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Pension Backloading, Wage Taxes, and Work Disincentives

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  • Laurence J. Kotlikoff
  • David A. Wise

Abstract

The Federal Government is actively involved in encouraging the formation and growth of private pensions and in regulating their behavior. The primary form of encouragement is the government's tax subsidization of pensions. A primary attribute of pension plan provisions is an implicit tax on employment after certain ages. The primary form of pension regulation is through ERISA, the Employee Retirement Income Security Act. The government's involvement in encouraging and regulating private pensions appears to reflect its desire that workers have a secure source of old age income which will lessen their reliance on Social Security. In recent years the government has reacted to demographic changes, and their effects on Social Security funding, and the increase in early retirement by also using its pension and Social Security tax and regulatory policies to encourage workers to delay their retirement decision. This paper examines the structure of pension plans with two questions in mind. First have government pension backloading regulations aimed at assuring future pension benefits been effective? and, second, has the structure of old age pension accrual at the end of the workspan, an implicit tax, greatly limited the effectiveness of government policy in reversing the trend to early retirement? The answers to these questions are important for assessing the benefits of the government's tax subsidization of pensions, as they are currently structured. The principal findings of this study are: (1) ERISA regulations notwithstanding, a significant proportion of defined benefit plans exhibit severe backloading. Indeed, backloading is an inherent property of defined benefit pension plans. (2) A large fraction of defined benefit plans embed very substantial old age work disincentives, through an implicit tax on wage earnings. (3) These pension retirement incentives are often much greater than Social Security's retirement incentives. (4) Evidence from one large Fortune 500 firm indicates that pension retirement incentives can greatly increase the extent of early retirement.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2463.

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Date of creation: Dec 1987
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Publication status: published as Tax Policy and the Economy. ed. L. Summers, vol. 2, MIT Press, 1988.
Handle: RePEc:nbr:nberwo:2463

Note: LS AG
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References

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  1. Crawford, Vincent P & Lilien, David M, 1981. "Social Security and the Retirement Decision," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 505-29, August.
  2. Jeremy I. Bulow, 1979. "Analysis of Pension Funding Under Erisa," NBER Working Papers 0402, National Bureau of Economic Research, Inc.
  3. Roger H. Gordon & Alan S. Blinder, 1980. "Market wages, reservation wages, and retirement decisions," NBER Chapters, in: Econometric Studies in Public Finance, pages 277-308 National Bureau of Economic Research, Inc.
  4. Alan S. Blinder, 1982. "Private Pensions and Public Pensions: Theory and Fact," NBER Working Papers 0902, National Bureau of Economic Research, Inc.
  5. Laurence J. Kotlikoff & David A. Wise, 1985. "Labor Compensation and the Structure of Private Pension Plans: Evidence for Contractual versus Spot Labor Markets," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 55-88 National Bureau of Economic Research, Inc.
  6. Campbell, Colin D & Campbell, Rosemary G, 1976. "Conflicting Views on the Effect of Old-Age and Survivors Insurance on Retirement," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 369-88, September.
  7. Anthony J. Pallechio, 1978. "The Social Security Earnings Test, Labor Supply Distortions, and Foregone Payroll Tax Revenues," NBER Working Papers 0272, National Bureau of Economic Research, Inc.
  8. Gary S. Fields & Olivia S. Mitchell, 1984. "Economic Determinants of the Optimal Retirement Age: An Empirical Investigation," Journal of Human Resources, University of Wisconsin Press, vol. 19(2), pages 245-262.
  9. Burtless, Gary & Hausman, Jerry, 1982. "`Double dipping': the combined effects of social security and civil service pensions on employee retirement," Journal of Public Economics, Elsevier, vol. 18(2), pages 139-159, July.
  10. Burkhauser, Richard V & Turner, John A, 1978. "A Time-Series Analysis on Social Security and Its Effect on the Market Work of Men at Younger Ages," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 701-15, August.
  11. Alan S. Blinder & Roger H. Gordon & Donald E. Wise, 1980. "Reconsidering the Work Disincentive Effects of Social Security," NBER Working Papers 0562, National Bureau of Economic Research, Inc.
  12. Boskin, Michael J. & Hurd, Michael D., 1978. "The effect of social security on early retirement," Journal of Public Economics, Elsevier, vol. 10(3), pages 361-377, December.
  13. Parsons, Donald O, 1980. "The Decline in Male Labor Force Participation," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 117-34, February.
  14. Gary Burtless & Robert A. Moffitt, 1986. "Social Security, Earnings Tests, and Age at Retirement," Public Finance Review, , vol. 14(1), pages 3-27, January.
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Cited by:
  1. Alan L. Gustman & Thomas L. Steinmeier, 1989. "Evaluating Pension Policies in a Model with Endogeous Contributions," NBER Working Papers 3085, National Bureau of Economic Research, Inc.
  2. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1995. "Why are Retirement Rates So High at Age 65?," NBER Working Papers 5190, National Bureau of Economic Research, Inc.

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