Pensions, Health Insurance, and Tax Incentives

Brief

Pensions, Health Insurance, and Tax Incentives

Abstract

In 2001, Congress significantly expanded the scope of Individual Retirement Accounts (IRA). This paper uses variation in IRA eligibility rules in the 1980s and 1990s to determine whether more widespread access to IRAs undermines traditional employer-sponsored pensions, especially 401(k)-type plans. This paper develops a model of the value of fringe benefits with a special focus on the valuation of pensions. The theoretical model illustrates how IRAs can reduce demand for employer-sponsored pensions. The empirical results, based on a model of compensation and job turnover, indicate that workers highly value pensions and health insurance. The findings suggest that restrictions enacted in 1986 on IRAs did not significantly increase workers' demand for employer-sponsored pensions.

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