Stanford News


CONTACT: Kathleen O'Toole, News Service (650) 725-1939;

'Success tax' on pensions eliminated

In an apparent response to a Stanford research paper, the new federal tax package negotiated between Congress and the president eliminates the so-called "success tax" on tax-deferred pensions.

The new tax law would end the "surcharge on withdrawals from large pension accumulations that John Shoven, an economist at Stanford University, calculated could raise the effective tax rate on retirement income above 90 percent," Peter Passell, an economics writer for the New York Times, reported in the newspaper's Aug. 7 issue.

Shoven, the Charles Schwab Professor of Economics and dean of the School of Humanities and Sciences, wrote a research paper last November on the combined effects of various tax provisions on savings within tax-deferred pension accounts. He dubbed the high marginal rates on large pensions a "success tax" because it penalized workers who had been reasonably successful in their careers and diligent savers for retirement. The paper, published by Stanford's Center for Economic Policy Research, was co-authored with David Wise, a Harvard professor and Hoover Institution fellow.

The tax changes "show the system can be responsive when serious anomalies are pointed out," Shoven said last week. "I thought all along the most reasonable interpretation of the law was that it was just a mistake and that not many people in the country had figured out yet that the deferred tax rates could reach 95 percent. Once people figured it out, they would not save as much" in pensions.

The research paper has been one of the most requested papers the Stanford policy center has published, said Deborah Carvalho, office administrator for the center. An earlier paper by Shoven on baby boom retirement issues was even more popular, she said.

Shoven said he didn't know if any members of Congress or the president read the pension tax paper, but that he had discussed it with members of the president's Council of Economic Advisers and officials at the Department of the Treasury.

The repeal of the tax provisions will force Shoven to rewrite the paper for a conference on pension taxation to be held at the National Press Club in Washington, D.C., on Sept. 30, he said. The Stanford center is co-sponsoring the all-day session for members of relevant congressional committees and administration officials with TIAA-CREF, a pension fund option used by many people who work in colleges and universities. The new law also ended the tax-exempt status of TIAA-CREF, and Shoven said the conference is likely to address how that change will affect higher-education employees and retirees.

Based on his early look at the new tax provisions, Shoven said, they make asset allocation even more important than before for people who hold financial assets both in and outside of pension funds. Because of more favorable tax treatment on capital gains, he said, savers may want to hold high-growth stocks outside of pensions and hold heavily taxed stocks or bonds inside pensions where the tax can be deferred until retirement.

The conference will address laws related to pensions more broadly and ask how various regulations encourage or discourage private savings, he said. For example, only half the workforce is now covered by pensions, and regulation of pensions might be one reason the rate is so low.

"There are all kinds of rules about pensions and the question is, are all these regulations working the way they were intended?" he asked.


By Kathleen O'Toole