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76–170—PDF 2011

S. HRG. 112–555 

TAX REFORM OPTIONS: 

PROMOTING RETIREMENT SECURITY 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

SEPTEMBER 15, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 3 

WITNESSES 

VanDerhei, Dr. Jack, research director, Employee Benefit Research Institute, 

Washington, DC ................................................................................................... 5 

Gale, Dr. William G., senior fellow, Brookings Institution, Washington, DC .... 7 

Miller, Judy A., chief of actuarial issues and director of retirement policy, 

American Society of Pension Professionals and Actuaries, Arlington, VA ...... 10 

Friedman, Karen, executive vice president and policy director, Pension Rights 

Center, Washington, DC ...................................................................................... 12 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 31 

Friedman, Karen: 

Testimony .......................................................................................................... 12 

Prepared statement with attachments ........................................................... 33 

Responses to questions from committee members ......................................... 64 

Gale, Dr. William G.: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 73 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 84 

Miller, Judy A.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 86 

Responses to questions from committee members ......................................... 103 

VanDerhei, Dr. Jack: 

Testimony .......................................................................................................... 5 

Prepared statement with attachments ........................................................... 113 

Responses to questions from committee members ......................................... 145 

COMMUNICATIONS

American Benefits Council, et al. ........................................................................... 157 

American Council of Life Insurers (ACLI) ............................................................. 169 

Americans for Secure Retirement .......................................................................... 195 

Center for Fiscal Equity .......................................................................................... 199 

The ESOP Association ............................................................................................. 207 

Investment Company Institute (ICI) ...................................................................... 213 

National Small Business Association (NSBA) ....................................................... 223 

The Savings Coalition of America .......................................................................... 227 

Swagel, Phillip ......................................................................................................... 230 

(III) 

(1) 

TAX REFORM OPTIONS: 

PROMOTING RETIREMENT SECURITY 

THURSDAY, SEPTEMBER 15, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:08 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Cardin, Hatch, and Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; and Thomas Reeder, Senior Benefits Counsel. Republican Staff: Jeff Wrase, Chief Economist; Jim 

Lyons, Tax Counsel; and Preston Rutledge, Tax and Benefits Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

I apologize for the delay. This so-called super-committee meeting 

lasted longer than intended. It was a very good meeting, and I am 

very heartened with its progress, but it did cause some delay here. 

Franklin D. Roosevelt once said, ‘‘True individual freedom cannot 

exist without economic security and independence.’’ For true economic security, Americans approaching retirement need to know 

they will have enough money every month to get by. Retirement security is often described as a 3-legged stool. The first of those legs, 

Social Security, is crucial to the stability of that stool. 

Prior to Social Security’s enactment, half of all seniors lived in 

poverty. Since that time, seniors in Montana and across the country have come to rely on Social Security benefits they have earned 

through years of hard work. So we must, and we will, do what it 

takes to ensure that leg of the stool remains sound. 

The average Social Security beneficiary receives only slightly more than $14,000 each year. As a result, most Americans will not 

be able to retire on Social Security alone. So today we examine the 

other two legs of the retirement stool: personal savings and 

employer-provided retirement plans. 

Our tax code has several key provisions that encourage Americans to save for their retirement with tax benefits applied to pensions, individual retirement accounts, and employee stock ownership plans. These tax incentives add up; in total, they cost more 

than the tax preference for employer contributions to health insurVerDate Nov 24 2008 14:44 Oct 10, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\76170.000 TIMD
2 

ance plans, and they cost nearly 50 percent more than the tax expenditure on the home mortgage interest deduction. 

The United States has the most successful private retirement 

system in the world, but, for the amount our country spends on retirement savings, are we getting enough bang for our buck? For 

much of the period from World War II through the mid-1980s, the 

majority of retiring American workers could depend on a pension 

plan from their employer. These defined benefit plans provided lifelong monthly payments to retirees. The retiree could not outlive his 

retirement plan. 

In 1980, 84 percent of Americans working for large and mediumsized employers participated in these plans, but by 2007, less than 

one-third of workers in large and medium-sized companies participated in this type of plan. These numbers continue to shrink. 

This dramatic trend away from pension plans has been coupled 

with a trend toward defined contribution plans. In a defined contribution plan, workers receive a lump sum when they retire. 

Under these types of plans, both the employer and employee commonly have the opportunity to contribute to the employee’s account. The increasing reliance on defined contribution plans blurs 

the line between personal savings and retirement benefits. 

The individual manages his or her own account. This account 

does not necessarily have to be used for retirement purposes. A retiree must avoid the temptation to spend these savings prior to retirement or spend too much too early in retirement. Unlike defined 

benefit plans, defined contribution plans do not provide life-long 

payments that can be used to cover long-term care expenses. 

This means the retiree can outlive his retirement savings, whether due to inflation, market declines, unexpected health expenses, or 

even the good fortune of living longer than expected. And many do. 

In spite of the tremendous tax preferences for retirement savings, 

many Americans are left without sufficient resources to maintain 

a comfortable retirement. 

The Government Accountability Office found that the median retirement account balance for Americans aged 60 to 64 was $60,000. 

This means the average retiree could only spend about $4,200 per 

year on top of Social Security, given current life expectancy. That 

same report indicated that nearly 30 percent of all Americans in 

the workforce for 25 or more years had zero retirement savings. 

Perhaps most troubling is that fewer than half of all American 

workers work for an employer that sponsors a retirement plan, and 

half of Americans who do not have access to an employer-sponsored 

retirement plan are almost entirely middle- or low-income. This 

means they are far less likely to have other forms of savings. These 

numbers do not paint a pretty picture for a large chunk of the 

Baby Boom generation approaching retirement. We have to do better. We need to look for ways to do more with less. 

I look forward to the hearing today. I look forward to hearing 

from the panelists on their views whether there are steps we can 

take to improve these numbers for those nearing retirement today. 

We must do what we can to make sure future generations do not 

find themselves in the same boat. 

So let us find ways to improve and increase retirement savings 

for millions of Americans. Let us look to make our retirement savVerDate Nov 24 2008 14:44 Oct 10, 2012 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\76170.000 TIMD
3 

* For more information, see also, ‘‘Present Law and Background Relating to the Tax Treatment 

of Retirement Savings,’’ Joint Committee on Taxation staff report, September 13, 2011 (JCX– 

44–11), http://www.jct.gov/publications.html?func=startdown&id=4357. 

ings system more efficient. And let us work to ensure that more 

hardworking Americans have the savings they need to enjoy the retirement they deserve.* 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I appreciate you 

holding this hearing. It is a timely hearing. The issue of retirement 

security has never been more important than it is today. With respect to public programs, the retirement of the Baby Boom generation is putting enormous stress on both Social Security and Medicare. 

Congress is going to have to address the solvency of both of these 

programs, not in the long term, but certainly in the short term. 

Fortunately, the private employer-based pension system has become the greatest wealth creator for the middle class in history, especially through 401(k) plans and individual retirement accounts, 

or IRAs. Despite the ups and downs of the stock market and historically low interest rates, millions of Americans have managed to 

save trillions of dollars for retirement. 

We all may be a little bit surprised to learn that more money has 

been set aside for retirement in defined contribution plans and 

IRAs than in Social Security. That is right. The Social Security 

Trust Fund holds $2.6 trillion in Treasury securities, but private 

employer-based defined contribution plans hold $4.7 trillion, and 

IRAs hold even more: $4.9 trillion. 

Think of that: IRAs, a voluntary savings vehicle that was only created in 1974, now hold $2.3 trillion more than the entire Social 

Security system, a mandatory program that has been with us since 

1935. That is almost double the assets just in IRAs. The numbers 

suggest that 401(k) plans and IRAs have been a resounding success. Can we improve them? There is always room for improvement. 

But limiting access to these savings vehicles is not progress, in 

my view. Putting aside the issue of retirement income, when you 

consider the fact that your average American will face over 

$200,000 in out-of-pocket post-retirement medical costs alone, we 

should probably be expanding opportunities to save. 

But make no mistake. Even as currently structured, these savings programs work for millions of Americans, yet all of the reforms I have read about lately seem directed toward reducing the 

amount of money that people may set aside in defined contribution 

plans and IRAs. 

For example, the National Commission on Fiscal Responsibility 

recommended capping pre-tax contributions at $20,000. The Congressional Budget Office, or CBO, describes a proposal to reduce 

annual contributions to 401(k)-type plans by $7,650 for older workers, largely by repealing the ability of workers at age 50 to begin 

4 

making catch-up contributions. IRA contributions also would be cut 

by $1,500 for older individuals. 

Now, many of these proposals are offered in the name of greater 

progressivity in the tax code and helping low-wage workers, but 

this just does not make sense. Trying to help lower-wage workers 

save for retirement by reducing the 401(k) and IRA contribution 

limits is like trying to cure a headache with a guillotine: the cure 

is worse than the disease. I am concerned that if these proposals 

were adopted, many employers would throw up their hands in disgust and just drop their plans. Congress has already covered this 

ground. We already made this policy call. 

In 2001, Congress increased the limits for contributions to 

401(k)s and IRAs. At the time, 401(k) contributions were limited to 

$10,500 per year and IRAs were limited to $2,000. This year, a 

worker age 50 and over may contribute up to $22,500 to a 401(k). 

An older individual may contribute up to $6,000 to an IRA. 

Now, here is what Congress concluded in 2001, as reported in the 

blue book published by the Joint Committee on Taxation: ‘‘The 

Congress believed that increasing the dollar limits on qualified 

plan contributions and benefits would encourage employers to establish qualified plans for their employees. The Congress understood that, in recent years section 401(k) plans have become increasingly more prevalent. The Congress believed it was important 

to increase the amount of employee elective deferrals allowed under 

such plans, and other plans that allow deferrals, to better enable 

plan participants to save for their retirement.’’ 

