of social security coverage, see Committeeon Ways and Means, *1998 Green Book* (WMCP 105-7), May 19, 1998, pp. 6-11.
40. *EBRI Databook on Employer Benefits*, Fourth Edition 1997.  Table 10.2 on page 84reports that in 1975, 31 million employees were participants in private sector pension plans.  By1993 this number had expanded to 45 million employees.  Among all civilian workers, thepercentage participating in a pension plan has grown from 44 percent in 1979 to 51 percent in1993 (Table 10.4, p. 86).
41.   Some private-sector employees contribute to 403(b) tax-sheltered annuities instead of401(k) plans.
42.   Gustman and Steinmeier, "Effects of Pensions on Savings," pp. 8-9.
43.   J.R. Woods, "Pension Coverage Among Private Wage and Salary Workers:Preliminary Findings from the 1988 Survey of Employee Benefits," *Social Security Bulletin*, 52,p.17.
44.   J.A. Turner and D. Beller, *Trends in Pensions,* (Washington, D.C.: U.S. Department ofLabor), 1989, pp. 65 and 357.
45.   "Gross financial assets" reports only the "asset side" of the family's balance sheet. That is, these figures do not net out the value of any of the family's financial liabilities such asmortgage or consumer debt.  "Gross financial assets less retirement assets" subtracts IRA anddefined contribution plan asset balances from reported gross financial assets.  Neither figureincludes a calculation of the value of any accrued defined benefit pension plan benefits.
46.   Congressional Budget Office, "Baby Boomers in Retirement: An Early Perspective,"September 1993, p. xiv. Also see, Joyce Manchester, "Baby Boomers in Retirement: An EarlyPerspective," in Dallas Salisbury and Nora Super Jones (eds.), *Retirement in the 21st Century:Ready or Not?* (Washington: Employee Benefits Research Institute), 1994. 
47.   B. Douglas Bernheim, "Adequacy of Savings for Retirement and the Role ofEconomic Literacy," in Dallas Salibury and Nora Super Jones (eds.), *Retirement in the 21stCentury: Ready or Not?* (Washington: Employee Benefits Research Institute), 1994.  Also seeLaurence Kotlikoff and Alan J. Auerbach, "U.S. Fiscal and Savings Crises and Their Impact forBaby Boomers" in the same volume.  Bernheim and Kotlikoff and Auerbach project potentialconsumption paths of baby boomers based on their current accumulation of assets andconsumption behavior.  Both studies conclude that baby boomer saving is, on average,inadequate for that generation to maintain its standard of living in retirement.  Bernheimestimates that, holding constant their participation in qualified plans, baby boomer non-retirement plan saving is at one-third the rate necessary to maintain pre-retirement consumption.
48.   For a brief review of this literature see Daniel B. Radner, "The Retirement Prospects ofthe Baby Boom Generation," *Social Security Bulletin*, 61, 1998, pp. 3-19.   This web site was copied prior to December 11, 2006. It is now a Federal record managed by the National Archives and Records Administration. External links, forms, and search boxes may not function within this collection.     Learn more.       [hide]**********