Private Pensions: Issues of Coverage and Increasing Contribution 
Limits for Defined Contribution Plans (17-SEP-01, GAO-01-846).	 
								 
Proposals intended to expand pension coverage and promote pension
savings have recently received much attention. In the Economic	 
Growth and Tax Relief Reconciliation Act of 2001, for example,	 
Congress raised statutory limits on tax-deferred pension	 
contributions and benefits and made other changes to the law	 
governing qualified pension plans. Some assert that increasing	 
these limits will enhance employer incentives to start new plans 
and improve existing plan coverage, especially for employees of  
small businesses. Other contend that these measures will	 
primarily benefit higher paid individuals and may not improve	 
pension coverage for low or moderate-income workers. Forty-seven 
percent of all workers participated in a pension plan, and 36	 
percent of all workers participated in a defined contribution	 
(DC) plan. Most pension plan participants had low or moderate	 
earnings (less than $40,000 per year) and were men. About eight  
percent of all DC participants, or 3.1 million people, were	 
likely direct beneficiaries of a simultaneous increase in all the
statutory contribution limits GAO analyzed. Higher earners were  
more likely than low and moderate earners, and men were more	 
likely than women, to benefit directly from such an increase;	 
this was also true of increases in each of the separate dollar	 
limits on contributions. About 721,000 DC participants, or 11	 
percent of eligible DC participants, were likely to benefit from 
a so-called "catch-up" provision allowing persons aged 50 or	 
older to make additional contributions to certain DC plans.	 
Higher earners were more likely to benefit directly from this	 
option than low and moderate earners. However, neither male more 
female DC participants were significantly more likely to benefit 
directly from this option.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-846 					        
    ACCNO:   A01445						        
  TITLE:     Private Pensions: Issues of Coverage and Increasing      
Contribution Limits for Defined Contribution Plans		 
     DATE:   09/17/2001 
  SUBJECT:   Income statistics					 
	     Retirement pensions				 
	     Tax expenditures					 

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GAO-01-846
     
Report to the Ranking Minority Member, Subcommittee on Oversight, Committee
on Ways and Means, House of Representatives

United States General Accounting Office

GAO

September 2001 PRIVATE PENSIONS Issues of Coverage and Increasing
Contribution Limits for Defined Contribution Plans

GAO- 01- 846

Page i GAO- 01- 846 Pension Contribution Limit Increases Letter 1

Results in Brief 3 Background 4 The Majority of Pension Participants Had Low
or Moderate

Earnings, but More Than Half of Low and Moderate Earners in the Workforce
Did Not Participate in a Pension Plan 7 Increase in DC Plan Contribution
Limits Would Likely Benefit

About 3.1 Million DC Participants Directly 14 ?Catch- Up? Provision Was
Likely to Benefit Few Participants

Directly 23 Agency Comments 27

Appendix Scope and Methodology 28

Tables

Table 1: Changes in Various DC Plan Contribution Limits, 19982006 7 Table 2:
Likely Direct Beneficiaries of Increasing the Three

Contribution Limits in Stages 21 Table 3: Earnings of Likely Direct
Beneficiaries of Increasing the

Three Contribution Limits in Stages 21 Table 4: Gender of Likely Direct
Beneficiaries of Increasing the

Three Contribution Limits in Stages 22 Table 5: Sampling Errors of 12
Percentage Points or More 29

Figures

Figure 1: Earnings of Pension Plan Participants 9 Figure 2: Pension Plan
Participation by Earnings and Gender 10 Figure 3: Gender of Pension Plan
Participants 11 Figure 4: Earnings of Participants in DC Plans 12 Figure 5:
Gender of Participants in DC Plans 13 Figure 6: DC Plan Participation by
Earnings and Gender 14 Figure 7: Increasing All Contribution Limits:
Earnings of Likely

Direct Beneficiaries and of DC Participants Who Were Not Likely Direct
Beneficiaries 17 Figure 8: Percent of DC Participants Likely to Benefit
Directly

From Increasing All Contribution Limits 18 Contents

Page ii GAO- 01- 846 Pension Contribution Limit Increases

Figure 9: Increasing All Contribution Limits: Gender of Likely Direct
Beneficiaries and of DC Participants Who Were Not Likely Direct
Beneficiaries 19 Figure 10: Permitting Additional Employee Contributions for

Participants Aged 50 and Older: Earnings of Likely Direct Beneficiaries and
of Eligible DC Participants Who Were Not Likely Direct Beneficiaries 25
Figure 11: Percent of Eligible DC Participants Likely to Benefit

Directly From Permitting Additional Employee Contributions for Participants
Aged 50 and Older 26

Abbreviations

CPS Current Population Survey DB defined benefit DC defined contribution SCF
Survey of Consumer Finances SIMPLE Savings Incentive Match Plan for
Employees

Page 1 GAO- 01- 846 Pension Contribution Limit Increases

September 17, 2001 The Honorable William J. Coyne Ranking Minority Member
Subcommittee on Oversight Committee on Ways and Means House of
Representatives

Dear Mr. Coyne: At $85 billion this year, tax preferences for public and
private employersponsored pension plans represent the largest tax
expenditure, exceeding those for either home mortgages or health benefits. 1
The purpose of these pension tax preferences is to raise private savings for
workers? retirement. Greater private savings for retirement can enhance
income security in retirement by supplementing Social Security benefits as
well as reduce the need for public assistance. Pension tax preferences are
structured to strike a balance between providing incentives for employers to
start and maintain voluntary, tax- qualified pension plans and ensuring that
participants receive an equitable share of the tax- subsidized benefits. The
Internal Revenue Code places limits on the amounts that workers and
employers can contribute to tax- deferred retirement plans. These limits
exist to prevent partial public subsidies of excessively large retirement
benefits through tax preferences.

Proposals intended to expand pension coverage and promote pension savings
have recently received much attention. In the Economic Growth and Tax Relief
Reconciliation Act of 2001, for example, Congress raised statutory limits on
tax- deferred pension contributions and benefits and made other changes to
the law governing qualified pension plans. Some assert that increasing these
limits will enhance employer incentives to start new plans and improve
existing plan coverage, especially for employees of small businesses. Others
contend that these measures will primarily benefit higher paid individuals
and may not improve pension

1 Joint Committee on Taxation, ?Estimates of Federal Tax Expenditures for
Fiscal Years 2001- 2005? (JCS- 1- 01), April 6, 2001. ?Tax expenditures? are
revenue losses attributable to provisions of federal tax laws and include
reductions in income tax liabilities that result from special tax provisions
or regulations that provide tax benefits to particular taxpayers. Pension
contributions that fall within statutory limits, as well as investment
earnings on pension assets, are not taxed until benefits are paid to plan
participants. As a result, these tax preferences largely represent timing
versus permanent differences in tax revenue generation.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 846 Pension Contribution Limit Increases

coverage for low- or moderate- income workers. In this report, we consider
increases in limits on contributions to defined contribution (DC) plans, 2
the type of pension plan that covers most pension participants. 3 You asked
us to describe: (1) the extent to which workers participate in all pension
plans, the extent to which workers participate in DC plans, and the earnings
and genders of these DC participants; (2) the number, earnings, and genders
of DC participants likely to benefit directly from an increase in limits on
contributions to qualified DC plans; and (3) the number, earnings, and
genders of DC participants likely to benefit directly from allowing
participants aged 50 or older in certain DC plans to make ?catchup?

contributions in excess of other statutory limits. To address your
questions, we used the 1998 Survey of Consumer Finances (SCF) to estimate
the number, percentage, earnings, and genders of all workers who
participated in pension plans and, separately, in DC plans. 4 We also used
the 1998 SCF to estimate the number, percentage, earnings, and genders of
certain DC participants (referred to below as likely direct beneficiaries)
who may benefit from the increases in statutory limits on contributions to
qualified DC plans we analyzed. 5 We analyzed increases in contribution
limits in isolation from any other enacted or

2 In a DC plan, pension benefits are based on the contributions to and
investment returns on individual accounts. Our analysis of all pension plan
participants includes participants in both DC and defined benefit (DB)
plans. Because most workers who participate in pension plans are in DC
plans, and because data limitations prevent us from analyzing the maximum DB
benefit, this report deals only with DC plan contribution limits. Subject to
data limitations, our analysis of contribution limits is based on all DC
plans, regardless of whether or not they permit employees to make tax-
deferred contributions. For additional information about the scope and
methodology of our analysis, see the appendix.

