A recent analysis by researchers at the University of Wisconsin-Madison revealed that employers contributed significantly higher amounts of capital to defined-benefit pension plans in 2017, likely because of the new tax law signed by President Donald Trump. That law cut tax corporate tax rates from 35 to 21 percent starting this year and provided an incentive for corporations to increase deductions in 2017, including deductions for pension contributions.
The study analyzed data samples taken from over 400 non-financial firm which calculate their financial statements on a calendar-year basis and found that, on average, that firms increased their unexpected pension contributions by $16 million each. These unexpected pension contributions are considered the difference between the amount a firm contributed and the amount of money it was expected to contribute on prior-year financial statements.
Those numbers came out to a 24-percent increase in 2017 on average compared to the same averages for individual firms from 2014 to 2016. Furthermore, the study determined that taxpaying firms made larger unexpected contributions than non-taxpaying firms which the researchers took as a sign that the increased contributions could be due to the cut in corporate tax rates.
“Our findings suggest the reduction in the corporate tax rate incentivized firms to increase pension contributions, resulting in a wealth transfer from capital to labor,” the researchers wrote in their paper. “Importantly, this was not a primary consideration in the decision to lower the corporate tax rate. Our results suggest a potential unintended consequence of the rate reduction.”
The conclusion that these pension increases were an unintended consequence of cutting corporate tax rates is an important distinction because it shows that the tax bill can help ordinary Americans save for their retirement. With other studies suggesting looming shortcomings in entitlement programs like Social Security and Medicare, coupled with skyrocketing healthcare costs, it is more important than ever for Americans young and old to save more for their retirements.
While many expect entitlement programs to act as a primary source of income during retirement, the truth is that benefits increases are slow to keep pace with inflation and will leave many with shortcomings they may not be equipped to deal with. By thinking ahead and engaging in careful planning, adults approaching retirement can take important steps to proper retirement planning to live out their Golden Years in comfort and health.