President Reagan's proposal to eliminate tax-deferred, on-the-job savings plans was bitterly criticized yesterday by Rep. James R. Jones (D-Okla.) and spokesmen for pension groups.
They said it is likely to rob many low-income workers and small-business employes of their best chance to accumulate a retirement nest egg through tax-free, on-the-job contributions from their salaries.
Jones, presiding over a joint hearing by two House Ways and Means subcommittees on long-term retirement income policy, called the proposal to repeal the favored tax treatment given such arrangements -- known as 401(k) plans -- "a giant leap backward from our goal of providing incentives to Americans to plan their own retirement security."
Gerald Facciani of the American Society of Pension Actuaries said elimination of 401(k) plans would "put the final nail in the coffin of small-business retirement plans."
U.S. Steel Corp. Vice President James Short, speaking for ERIC, a coalition of more than 100 of the nation's largest companies with pension and savings plans, said:
"The 401(k) program has produced a revolution in worker savings. Employes, especially younger and lower-paid workers, who are unable to find $2,000 at the end of the year for an Individual Retirement Account, find they can take advantage of the tax-deferred savings program offered through company-sponsored 401(k) plans."
Dallas L. Salisbury of the Employee Benefit Research Institute (EBRI) presented figures showing that 20 to 30 percent of eligible lower-income workers least likely to have regular employer-paid pensions sign up for on-the-job tax-deferred savings plans if the employer institutes them.
But nationwide, only 6 to 10 percent of the same low-income classes eligible to buy tax-deferred IRAs out of their own pockets do so.
Even at middle- and higher-income levels, participation rates for 401(k) plans are twice as high as for IRAs, in part because it is easy to have a small amount deducted from salary each week and in part because more than 70 percent of employers add a small matching contribution.
According to the EBRI, participation in the savings plans is growing rapidly and has reached about 10 million persons, but annual IRA participation has leveled off at 12 million for a program that began much earlier.
Witnesses said these figures show that 401(k) plans are a far better instrument for ensuring that low-income workers will have extra retirement income to supplement Social Security benefits. The same is true, they said, for many small businesses that cannot afford employer-paid pension systems.
Under the law, when a worker authorizes his employer to deduct part of his salary and put it in a savings plan, that amount and interest earned on it are treated as tax-free income. The worker need not pay taxes on these amounts until he retires and starts drawing benefits. By then, his tax rate is usually lower because he is no longer working.
The administration said Tuesday that, as part of its overall tax-overhaul plan, the tax-deferred status of savings plans should be eliminated to save the Treasury $11.6 billion in tax losses from 1986 to 1990.