3 We define pension participants as persons aged 18 or older who were
working at the time of the survey, whose earnings could be expressed as an
annual amount, and who were included in a pension plan through their job.
Pension participants, under this definition, exclude workers whose employers
offered pension plans but who were not included in those plans because they
were not eligible to be included or chose not to be included.

4 The 1998 Survey of Consumer Finances (SCF) was the most recent triennial
survey of household finances sponsored by the Board of Governors of the
Federal Reserve System. For more information on the SCF- including data
availability, survey and sample design methodology, data documentation, and
applications- visit the SCF Web site at http:// www. federalreserve. gov/
pubs/ oss/ oss2/ scfindex. html.

5 Our analysis describes who was likely to benefit directly from
contribution limit increases at the time the SCF was conducted in 1998.
Individuals we did not classify as likely to benefit directly from increased
contribution limits may benefit in subsequent years if they are able to
contribute at higher levels. Our analysis did not permit us to estimate how
many workers would likely benefit directly from higher contribution limits
at any point in their working life.

Page 3 GAO- 01- 846 Pension Contribution Limit Increases

proposed statutory changes and did not analyze the specific contribution
limit increases in any specific enacted or proposed legislation. We defined
likely direct beneficiaries of an increase in DC plan contribution limits as
employed DC participants whose employer and/ or employee contributions were
equal to or above the contribution limits we analyzed. 6 (Individuals can
make contributions in excess of the specified limits, but these additional
contributions do not receive favorable tax treatment.)

In addition to analyzing SCF data, we analyzed a small sample of
planspecific data and obtained analyses conducted by the Department of the
Treasury and by a large financial services firm. We also interviewed federal
agency officials, pension experts, and representatives of nongovernmental
organizations to obtain their views on the effects of raising various
contribution limits. We conducted our work between January and August 2001
in accordance with generally accepted government auditing standards.

According to data from the most recent (1998) SCF, 47 percent of all workers
participated in a pension plan, and 36 percent of all workers participated
in a DC plan. (? All workers? includes both full- time and parttime
workers.) More than half of pension plan participants, like more than half
of all workers, had low or moderate earnings (less than $40,000 per year)
and were men. When we categorized pension participants by their earnings, we
found that more than half of pension participants had low or moderate
earnings. For example, 57 percent of all pension participants earned less
than $40,000 per year. However, when we examined the percentages of workers
at different earnings levels that participated in pension plans, we found
that workers with low or moderate earnings were less likely than higher
earners to participate in a pension plan. For example, 38 percent of workers
who earned less than $40,000 per year participated in a pension plan, while
70 percent of workers who earned between $40,000 and $74,999 per year
participated in a plan. 7 In addition, when we characterized pension
participants by their gender, we found that

6 The appendix provides a more detailed explanation of this definition.
Likely direct beneficiaries, defined in this way, are in a position to
increase their contributions (or their employers are in a position to
increase employer contributions) if contribution limits are raised. However,
this does not mean that all likely direct beneficiaries (or their employers)
will actually increase their contributions if contribution limits are
raised.

7 Similarly, workers who earned under $40,000 per year were less likely to
participate in pension plans than higher earning workers whose annual
earnings were $75,000-$ 149, 999 or $150, 000 or higher. Results in Brief

Page 4 GAO- 01- 846 Pension Contribution Limit Increases

more than half of pension participants were men. When we examined the
percentages of male and female workers participating in pension plans, we
found that men were more likely than women to be plan participants. In most
cases, the earnings and gender characteristics of DC participants resembled
those of all (DC and DB) pension plan participants.

About 8 percent of all DC participants, or 3.1 million people, were likely
direct beneficiaries of an increase in all the statutory contribution limits
we analyzed. Higher earners were more likely than low and moderate earners,
and men were more likely than women, to benefit directly from such an
increase. When we analyzed increases in each of the three contribution
limits sequentially, we found that increasing the percentage limit on
combined employer and employee contributions first accounts for half of the
3.1 million likely direct beneficiaries of an increase in all three
contribution limits. Increasing DC plan contribution limits could also
indirectly benefit some additional low- and moderate- earning workers. Those
workers could benefit indirectly if employers found higher limits attractive
enough to form new plans that would extend pension coverage to more
employees, expand pension coverage in existing plans, and/ or increase their
contributions for low- and moderate- earning participants in existing plans.
These expansions of coverage or increases in contributions for low and
moderate earners are very difficult to measure. They occur at the
individual, employer, and pension plan levels, and how widespread they would
be is unknown.

About 721,000 DC participants, or 11 percent of eligible DC participants,
were likely to benefit directly from a so- called ?catch- up? provision
allowing persons aged 50 or older to make additional contributions to
certain DC plans. Higher earners were more likely to benefit directly from
this option than low and moderate earners. However, there is no significant
difference between the percentage of eligible male DC participants likely to
benefit directly and the percentage of eligible female DC participants
likely to benefit directly.

Total retirement income comes from Social Security, pensions, personal
savings and other assets, and postretirement earnings. Depending on the
individual, an adequate retirement income may be achieved with different
combinations of these sources. For example, Social Security provides near-
universal coverage and provides proportionally larger benefits for lower
earning participants. That is, Social Security replaces a higher percentage
of preretirement income for lower earning workers than for higher earners.
In contrast, the U. S. employer- sponsored pension system is voluntary and
tax- subsidized and provides proportionally larger benefits Background

Page 5 GAO- 01- 846 Pension Contribution Limit Increases

for higher earning participants. To the extent that it is deemed desirable
that the total percentage of preretirement income replaced by Social
Security and employer- sponsored pensions together is reasonably constant,
private pensions would tend to play a larger role in the retirement income
of higher earning workers.

The two types of employer- sponsored pension plans are defined benefit (DB)
and defined contribution (DC). DB plans promise to provide a level of
retirement income that is generally based on salary and years of service.
The employer, as the plan sponsor, is responsible for funding the promised
benefit, investing and managing the plan assets, and bearing the investment
risk. Under DC plans, employees have individual accounts to which employers,
employees, or both make periodic contributions. DC plan benefits are based
on the contributions to and investment returns on the individual accounts.
The employee bears the investment risk. In some types of DC plans, including
401( k), 403( b), 457, and Savings Incentive Match Plan for Employees
(SIMPLE) plans, employees may choose to make tax- deferred contributions
instead of receiving the same amount as taxable salary. 8

A fundamental requirement for tax- qualified pension plans of taxable
private employers is that contributions or benefits be apportioned in a
nondiscriminatory manner between a top group of highly paid employees and
owner- employees and workers outside the top group. There are standard plan
designs that allow employers to comply with this requirement. Alternatively,
employers can develop a custom- tailored plan design and apply general
testing methods (as required by law) to a plan?s apportionment of
contributions or benefit accruals each year. These methods for custom-
tailored plan designs are complex, but they generally require the employer
to provide both coverage and contributions (or benefits) for workers outside
the top group at rates that do not differ too greatly from the rates at
which the employer provides coverage and contributions (or benefits) for
members of the top group.