Well, it worked. Since 2000, retirement assets in defined contribution plans have grown from $3 trillion to $4.7 trillion, despite 

the market downturn in 2008. Assets in IRAs have grown from 

$2.6 trillion to $4.9 trillion. In fact, increased contribution limits 

work so well that, in 2006, Congress made those provisions permanent. The vote to make them permanent was an overwhelming 

93:5. 

Today I expect that the committee will hear about proposals to 

fundamentally change the 401(k) and IRA system. One of the proposals would eliminate pre-tax contributions to 401(k) plans and 

IRAs. Instead, workers would make after-tax contributions, receive 

a tax credit, and then pay ordinary income taxes again when the 

money is withdrawn in retirement. 

Now, I am sure these proposals are well-intentioned, and I will 

listen to them with an open mind. But I must say that I am skeptical that this type of approach is wise tax and retirement policy, 

to experiment with our current defined contribution and IRA retirement savings system—a system benefitting many millions of 

Americans—by taking away pre-tax contributions and converting 

the system into a refundable tax credit program. 

I want to thank you, Mr. Chairman. These hearings have been 

really worthwhile, and you deserve a lot of credit for them. I just 

want to thank you for them. 

The CHAIRMAN. Thank you very much, Senator. I appreciate 

that. 

[The prepared statement of Senator Hatch appears in the appendix.] 

5 

The CHAIRMAN. I might add that Senator Cardin is here. Senator 

Cardin and Senator Portman, when both were in the House, 

worked very hard on our pension system. I thank them very much 

for their hard work. 

I would now like to introduce our panel. We will first hear from 

Dr. Jack VanDerhei. Jack is a research director of the Employee 

Benefit Research Institute. Also, thank you very much, Jack, for 

your valuable contribution in the State of Montana when you came 

out to our Butte Economic Development Summit. People really appreciate your advice and your insights. We appreciate it very, very 

much. 

Next, we will hear from Dr. William Gale, who is a senior fellow 

at the Brookings Institution. Dr. Gale is a director of the retirement security project and co-director of the Urban-Brookings Tax 

Policy Center, and holds the Arjay and Frances Miller chair in Federal economic policy at Brookings. 

Next, we will hear from Judy Miller, chief of actuarial issues and 

director of retirement policy at the American Society of Pension 

Professionals and Actuaries. Welcome back, Judy. We have missed 

you very much. I want to thank you as well for your excellent contribution to the Butte Economic Development Summit last year. 

You all out there in the audience are wondering what is the Butte 

Economic Development Summit. This is something we put on every 

few years. It is a success. It is really super. Thank you both for 

helping make it so good. Your efforts to help small businesses 

adopt and maintain retirement savings plans are much appreciated, Judy. Thanks for working with them. 

Rounding out the panel will be Karen Friedman, executive vice 

president and policy director of the Pension Rights Center, an organization dedicated to protecting and promoting the retirement security of American workers, retirees, and their families. Thank you 

very much, Karen. 

Thank you for coming. Let us make this a great hearing. Your 

prepared statements will be made part of the record. I urge you to 

summarize them and just get straight to the point; say what you 

want to say. This is the only opportunity we have. Thank you. 

Dr. VanDerhei, why don’t you proceed? Go ahead. 

STATEMENT OF DR. JACK VanDERHEI, RESEARCH DIRECTOR, 

EMPLOYEE BENEFIT RESEARCH INSTITUTE, WASHINGTON, DC 

Dr. VANDERHEI. Chairman Baucus, Ranking Member Hatch, 

members of the committee, I am Jack VanDerhei, research director 

of the Employee Benefit Research Institute. EBRI is a nonpartisan 

institute that has been conducting original research on retirement 

and health benefits for the past 33 years. EBRI does not take policy positions and does not lobby. 

My testimony today will focus on retirement security and the potential impact of various types of tax reform options on retirement 

income adequacy. This draws on the extensive research conducted 

by EBRI on these topics over the last 12 years, with its Retirement 

Security Projection Model, as well as annual analysis of the behavior of tens of millions of individual 401(k) participants dating back, 

in some cases, as far as 1996. 

6 

EBRI research has shown repeatedly that the traditional type of 

401(k) plan under current tax incentives has the potential to generate a sum that, when combined with Social Security benefits, will 

replace a sizeable portion of the employee’s pre-retirement income 

for those with continuous coverage. 

Our research has also shown that the automatic enrollment type 

of 401(k) plan, when combined with automatic escalation provisions, appears to have the potential to produce even larger retirement accumulations for most of those who are covered by such 

plans. 

Last year EBRI updated its simulation model and determined 

that the overall retirement income adequacy for U.S. households 

has substantially improved since 2003. Even with these improvements, however, almost one-half of Baby Boomer and GenXer 

households were determined to be at risk of not having sufficient 

retirement income to cover even basic expenses and uninsured 

health care costs. 

However, the study was also able to document the degree to 

which eligibility for participation in qualified retirement plans matters with respect to at-risk status. For example, the at-risk probability for GenXers varies from 60 percent for those with no future 

years of eligibility in a DC plan to only 20 percent for those with 

20 or more years. In fact, it can be argued that much of the problem with retirement income adequacy in this country is one of 

whether a household is covered by an employer-sponsored retirement plan, and for how long. 

As Senator Hatch mentioned, in December of 2010 the National 

Commission on Fiscal Responsibility and Reform put forth a tax reform plan that would modify retirement plans by capping annual 

contributions to the lower of $20,000 or 20 percent of income. This 

new constraint would substantially reduce the current limits available under qualified defined contribution plans. 

Earlier this year, EBRI provided preliminary evidence of the impact of these so-called 20/20 caps on projected retirement accumulations. Assuming the caps are imposed starting in 2012, the annual percentage reductions in 401(k) balances at retirement age 

are displayed in Figure 2 of my written testimony. 

The 20/20 cap would, as expected, most affect the highest-income 

workers—as much as a 15-percent average reduction for those currently ages 36 to 45—but would also cause a significant reduction 

in retirement accumulations for the other workers, including those 

in the lowest-income quartiles. 

Dr. Gale will be describing his proposal next; however, public policy consideration of this proposal will undoubtedly be subject to 

some type of a cost/benefit analysis beyond one that is going to assume retirement saving contributions remain constant. It is very 

difficult to determine how certain employees will react to this new 

set of incentives, but, until this type of information is available, 

any accurate assessment of the benefit portion of the cost/benefit 

analysis will be problematic. 

However, EBRI is currently in a position to provide the committee with guidance on what some of the likely costs will be in 

terms of reduced benefits for those currently in the 401(k) system. 

Based on self-reported responses to EBRI’s 2011 Retirement ConVerDate Nov 24 2008 14:44 Oct 10, 2012 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\76170.000 TIMD
7 

fidence Survey, Figure 3 in my written testimony provides the average percentage reductions in 401(k) balances at retirement age 

expected as a result of permanently modifying the exclusion of employee contributions. 

As expected, the younger cohorts would experience larger reductions given their increased exposure to this proposal. Focusing on 

those currently 26 to 35, the average percentage reductions vary 

from 11 percent for the highest income quartile to 24 percent for 

the lowest income quartile. 

As the analysis of this figure was intended to look exclusively at 

the impact of changing the exclusion of employee contributions 

from taxable income, it was assumed that the total matching contributions would remain constant. 

However, it may be instructive to assess the additional reduction 

in 401(k) accumulations if employers were to drop their plan 

matches to 401(k) participants and would instead have only the 18- 

percent match provided by the government. Figure 5 in my written 

testimony models the same changes in tax incentives but, unlike 

Figure 3, assumes the plan sponsors completely drop their plan 

match and that employees are left with only the government match 

of 18 percent. 

Given that most 401(k) sponsors currently match at a rate greater than 18 percent, it is not surprising that the average reductions 

increased in Figure 5. For those currently 26 to 35, the average reduction varies from 31 percent for the highest income quartile to 

41 percent for the lowest income quartile. 

In conclusion, given that the financial fate of future generations 

of retirees appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic 

of modifying, either completely or marginally, the incentive structure of employees and/or employers for defined contributions at 

this time needs to be thoroughly examined. 

The potential increase of at-risk percentages resulting from either employer modifications to existing plans or a substantial portion of low-income households decreasing or eliminating future contributions to savings plans needs to be carefully analyzed when 

considering the overall impact of such proposals. 

Thank you. I look forward to your questions. 

The CHAIRMAN. Thank you very much, Doctor. 

[The prepared statement of Dr. VanDerhei appears in the appendix.] 

The CHAIRMAN. Next, Dr. Gale. 

STATEMENT OF DR. WILLIAM G. GALE, SENIOR FELLOW, 

BROOKINGS INSTITUTION, WASHINGTON, DC 

Dr. GALE. Thank you very much, Chairman Baucus, Ranking 

Member Hatch, members of the committee, Mr. Cardin. I particularly welcome the opportunity to offer a proposal today, given that 

it has already been critiqued and, I think, mischaracterized at least 

once. 

So let me say I would like to offer a proposal that will help improve the retirement system, will help reduce long-term fiscal deficits, all without raising statutory tax rates, all without reducing 

contribution limits in the basic form, and without even touching 

8 

the employer deduction. Before I turn to that, let me just add, it 

would improve incentives to contribute to retirement accounts for 

about 90 percent of the population. How that supposedly translates 

into a 24-percent reduction in 401(k) balances among low-income 

workers, as Dr. VanDerhei suggests, is not credible. The lowestincome workers will get the biggest improvement in incentives 

under this plan. 

Before I turn to this, let me just say the opportunity to reform 

the retirement system is very timely, for two reasons. First, everything that has happened in the last few years—the drop in housing 

wealth, the rise in unemployment, the volatility in the stock market—has made it harder for people to make ends meet and, hence, 

has pushed people to pull out of the retirement system or to reduce 

their contributions. The chance to offset those factors by encouraging contributions specifically among low- and middle-income 

households by increasing their incentives to participate would be 

very helpful for the goal of ensuring that people reach retirement 

with adequate resources. The current events have exacerbated the 

existing flaws in the retirement system. 

