Plan Types Pensions and Policy Approaches

As discussed above, only 50 percent of nonagricultural wage and salary employees in the private sector participate in a pension plan. Part of the coverage issue arises in firms where the employer offers a plan and employees are excluded or choose not to participate. The other part of the problem is that some firms—particularly small ones—do not offer pension plans. Surveys reveal that 29 percent of workers without pension coverage are employed by firms sponsoring pension plans, and 71 percent work for employers without plans.

The framers of ERISA recognized the lack of coverage as a serious problem, but shied away from mandating coverage in any way. Instead, they believed in encouraging the growth of employer-sponsored plans, and, for those workers whose employers did not provide a plan, authorized the individual retirement account (IRA). Historically, IRAs allowed individuals to accumulate $2,000 per year on a tax-preferred basis. The maximum rises to $3,000 in 2002 and will gradually increase to $5,000 in 2008, and thereafter increase inflation increments of $500. Recent data show that 28 percent of households have an IRA, but they are used primarily by upper-income households and appear to supplement conventional pension coverage, since nearly 50 percent of total households with IRAs also have pension coverage. This pattern means that only an additional 13 percent of households picked up coverage through IRAs, leaving a very large number of households with no pension provisions at all. It is not surprising that IRAs cannot solve the coverage problem. Low and moderate earners have too many pressing needs for current income to think about saving. Tax relief is also unlikely to affect their decisions since many low and moderate earners face low marginal tax rates.

The lack of pension coverage would not be a source of concern if Social Security provided enough income for workers to maintain their preretirement standard of living, but Social Security alone—even for lower paid workers—is inadequate when viewed either in terms of replacement rates or relative to poverty thresholds. The question is the extent to which the provision of pension income can be solved through the expansion of the existing employer-based system or whether some new program may be needed for those who cannot reduce their cash wages further in order to receive pension protection.

In any event, the lack of universal coverage for supplementary retirement benefits, like the erosion of termination benefits in defined benefit plans, the cashing out of lump-sum distributions, and lack of inflation protection, remains an unsolved problem.