Tax- deferred contributions to defined contribution plans by employers and
employees are constrained by legal limits. The purpose of these limits

8 A private employer may establish a 401( k) plan (26 U. S. C. 401( k)). A
tax- exempt employer or public educational organization may establish a 403(
b) plan (26 U. S. C. 403( b)). A state or local government employer may
establish a funded 457 plan (26 U. S. C. 457( g)). A taxexempt employer may
establish an unfunded 457 plan (26 U. S. C. 457 (b)( 6)). An employer with
100 or fewer employees may establish a SIMPLE plan (26 U. S. C. 408( p)). A
SIMPLE plan is a simplified retirement plan for small employers that is not
subject to some of the requirements that the Internal Revenue Code imposes
on qualified pension plans.

Page 6 GAO- 01- 846 Pension Contribution Limit Increases

is to prevent tax preferences from being used to subsidize excessively large
pension benefits. The Employee Retirement Income Security Act of 1974
imposed dollar and percentage- of- compensation limitations on combined
employer and employee tax- deferred contributions. 9 The Tax Reform Act of
1986 introduced a dollar limitation (i. e., a maximum dollar contribution)
on employees? tax- deferred contributions to DC plans. 10 The Economic
Growth and Tax Relief Reconciliation Act of 2001 increases all three of
these limits beginning in 2002; the scheduled increases are to be fully
implemented by 2006. The same law also allows a so- called ?catchup?

provision, where persons aged 50 or older are permitted to make additional
tax- deferred contributions, in excess of other applicable statutory limits,
to 401( k) and similar DC plans. Such a provision permits older workers to
make larger contributions and may help those who had not previously been
able to save sufficiently to ?catch up? to more adequate levels of
retirement savings. (See table 1 for a summary of these limits.)

Tax- deferred pension contributions may also be limited by the application
of other statutory limits that we do not analyze in this report because of
data limitations. 11 In addition to the legal limits, some plans set their
own limits on contributions. In DC plans with plan- specific contribution
limits, tax- deferred contributions are limited to the statutory limit or
the planspecific limit, whichever is smaller. Employers set plan- specific
limits, in part, to ensure that the plans they sponsor pass statutory and
regulatory requirements such as the requirement that contributions or
benefits not be skewed too heavily in favor of highly paid employees or
owner- employees.

9 26 U. S. C. 415( c)( 1). The dollar limit was initially indexed for
inflation but was reduced during the early 1980s and did not increase again
until 2001. The percentage limit had not changed since it was first enacted,
but an increase is scheduled to take effect in 2002.

10 26 U. S. C. 402( g)( 1). The Tax Reform Act of 1986 limited employees?
tax- deferred contributions to a dollar amount that is indexed for
inflation. 11 There is a statutory limit on the amount of compensation that
can be taken into account in determining qualified pension plan
contributions or benefits (26 U. S. C. 401( a)( 17)). There is also a
statutory limit on the total amount of tax- deductible contributions that an
employer may make to certain types of plans (26 U. S. C. 404( a)( 3)).

Page 7 GAO- 01- 846 Pension Contribution Limit Increases

Table 1: Changes in Various DC Plan Contribution Limits, 1998- 2006 Limit on
tax- deferred contributions

Level of limit in 1998

(in 1998 dollars)

Level of limit in 2001

(in 2001 dollars)

Level of limit in 2006

(in 2006 dollars)

Dollar limit on employee contributions a $10,000 $10,500 $15,000, indexed
for inflation

after 2006 b Dollar limit on combined employer and employee contributions c

$30,000 $35,000 $40,000, indexed for inflation currently and to continue to
be indexed Percentage limit on combined employer and employee contributions
c

25% of compensation 25% of compensation 100% of compensation Persons aged 50
or older allowed to make ?catch- up? contributions a

Provision did not exist d Provision did not exist d $5,000 additional
contribution in excess of other applicable statutory limits, indexed for
inflation after 2006

Note: This table includes recent changes in each of the DC plan contribution
limits analyzed in this report. We include the level of each limit in 1998,
the year to which our analysis pertains, as well as the levels in 2000 and
2001 and the scheduled level in 2006. a These limit increases are scheduled
to be phased in between 2002 and 2006, as provided in the

Economic Growth and Tax Relief Reconciliation Act of 2001. b The dollar
limit on employee contributions is the same for 401( k) and 403( b) plans.
In 2001, this limit

is $8, 500 for 457 plans and $6, 500 for SIMPLE plans. Beginning in 2002,
the dollar limit on employee contributions for 457 plans will be the same as
the limit for 401( k) and 403( b) plans. For SIMPLE plans, this limit will
increase to $10,000 by 2005 and will be indexed for inflation thereafter. c
Under section 415( c) of the Internal Revenue Code, combined employer and
employee contributions are limited to the lesser of $35,000 or 25 percent of
compensation in 2001. Increases in the dollar and percentage limits on
combined employer and employee contributions are not phased in. The
increases take effect in 2002. The value of the percentage limit is not
scheduled to change after 2002. Beginning in 2006, combined employer and
employee contributions will be limited to the lesser of $40,000 or 100
percent of compensation. d Catch- up provisions more restrictive than the
one enacted as part of the Economic Growth and Tax

Relief Reconciliation Act of 2001 already exist for 403( b) and 457 plans.

About 51 million workers, or 47 percent of all workers, participated in a
pension plan in 1998. (? All workers? includes both full- time and part-
time workers.) When we categorized pension participants by their earnings,
we found that more than half of pension participants, like more than half of
all workers, had low or moderate earnings. However, when we examined the
percentages of workers in various earnings groups that participated in
pension plans, we found that participation rates were lower for low and
moderate earners than for higher earners. When we categorized pension
participants by their gender, we found that more than half of pension
participants, like more than half of all workers, were men. When we examined
the percentages of male workers and of female workers that participated in
pension plans, we found that participation rates were lower for women than
for men. The patterns of participation by earnings and gender for DC plans
were generally similar to those for all pension plans. The Majority of

Pension Participants Had Low or Moderate Earnings, but More Than Half of Low
and Moderate Earners in the Workforce Did Not Participate in a Pension Plan

Page 8 GAO- 01- 846 Pension Contribution Limit Increases

In 1998, about 51 million workers, or 47 percent of all workers,
participated in a pension plan. Workers who did not participate either
worked for employers that did not offer pension plans, were not eligible to
participate in their employers? plans, or chose not to participate in their
employers? plans. 12

When we estimated the percentages of pension participants that were in
different earnings groups, we found that more than half of pension
participants, like more than half of all workers, had low or moderate
earnings. 13 Of the 51 million workers who participated in a pension plan,
57 percent had annual earnings of less than $40,000. (See fig. 1.) Our
analysis of pension participation by household income detected a similar
pattern. About 28 percent of pension participants had household incomes of
less than $40,000 per year, while another 41 percent had annual household
incomes above $40,000 but below $75,000.

12 According to our prior work, 14 percent of the employed labor force did
not participate in pension plans offered by their employers because they
were not eligible to participate or chose not to participate. Also, 39
percent of the employed labor force did not participate because their
employers did not offer pension plans. Pension Plans: Characteristics of
Persons in the Labor Force Without Pension Coverage (GAO/ HEHS- 00- 131,
Aug. 22, 2000).

13 According to our analysis of 1998 SCF data and Current Population Survey
data from the March 1999 Annual Demographic Supplement, at least 70 percent
of all workers earned less than $40,000 in 1998. Fewer Than Half of All

Workers Participated in Pension Plans

Page 9 GAO- 01- 846 Pension Contribution Limit Increases

Figure 1: Earnings of Pension Plan Participants

Note: ?Workers participating in pension plans? includes both full- time and
part- time employees. Percentages do not total 100 percent because of
rounding.

Source: GAO tabulations of 1998 SCF data.

However, higher earners were more likely to participate in pension plans
than low and moderate earners. Specifically, 38 percent of workers who
earned less than $40,000 per year participated in a pension plan, while 70
percent of workers who earned between $40,000 and $74, 999 per year
participated in a plan. (See fig. 2.)