Second, as we begin to debate long-term fiscal reforms, we need 

to think about enhancing saving outside Social Security for the 

simple reason that, to the extent that Social Security benefits or 

Medicare benefits are reduced, retirees will find it even harder to 

make ends meet, so encouraging saving for retirement could help 

offset some of those changes. However, given that the goal is to reduce the long-term deficits, the challenge is to raise retirement saving without revenue loss to the government, and possibly even with 

a revenue increase to the government. 

With that as background, let me turn, briefly, to the retirement 

system. You have already heard people wax eloquent about what 

a great system it is, and, for some people, it is a great system. 

Some people are doing quite well. But 30 years into the 401(k) experiment and the IRA experiment, it is obvious that there are huge 

concerns with the system. 

One concern is that many workers are not doing very well. They 

are left behind by the retirement system. Only about half of workers have access to a 401(k) or a pension. Chairman Baucus mentioned the GAO study showing very little accumulation among a 

large segment of the population. Many of those who participate 

contribute very little. 

In a recent study, the median 401(k) and IRA balance among 55- 

to 59-year-olds who had 401(k)s and IRAs—not even including the 

large number who do not—the median among those who had 

401(k)s and IRAs was less than $10,000. That is nowhere near 

close to providing an adequate retirement income base for those 

households. 

The second problem is that the immediate subsidies that are generated are upside down. Seventy-five percent of the population gets 

either a 15-percent deduction or less. If you are in a 10-percent tax 

rate, you get only 10 cents that you save on the dollar per dollar 

contribution. If you face a 35-percent tax rate, you save 35 cents 

immediately per dollar of contribution. 

That gives a subsidy, the largest subsidy and the most expensive 

subsidy, to those who need it least, and it reduces the subsidy or 

9 

eliminates the subsidy to those who need it most, not just in terms 

of current income but in terms of—if you look at what studies say 

about which households are not saving adequately for retirement, 

it is mainly low- and middle-income households. Of course, they are 

the ones that are getting the lowest incentives from the current deduction. 

On top of that, the current upside-down structure gives the biggest subsidies to those whose 401(k) contributions are most likely 

to represent shifting of assets, and it gives the smallest 401(k) subsidy to those whose contributions are most likely to represent new 

additions to net saving. 

So we can all celebrate the very large sums of money that are 

in 401(k)s and IRAs right now, but it is worth noting that the national saving rate—the personal saving rate—has gone down in the 

last 30 years. It has gone down markedly in the 30 years since we 

have moved away from the traditional system and moved toward 

401(k)s and IRAs. 

The key issue is not whether people are taking advantage of this 

tax subsidy, the key issue is whether, by doing so, they are actually 

raising retirement preparedness on a net basis, whether they are 

raising national saving. So far, there is nothing in the data that 

suggests that these things are effective in raising national saving 

by very much. 

The third problem is that the deduction is given to the individual 

as cash back rather than putting it in the account. So the proposal, 

although I am running out of time, is to build on the strengths of 

the 401(k) system, including the payroll deduction, and to try to resolve some of the weaknesses, mainly lack of participation and low 

contributions among many households. 

The proposal in its simplest form would change the individual 

deduction to a matching contribution by the government. There 

would be a flat-rate contribution, so the structure would not be 

upside-down. The match would be placed directly in an individual’s 

account, which would likely increase the impact on saving rather 

than giving the money back to people as cash, encouraging them 

to spend it. 

In the simplest form, a 30-percent matching contribution would 

be revenue-neutral relative to current law. It would improve incentives and retirement benefits for 90 percent of the population. If instead we had an 18-percent matching contribution, the proposal 

would raise $250 billion over the next decade, again, without touching marginal tax rates, without reducing contribution limits, and 

without affecting the employer deduction. It would raise $250 billion, and it would still benefit and give incentives, raising the rate 

of return on saving for low- and middle-income households. 

The proposal can be extended to include employer matching. If 

you did that, it would raise $450 billion. In any case, I would be 

happy to take questions about the actual proposal and discuss its 

actual effects. I thank you again for the opportunity to discuss 

these issues here. 

The CHAIRMAN. Thank you very much, Doctor. 

10 

[The prepared statement of Dr. Gale appears in the appendix.] 

The CHAIRMAN. Ms. Miller, you are next. 

STATEMENT OF JUDY A. MILLER, CHIEF OF ACTUARIAL ISSUES AND DIRECTOR OF RETIREMENT POLICY, AMERICAN 

SOCIETY OF PENSION PROFESSIONALS AND ACTUARIES, ARLINGTON, VA 

Ms. MILLER. Thank you. Thank you, Chairman Baucus, Ranking 

Member Hatch, and members of the committee for the opportunity 

to speak with you today. I am Judy Miller, chief of actuarial issues 

and director of retirement policy for the American Society of Pension Professionals and Actuaries. 

We want to thank this committee for its leadership in passing 

the Pension Protection Act of 2006. PPA had overwhelming bipartisan support from this committee and the entire Congress, and, by 

permanently extending changes to various retirement plan rules, 

PPA provided needed certainty for workplace retirement plans. 

Proposals currently under discussion—slashing the contribution 

limits or turning the current year’s exclusion into a credit—would 

discourage small business owners from setting up or maintaining 

a workplace plan. This is the exact opposite of what needs to be 

done. Data clearly shows the primary factor, in determining whether or not a worker is saving for retirement, is whether or not they 

have a retirement plan at work. When evaluating any current retirement policy proposal, the critical question this committee must 

ask is: ‘‘Will it improve access to workplace retirement savings?’’ 

Many of these flawed proposals are based on some persistent 

myths. 

Myth 1: Less than half of workers have access to retirement savings at work. This myth is dangerous because it gives the impression current incentives have failed, when facts show otherwise. 

Bureau of Labor Statistics data shows 78 percent of all full-time 

workers have access to a workplace retirement plan, with 84 percent participating. If you look only at private sector workers, 73 

percent have access to a plan, with 80 percent participating. This 

is a far cry from the ‘‘less than half’’ commonly cited. 

Myth 2: The current tax incentive is upside down. This myth 

arises from a failure to recognize that the incentives for workplace 

retirement plans are different from just about any other tax incentive in the code. Non-discrimination rules make sure that retirement plan incentives do not discriminate in favor of the highly paid 

and limit pay that can be counted toward benefits. 

The result is, the current tax incentive for employer-sponsored 

defined contribution plans is more progressive than the current income tax system. Based on an analysis by a former JCT economist, 

taxpayers making less than $50,000 pay only 8 percent of income 

taxes but receive 30 percent of tax incentives for defined contribution plans. 

Households making less than $100,000 pay 26 percent of income 

taxes but get over 60 percent of the benefit of this tax incentive. 

By contrast, households making more than $200,000 pay 52 percent of income taxes but receive only 11 percent of the retirement 

plan tax incentives. Sixty percent of a tax incentive going to workVerDate Nov 24 2008 14:44 Oct 10, 2012 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 R:\DOCS\76170.000 TIMD
11 

ers who pay less than 30 percent of income taxes is not upside 

down, it is very much right side up. 

Myth 3: Small businesses will sponsor retirement plans without 

an appropriate tax incentive. I spent over 20 years talking to small 

business owners in Montana about why they should set up, and 

keep operating, a retirement plan. With rare exceptions, the current tax savings was a critical factor, often the only factor, supporting the decision to put in a plan. 

It is not that small business owners are selfish or they do not 

want to help their employees save for retirement. In real life, most 

small business owners are not sitting on lots of cash. They use the 

savings generated from the retirement plan tax incentives to help 

pay for contributions required by the non-discrimination rules. Reducing the incentive literally reduces the cash the small business 

owner has to work with. There is not a doubt in my mind that reduced incentives will mean fewer plans or lower employer contributions for the plans that remain. 

Myth 4: It does not matter if a new tax structure causes employers to terminate plans because re-engineering the tax incentive will 

lead more workers to save on their own. The truth is, the only way 

we have ever gotten working Americans to save for retirement is 

through employer-sponsored retirement plans. Over 70 percent of 

workers making $30,000 to $50,000 contribute when covered by a 

plan at work. 

By comparison, less than 5 percent of workers at the same income levels save on their own in an IRA when there is no workplace plan. This is a startling difference in savings rates. Changing 

the exclusion to a credit will never make up this difference. Increasing plan coverage is a much simpler task, with more certain 

results. 

Myth 5: Tax incentives for retirement savings are lost revenue. 

Unlike deductions for mortgage interest or charitable contributions, 

which are permanent deductions, the incentives for retirement savings are a deferral. Contributions and earnings are taxed at ordinary income rates when distributed from the plan. 

The truth is, the revenue you think you gained in the budget 

window from cutting retirement savings is an illusion. Reduced 

contributions today means lower revenue outside the budget window when there will be less retirement savings to be withdrawn 

and taxed. 

In summary, given existing pressures on Social Security, this is 

not the time for a massive experiment with workers’ 401(k) plans. 

We need a tune-up, not an overhaul. The key to promoting retirement security is expanded workplace savings, and reduced incentives for small business owners to sponsor plans would be a big 

step in the wrong direction. 

I would be pleased to discuss these issues further with the committee or answer any questions you have. Thank you very much. 

The CHAIRMAN. Thanks, Ms. Miller. 

[The prepared statement of Ms. Miller appears in the appendix.] 

The CHAIRMAN. Next, Ms. Friedman. 

12 

STATEMENT OF KAREN FRIEDMAN, EXECUTIVE VICE PRESIDENT AND POLICY DIRECTOR, PENSION RIGHTS CENTER, 

WASHINGTON, DC 

Ms. FRIEDMAN. Hello. Thank you so much. Chairman Baucus and 

Ranking Member Hatch, members of the committee, we are pleased 

that you are holding this hearing today to examine tax reform options to promote retirement security. 

Given the enormous challenges facing the country, this hearing 

could also be subtitled, ‘‘How to Better Use the Tax System to Rebuild the American Dream for Workers and Retirees,’’ because that 

is what it is about. 

