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The Defined Contribution Paradigm |
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Edward A. Zelinsky [View as PDF]
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114 Yale L.J. 451 (2004)
Pension cognoscenti have frequently remarked on the stagnation of defined benefit pensions and the concomitant rise of defined contribution plans. This Article suggests that over the last generation something more fundamental, which can justly be called a paradigm shift, has occurred. Americans today primarily conceive of and implement retirement savings in the form of individual accounts. Such accounts have become primary instruments of public policy, not just for retirement savings, but increasingly for health care and education as well.
This Article contends that the defined contribution society as it has emerged today constitutes a fundamental transformation of the way Americans think about and implement tax and social policy. The defined contribution paradigm began to emerge with ERISA's creation of the IRA and evolved further with the creation and popularization of 401(k) accounts. During the 1990s, policymakers adapted defined contribution accounts to cover savings for health care and education. To varying extents, Americans today can undertake the bulk of their most significant savings--for retirement, health care, and education--in defined-contribution-style accounts.
Today, the policies likely to be adopted are those that channel government subsidies through individual accounts controlled by the taxpayer herself. In contrast, defined benefit arrangements--as exemplified by the traditional pension plan and the federal Social Security system--are less likely to be proposed, adopted, or expanded. The defined contribution paradigm has major tax policy implications as well. As a result of the increasing prevalence of defined contribution programs, upper-middle-class taxpayers can undertake most of their significant financial savings through these tax-favored accounts. If Congress ever formally transformed the Internal Revenue Code into a federal consumption tax, the defined contribution paradigm would have paved the way by acclimating the public to a system in which savings may be undertaken on a tax-free or tax-advantaged basis.
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