Page 10 GAO- 01- 846 Pension Contribution Limit Increases

Figure 2: Pension Plan Participation by Earnings and Gender

Note: There are no statistically significant differences at the 0. 05 level
among the percentages of workers that participated in pension plans in the
$40, 000-$ 74,999, $75,000-$ 149,999, and $150,000+ earnings categories.
Categories include both full- time and part- time employees. Our sample
includes persons 18 years of age and older who work, including persons who
may be self- employed. We did not include contributions to IRAs for any
person in our sample, including the self- employed nor did we consider Keogh
plans in our analysis. See appendix.

Source: GAO tabulations of 1998 SCF data.

A similar pattern of lower participation rates for low- and moderateincome
workers exists when individual workers are classified by their household
incomes rather than by their individual earnings. Of workers with household
incomes of less than $40,000 per year, 30 percent participated in a pension
plan. Of workers with annual household incomes between $40,000 and $75,000
per year, 57 percent participated. Among the reasons for low- income
workers? lower pension plan participation rates are that low- income workers
are more likely to work for small employers (who are less likely to offer
pension plans than larger employers), are more likely to work in part- time
positions (which are less likely to be

Page 11 GAO- 01- 846 Pension Contribution Limit Increases

covered by pension plans than full- time positions), are less likely to be
able to afford to save for retirement through employer- sponsored plans, and
depend more heavily on Social Security as a source of retirement income.

When we estimated the percentages of pension participants that were male and
female, we found that more than half of pension participants, like more than
half of all workers, were men. Of the 51 million workers who participated in
a pension plan, 56 percent were men. (See fig. 3.) In 1998, about 53 percent
of all workers were men.

Figure 3: Gender of Pension Plan Participants

Note: ?Workers participating in pension plans? includes both full- time and
part- time employees. Source: GAO tabulations of 1998 SCF data.

As in our earnings analysis, we tested the possibility that even though most
pension participants were men, there could be many men who did not
participate in pension plans and many women who did participate. To test
this possibility, we examined the percentages of female and male workers who
participated in pension plans. We found that women were Women Were Less
Likely

to Participate in Pension Plans Than Men

Page 12 GAO- 01- 846 Pension Contribution Limit Increases

less likely than men to participate in a pension plan. Specifically, half of
all male workers and 44 percent of all female workers participated in a
plan. (See fig. 2.) Women workers? lower wages, greater concentration in
parttime jobs, and greater concentration in industries where few employers
offer pension plans may be among the reasons why women were less likely than
men to participate in plans.

The earnings and gender patterns of DC plan participation resembled those of
participation in all pension plans. About 38.9 million workers, or 36
percent of all workers, participated in DC plans. Of these 38.9 million
workers, 54 percent had annual earnings of less than $40,000, and 57 percent
were men. (See fig. 4 and fig. 5.)

Figure 4: Earnings of Participants in DC Plans

Note: ?Workers participating in pension plans? includes both full- time and
part- time employees. Source: GAO tabulations of 1998 SCF data.

DC Plan Participation Patterns Were Generally Similar to Those of All
Pension Plans

Page 13 GAO- 01- 846 Pension Contribution Limit Increases

Figure 5: Gender of Participants in DC Plans

Note: ?Workers participating in pension plans? includes both full- time and
part- time employees. Source: GAO tabulations of 1998 SCF data.

When we estimated the percentage of workers in each earnings group that
participated in DC plans, we found that low and moderate earners were less
likely to participate than higher earners. Of all workers who earned less
than $40,000 per year, 28 percent participated in DC plans; of those who
earned between $40,000 and $75,000 per year, 55 percent participated in DC
plans. (See fig. 6.) Likewise, workers with low or moderate household
incomes were less likely to participate than those with higher household
incomes. When we estimated the percentages of men and women workers that
participated in DC plans, we found that a higher percentage of male (39
percent) than female workers (32 percent) participated in DC plans.

Page 14 GAO- 01- 846 Pension Contribution Limit Increases

Figure 6: DC Plan Participation by Earnings and Gender

Note: There are no statistically significant differences at the 0. 05 level
between the percentages of workers that participated in DC plans in the
$40,000-$ 74,999, $75, 000-$ 149,999, and $150, 000+ earnings categories.
Categories include both full- time and part- time employees.

Source: GAO tabulations of 1998 SCF data.

About 8 percent of all DC participants were likely to benefit directly if
all three DC plan contribution limits discussed in this report increased at
the same time. The 3.1 million DC participants who were likely to benefit
directly from these limit increases generally had higher earnings than the
35.7 million who were not likely to benefit directly. When we examined the
percentages of workers in various earnings categories that were likely to
benefit directly from these limit increases, we found that higher earners
were more likely than low and moderate earners to benefit directly. When we
compared the gender of likely direct beneficiaries with that of DC
participants not likely to benefit directly, we found that men made up a
higher percentage of likely direct beneficiaries than of DC participants not
likely to benefit directly. When we examined the percentages of male and
female DC participants that were likely to benefit directly, we found that a
Increase in DC Plan

Contribution Limits Would Likely Benefit About 3.1 Million DC Participants
Directly

Page 15 GAO- 01- 846 Pension Contribution Limit Increases

higher percentage of men than women were likely to benefit directly. When we
analyzed the effects of increases in each of the three contribution limits
sequentially, we found that increasing the percentage limit on combined
employer and employee contributions first accounts for half of the 3.1
million likely direct beneficiaries of an increase in all three contribution
limits. In addition to likely direct beneficiaries, some low and moderate
earners might benefit indirectly from increases in DC plan contribution
limits if they resulted in extra pension coverage or contributions for those
workers, but the number of workers who might benefit in this way is unknown.

Few DC participants were likely to benefit directly from increasing all
three DC plan limits we analyzed. 14 We define likely direct beneficiaries
as employed DC participants whose employer and/ or employee contributions
were equal to or above the statutory limits we analyzed. 15 About 8 percent
of all DC participants, or 3. 1 million people, were likely to have
benefited directly if all the contribution limits analyzed in this report
had been increased.

The results of our analysis of the SCF are consistent with plan- specific
data we analyzed. A New York state law firm that administers DC plans
provided us with data on a sample of 1,831 participants in 15 DC plans. 16
About 6 percent of these 1,831 participants had employer and/ or employee
contributions at or above one or more of the three contribution limits we
analyzed. An additional 4 percent of these participants made the maximum
contributions allowable under plan- specific contribution limits or

14 In addition to likely direct beneficiaries, some workers could benefit
indirectly from DC plan contribution limit increases. We were unable to
estimate the number of indirect beneficiaries, including DC participants who
could benefit from additional employee or employer contributions,
nonparticipants who could be included in existing DC plans if they expanded
their coverage, and nonparticipants who could be included in new DC plans.

15 The appendix provides a more detailed explanation of this definition.
Note that participants whose contributions exceed statutory limits on tax-
deferred contributions are subject to tax on amounts contributed in excess
of the limits.

16 This sample of DC participants is not nationally representative and
covers the year 2000 rather than 1998. We analyzed it because we were not
able to obtain nationally representative plan- specific data. Few Workers
Were Likely

to Benefit Directly If All DC Plan Contribution Limits Increased

Page 16 GAO- 01- 846 Pension Contribution Limit Increases

nondiscrimination rules. 17 Therefore, between 6 and 10 percent of these
participants would likely have benefited directly if all three contribution
limits we analyzed had been increased. This is generally consistent with our
finding that 8 percent of DC participants were likely direct beneficiaries
of an increase in all three contribution limits we analyzed.