At a time when the economy is in a tailspin and middle-class 

American families are facing enormous challenges, we want to 

make sure that those who have worked hard and played by the 

rules are able to retire with adequate income and dignity. In our 

country, this is a fundamental and shared ideal. 

Yet too many people are facing a bleak retirement, as we have 

heard today. Half of all private sector workers have no pensions or 

retirement savings to supplement Social Security, and we have 

heard that. We have also seen how employers who sponsor secure 

pension plans are freezing or terminating these plans. And 401(k) 

plans, which are the predominant savings plan in America, have 

left most workers with insufficient assets. In 2007, half of all 

households had $45,000 in their accounts and $98,000 for those approaching retirement age. So you can see, that is not enough to 

make it through retirement. 

While 401(k) plans can work as a supplemental savings plan, 

they do not work well as the primary retirement vehicle for most 

Americans. They put all of the risks onto individuals who then 

have to decide whether to participate, how much to contribute, 

what to invest in, and then figure out how to make the money last 

through retirement. That is a lot to put on folks who are struggling 

to hold onto a job, keep the house afloat, and keep the family above 

water. 

According to a recent Gallup poll, Americans say their top financial concern right now is being able to save enough money for retirement. That even surpasses their concerns about paying for 

health care or paying the mortgage. 

So, while Congress is addressing the long-term Federal deficit, 

there is another deficit facing the country that also needs urgent 

attention, and that is the retirement income deficit. According to 

the Center for Retirement Research at Boston College, the retirement income deficit facing Americans is an astonishing $6.6 trillion. 

That number represents the gap between what people have 

saved as of today and what they should have saved to achieve a 

level of sufficiency in retirement. 

Cutting Social Security would only add to the retirement income 

deficit, and we urge Congress to strengthen, not cut, this vital program for American workers and retirees. 

So, in context of what we are talking about, what are the solutions to the retirement income deficit? There is no one magic bullet, 

but restructuring tax incentives for retirement savings can contribute to solutions. 

13 

Congress gives preferential tax treatment because it is hard to 

save for retirement, and Congress recognizes that. It is especially 

hard for workers struggling with their daily needs. These tax incentives are meant to encourage employers to set up plans and to 

encourage employees to save. However, as we heard from Bill Gale, 

these incentives end up disproportionately benefitting those who 

need them the least. 

Today I would like to offer a range of possible reform ideas. The 

first reform bucket is short-term, meaning these things could be 

done now to make existing plans fairer. The second bucket includes 

ideas that are comprehensive, leading to a new universal secure 

and adequate system for future generations. I want to emphasize 

that we believe that this should be a time for re-envisioning the tax 

system, not a time for retrenchment. 

Here is a list of some possible short-term reforms described in 

more detail in my written statement. First, expand the saver’s 

credit and make it refundable so it reaches more workers and provides a stronger savings incentive for lower-paid and middleincome workers. Second, consider reverse matches for 401(k) plans 

and Simplified Employee Pensions. Third, consider ways to encourage employers to preserve good defined benefit plans and adopt 

new kinds of guaranteed defined benefit plans, such as those developed by the Common Ground Conversation on Coverage, which 

many of these participants were involved in—all the panelists 

today. 

I want to also point out—in terms of Judy talking about the fact 

that workers do better when an employer sponsors a plan—well, 

defined benefit plans should not be written off. Too often we are 

saying, oh, they are dinosaurs, we cannot afford them anymore. 

But it is through defined benefit plans that people still get guaranteed lifetime income that they cannot outlive, and that is something that we definitely need to be looking at. Also, we have some 

proposals in our written statement for stopping leakage, which is 

a huge problem, people withdrawing their assets before they reach 

retirement age. 

But, while you are examining short-term reforms, we would like 

to encourage this committee to also examine a better system for future generations. The fact is that, regardless of the amount of tax 

incentives provided to employers and employees, the end result is 

that coverage is still too low. People have not saved adequately, 

and benefits are not secure. So to that end, the Center, along with 

partnering organizations, started a new initiative called Retirement USA. 

Retirement USA is an initiative to design a new system on top 

of Social Security that basically has three over-arching principles: 

the system should be universal, meaning everyone should be covered by a plan; the system should be secure so people can count 

on a steady stream of benefits to supplement Social Security—and 

that is not being done in today’s 401(k) system; and the system 

should be adequate. By adequacy we mean that people should have 

a basic level of sufficiency when they reach retirement age. 

So, to achieve these goals, we believe there needs to be a pension 

system with shared responsibility, where assets are pooled and professionally managed, and assets are paid out and the benefits are 

14 

paid out as lifetime annuities. These are not unreachable ideals, 

and there are many plans and proposals that meet these principles 

that I have outlined in my statement. Some of them, as you will 

see, have even been proposed by business groups. 

So in closing, I have been struck recently by news coverage of 

Steve Jobs. He created a successful company, one of the most successful, because of his vision and his gumption. So today I am asking that we all try to have the can-do spirit of Steve Jobs and apply 

it to retirement policy by dreaming big. 

With the economy in turmoil, we must be creative in deploying 

our tax system to meet the challenges of today’s and tomorrow’s retirees, because, when people have good pensions, they can contribute to their communities and live with dignity, as well as continue to buy goods and services, which is a boon for the economy 

and for society. 

Thank you very much. I would be pleased to answer any questions you have. 

The CHAIRMAN. Thank you. Thank you very much. 

[The prepared statement of Ms. Friedman appears in the appendix.] 

The CHAIRMAN. Ms. Miller, you talked about tuning up the system, not overhauling it. What do you mean by tuning up? When 

you answer your question, please address some of the questions 

that have been raised, basically the underlying question that not 

enough people save. 

Ms. MILLER. Sure. 

The CHAIRMAN. Either they do not belong to a defined contribution plan because they do not work, or their plan is not that great, 

or people leave their jobs, and so on and so forth. If you could just 

please tell us how we tune up in a way that addresses the underlying problem. 

Ms. MILLER. Sure. As I mentioned, I think the first real basic 

problem is access. In order to get more small employers, particularly, into the system, I think we need to look at ways to simplify 

qualified retirement plans and make the costs lower. If you look at 

any survey of small businesses that do not sponsor a plan and why 

they do not sponsor a plan, the top of the list is always economic 

concerns. The business is not stable, they are worried about having 

to make contributions, they do not like the idea of having to make 

contributions for a short-time person, that kind of thing—more 

business concerns. 

So I think we can look at—there has been a lot of discussion lately about a structure called a multiple employer plan; for example, 

where you have a sponsor, and small businesses can join basically 

a large group to spread expenses, reduce costs. But there are some 

concerns about those right now, about who can sponsor them, how 

Treasury would be able to deal with them as a large group. It does 

not take a lot of changes. As I said, there are some proposals. We 

think they need improving, and we are working on a set of proposals ourselves for that. I think that could be very effective. 

I think some of the issues that Karen mentioned are issues that 

sometimes arise from an artificial distinction made between defined benefit and defined contribution plans. I am an actuary, so 

I have strong affinity for a defined benefit plan, but you can have 

15 

managed investments in a defined contribution plan. That might 

not be the tendency, but I think, in PPA, another great thing that 

you did was modifying the qualified default investment rules. 

The CHAIRMAN. What about the point Dr. Gale makes, that the 

incentives are upside down? 

Ms. MILLER. Well, as I said, I really just think that is wrong, and 

it is based on a misunderstanding of how the system works. There 

is a chart in my testimony that shows how the benefits are allocated compared to the portion of taxes that are paid. When over 60 

percent of the benefits are going to people making under $100,000, 

that, I do not think, is an upside-down tax benefit. They are only 

paying less than 30 percent of the taxes, so it actually shifts them 

in that direction. 

The CHAIRMAN. I will give you a chance, Dr. Gale. You have 

heard what Ms. Miller said. Is it or is it not upside down? Off the 

top, I do not think we want something that is actually too much 

upside down, or even very much upside down. I would just think 

you have to help people who are not participating. 

Dr. GALE. Right. As long as you have contribution limits, you will 

have a distribution of 401(k)s being less progressive than the overall income tax, and that actually makes sense because the purpose 

of the retirement system is to subsidize or promote an adequate retirement. The purpose is not to promote unlimited tax sheltering 

via 401(k)s or IRAs or other vehicles. 

So when I refer to upside down, I think the criteria that is relevant is the structure of the incentives that a low-income person 

faces versus a high-income person. Under the current system, a 

low-income person has an immediate deduction of zero, and you 

can understand why they may not want to participate. 

Under the matching system, they would have a matching rate of 

18 or 30 percent, depending on whether it was revenue-neutral or 

revenue-raising. You could understand that, under that system, 

they would have a much stronger incentive for immediate deduction than they currently do. 

The CHAIRMAN. Thank you. 

Ms. Miller is anxiously trying to get in here. 

Ms. MILLER. I am because I think this analysis assumes that all 

contributions are elective deferrals, that is, contributions that people elect to make to the plan on their own behalf. In reality, we 

have these non-discrimination rules that make sure that, if an employer wants to get a significant contribution under these programs, they have to make a contribution too on behalf of employees. 

Now, if they are making a 3-percent contribution or a 5-percent 

contribution—in most small businesses the minimum would be 3, 

and very commonly 5—that gets no credit. That individual has a 

zero-percent tax bracket. You are saying, oh, there is no benefit for 

that person from this system if you look strictly at the marginal 

tax rate times the contribution, whereas they are getting 3 percent 

of pay from that employer. 

If you remove the incentive for that employer to put money into 

the plan, then these non-discrimination rules do not get to really 

fully operate, and they are not getting any contribution. So right 

now, instead of having to pony up some money, these lower-paid 

16 

people are getting employer contributions, and it really works in a 

pretty slick fashion. 

The CHAIRMAN. My time is running out, but, Doctor, I will give 

you 15 seconds if you could just be brief. 

