An unintended consequence of the GOP tax law: bigger pensions for some
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Because of the new tax law, many companies got more serious about saving for retirement last year.
According to a new study from the University of Wisconsin-Madison, the GOP tax bill likely led some companies to increase their defined-benefit pension contributions in 2017.
Defined-benefit pension plans, which the study says are significantly underfunded right now, guarantee monthly payments when you retire, with the amounts often depending on factors such as salary and how long you’ve worked with a company. America’s retirement system has largely moved away from these plans to defined-contribution plans — which you’re probably familiar with. Think 401(k)s and 403(b)s, where you put in your own money (although some companies may match the percentage you put in).
The study looked at 414 nonfinancial firms, finding that their unexpected defined-benefit pension contributions increased by $16 million each, on average, in 2017. That totals about $6.6 billion overall. These firms ended up increasing their contributions by about 24 percent in 2017 compared to earlier years.
A centerpiece of the the new tax law was a decrease in the corporate tax rate from 35 percent to 21 percent, which takes effect for the 2018 tax year. As a result, companies had an incentive to accelerate tax deductions into 2017, like contributions to defined-benefit pension plans, as they would be deducted at a higher tax rate.
“By doing that, they’re saving kind of the difference between the 35 percent and this 21 percent on every dollar that they’re putting in there that qualifies for the 2017 tax year,” said Daniel Lynch, an assistant professor at Wisconsin-Madison who co-authored the paper with colleagues Fabio B. Gaertner and Mary Vernon.
However, increased pensions were not a primary consideration in the decision to lower the corporate rate.
“This is why I think it’s an interesting unintended consequence. When we go back and read about all the debate leading up to the Tax Cuts and Jobs Act, there wasn’t a lot of talk about accelerating pension contributions,” Lynch said.
But Lynch noted that they don’t yet have data on 2018 contributions.
“It’s going to be an interesting question of: Is this just a timing story, or are we going to see this permanent increase in the funding of these defined-benefit pension plans?” he added.
Right now, about a third of Americans have nothing saved for retirement.
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