Likely direct beneficiaries of an increase in all three contribution limits
generally had higher earnings than DC participants who were not likely to
benefit directly from such an increase. Of the 3.1 million likely direct
beneficiaries, 24 percent earned less than $40,000 per year, while 22
percent earned more than $150,000 per year. Of the 35.7 million DC
participants who were not likely direct beneficiaries of limit increases, 57
percent earned less than $40,000 per year, and 1 percent earned more than
$150,000 per year. (See fig. 7.) We found a similar pattern when we analyzed
individual DC participants by their household incomes rather than by their
individual earnings. Likely direct beneficiaries of an increase in all
limits analyzed in this report generally had higher household incomes than
DC participants who were not likely direct beneficiaries.

17 DC participants who made the maximum contribution allowable under plan-
specific contribution limits should be considered likely direct
beneficiaries of increases in statutory contribution limits only if their
plan limits increased to enable participants to take advantage of at least
some of the extra contributions allowed by law. Participants who made the
maximum contribution allowable under nondiscrimination rules should be
considered likely direct beneficiaries of increases in statutory
contribution limits only if their plans would still satisfy
nondiscrimination rules when those participants made additional
contributions. Our analyses of 1998 SCF data do not include participants who
made the maximum contribution allowable under plan- specific contribution
limits or nondiscrimination rules as likely direct beneficiaries of limit
increases because the 1998 SCF does not contain the plan- specific
information that would be necessary to identify such participants. Likely
Direct Beneficiaries

of Increasing All Contribution Limits Generally Had Higher Earnings Than DC
Participants Not Likely to Benefit Directly

Page 17 GAO- 01- 846 Pension Contribution Limit Increases

Figure 7: Increasing All Contribution Limits: Earnings of Likely Direct
Beneficiaries and of DC Participants Who Were Not Likely Direct
Beneficiaries

Note: Analysis based on 402( g) limit and 415( c)( 1) dollar and percentage
limits. The difference in percent with earnings of $40,000-$ 74,999 between
likely direct beneficiaries and DC participants who were not likely to
benefit directly is not statistically significant at the 0.05 level.
Categories include both full- time and part- time employees.

Source: GAO tabulations of 1998 SCF data.

We also estimated the percentage of DC participants, within each earnings
category, who were likely to benefit directly from increasing all three
contribution limits. We found that higher earning DC participants were more
likely than low- or moderate- earning DC participants to benefit directly
from an increase in all three DC plan contribution limits. Specifically,
among DC participants with annual earnings over $150,000, 58

Page 18 GAO- 01- 846 Pension Contribution Limit Increases

percent were likely to benefit directly. In contrast, 4 percent of DC
participants with annual earnings of less than $40,000 were likely to
benefit directly. (See fig. 8.)

Figure 8: Percent of DC Participants Likely to Benefit Directly From
Increasing All Contribution Limits

Note: Analysis based on 402( g) limit and 415( c)( 1) dollar and percentage
limits. Categories include both full- time and part- time employees.

Source: GAO tabulations of 1998 SCF data

Page 19 GAO- 01- 846 Pension Contribution Limit Increases

When we compared the gender of likely direct beneficiaries of an increase in
all three limits with the gender of DC participants who were not likely to
benefit directly from such an increase, we found that likely direct
beneficiaries were more likely to be men. About 74 percent of the 3.1
million likely direct beneficiaries were men, and 56 percent of the 35. 7
million DC participants who were not likely to benefit directly were men.
(See fig. 9.)

Figure 9: Increasing All Contribution Limits: Gender of Likely Direct
Beneficiaries and of DC Participants Who Were Not Likely Direct
Beneficiaries

Note: Analysis based on 402( g) limit and 415( c)( 1) dollar and percentage
limits. Categories include both full- time and part- time employees.

Source: GAO tabulations of 1998 SCF data.

If All DC Plan Contribution Limits Increased, Male DC Participants Were More
Likely to Benefit Directly Than Female Participants

Page 20 GAO- 01- 846 Pension Contribution Limit Increases

As we did for earnings, we also did a second set of analyses for gender, in
which we examined the percentages of male and female DC participants who
were likely direct beneficiaries of an increase in all three contribution
limits. In doing so, we found that 10 percent of male and 5 percent of
female DC participants were likely direct beneficiaries of an increase in
all these limits. (See fig. 8.) Women workers? lower earnings might be a
reason why women were less likely to benefit directly from these limit
increases. 18

Although 3.1 million DC participants were likely direct beneficiaries of
increasing the three contribution limits, many of the 3.1 million likely
direct beneficiaries could have benefited because only one of the three
limits was increased. Other likely direct beneficiaries could have benefited
only from increasing at least two of the contribution limits.

To determine how each of the three limits contributes to the total number of
likely direct beneficiaries, we analyzed the effects of increasing the three
contribution limits sequentially. Because the effects of the three separate
limit increases interact, this sequential analysis is preferable to an
analysis in which each limit is increased while the other two are held
fixed. 19 First, we increased the percentage limit on combined employer and
employee contributions, while holding the other dollar contribution limits
fixed. Next, we increased the dollar limit on employee contributions, while
holding the dollar limit on combined employer and employee contributions
fixed. Finally, we increased the dollar limit on combined employer and
employee contributions. For each stage in the analysis, we asked two
questions: (1) how many DC participants were likely to benefit directly at
this stage and (2) what were their earnings and gender.

Increasing the percentage limit first accounts for half of all the 3. 1
million likely direct beneficiaries of increasing all three contribution
limits. Also, likely direct beneficiaries of increasing the percentage limit
generally had lower earnings and were more likely to be female than likely
direct beneficiaries of increasing the dollar limits. Specifically, we found
that

18 According to the 1998 SCF, women who participated in DC plans had median
earnings of $29, 000; i. e., half earned more than $29,000 and half earned
less. Male DC participants had median earnings of $43,193.

19 The sequence in which the limits were increased did not substantially
affect the results of our sequential analysis. See the appendix for more
information on the methodology for this analysis. Different Earnings and

Gender Groups Were Likely to Benefit from Increasing Percentage and Dollar
Contribution Limits

Page 21 GAO- 01- 846 Pension Contribution Limit Increases

 Increasing the percentage limit on combined employer and employee
contributions first accounts for 1.5 million of the 3.1 million DC
participants who were likely direct beneficiaries of increasing all three
contribution limits. (See table 2.) Forty- eight percent of these 1.5
million likely direct beneficiaries earned less than $40,000 per year and 44
percent earned between $40,000 and $75,000 per year. (See table 3.) Forty-
four percent of these 1.5 million likely direct beneficiaries were female.
(See table 4.)

 Increasing the dollar limit on employee contributions second accounts for
1.1 million of the 3.1 million likely direct beneficiaries of increasing all
three contribution limits. Fifty- four percent of these 1.1 million likely
direct beneficiaries earned between $75,000 and $150,000 per year and 91
percent were male.

 Increasing the dollar limit on combined employer and employee
contributions third accounts for 519,000 of the 3.1 million likely direct
beneficiaries of increasing all three contribution limits. Seventy- four
percent of these likely direct beneficiaries earned $150,000 or more per
year and 92 percent were male.

Table 2: Likely Direct Beneficiaries of Increasing the Three Contribution
Limits in Stages Sequence of contribution limit increases Number of likely

direct beneficiaries Percent of total

Stage #1- Percentage limit on combined employer and employee contributions
1.5 million 50 Stage #2- Dollar limit on employee contributions 1.1 million
34 Stage #3- Dollar limit on combined employer and employee contributions
519,000 17

Total number of likely direct beneficiaries 3.1 million 100

Note: Percentages do not total 100 percent because of rounding.

Table 3: Earnings of Likely Direct Beneficiaries of Increasing the Three
Contribution Limits in Stages Percent of likely direct beneficiaries in each
earnings category Sequence of contribution limit increases Under

$40,000 $40,000- $74,999 $75,000-

$149,999 $150,000+ All earnings categories

Number of likely direct beneficiaries

Stage #1- Percentage limit on combined employer and employee contributions
48 44 7 0 100 1.5 million Stage #2- Dollar limit on employee contributions 0
16 54 30 100 1.1 million Stage #3- Dollar limit on combined employer and
employee contributions 0 7 19 74 100 519,000

Note: Percentages may not total 100 percent because of rounding.