Dr. GALE. All right. I think we are talking past each other. As 

I said, the employer deduction could be separated from the other 

deduction, from the individual deduction. I am talking about the 

structure of the individual deduction. The individual gets zero. The 

employer obviously currently gets an employer deduction and could 

continue to under this proposal. 

The CHAIRMAN. All right. I appreciate that very much. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

Ms. Miller and Dr. VanDerhei, all of these proposals—I read 

about the Fiscal Commission’s 20/20 proposal, Dr. Gale’s Refundable Tax Credit proposal, the CBO option that would cap employee 

deferrals. All of them seem to rely on the premise that lower contribution limits for workers will increase their savings rate. At 

least that is the way I interpret it. 

The proposals also assume that reduced tax incentives for companies will have no effect on the willingness of the business to keep 

its plan in operation or start a new plan. Well, I personally do not 

believe that. I think that, if we roll back the laws that Congress 

enacted in the last decade that increased the tax incentives to save, 

then two very bad things will happen, at a minimum. 

First, I believe businesses will stop contributing to pension plans 

because they are too complex and expensive to put up with without 

adequate tax incentives, and number two, employees will stop saving as much because the tax incentives will be less for most workers. Now, I do not think academics understand either of these 

points, or at least that is my personal opinion. 

Now, Ms. Miller, what does your real-world experience working 

with business people making these decisions tell you? 

Ms. MILLER. Well, my experience is what you suspect it would 

be, sir, that the tax benefit is very, very key to setting up these 

arrangements. Usually you have an employer—you know, for a 

small business owner, it takes a few years to have a stable business. They finally have a stable business. They are looking at putting in a plan. It is key to them that there is enough of a tax benefit to help them make these contributions that are required by the 

non-discrimination rules. So the tax benefit gets them to put the 

plan in, and then it helps them spread that benefit to the other employees. 

Senator HATCH. Well, Dr. VanDerhei, your extensive analysis of 

the savings behavior of workers, what does that tell you? 

Dr. VANDERHEI. Well, I would agree entirely with what Judy 

said. In fact, if I could just add one quick addendum to the impact 

on employers. 

Senator HATCH. Sure. 

Dr. VANDERHEI. Since May, Judy and I, prior to this meeting 

was scheduled, had been working on what would be the impact on 

small plans if the 20/20 proposal were enacted. If I could just refer 

to page 15 of her written testimony, we have actually modeled 

what would be the likely impact on the small plans, and we find 

17 

that we have reductions for the youngest cohort of anywhere from 

14 to 22 percent with respect to average 401(k) balances at retirement. 

With respect to the incentives for the employees, I agree with 

you 100 percent. With respect to the upside-down nature of the current incentives, we have had a lot of theoretical debate here. If I 

might be able to interject some empirical evidence, every year that 

we do the EBRI/ICI 401(k) update with over 20 million individuals, 

we do a chart looking at the ratio of account balances to salary, 

broken out by age and by tenure. 

If indeed these incentives were upside down, one might expect 

that those ratios would be higher, account balances to salary, for 

higher-salaried people. If I could submit for the record page 22, figure 19 of our November 2010 issue brief, I will guarantee that you 

are going to look at a set of lines which is absolutely flat. 

[The figure appears in the appendix on p. 144.] 

So, in fact, looking at these incentives and seeing how they 

played out, because of things such as the non-discrimination requirements that Judy mentioned, talking about the current 402(g) 

limits, et cetera, in fact we are finding a system that has about as 

close to equal parity as anything I have ever seen. 

Senator HATCH. That is interesting. Dr. VanDerhei, Dr. Gale 

says his proposal will not cap contributions. At least, that is what 

I understand. But will an 18-percent tax credit really not have the 

same effect? Dr. VanDerhei, I would ask you, then Dr. Gale can say 

anything he would care to say. 

Dr. VANDERHEI. Would it have the same effect as capping the 

contributions? I am sorry. 

Senator HATCH. Yes. Will it not basically have the same effect? 

Dr. VANDERHEI. The primary impact of having an 18-percent 

credit in terms of a government match on these, I think, depends 

to a very large extent on how the plan sponsors react. If the plan 

sponsors have a situation in which they realize now they no longer 

need to make matching contributions to get the lower-paid individuals to participate and therefore be able to satisfy the nondiscrimination requirements, I think you are going to be in a situation much like you were in the late 1980s with respect to defined 

benefit plans. 

There was a situation in which a full funding limit was placed 

on sponsors, largely for revenue situations, that put, in essence, a 

holiday on the ability to make deductible pension contributions for 

a very large percentage of these individual firms. You found that 

after those holidays basically vanished, that many of the employers 

had then found better things to do with their corporate funds than 

to continue to fund these defined benefit plans. 

My suspicion is, with increasing health care costs, many employers—in fact, some of the ones whom we have interviewed since this 

proposal first came up—have suggested that they would be more 

than happy to just allow the government to have the match, and 

they would divert their funds to other purposes. 

My big problem, and something which Dr. Gale’s previous research supports, is the level of the match in essence has a huge effect on what the employee’s reaction is going to be. We did a lot 

of work back in 2000, 2001 for a Society of Actuaries conference 

18 

that showed the higher the match rate, the more the employees are 

going to be contributing. So, if the employers do cut back on their 

match as a result of this, I think there would definitely be an impact on overall employee contributions. 

Senator HATCH. Dr. Gale, I want to give you an opportunity, too. 

Dr. GALE. All right. Thank you. I appreciate that. 

First thing, let me be clear. There is no lower contribution limit, 

and there is no higher tax rate on companies in the individual 

version of the proposal. The company treatment can be exactly the 

same. The tax incentives will be improved for about 90 percent of 

workers, not reduced. They will be better for 90 percent of workers. 

The issue about matching contributions, if I understand what 

Jack said, is almost Orwellian. The concern with the proposal is 

that so many people would contribute so much to their retirement 

account and get the government match, that employers would then 

cut back on their own matching contribution. 

Oh, geez. Would that not be a good problem to have, that so 

many people were participating so actively in the retirement system? If we were concerned then, if that happened, that companies 

were then going to cut back on their match, well just change the 

non-discrimination rules so they still had to match at the same 

level that they do. But gee, that would be one of the best problems 

we could ever have, that so many people, this half of the workforce 

that is not participating, they responded so massively and so positively to this change in incentives, that would be great. 

Senator HATCH. Dr. VanDerhei, did you have a comment about 

that? 

Dr. VANDERHEI. I did not know Orwell wrote science fiction. But 

I think probably what is going on here is not necessarily that we 

assume because of this there is going to be such an increase with 

respect to the employee participation, but the employers, to a very 

large extent—if you go back and look at the history of 401(k) plans 

in this country, after the proposed regulations came out in 1981, 

there was a period in which—it was exponential growth in the 

401(k) system. 

For budget purposes, I think the consensus was there had to be 

cut-backs on these to stem some of the tax revenue lost. One of the 

things they came up with was the non-discrimination requirements, and many employers in essence are putting in matches as 

incentives to bring the low-income into the plans in an appropriate 

degree to be able to continue to sustain the salary deferrals that 

the highly compensated employees want to put in. 

Again, if the government’s match is going to be sufficient to 

produce that, I think—and I think this would be a great topic for 

a survey—a lot of employers would say, we no longer need to divert 

our funds to this particular goal, because the government match 

would take care of that. 

The CHAIRMAN. Thank you very much. 

Senator Cardin? 

Senator CARDIN. Well, thank you, Mr. Chairman. I thank you not 

only for this hearing, but I thank you for your leadership on providing ways in which people can save for their retirement and we 

can increase private savings in this country. 

19 

Senator Hatch, I want you to know that I appreciate your statements. I agree with you on your observations on the limits, that 

it would be counterproductive to think that we are going to increase progressivity in retirement savings by reducing caps. To me, 

that would just reduce retirement savings, a goal that I think is 

wrong. 

We need to increase private savings in America. We have had to 

do this for a long period of time. Even when the economy was performing in such a strong way, we did not have enough private savings and private retirement. I remember a hearing in the Ways 

and Means Committee—it may have been the same witnesses here, 

I am not sure—in which that question was asked. And I got a response from one of the questions I asked. They said, well, we do 

not have to worry about that because people are saving through the 

equities in their homes. So we need to increase retirement savings 

in this country. 

The point, Ms. Miller, that you raised, your myth #5, is so relevant to this debate because, quite frankly, these hearings are 

being convened with the backdrop of this super joint committee, 

and what are we doing about deficit reductions, and how are we 

going to get revenues for this Nation. 

What is interesting about retirement savings incentives, Mr. 

Chairman, is that we have received criticisms from the general 

public that a lot of our social safety net programs have accrued liabilities in the future, and our budget system does not really account for that. Well, it is interesting. The retirement savings is just 

the reverse. It is just the reverse. 

It is a source of revenue for the future of this country that is not 

accounted for in the way that we do our budgeting. To me, it would 

be so counterproductive to dealing with the significant budget problems we have if we try to take the short-term revenue gains from 

retirement savings and say we are doing something about the deficit, because we will not. We will just make the situation worse. 

So I know a lot of good suggestions have been raised by our 

panel. I agree with a lot of the points about the saver’s credit. I 

think that is important to improve. I think automatic enrollment 

is an important way to increase savings. I agree with defined benefit plans. I think we have to do what we can to preserve the defined benefit world. 

I also think we need to make sure retirement funds are used for 

retirement, and to the extent possible, encourage that to be used 

for annuitant retirement, because that, to me, is where the real 

pressure is on government programs, and on security when people 

retire. 

My question is, we have a very successful program here in the 

Federal Government as an employer. We have the Thrift Savings 

Plan. I do not think there is a member of Congress who would suggest that the Thrift Savings Plan has not worked well for all of our 

workers. But it really indicates that, as important as the tax incentives are, deferrals, without additional money on the table, average 

workers are not going to put money away for their retirement. That 

is why we want to have employer-sponsored plans where the employer puts money on the table. 

