1. POLICY-MAKING FOR PRIVATE PENSIONS: THE GENESIS AND STRUCTURE OF A POLICY DOMAIN
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By the time Congress passed ERISA in 1974,businesses in the United States had been pensioning employees for almost a hundred years. Over the course of a century, a few ad hoc arrangements had become a major institution of American life. The private pension system came to embrace complex networks of purposes, roles, and relationships that linked employers, unions, service providers, and millions of employees. These networks and the legal rules that governed them defined the “political topography” of pension reform.1 Government regulation would benefit some stakeholders in the private pension system and burden others. The structure and organization of the private pension system determined who would gain or lose from particular proposals. In this way, the institutional status quo defined patterns of political mobilization in the campaign for reform.2 The purposes, roles, and relationships that comprise the private pension system cluster around two functions of a retirement plan. One is the pension bargain.3 A pension plan is a contractual arrangement that employers and unions use to manage employees. By providing retirement income in the present, a pension plan allows an employer or union to influence employees ’ decisions to leave the workforce. By promising retirement income in the future, a pension plan bonds employees to the firm or union that sponsors the plan. A second set of roles clusters around the relationship of intermediation a pension plan calls into being. A pension plan transfers claims to income from an employee’s working years to his or her retirement years. The transfer requires an intermediary that bears the claims for the period they are deferred. Over time, an industry of service providers, including banks, insurance companies, and consulting firms, grew up to perform this function. The federal tax and labor laws established a framework of incentives and 17 1 Policy-Making for Private Pensions The Genesis and Structure of a Policy Domain 18 / Policy-Making for Private Pensions rules that encouraged and shaped the private pension system.4 From the 1920s until Congress passed ERISA, federal policy generally embodied a personnel theory of pensions.According to this view, the function of a pension plan was to manage employees. Lawmakers sought to accommodate arrangements that served this purpose. In the sphere of tax policy, this proved to be a difficult task.The progressive rate structure of the federal income tax made (and still makes) it virtually impossible to tax a pension plan on equal terms with earnings received as wages or salary.5 In the 1920s the revenue laws overtaxed pension plans, so Congress created special rules to eliminate the bias. In the 1930s it became clear that these rules undertaxed pension plans and invited tax avoidance. Congress responded in 1942 by amending the revenue laws to deny favorable treatment to retirement plans that appeared not to serve a bona fide personnel purpose.Although the new regulations constrained plan design, employers retained a great deal of discretion , and the tax laws retained a strong bias in favor of deferred compensation . Like the tax laws, the labor laws placed few constraints on private prerogative . Federal policy generally left it to employers, employees, and unions to set the terms of the pension bargain. If employees were not represented by a union, the employer controlled the design and operation of a retirement plan. If employees were unionized, their employer had to bargain pension issues with the union.The labor laws were not completely permissive , however. Congress created regulatory standards and disclosure requirements to guard against the danger that managers of an employee benefit plan would mishandle or steal plan funds. In devising these protections , lawmakers took care to avoid measures that would restrict the scope of private bargaining. Congress tried to help employees get the benefit of their bargain without telling them or their employer what bargain to make. With few exceptions, employees derived their right to retirement benefits from their pension plan rather than statutory law. In the 1940s a new view of retirement plans emerged to challenge the personnel theory. According to the subsidy theory, the Internal Revenue Code gave preferential treatment to pension plans to encourage firms to provide retirement benefits to their employees.The subsidy theory justified a broader government role in the private pension system. A pension plan was not just a tool for managing employees. It was an instrument of public policy that allowed employers to spend federal funds. There was disagreement , however, about the policy implications...


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