Page 22 GAO- 01- 846 Pension Contribution Limit Increases

Table 4: Gender of Likely Direct Beneficiaries of Increasing the Three
Contribution Limits in Stages Percent of likely direct beneficiaries in each
gender category Sequence of contribution limit increases Male Female Both
genders Number of likely

direct beneficiaries

Stage #1- Percentage limit on combined employer and employee contributions
56 44 100 1.5 million Stage #2- Dollar limit on employee contributions 91 9
100 1.1 million Stage #3- Dollar limit on combined employer and employee
contributions 92 8 100 519,000

In addition to participants who would likely benefit directly from raising
DC plan limits, some low and moderate earners who do not now participate in
DC plans might benefit indirectly from increases in those limits. Some
industry groups told us that some employers, especially small employers,
could find higher limits attractive enough to form new DC plans that would
extend pension coverage to employees not previously covered. Other
employers, these groups told us, could find higher limits attractive enough
to expand coverage and/ or increase their contributions for low- and
moderate- earning participants in their existing DC plans. These groups told
us that many of those who could take advantage of increased contribution
limits were key business decisionmakers who determine pension plan formation
and coverage for their firms. One way that these key decisionmakers could
take advantage of higher contribution limits would be to start new qualified
DC plans. If they chose to do this, then nondiscrimination rules would
require them to include some low- and moderate- earning employees in those
new plans.

We were unable to measure the number or characteristics of workers who might
benefit indirectly from increases in DC plan contribution limits, including
workers who might be included in new DC plans. Whether or not these indirect
effects would occur is specific to the individual, employer, and plan. How
widespread these effects would be is unknown; the effects are very difficult
to measure.

Survey data suggest that limits on tax- deferred pension contributions may
not be among the most important reasons why some small employers do not
offer pension plans. According to the Employee Benefit Research Institute?s
2001 Small Employer Retirement Survey, insufficient tax benefits for the
firm?s owner ranked 9th out of 12 major reasons that small Low and Moderate
Earners

Could Benefit Indirectly From DC Plan Limit Increases

Page 23 GAO- 01- 846 Pension Contribution Limit Increases

employers who did not offer pension plans gave for their decision not to
offer a plan. 20 In that survey, 48 percent of employers who had 5 to 100
employees and who did not offer a plan cited uncertain revenue as a major
reason for not offering a plan, and 18 percent of those employers cited this
as the most important reason. In contrast, 16 percent of employers surveyed
said that ?tax benefits for the owner are too small? was a major reason why
they did not offer a plan, while 1 percent said that it was the most
important reason. However, it is difficult to isolate the effects of one of
these explanations in light of the many competing factors small employers
must consider when deciding whether to offer a pension plan.

Some key business decisionmakers may have to expand pension coverage or
contributions in their companies? existing qualified DC plans in order to
take advantage of increased contribution limits. To enable highly paid
employees to take advantage of the higher limits and still have their plans
pass the nondiscrimination tests, some companies may have to include more
low- and moderate- earning workers in their plans, increase their
contributions for low and moderate earners, or both.

Allowing a ?catch- up? provision- permitting persons aged 50 or older to
make additional contributions to DC plans in excess of the statutory limits
we analyzed- would likely have directly benefited 11 percent of all eligible
DC participants, or 721,000 participants. The 721,000 DC participants who
were likely to benefit directly from this option generally had higher
earnings than the 5. 9 million eligible DC participants who were not likely
to benefit directly. In addition, when likely direct beneficiaries are
considered as a percentage of all eligible DC participants in various
earnings categories, a larger percentage of participants earning $75,000 per
year or more than of those earning less than $75,000 per year was likely to
benefit directly from this provision. The likely direct beneficiaries of
this provision did not differ significantly in gender from eligible DC
participants who were not likely direct beneficiaries. When likely direct
beneficiaries are considered as a percentage of all eligible male DC
participants and of all eligible female DC participants, there is no
significant difference between the percentage of eligible male DC
participants likely to benefit directly and the percentage of eligible
female DC participants likely to benefit directly.

20 Employee Benefit Research Institute, The 2001 Small Employer Retirement
Survey (SERS) Summary of Findings (n. d.), available at www. ebri. org/
sers/ 2001/ 01serses. pdf.

?Catch- Up? Provision Was Likely to Benefit Few Participants Directly

Page 24 GAO- 01- 846 Pension Contribution Limit Increases

Few eligible DC participants were likely to benefit directly if employees
aged 50 or older were allowed to make additional contributions in excess of
other statutory limits. In analyzing this option, we defined eligible DC
participants as workers aged 50 or older who contributed to 401( k) or
similar DC plans. About 11 percent of eligible DC participants, or 721,000
people, were likely direct beneficiaries of this option.

This finding is consistent with other efforts to analyze the effects of
allowing older workers to make additional contributions to DC plans.
Treasury?s analysis of 1998 federal income tax data showed that 8 percent of
workers aged 50 or older who contributed to DC plans made contributions
equal to the employee dollar contribution limit. This is comparable to our
finding of 11 percent of eligible DC participants aged 50 or older who would
be likely direct beneficiaries of a ?catch- up? provision. Our finding is
also generally consistent with the result of our analysis of data on a
nonrepresentative sample of 367 participants aged 50 or older in 11 401( k)
plans administered by a New York state law firm. In that sample, about 15
percent of participants aged 50 or older made employer and/ or employee
contributions at or above one of the three limits we analyzed, and an
additional 8 percent made the maximum contributions allowable under plan-
specific contribution limits or nondiscrimination rules.

Those likely to benefit directly if older workers were permitted to make
additional contributions to DC plans generally had higher earnings than
eligible DC participants not likely to benefit directly. We divided eligible
DC participants into two earnings categories: those who earned less than
$75,000 per year and those who earned $75,000 per year or more. 21 About 47
percent of these 721,000 likely direct beneficiaries of this option earned
less than $75,000 per year, while 53 percent earned more than $75,000 per
year. Of the 5.9 million DC participants who were not likely to benefit
directly, 90 percent earned less than $75,000 per year, and 10 percent
earned more than $75, 000 per year. (See fig. 10.) We found a similar
pattern when we analyzed individual DC participants by their household
incomes rather than by their individual earnings. Employees who were likely
to benefit directly if older workers were allowed to make extra
contributions to DC plans had higher household incomes than eligible DC
participants who were not likely direct beneficiaries.

21 For the analysis of this option, we used only two categories for earnings
and household income, under $75,000 per year and $75,000 per year and up,
rather than the four categories we used for the analyses of other limit
increases. The reason for this difference is that the use of four categories
for earnings and for household income did not produce statistically reliable
results in the analysis of additional contributions by older workers. Few
Eligible DC

Participants Were Likely to Benefit Directly From

?Catch- Up? Provision Likely Direct Beneficiaries of ?Catch- Up? Provision
Generally Had Higher Earnings Than Other Eligible DC Participants

Page 25 GAO- 01- 846 Pension Contribution Limit Increases

Figure 10: Permitting Additional Employee Contributions for Participants
Aged 50 and Older: Earnings of Likely Direct Beneficiaries and of Eligible
DC Participants Who Were Not Likely Direct Beneficiaries

Note: Eligible DC participants are those aged 50 and older who contributed
to 401( k) and similar plans. Likely direct beneficiaries are eligible DC
participants who contributed or received contributions at or above the 402(
g) limit and/ or 415( c)( 1) dollar or percentage limit. Categories include
both fulltime and part- time employees.

Source: GAO tabulations of 1998 SCF data.

We also estimated the percentage of eligible DC participants within each
earnings category who were likely to benefit directly from allowing persons
aged 50 or older to make additional contributions. We found that 6 percent
of eligible DC participants who earned less than $75,000 per year were
likely to benefit directly from this option, while 38 percent of eligible DC
participants with annual earnings of $75,000 or more were likely to benefit
directly from it. (See fig. 11.)