20 

As the Federal Government, as an employer, puts money on the 

table, workers are going to take up that offer. And the saver’s credit, of course, is a substitute for that, but to me the better plan is 

to have more employers willing to put a plan in place where they 

are willing to put money up so that their workers participate in a 

retirement plan. 

So what would you suggest? What are the most important 

changes we could make in our retirement laws to encourage more 

employers, particularly the smaller employers, to sponsor plans 

where they encourage their workers to put money into retirement 

by match? What should we be doing? 

Ms. FRIEDMAN. Well, I am going to both answer your question 

and also go beyond your question, if that is all right, Senator, because I have a few ideas that have been storing up that I want to 

kind of get out also, in response to some of the other questions 

here. 

Senator CARDIN. I saw that you were really anxious on some of 

them. 

Ms. FRIEDMAN. I do not know if I was anxious, but I was starting 

to think, what do I want to say? So I want to make a couple of 

points. One point I wanted to make throughout this is that we have 

to sometimes go from statistics to real people, right? 

Just yesterday the Census data came out showing that poverty 

is on the increase, that the median wage for individuals has gone 

down to a 1997 level, and the fact is that people are struggling 

right now, and they are struggling to pay their everyday bills. They 

do not have a whole lot of money to put into retirement. 

So I just want to pose, both to the committee and also to the panelists—because everybody here is super-smart—how do we create a 

system where all the risks and responsibilities are not just on individuals? We have been talking a lot today about just giving incentives so individuals save, giving incentives so employers set up 

plans. But the fact is, we have been doing that, and we still are 

stuck with coverage rates at 50 percent, inadequate savings, and 

people not having enough money for retirement. 

So I want to propose two things in terms of—it is a little bit 

broader than your question, Senator. But the Conversation on Coverage, which was a common-ground dialogue that the Pension 

Rights Center ran with business groups, financial institutions, and 

others for 7 years—and virtually everybody on this panel, either organizationally or individually, has been involved in this. 

We came up with new ideas to incentivize employers and employees to save. We came up with some new simplified defined benefit 

plans, something called the Plain Old Pension Plan, which I would 

love to bring to your attention. There are more details of it in my 

written statement. Judy had an idea for a multiple-employer plan. 

We think, let us look at new models. 

But here is what I would want to say to you: let us not just have 

plans where all the risks and responsibilities are individuals’. What 

Retirement USA, which is the initiative I talked about, is also putting forward is, can we both design a new system but also work on 

today’s plans to make sure that there is shared responsibility, employers and employees both contributing? 

21 

Senator CARDIN. My time has expired, so let me just welcome 

suggestions—not right this moment—from the panelists, because I 

think there is interest to try to get employers more engaged in establishing plans where money is on the table, because we know 

that will get people to save. We look at our Thrift Savings Plan as 

a prime example of that. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Would you expand, Ms. Miller, on the interesting point that Senator Cardin made about myth #5? Could you expand on that a little 

bit, please? 

Ms. MILLER. Yes. Sure. Most tax preferences are really cash 

basis tax preferences. You have paid a lot of mortgage interest 

and—— 

The CHAIRMAN. Ms. Miller, could you suspend? I did not see Senator Thune. 

Ms. MILLER. I am sorry. 

The CHAIRMAN. No, no, no, no. Go ahead. 

Senator THUNE. That is all right. Go ahead. 

The CHAIRMAN. No, no, Senator. I missed you, and I apologize. 

Senator THUNE. That is all right. Thank you, Mr. Chairman. 

I appreciate the discussion this morning. It is an important one. 

I think, too, that savings is something we do not emphasize enough 

in this country, and obviously we have a long ways to go to get our 

savings rate up to where I think it provides the right kind of security for Americans as they approach those retirement years. 

I wanted to direct this to Dr. VanDerhei and Judy—Ms. Miller— 

if I might. But I wonder if each of you could discuss the current 

limits on 401(k) and IRA contributions in the context of Americans 

clearly needing to save more for retirement, and would you propose 

to raise either of these limits, and if so, by how much? 

Ms. MILLER. That is a very good question. I think that, as we 

look at this, the current limit for IRAs for somebody who is under 

age 50 is $5,000, and it is $16,500 for an elected deferral, a personal contribution to a 401(k) plan. If there is employer money, 

then it can go up to $49,000. 

Now, a key component to us of maintaining the employer plan 

and encouraging it is that there be a differential between this 

$5,000 IRA contribution that you can make without making a contribution for your employees and the $16,500 that requires that you 

offer arrangements to your employees. 

Now, if you are looking at a small business, there can be a problem here in that, as I said, a lot of small businesses just do not 

have much money. The small business owners are not in the 35- 

percent tax bracket. You talk to them about putting in a plan, and 

they cannot afford much more than $5,000 themselves. 

They say, oh, I can do an IRA, my employees can do an IRA, 

what is the big deal? If we had something that was—and again, we 

do not have all the fine-tuning done, and many folks up here are 

already working on things like this. But if you had a multipleemployer plan, if you had the ability for a small business to start 

a plan and just give people the opportunity to contribute without 

incurring additional liability, it could be very helpful, so you could 

22 

maybe set the limit at $8,000 instead of—put it somewhere in the 

middle. 

Put them in a plan so that, the year they have a good year, it 

is already there. They can make contributions for everybody. But 

in the meantime, right now, for example, one of the problems is 

that we have had these different figures: 73 percent access, less 

than 50. A big part of that is, are we looking at part-time workers 

or not? 

The incentives set up in the code have been deliberately set up 

substantially for full-time workers, so it is really not fair to say if 

they have been effective for everybody. You should be looking at 

full-time workers to see if they have been effective. If you want to 

expand them, go ahead and expand them, but you should be comparing results for the group that has been targeted. A small employer who decides to let somebody in whom they do not have to 

let in, suddenly they have to put 3 percent of pay in, and it is an 

additional challenge. 

So, to answer your question, we always would like to see higher 

limits. I really do think that it would encourage more participation. 

But I think there is also room to expand coverage by looking in the 

middle, and seeing what can be done by simplifying rules, and creating options for employers that some day will want a plan that 

they can contribute to, but right now would be happy to help people contribute, if they saw any good reason to do it, other than figuring, oh, they can use an IRA. 

Senator THUNE. All right. 

Dr. VanDerhei? 

Dr. VANDERHEI. I do not disagree with anything Judy said, but 

if I could expand your question just a bit, Senator. I think perhaps 

what is even more important today is that, with the exponential 

growth in automatic enrollment plans, there is still a great deal of 

concern in how high they will allow employee contributions to autoescalate. One of the few limitations from PPA was the safe harbor 

that only would allow those contributions to go up to 10 percent. 

Now, I think most financial professionals would tell you that, for 

a contribution rate to be sufficient, if you are only going to have 

the 401(k) and Social Security, it needs to allow employees to go 

beyond 10 percent with this auto-escalation provision. Personally, 

I would think, depending on your objective, if your objective is to 

increase retirement income adequacy for the largest percentage of 

U.S. households as possible—instead of going back and increasing 

the 402(g) or the 415(c) limits—you would want to have this autoenrollment work the way it should work and, once you get an employee in and allow them to start auto-escalating their contributions year by year, to go back and look at the logic of having a hard 

cap on this 10-percent limit. 

It is still too early to tell because, again, this was only passed 

in 2006, and we are still waiting to see what happens when employee contributions get that high. But if employees would still be 

willing to voluntarily increase their elective deferrals 1 percent per 

year once they hit 10 percent, I personally think you would be 

doing much more to improve retirement income adequacy by relooking at that particular cap. 

23 

Senator THUNE. Just as a quick follow-up, if I might. As you 

know, we are talking about tax reform here. You have both touched 

on the benefits of our current tax preferences for savings. I am 

wondering what your thinking is with regard to continuing to encourage Americans to save without the current treatment of the 

various tax-preferred savings vehicles, in other words, interaction 

with the tax code. And, if we end up with a tax reform that does 

lower rates and broadens the tax base, is the incentive there still 

sufficient for putting money aside in some of these retirement vehicles. 

Ms. FRIEDMAN. May I respond to that? 

Senator THUNE. Sure. 

Ms. FRIEDMAN. We may have a slightly different opinion than 

both Judy and Jack on this, but I think that when you are looking 

at these tax subsidies, you have to ask, what are they supposed to 

be doing? The government is now spending $123 billion in tax subsidies to encourage employers to set up plans that incent employees 

to save. As we heard earlier, about two-thirds of those incentives 

already go to the highest-paid employees who do not need those incentives to save. 

We would be against raising the IRA and 401(k) contribution levels, particularly because right now, if you look at studies, there is 

a minuscule—I mean, we are talking very small—percentage of 

lower- and middle-income workers who are now putting in the 

maximum. So, if we are spending all this money to incentivize the 

system, what we are saying is, we should be looking at ways of getting more lower- and middle-income workers to save. The proposal 

to raise both the IRA limit and the 401(k) limit would help those 

people who already are saving. So, I just wanted to point that out. 

Thank you. 

The CHAIRMAN. What is your view about whether non-discrimination rules work? Do they adequately spread out benefits between 

high- and low-income—— 

Ms. FRIEDMAN. You know, that is an interesting question, because I know what Judy was basically saying is that we have this 

system where we have non-discrimination rules to ensure that not 

all the benefits can be skewed to the higher-paid. 

The CHAIRMAN. Right. They work. I think they work. 

Ms. FRIEDMAN. The fact is, there is a lot of gaming of nondiscrimination rules. Dan Halperin, who is a professor at Harvard 

Law School and also a fellow with the Pension Rights Center, just 

wrote an article on that that I would be happy to share with the 

committee, and, with your permission, I would like to submit that 

into the record. 

The CHAIRMAN. Without objection. 

[The article appears in the appendix on p. 42.] 

The CHAIRMAN. What about saving for health care expenses? Fidelity came out with a number that people are going to need when 

they retire, about $240,000 for out-of-pocket health care expenses. 

