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CCH® PENSION AND BENEFITS — 6/23/08

Retirement groups urge change in method of estimating revenue effects of legislative proposals

A group consisting of ten retirement advocacy organizations, including the American Society of Pension Professionals & Actuaries (ASPPA), the Profit Sharing/401k Council of America (PSCA), the ESOP Association, the American Benefits Council and the ERISA Industry Committee (ERIC), has issued a research report which advocates the use of present-value accounting instead of cash-flow accounting when estimating the revenue cost of proposed legislative changes affecting retirement policy. The report contends that current federal budget scorekeeping rules, under which revenue effects are reflected on a cash-flow basis using a ten-year budget window rather than on a present-value basis, distort the economic costs of tax deferrals, thereby overstating the true costs of retirement savings proposals and inhibiting their legislative enactment.

Cash-flow estimates less suited for proposals involving tax deferrals

The report, Revenue Estimates and Retirement Policy: The Need to Consider Present-Value Estimates of Changes in Tax Policy, notes that budget scorekeeping conventions generally require that changes in revenues be measured on a cash-flow basis (cash-flow accounting) and that the cash-flow analysis be provided for a 10-year budget period. Cash-flow accounting works well for retirement plan proposals which provide a current-year tax deduction not offset by a future tax liability, the report states. However, the report contends, cash-flow estimates overstate the true revenue cost of retirement plan proposals which provide a current-year tax deferral recovered in a future year which may be beyond the 10-year budget window and which include income in the tax-deferred withdrawals. While the revenue effect of a deduction proposal and a deferral proposal might show an equivalent revenue loss in one year of the budget period, the report continues, the deferral proposal will have a lower total revenue loss because of the subsequent income inclusion.

The report recommends that the revenue costs for retirement plan proposals be calculated on a present-value basis. The report notes that federal credit programs already use present-value estimates to estimate outlay effects, and that tax expenditure estimates in the President’s budget also provide present-value estimates to provide an alternative picture of the revenue effects of various existing tax incentives. A present-value analysis of deferral proposals, the report concludes, would provide policy-makers with a more accurate measure of the long-term revenue costs attributable to these retirement policy changes.