Page 26 GAO- 01- 846 Pension Contribution Limit Increases

Figure 11: Percent of Eligible DC Participants Likely to Benefit Directly
From Permitting Additional Employee Contributions for Participants Aged 50
and Older

Note: Eligible DC participants are those aged 50 and older who contributed
to 401( k) and similar plans. Likely direct beneficiaries are eligible DC
participants who contributed or received contributions at or above the 402(
g) limit and/ or 415( c)( 1) dollar or percentage limit. There is no
statistically significant difference at the 0. 05 level between the percent
of male DC participants who were likely to benefit directly and the percent
of female DC participants who were likely to benefit directly. Categories
include both full- time and part- time employees.

Source: GAO tabulations of 1998 SCF data.

The gender of DC participants who were likely to benefit directly from a

?catch- up? contribution provision did not differ significantly from that of
eligible DC participants who were not likely to benefit directly. About 73
percent of the 721,000 likely direct beneficiaries of allowing workers aged
50 or older to make extra contributions to DC plans were men. Of the 5.9
million eligible DC participants who were not likely to benefit directly, 60
percent were men. This percentage did not differ significantly from 73
percent.

As we did for earnings, we also analyzed the percentages of eligible male
and female DC participants that were likely to benefit directly from the

?Catch- Up? Provision Would Not Likely Have Directly Benefited Men or Women
Significantly More

Page 27 GAO- 01- 846 Pension Contribution Limit Increases

?catch- up? provision. In doing so, we found that among eligible DC
participants, there is no significant difference between the percentage of
men likely to benefit directly and the percentage of women likely to benefit
directly.

The Department of Labor had no comment on the report. The Department of the
Treasury provided us with technical comments, which we incorporated as
appropriate.

We are sending copies of this report to the Secretary of the Treasury, the
Secretary of Labor, and interested congressional committees. Copies will
also be made available to others on request. Please call me or Charles A.
Jeszeck at (202) 512- 7215 if you or your staff have any questions. Other
major contributors to the report include Howard Wial, Jeremy Citro, Gene
Kuehneman, Edward Nannenhorn, Donald J. Porteous, and Andrew Davenport.

Sincerely yours, Barbara D. Bovbjerg Director, Education, Workforce,

and Income Security Issues Agency Comments

Appendix: Scope and Methodology Page 28 GAO- 01- 846 Pension Contribution
Limit Increases

We used survey data from the 1998 Survey of Consumer Finances (SCF),
sponsored by the Board of Governors of the Federal Reserve System, to
estimate

 the number and percentage of workers that participated in pension plans
and the number and percentage of workers that participated in DC plans, by
earnings and gender;

 the earnings and gender distributions of pension plan participants and DC
participants;

 the number and percentage of DC participants who would and would not
likely have benefited directly from increasing the three contribution
limits, by earnings and gender;

 the number and percentage of likely direct beneficiaries of increasing
each of the contribution limits sequentially, by earnings and gender; and

 the number and percentage of participants in certain DC plans aged 50 or
older who would and would not likely have benefited directly from allowing
"catch- up" contributions in excess of the three contribution limits, by
earnings and gender.

We also interviewed federal agency officials, pension experts, and
representatives of nongovernmental organizations to obtain their views on
the effects of raising DC plan contribution limits.

The SCF is a triennial, nationally representative survey that provides
extensive information on the financial characteristics of households. We
used the 1998 SCF because it is the most recent, nationally representative
data source with information for all age groups on pension plan
participation, DC plan participation, and employer and employee
contributions to DC plans. Data on overall pension participation and
characteristics of pension plan participants obtained from the 1998 SCF are
generally comparable to those obtained for 1998 from the 1999 Current
Population Survey (CPS), a much larger, nationally representative data set
that does not contain as much detail on pensions as the SCF. 1 The SCF asked
a representative sample of 4,309 households questions about their pensions,
incomes, labor force participation, asset holdings and debts, use

1 A comparison of SCF and CPS data on participation in pension plans shows a
1 percentage point difference between the two surveys regarding the pension
participation rates of all workers, male workers, and female workers in
1998. The percentage of pension participants who were male differs by 2
percentage points between the two surveys. However, the estimated numbers of
workers and pension participants derived from the SCF are smaller than the
corresponding numbers derived from the CPS, in part because the SCF does not
include data on more than two workers in each household. Appendix: Scope and
Methodology

1998 Survey of Consumer Finances

Appendix: Scope and Methodology Page 29 GAO- 01- 846 Pension Contribution
Limit Increases

of financial services, and demographic information. From the SCF, we created
a sample containing information on 4,776 individual respondents and spouses
(or partners) who were at least 18 years old and working at the time of the
survey and whose earnings could be expressed as an annual dollar amount. We
used sample weights throughout our analysis.

There is a wide range of sampling errors for the estimated percentages used
in this report. All estimated percentages for which the base (i. e., the
denominator) is ?all workers? have sampling errors less than plus or minus 3
percentage points at the 95- percent confidence level. All estimated
percentages for which the base is ?all pension plan participants? have
sampling errors less than plus or minus 4 percentage points at that
confidence level. All estimated percentages for which the base is ?all DC
participants? have sampling errors less than plus or minus 5 percentage
points at that confidence level. Except as shown in table 5, all estimated
percentages cited or relied on in this report had sampling errors less than
plus or minus 12 percentage points at that confidence level.

Table 5: Sampling Errors of 12 Percentage Points or More Percentage of
Sampling error a

(percentage points)

Likely direct beneficiaries of an increase in all three limits analyzed in
this report that were likely direct beneficiaries of an increase in the
percentage limit on combined employer and employee contributions b 12
Workers with household incomes of $150, 000+ that participated in a pension
plan 12 Likely direct beneficiaries of an increase in all three limits
analyzed in this report that were male 12 Likely direct beneficiaries of an
increase in the dollar limit on employee contributions c with earnings of
$150,000+ 13 Likely direct beneficiaries of an increase in the percentage
limit on combined employer and employee contributions b with earnings of
$40,000-$ 74,999 13 Workers with earnings of $150,000+ that participated in
a DC plan 13 Workers with earnings of $150,000+ that participated in a
pension plan 14 Likely direct beneficiaries of allowing extra contributions
by workers aged 50+ with earnings of $75,000+ 15 Likely direct beneficiaries
of an increase in the percentage limit on combined employer and employee
contributions b that were male 16 Likely direct beneficiaries of an increase
in the percentage limit on combined employer and employee contributions b
that were female 16 DC participants with earnings of $150,000+ who were
likely direct beneficiaries of an increase in all three limits analyzed in
this report 17 Likely direct beneficiaries of an increase in the percentage
limit on combined employer and employee contributions b with earnings under
$40,000 17 Likely direct beneficiaries of allowing extra contributions by
workers aged 50+ with household incomes under $75,000 22 Likely direct
beneficiaries of an increase in the dollar limit on combined employer and
employee contributions d with earnings of $75,000-$ 149,999 22 Likely direct
beneficiaries of an increase in the dollar limit on combined employer and
employee contributions d with earnings of $150,000+ 25

Appendix: Scope and Methodology Page 30 GAO- 01- 846 Pension Contribution
Limit Increases

Percentage of Sampling error a (percentage points)

Likely direct beneficiaries of an increase in the dollar limit on employee
contributions c that were male 26 Likely direct beneficiaries of an increase
in the dollar limit on employee contributions c with earnings of $75,000-$
149,999 27 Likely direct beneficiaries of allowing extra contributions by
workers aged 50+ with earnings under $75,000 31 Likely direct beneficiaries
of allowing extra contributions by workers aged 50+ that were male 33 Likely
direct beneficiaries of an increase in the dollar limit on combined employer
and employee contributions d that were male 34

a At the 95- percent confidence level. b First stage of sequential analysis.
c Second stage of sequential analysis d Third stage of sequential analysis.