That is a lot of money that is out of pocket. Does that sound about 

right to all of you? If it does, to what degree do these proposals we 

are talking about here address it? We will start with you, Dr. 

VanDerhei. 

24 

Dr. VANDERHEI. Well, I certainly agree. We have done similar 

simulations at EBRI now for quite some time, and we come up with 

the 50th percentile number very close to what Fidelity has. May I 

just add, though, that you may still not be looking at perhaps the 

most important health care expense, and that would be for a nursing home. 

Long-term care insurance is something—every time we go back 

and run these simulations and look at, what is the optimal risk 

management decisions when you retire, should you buy an annuity, 

should you buy longevity insurance, should you buy long-term care 

insurance, the potential catastrophic expenses that could be incurred because of nursing home costs to a household that otherwise 

had done everything right and would have had adequate financial 

resources is the trigger point that hits most of these households 

more often than anything else. So not only does one need to worry 

about the savings for out-of-pocket costs such as Medigap and such 

as the Part B premiums, et cetera—— 

The CHAIRMAN. Right. Right. 

Dr. VANDERHEI [continuing]. But I would very much encourage 

one to consider also dealing with the nursing home expenses. 

The CHAIRMAN. Dr. Gale? 

Dr. GALE. Thank you. The health expenses are obviously one of 

the major, if not the major, component of retirement expenses, so 

it is appropriate to link these two. Just as if we talk about combined Social Security and Medicare changes, we need to think 

about the interaction in reducing Medicare benefits as in some way 

the same thing as reducing Social Security benefits in terms of 

whom it affects. 

I think the best way to do this is through encouraging saving 

generally rather than through target accounts for particular—you 

know, whether it is health, education, whatever. The argument is 

that, obviously, the goal for preparing for retirement and health 

care expenses is to move resources into that period of your life, but 

then, if you do not have the health expenses, if you happen to be 

healthier than otherwise, then you can use the money for other 

purposes if it is in this general account. 

In the health care account, it is sort of stuck; it is kind of earmarked. So, I would prefer not to see a proliferation of accounts for 

every conceivable use, and I would prefer to see focus on streamlining and consolidating the accounts we have into kind of a broadbased saving account. 

The CHAIRMAN. I am going to change gears here a little bit, because my time is expiring. Most of the proposals we are talking 

about here, with the exception of maybe one of yours, Dr. Gale, designed to try to encourage more savings, cost Federal money, and 

that is not where this Congress is today. This Congress—I am on 

this so-called super-committee that is trying to reduce the debt, 

and the big talk around here is tax reform. Let us broaden the 

base, lower the rate. But broaden the base. 

Dr. GALE. Right. 

The CHAIRMAN. So how do we fit the two together? You know, 

save some money—with the exception of one of your proposals, I 

guess—but yet encourage savings? 

25 

Ms. FRIEDMAN. I mean, I guess I will start on that just by saying 

I think that, when we have challenges in this country, we always 

meet them, and we find the resources to meet them. And as I said 

earlier, there is a $6.6-trillion retirement income deficit that is only 

going to get worse if we do not do something now to address it. 

I want to just point out again that the Joint Tax Committee esti- mates that the government is spending $123 billion in tax subsidies to encourage employers and employees to save, and to repeat 

again that two-thirds of the value of those tax subsidies goes to the 

highest-paid, who do not need them. 

So we would argue—and I want to say we agree with you, Senator Cardin, not exactly, but there is a lot of room for rejiggering 

some of the tax subsidies in a more creative way that we feel would 

make them fair and more effective. But I want to say exactly what 

Senator Cardin said, though: we think that any tax subsidies that 

are redirected elsewhere have to be used only for retirement solutions, not for general deficit reduction. 

Then I am also going to put out just another idea that I know 

some of you will not totally agree with. But again, Harvard Law 

professor Dan Halperin has, because of the points I made earlier, 

suggested that we lower the limits that are now going to 401(k) 

plans to earlier levels, back to the pre-EGTRRA levels that I am 

sure—and I know, Senator Cardin, that you were a big advocate 

for that, but only because such a small number of low- and 

moderate-wage earners are actually able to even put in the maximum allowed. If you were to do that—and this is just a suggestion, I am not saying that we are telling you you should do this, 

but it is a suggestion to look at—then that money could go into 

what we feel are more effective and secure retirement solutions. 

The CHAIRMAN. All right. 

Senator Hatch? 

Senator HATCH. Thank you, Mr. Chairman. 

The opponents of the 401(k) retirement savings system ignore 

the fact that workers receive, in addition, Social Security. Now, Dr. 

VanDerhei, you published a paper a few years ago that analyzed 

the retirement income replacement rate that workers in various income groups could anticipate when they combined their 401(k) account with their Social Security benefit. 

Now, you concluded that workers in the lowest income group receive as much as 103 percent of their pre-retirement income from 

a combination of 401(k) and Social Security benefits. Could you 

elaborate a little bit more on your findings for us? 

Dr. VANDERHEI. Certainly. This is something that I did in conjunction with Sarah Holden from the Investment Company Institute. One of the big problems we had—and this was back around 

the time of Enron when a lot of calls were being made as far as 

the appropriateness of the 401(k) system as a result. 

Senator HATCH. Right. 

Dr. VANDERHEI. And people would take a look at just what the 

average 401(k) balance was and say, there is no way that is going 

to be able to support an adequate retirement. The problem is, of 

course, those look at people of all ages. Even if you do look at people approaching retirement age, people in their 60s, you have a 

tendency to combine people with very low tenure, people who may 

26 

have just changed jobs and only had one or 2 years of contributions 

in their account, with other people who have been there for a very 

long time. 

So we tried to be very, very specific, when we built this database, 

about looking at the potential for retirement income from 401(k) 

plans. But even at that time—because, again, 401(k) plans really 

had their genesis in November of 1981, and it was not until 1982 

or 1983 that most of these plans really were installed, and most 

employees did not have the opportunity to be in a 401(k) plan for 

their entire career when they were retiring. 

We had the benefit of having tens of millions of administrative 

records going back to 1996 to put together a simulation model that 

would allow you to look at how employees were reacting in terms 

of asset allocation and contribution behavior, and we put forth a 

baseline, assuming a 401(k) participant was always working for an 

employer who sponsored a 401(k) plan and assuming historical 

rates of return—we also did sensitivity analysis for some bear markets—what might they expect if, at 65, they took those accumulations and basically bought an annuity. 

We found for the lowest income quartile that, again, if they were 

continuously covered and had been eligible to participate their entire career, 51 percent of their pre-retirement income could be replaced by an annuity, and when you combined it with the 48- 

percent replacement rate from Social Security, it basically gets you 

up to the 103 percent that you mentioned. 

Now, obviously, given the way that the Primary Insurance 

Amount formula is defined with Social Security, the higher income 

quartiles would receive less from Social Security, so their combined 

replacement rate would be much less, but at least for the lowest 

income quartile, as you mentioned, they would have been able to 

replace more than 100 percent of their pre-retirement income just 

from the 401(k) and Social Security. 

Senator HATCH. Dr. Gale, under your proposal, when an employee contributes after-tax dollars to a 401(k) plan, a check from 

the government in the amount of the refundable tax credit will be 

deposited into a 401(k) account, as I understand it, of the employee. 

The IRS currently receives data on the 401(k) plans but not on 

the employee accounts within the plans. Now, your proposal would 

greatly expand, as I view it, government deposits to private 401(k) 

plan accounts. Now, how is the IRS supposed to administer this expanded refundable tax credit, and what sort of information, or new 

information, will employers be required to provide to the IRS? 

When you get through answering this, I would like to have Ms. 

Miller explain, what are your views on the wisdom of expanding 

government deposits to private 401(k) accounts? 

Dr. GALE. That is a good question. Basically there would be an 

expanded administrative capacity needed, but you could administer 

it as part of a refund, for example. When people file their income 

tax form, they can split refunds. The W–2 has a 401(k) contribution 

on it. It would not be that hard to list the 401(k) account number 

as one of the refund lines, and then the check gets cut. 

Right now you can get cash back, or you can get money put into 

an IRA. This would just automatically put it into the 401(k). It 

27 

strikes me that there is work to be done here, but it does not strike 

me as an insuperable or even a big administrative burden once the 

system is set up. 

Senator HATCH. All right. 

Ms. MILLER. I would like to back up to the small employer and 

the way the deduction creates cash flow because, if you have an 

employer who is counting on their personal deferral of income taxes 

to help pay for employee contributions, if that credit is going directly into their account, they no longer have that cash. 

So it is a bit of a problem just from the small employer standpoint in terms of how this all fits together. If this credit, as was 

in the written testimony, applied also to employer contributions, 

then it would be devastating because they just plain would not 

have the money. 

But getting beyond that and just saying, all right, we have some 

refundable credit, I think that there has been some groundwork 

laid in terms of in the 1040, allowing people to split their deposit 

and have some go to an IRA. I do not think necessarily all 401(k) 

providers would—it would take a lot for them to gear up to handle 

deposits. It think it would be more of an expense on the system, 

the record keepers, probably, than Treasury. But either way, there 

are certainly some challenges there. 

The CHAIRMAN. Thank you, Senator. 

Senator Cardin? 

Senator CARDIN. Thank you, Mr. Chairman. 

Ms. Miller, I want to get back to the point that you raised about 

the IRA limits and the other limits we have in our system. The 

IRA program has been very valuable in improving retirement savings, and it is very popular, but you raise a very valid point. It is 

important for low-wage workers to have an employer-sponsored 

plan where money is on the table. That would allow for greater accumulation of retirement savings for that lower-wage worker. We 

do not want to make the IRAs so attractive that particularly small 

companies choose to use the IRA route rather than an employersponsored plan. So what is your advice as to the right ratio here 

between these plans? What should we be looking at? 

