Reality Testing for Pension Reform

Paper prepared for presentation at the Tax Policy Center Symposium, "Saving Private Pensions," The Brookings Institution, Washington, D.C., May 6, 2003. This is a working draft. The views expressed are those of the authors and do not necessarily reflect those of the Urban Institute, its board or its sponsors.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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I'm staring at documents that make no sense to me, no matter how many beers I drink ... Apparently I have until Sept. 30 (in most instances) ... to comply with something (but what?) called "GUST" ... [for my Keogh plan and I] ... must adopt EGTRRA prior to the end of the plan year beginning in 2002. I am, frankly, reluctant to adopt anything called "EGTRRA," which sounds like the name of a giant radioactive chicken that destroys Tokyo ... the federal Tax Code is out of control ... It's gigantic and insanely complex, and it gets worse all the time. Nobody has ever read the whole thing. IRS workers are afraid to go into the same ROOM with it. They keep it locked in the basement, and once a day, they open the door, heave in a live taxpayer—some poor slob who failed to adopt EGTRRA in time to comply with GUST (and various other amendments)—then slam the door shut, before the screams start.¹

Dave Barry is right. And the private pension system is fair game for jokes and ridicule. It is absurdly complicated and incomprehensible. The relevant tax rules and regulations include more than 3,000 pages of small, single-spaced text and weigh more than most laptop computers. The companion labor rules under ERISA are smaller but not by much. There is widespread agreement that the present situation is untenable and something must be done. Every effort to "simplify" the private pension system, however, seems to achieve just the opposite.

But these are interesting times in the pension world. Perhaps for the first time, there are two diametrically opposed proposals for change before Congress. The first is the Pension Preservation and Savings Expansion Act of 2003 recently introduced by Representatives Portman and Cardin. PPSEA is the traditional type of pension reform, an omnibus bill that tinkers with almost every aspect of the private pension system to make incremental changes. The second is the Administration's attempt at radical change and simplification. Its proposal contemplates a sweeping consolidation in the number and types of defined contribution plans. This paper evaluates these two approaches - one evolutionary, the other revolutionary—and then considers an alternative.

Analyses of the private pension system typically focus on such issues as how to improve coverage or encourage saving or prevent tax abuse or generate retirement income more equitably. Those issues are important, but the thesis of this paper is that more attention needs to be paid to the structure in which they are embedded. It examines the nuts-and-bolts of the private pension system, that is, the plans that comprise it and the rules that govern them. The architecture and machinery of the private pension system have much to teach us about directions for reform.

Notes from this section

1. Dave Barry, "The Taxman Cometh, with Satan in the Van," The Miami Herald, April 5, 2003.

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