Total retirement income comes from Social Security, pensions, personal savings and other assets, and postretirement earnings. Depending on the individual, an adequate retirement income may be achieved with different combinations of these sources. For example, Social Security provides near-universal coverage and provides proportionally larger benefits for lower earning participants. That is, Social Security replaces a higher percentage of preretirement income for lower earning workers than for higher earners. In contrast, the U.S. employer-sponsored pension system is voluntary and tax-subsidized and provides proportionally larger benefits for higher earning participants. To the extent that it is deemed desirable that the total percentage of preretirement income replaced by Social Security and employer-sponsored pensions together is reasonably constant, private pensions would tend to play a larger role in the retirement income of higher earning workers. The two types of employer-sponsored pension plans are defined benefit (DB) and defined contribution (DC). DB plans promise to provide a level of retirement income that is generally based on salary and years of service. The employer, as the plan sponsor, is responsible for funding the promised benefit, investing and managing the plan assets, and bearing the investment risk. Under DC plans, employees have individual accounts to which employers, employees, or both make periodic contributions. DC plan benefits are based on the contributions to and investment returns on the individual accounts. The employee bears the investment risk. In some types of DC plans, including 401(k), 403(b), 457, and Savings Incentive Match Plan for Employees (SIMPLE) plans, employees may choose to make tax-deferred contributions instead of receiving the same amount as taxable salary. A fundamental requirement for tax-qualified pension plans of taxable private employers is that contributions or benefits be apportioned in a nondiscriminatory manner between a top group of highly paid employees and owner-employees and workers outside the top group. There are standard plan designs that allow employers to comply with this requirement. Alternatively, employers can develop a custom-tailored plan design and apply general testing methods (as required by law) to a plan’s apportionment of contributions or benefit accruals each year. These methods for custom-tailored plan designs are complex, but they generally require the employer to provide both coverage and contributions (or benefits) for workers outside the top group at rates that do not differ too greatly from the rates at which the employer provides coverage and contributions (or benefits) for members of the top group. Tax-deferred contributions to defined contribution plans by employers and employees are constrained by legal limits. The purpose of these limits is to prevent tax preferences from being used to subsidize excessively large pension benefits. The Employee Retirement Income Security Act of 1974 imposed dollar and percentage-of-compensation limitations on combined employer and employee tax-deferred contributions. The Tax Reform Act of 1986 introduced a dollar limitation (i.e., a maximum dollar contribution) on employees’ tax-deferred contributions to DC plans. The Economic Growth and Tax Relief Reconciliation Act of 2001 increases all three of these limits beginning in 2002; the scheduled increases are to be fully implemented by 2006. The same law also allows a so-called “catch- up” provision, where persons aged 50 or older are permitted to make additional tax-deferred contributions, in excess of other applicable statutory limits, to 401(k) and similar DC plans. Such a provision permits older workers to make larger contributions and may help those who had not previously been able to save sufficiently to “catch up” to more adequate levels of retirement savings. (See table 1 for a summary of these limits.) Tax-deferred pension contributions may also be limited by the application of other statutory limits that we do not analyze in this report because of data limitations. In addition to the legal limits, some plans set their own limits on contributions. In DC plans with plan-specific contribution limits, tax-deferred contributions are limited to the statutory limit or the plan- specific limit, whichever is smaller. Employers set plan-specific limits, in part, to ensure that the plans they sponsor pass statutory and regulatory requirements such as the requirement that contributions or benefits not be skewed too heavily in favor of highly paid employees or owner-employees. About 51 million workers, or 47 percent of all workers, participated in a pension plan in 1998. (“All workers” includes both full-time and part-time workers.) When we categorized pension participants by their earnings, we found that more than half of pension participants, like more than half of all workers, had low or moderate earnings. However, when we examined the percentages of workers in various earnings groups that participated in pension plans, we found that participation rates were lower for low and moderate earners than for higher earners. When we categorized pension participants by their gender, we found that more than half of