Ms. MILLER. Oh, that is a good question. When I spoke earlier, 

I said that I thought that the current ratio was effective, but that 

there is maybe room for, I guess it would be a special deferral-only 

safe harbor, maybe in the 401(k) environment, that is low enough 

so that there is still a lot of reason for employers to want to contribute on their own behalf, and put more money in, but also encourages them to put in one of these arrangements. 

Senator CARDIN. In addition, of course, to limits, there are also 

complexity issues in different plans and other areas. 

Ms. MILLER. Yes. 

Senator CARDIN. So can you just give us your experience as to 

what we need to do within the IRA world to encourage smaller 

companies to set up plans where they are offering matches? 

Ms. MILLER. So, in the IRA world, there is not really much room, 

I guess, for an employer match, so I think we ought to look more 

toward multiple-employer arrangements, where there can be a cost 

savings in terms of setting them up. There are challenges with 

IRAs in a group setting, in terms of the banking rules. And I am 

28 

not an expert, but I know, in talking to some our members that 

would be interested in doing them on a volume basis, you have 

PATRIOT Act concerns and that kind of thing. So we need something that allows an employer to put in a plan that is kind of a 

mass plan, so to speak. 

Now, I know any time we expand coverage, there are costs involved. If you do not mind for just a couple of seconds, I will get 

back to my myth 5, because the question has come up, and there 

have been statements made here, that it costs $120 billion a year, 

but it does not. We are not spending $120 billion a year on retirement savings incentives. These are deferrals. Unlike the mortgage 

interest deduction, the health exclusion, anything else, these are 

monies that are set aside that we are going to be paying taxes on 

later. So I do not think we should let that discourage us from expanding savings. 

Senator CARDIN. Thank you. You made that point before. 

The Roth treatment has been a very popular way in which particularly younger workers, who have the capacity, are able to put 

money away for their retirement. Do any of you have a view as 

to—and you have all expressed a preference to try to target our results on lower-wage workers to put more money away for their retirement. Does Roth treatment help us or hurt us in this regard? 

Do IRAs help us or hurt us? What do we need to do in regards to 

the popular retirement options—Roth treatment, IRAs—as far as 

encouraging an environment where lower-wage workers will participate in larger numbers for retirement. 

Dr. GALE. Well, the most effective thing that could be done would 

be to make it possible to create automatic IRAs so that—this is a 

proposal that David John at The Heritage Foundation and Mark 

Iwry, who is now in the Treasury Department, put together several 

years ago under the auspices of the Retirement Security Project, 

which I run. And the idea would be, in the same way that automatic enrollment has helped raise enrollment in 401(k)s, to allow 

part of the workforce that does not have access to 401(k)s, and the 

part of the employer force, if you will, that does not want to or cannot set up pension plans, nevertheless, to let those workers benefit 

from the incentives that are put in the retirement system. I think 

in the same way that auto-401(k) was a very natural extension and 

was done in PPA 2006, auto-IRA is clearly the next step, if you 

will, to getting the rest of the workforce covered. 

Ms. FRIEDMAN. I guess the Pension Rights Center’s response to 

that is, while we think that the auto-IRA proposal is a positive step 

and that we are addressing the needs of people who now do not 

have employer-based plans, I think we would like to see something 

that goes a lot further, something that does not have all the risks 

and responsibilities on employees, where employees have to decide 

whether to participate, or there are no employer contributions even 

if there is automatic enrollment. 

If people, especially in this economy, need that money, they will 

take it out, and they could be hit with a penalty tax, and lots of 

other things. We would rather see, as I said earlier, shared responsibility, and pooled investments, and things like that. 

But it occurred to me, listening to Judy, that there are places 

where ASPPA and the Pension Rights Center and other organizaVerDate Nov 24 2008 14:44 Oct 10, 2012 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 R:\DOCS\76170.000 TIMD
29 

tions could work together to start coming up with better plans for 

the country that have employer and employee responsibility. You 

know, I think the problem with the way that the policy is going so 

much in this country is, we are putting so much onto individuals 

at a time when they really cannot accept all this risk. 

Senator CARDIN. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

I have no more questions. Senator Hatch, do you have another 

question? 

Senator HATCH. Could I ask one more? 

The CHAIRMAN. Sure. 

Senator HATCH. I just want to ask Dr. Gale another question. 

That is, I believe there is an important detail that we have not discussed here and was described in your proposal. And maybe I am 

wrong about this, but let me just ask it. Employer contributions 

and matching contributions to retirement plans on behalf of employees are exempt from payroll taxes. Under your proposal, employer contributions would be taxable income to the employee, including being subject to employer payroll taxes. 

As I view it, this would increase the costs to small businesses 

making contributions. Now, my question is, do you not think that 

the extra burden on small businesses will discourage matching contributions as well as the adoption of new 401(k) plans? 

I am concerned about that because I think that is—and then if 

you could, Ms. Miller or Dr. VanDerhei, what do you think the effect of the payroll tax increase will be on the decision of a small 

business to start or maintain a plan with a matching contribution? 

I would like to have both of your viewpoints on that. 

Dr. GALE. The proposal left that unspecified. At one point it said 

it was treated just like wages; at the other point it said, here are 

the things that would change, and everything else would stay as 

is. It was not my intent to change the payroll tax treatment. A 

number of people who have read it have raised that issue with me 

in an e-mail last night, so I apologize for the confusion in the proposal. I was not at all proposing that employer contributions be 

subject to payroll tax. 

As I stated in the oral testimony and as in the written testimony, 

you can separate changing the individual deduction to a credit from 

the notion of dealing with the employer deduction at all. So at an 

18-percent credit, if you just change the individual deduction to a 

matching credit, you would raise $250 billion over the next decade. 

If you also changed the employer contribution, you would raise 

$450 billion, but that is conceptually, administratively, whatever, 

just a separate component of the proposal. It could be separated 

out. 

The gist of the proposal is—in the spirit of what Judy said, the 

retirement system needs a tune-up, not an overhaul. The gist of the 

proposal is to convert the retirement deduction to a government 

matching contribution and, instead of giving the money back to the 

person in cash, to put the money into the account. That would both 

raise incentives and raise contributions and balances for the majority of workers. 

30 

That strikes me as a very favorable tune-up, especially in a time 

when the short-term economy is weak, and the long-term economy 

needs revenues. But it does not strike me at all as an overhaul of 

the retirement system, so I was kind of surprised to hear that idea 

characterized in that manner. 

Senator HATCH. Yes? 

Ms. MILLER. When I read the testimony, what I read was that 

the employer contribution would be treated like pay. So I think I 

would have assumed, in that circumstances, it would be FICA, and 

that would be very, very disruptive. If that is not the case, then 

that is an issue that, on its own, would be taken off the table. I 

would offer that there are other complications. Even if we take 

FICA off the table, if the employer contribution is part of this discussion in terms of a credit, there are other complications due to 

things like vesting schedules. 

Again, on this proposal I worry about the cash flow aspects for 

the small business. If they are not getting their own tax benefit deferral to have cash available, then that would affect it, but obviously, if you are only looking at the elective deferral and not the 

employer contribution, the impact becomes a question of two 

things: is it deposited to the account or not, and what is the 

amount of the credit? I think until the committee had some formal 

numbers on that, it would be hard to say. 

Senator HATCH. Well, I want to thank the four of you for your 

testimony here today. This has been really—I never thought this 

would be an interesting hearing. [Laughter.] 

But I think it has been an interesting hearing, and the four of 

you have done yourselves well as far as I am concerned. I just appreciate the effort that you have all made to be with us. Thank you 

so much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

I had somewhat the same reaction. These are all four great witnesses. You made it all very interesting. Thank you very much. It 

has been very helpful. 

The hearing is adjourned. 

[Whereupon, at 11:45 a.m., the hearing was concluded.] 

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76170089.eps
120 


76170090.eps
121 


76170091.eps
122 


76170092.eps
123 


76170.093
124 


76170.094
125 


76170.095
126 


76170.096
127 


76170.097
128 


76170.098
129 


76170.099
130 


76170.100
131 


76170.101
132 


76170.102
133 


76170.103
134 


76170.104
135 


76170.105
136 


76170.106
137 


76170.107
138 


76170.108
139 


76170.109
140 


76170.110
141 


76170.111
142 


76170.112
143 


76170.113
144 


76170.114
145 


76170.115
146 


76170.116
147 


76170.117
148 


76170.118
149 


76170.119
150 


76170.120
151 


76170.121
152 


76170.122
153 


76170.123
154 


76170.124
155 


76170.125
(157) 

COMMUNICATIONS


76170126.eps
158 


76170.127
159 


76170.128
160 


76170.129
161 


76170.130
162 


76170.131
163 


76170.132
164 


76170.133
165 


76170.134
166 


76170.135
167 


76170.136
168 


76170.137
169 


76170.138
170 


76170.139
171 


76170.140
172 


76170.141
173 


76170.142
174 


76170.143
175 


76170.144
176 


76170.145
177 


76170.146
178 


76170.147
179 


76170.148
180 


76170.149
181 


76170.150
182 


76170.151
183 


76170.152
184 


76170.153
185 


76170.154
186 


76170.155
187 


76170.156
188 


76170.157
189 


76170.158
190 


76170.159
191 


76170.160
192 


76170.161
193 


76170.162
194 


76170.163
195 


76170.164
196 


76170.165
197 


76170.166
198 


76170.167
199 


76170.168
200 


76170.169
201 


76170.170
202 


76170.171
203 


76170.172
204 


76170.173
205 


76170.174
206 


76170.175
207 


76170.176
208 


76170.177
209 


76170.178
210 


76170.179
211 


76170.180
212 


76170.181
213 


76170.182
214 


76170.183
215 


76170.184
216 


76170.185
217 


76170.186
218 


76170.187
219 


76170.188
220 


76170.189
221 


76170.190
222 


76170.191
223 


76170.192
224 


76170.193
225 


76170.194
226 


76170.195
227 


76170.196
228 


76170.197
229 


76170.198
230 


76170.199
231 

Æ 


76170200.eps