The SCF uses multiple imputation to estimate responses to most survey
questions to which respondents did not provide answers. The error due to
this imputation procedure is included in the sampling errors described
above.

The SCF and other surveys that are based on self- reported data are subject
to several other sources of nonsampling error, including the inability to
get information about all sample cases; difficulties of definition;
differences in the interpretation of questions; respondents? inability or
unwillingness to provide correct information; and errors made in collecting,
recording, coding, and processing data. These nonsampling errors can
influence the accuracy of information presented in the report, although the
magnitude of their effect is not known.

In estimating the percentage and characteristics of workers that
participated in pension plans and in DC plans, we defined workers as all
persons aged 18 or older who were working at the time of the survey and
whose earnings could be expressed as an annual amount. This definition
included both public- and private- sector workers and included selfemployed
workers. We defined pension plan participants as workers who were included
in any type of pension plan through their job. We defined DC participants as
workers who participated in a plan in which money is accumulated in an
account. We did not include personal contributions to IRAs for any person in
our sample, including persons who may be selfemployed nor did we consider
Keogh plans in our analysis because of both the report?s objectives and
limitations in the SCF data. This is relevant for figures 1, 2, and 3 in the
text, where considering IRA contributions and Definitions of

Concepts Used in Our Analysis of the SCF

Appendix: Scope and Methodology Page 31 GAO- 01- 846 Pension Contribution
Limit Increases

participation in Keogh plans by self- employed persons would likely raise
pension participation rates, particularly for the higher income categories.

We defined likely direct beneficiaries of an increase in all three DC plan
contribution limits we analyzed as employed DC participants whose employer
and/ or employee contributions were equal to or above one or more of the
three statutory limits. 2 We defined likely direct beneficiaries in this
manner because participants with contributions at the current statutory
limits (or their employers) are in a position to increase their
contributions if the limits are raised. This definition does not imply that
all likely direct beneficiaries (or their employers) will actually increase
their contributions if the limits are raised, only that they are in a
position to do so.

On the other hand, it is not likely that participants with contributions
below the current statutory limits would respond to an increase in the
statutory limits by contributing more than the current limits. We included
participants with contributions above the statutory limits in our definition
of likely direct beneficiaries because the SCF does not distinguish between
tax- deferred and nontax- deferred contributions or between qualified and
nonqualified plans. Therefore, we were unable to identify DC participants
whose tax- deferred contributions were exactly equal to the statutory
limits. The general patterns described in the report were not sensitive to
several alternative definitions of likely direct beneficiaries. In analyzing
the option of allowing workers aged 50 or older to make extra contributions
to DC plans, we limited our analysis to eligible DC participants. We defined
eligible DC participants as workers aged 50 or older who contributed to 401(
k) and similar DC plans. The SCF enabled us approximately to identify
participants in plans of this general type, but did not enable us to
distinguish between particular types of plans within this category, such as
401( k), 403( b), 457, and SIMPLE plans.

We classified individuals by their gender, individual earnings, and
household income. We defined earnings as the sum of wage and salary income
from a worker?s main job and business income (if any) from that job. For
workers who did not report their earnings as annual amounts, we used
information about hours worked per week and weeks worked per

2 Our analyses of SCF data do not include participants who made the maximum
contribution allowable under plan- specific contribution limits or
nondiscrimination rules as likely direct beneficiaries of limit increases
because the 1998 SCF does not contain the plan- specific information that
would be necessary to identify such participants.

Appendix: Scope and Methodology Page 32 GAO- 01- 846 Pension Contribution
Limit Increases

year to express earnings as an annual amount. Our analyses excluded
individuals whose earnings could not be expressed as an annual amount. For
all analyses except that of allowing older workers to make extra
contributions, we used four earnings categories: under $40,000 per year,
$40,000-$ 74,999 per year, $75,000-$ 149,999 per year, and $150,000 per year
or more. We chose the $40, 000 cutoff because $40, 000 was slightly higher
than the $36,000 median annual earnings of all pension participants in 1998.
We chose the $75,000 cutoff because 90 percent of all pension participants
earned less than $75,000 per year in 1998. We chose the $150,000 cutoff
because more than 95 percent of all pension participants earned less than
$150,000 per year in 1998. For the analysis of allowing older workers to
make extra contributions, we used two earnings categories (under $75,000 per
year and $75,000 per year or more) because the use of four categories did
not produce statistically reliable results in this analysis.

We used the same dollar cutoffs for household income as for earnings.
Because the 1998 SCF asked respondents about their 1997 household income, we
converted reported household income to 1998 dollars using the Consumer Price
Index.

To understand how each of the three limits contributes to the total number
of likely direct beneficiaries, we analyzed the effects of increasing the
three limits sequentially in a three- stage process. First, we increased the
percentage limit on combined employer and employee contributions, while
holding the dollar contribution limits fixed. Likely direct beneficiaries at
this stage of the analysis are those DC participants whose contributions are
limited only by the percentage limit on combined employer and employee
contributions and those DC participants whose contributions are limited by
both the percentage limit on combined employer and employee contributions
and the dollar limit on employee contributions. This stage contributes half
of the likely direct beneficiaries of increasing all three contribution
limits. Next, we increased the dollar limit on employee contributions, while
holding the dollar limit on combined employer and employee contributions
fixed. Likely direct beneficiaries at this stage are those DC participants
whose contributions are limited only by the dollar limit on employee
contributions. This stage contributes about an additional third of the
likely direct beneficiaries of increasing all three contribution limits.
Finally, we increased the dollar limit on combined employer and employee
contributions. Likely direct beneficiaries at this final stage are those DC
participants whose contributions are limited by the dollar limit on combined
employer and employee contributions (including those whose contributions are
limited Sequential Analysis of

Likely Direct Beneficiaries

Appendix: Scope and Methodology Page 33 GAO- 01- 846 Pension Contribution
Limit Increases

by one or both of the other two limits in addition to the percentage limit
on combined employer and employee contributions). The sequence in which the
limits are raised does not substantially affect the results of the
sequential analysis.

We examined contributions to DC plans as of the time the SCF was conducted
in 1998. Individuals we did not classify as likely to benefit directly from
increased contribution limits may benefit in future years if they are able
to contribute at higher levels. Our single- year analysis did not permit us
to estimate how many workers would likely benefit directly from higher
contribution limits at any point in their working life. Similarly, because
we did not have data on earnings or income for more than 1 year, we were
unable to classify individuals by their lifetime earnings or income.

We conducted our analyses of the effects of increasing DC plan contribution
limits with the individual, rather than the household, as our primary unit
of analysis. Conducting an analysis based exclusively on household- level
data could yield different results. For example, some households may include
two DC participants, in which one is contributing or receiving contributions
at one or more of the limits we analyzed, while the other has room under
these limits for additional contributions. At the individual level, the
contributor constrained by the limit would be included as a likely direct
beneficiary, while the spousal participant not contributing at the limit
would not be included. From a household- level perspective, such a household
might or might not be classified as benefiting directly from one or more of
the limit increases we analyzed. Depending on how such households would be
classified, the results could differ from an individual- level analysis. We
note that our methodology is consistent with that used by the Department of
the Treasury in analyzing the effects of increasing DC plan contribution
limits.

We conducted interviews to obtain the views of federal agency officials,
pension experts, and representatives of nongovernmental organizations on the
effects of raising various DC plan contribution limits. The federal agencies
whose officials we interviewed were the Departments of Labor and Treasury.
Pension experts we interviewed had expertise in pension tax law and/ or
pension policy. Nongovernmental organizations whose views we obtained
included pension actuaries and industry associations. Other Methodological

Issues in the SCF Analysis

Interviews

(130025)

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