pension participants, like more than half of all workers, were men. When we examined the percentages of male workers and of female workers that participated in pension plans, we found that participation rates were lower for women than for men. The patterns of participation by earnings and gender for DC plans were generally similar to those for all pension plans. In 1998, about 51 million workers, or 47 percent of all workers, participated in a pension plan. Workers who did not participate either worked for employers that did not offer pension plans, were not eligible to participate in their employers’ plans, or chose not to participate in their employers’ plans. When we estimated the percentages of pension participants that were in different earnings groups, we found that more than half of pension participants, like more than half of all workers, had low or moderate earnings. Of the 51 million workers who participated in a pension plan, 57 percent had annual earnings of less than $40,000. (See fig. 1.) Our analysis of pension participation by household income detected a similar pattern. About 28 percent of pension participants had household incomes of less than $40,000 per year, while another 41 percent had annual household incomes above $40,000 but below $75,000. However, higher earners were more likely to participate in pension plans than low and moderate earners. Specifically, 38 percent of workers who earned less than $40,000 per year participated in a pension plan, while 70 percent of workers who earned between $40,000 and $74,999 per year participated in a plan. (See fig. 2.) A similar pattern of lower participation rates for low- and moderate- income workers exists when individual workers are classified by their household incomes rather than by their individual earnings. Of workers with household incomes of less than $40,000 per year, 30 percent participated in a pension plan. Of workers with annual household incomes between $40,000 and $75,000 per year, 57 percent participated. Among the reasons for low-income workers’ lower pension plan participation rates are that low-income workers are more likely to work for small employers (who are less likely to offer pension plans than larger employers), are more likely to work in part-time positions (which are less likely to be covered by pension plans than full-time positions), are less likely to be able to afford to save for retirement through employer-sponsored plans, and depend more heavily on Social Security as a source of retirement income. When we estimated the percentages of pension participants that were male and female, we found that more than half of pension participants, like more than half of all workers, were men. Of the 51 million workers who participated in a pension plan, 56 percent were men. (See fig. 3.) In 1998, about 53 percent of all workers were men. As in our earnings analysis, we tested the possibility that even though most pension participants were men, there could be many men who did not participate in pension plans and many women who did participate. To test this possibility, we examined the percentages of female and male workers who participated in pension plans. We found that women were less likely than men to participate in a pension plan. Specifically, half of all male workers and 44 percent of all female workers participated in a plan. (See fig. 2.) Women workers’ lower wages, greater concentration in part- time jobs, and greater concentration in industries where few employers offer pension plans may be among the reasons why women were less likely than men to participate in plans. The earnings and gender patterns of DC plan participation resembled those of participation in all pension plans. About 38.9 million workers, or 36 percent of all workers, participated in DC plans. Of these 38.9 million workers, 54 percent had annual earnings of less than $40,000, and 57 percent were men. (See fig. 4 and fig. 5.) When we estimated the percentage of workers in each earnings group that participated in DC plans, we found that low and moderate earners were less likely to participate than higher earners. Of all workers who earned less than $40,000 per year, 28 percent participated in DC plans; of those who earned between $40,000 and $75,000 per year, 55 percent participated in DC plans. (See fig. 6.) Likewise, workers with low or moderate household incomes were less likely to participate than those with higher household incomes. When we estimated the percentages of men and women workers that participated in DC plans, we found that a higher percentage of male (39 percent) than female workers (32 percent) participated in DC plans. About 8 percent of all DC participants were likely to benefit directly if all three DC plan contribution limits discussed in this report increased at the same time. The 3.1 million DC participants who were likely to benefit directly from these limit increases generally had higher earnings than the 35.7 million who were not likely to benefit directly. When we examined the percentages of workers in various earnings categories that were likely to benefit directly from these limit increases, we found that higher earners were more likely than low and moderate earners to benefit directly.