THE TAX CODE now provides every worker some incentive to put away money for retirement. But the size of that incentive varies enormously--and unfairly--depending on where you work.
A corporate executive or an incorporated doctor or lawyer may have a corporate plan that sets aside up to $45,475 each year in a single retirement account--and as much as $150,000 if he is covered by two plans. He pays no tax on that amount or the interest earned on it until it is withdrawn after retirement. His heirs pay no estate tax on the fund when he dies. Self-employed people, however, can set aside only $15,000 a year in a tax-exempt account, and an ordinary employee who is single can lay away only $2,000 a year tax-free.
Corporate plans, moreover, may allow individuals to borrow money from their retirement accounts to use for other purposes--thereby wiping out any stimulus for additional savings that the tax exemption may have provided.
The generous tax treatment of corporate pensions was meant to encourage corporations to provide better benefits for all their employees. In practice, however, other features of the tax law allow corporations to tailor their plans so that the vast bulk-- even all--of the benefits go to higher-paid employees. In recent years, increasing numbers of professionals have incorporated so that they could get similar benefits. Now the self-employed are complaining because they don't get equal treatment.
Extending corporate-level benefits to all types of businesses and workers would simply cost the Treasury too much in lost revenue. The only sensible answer is the one that the Treasury Department --and the House legislation sponsored by Rep. Charles Rangel--would pursue: cutting back on corporate benefits, eliminating loopholes that promote use of pension funds as simple tax shelters and moving in the direction of eliminating all distinctions among types of businesses and trades.
Corporations are naturally fighting tooth and nail against any erosion of their executives' benefits. To satisfy critics, they'd rather just cut out benefits for professionals and keep their own. Some corporations are even threatening to respond to any cutback by retrenching on the relatively stingy benefits they give their lower-paid workers. But, as Assistant Treasury Secretary John Chapoton suggested recently in testimony before the House Ways and Means committee, if inducements for fair treatment of lower-paid workers are needed, there are better ways to provide them.
The government has an interest in encouraging people to provide adequately for their old age. But tax breaks for some mean higher taxes for others, and the case for subsidizing truly golden retirement years is extraordinarily weak.