Ad hoc pension increases are either a flat increase or an increase varying by length of service or years of retirement. Flat increases were most common: they applied to three-quarters of all public sector workers in plans that had granted an ad hoc pension increase in the 5 years prior to the 1987 survey. Most often, the increase was a percent of the present benefit. Increases based on years of service or retirement were typically a percentage increase times years of service or retirement. In private industry, ad hoc increases were more evenly distributed among the three formulas. How do the plans compare? Public pension plans provide higher benefit levels, but they require a greater incidence and amount of employee contributions and this must be taken into account. Conversely, even though private pension plans alone yield lower benefits, private defined benefit plans are commonly supplemented by one or more defined contribution plans. Depending on who makes contributions and in what proportion, a combination of these two types of plans could yield a total retirement benefit comparable to that provided by State and local governments. The length of retirement is another factor that most often affects the value of a pension. A State and local government worker retiring 10 years earlier than a private worker, on average, would receive a substantially greater benefit over his or her lifetime. Moreover, the public sector has a higher incidence of COLA's. Such adjustments can make a considerable difference in the ultimate value of a pension over time. -FOOTNOTES 'These surveys, and their scope, are described in William Wiatrowski, "Comparing employee benefits in the public and private sectors," this issue, pp. 3-8. 2Not all defined contribution plans are retirement plans, as some have less restrictive withdrawal requirements. As defined in the Employee Benefits Survey, retirement plans do not allow for withdrawal of employer contributions until retirement age, death, disability, separation from service, age 591⁄2, or hardship. (Plans with more liberal withdrawal requirements are labeled capital accumulation plans.) The gap between the private and public sector widens when capital accumulation plans are counted: coverage of all defined contribution plans was 60 percent in the private sector and 9 percent among State and local government employees. *Free-standing plans were not considered in the analysis of retirement plans because none of the costs were borne by the employers. The Employee Benefits Survey focuses on plans financed entirely or partly by employers. "These averages were calculated for plans in which the percentages did not vary by age, service, earnings, or earnings and service. Of all participants in plans with terminal earnings formulas, 57 percent of private participants and 72 percent of public participants were in plans specifying uniform percentages. (By public sector occupational group, the percentages were: regular workers, 71 percent; teachers, 78 percent; and police and firefighters, 65 percent.) "The 3- or 5-year periods used in terminal earnings formulas are not necessarily the final years of employment. For example, most plans based on 5 years define earnings as the average of the high 5 or high consecutive 5 years during the entire career or the last 10 years of employment. The Social Security Amendments of 1983 disallowed the withdrawal of State and local governments from the Social Security system as of April 30, 1983. In addition, the Amendments allowed for the reentry of previously terminated State and local government groups. Excluded are railroad workers covered by the Railroad Retirement Act and some employees of nonprofit organizations. 'Although integration formulas may take many forms, they can be separated into three types: offset, pure excess, and step-rate excess. An offset formula reduces the calculated pension benefit by a portion of the primary Social Security payment, such as 1.67 percent times years of service, up to a maximum reduction of 50 percent. A pure excess formula bases benefits on earnings in excess of a specified level, often the Social Security taxable wage base. The Tax Reform Act of 1986, however, has disallowed this type of integration formula as of January 1, 1988. A step-rate excess formula applies a lower benefit accrual rate to earnings subject to Social Security taxes or below a specific dollar breakpoint. For example, a terminal earnings benefit formula may be 1 percent of final average earnings through the Social Security taxable earnings base and 1.5 percent for earnings above that amount. Social Security integration is discussed by Donald Bell and Diane Hill in "How Social Security payments affect private pensions," Monthly Labor Review, May 1984, pp. 15-20. 10For a fuller discussion of replacement rates, see Donald G. Schmitt, "Today's pension plans: how much do they pay?" Monthly Labor Review, December 1985, pp. 26-33. An exception is a floor-offset plan, where payments under a defined benefit plan are reduced by the amount of payments employees receive from a defined contribution plan. Only 3 percent of private sector employees participated in floor-offset plans in 1986. 12 Pension plans must provide an annuity arrangement which pays a surviving spouse regular income equal to at least half of the pension paid to the retiree. The plan may reduce the pensions paid to the retiree to reflect the additional cost of providing retirement benefits over two lives. This reduced pension, called the "joint-and-survivor annuity," is the normal form of pension for a married employee. Replacement rates shown in this article, as yielded by the plan's benefit formula, represent the payments made to an unmarried retiree or a retiree who has waived the joint-and-survivor annuity. For discussion of survivor benefits, see Donald Bell and Avy Graham, "Surviving spouse's benefits in private pension plans," Monthly Labor Review, April 1984, pp. 23-31. 13See Coming of Age: Toward a National Retirement Income Policy (President's Commission on Pension Policy, Feb. 26, 1981). The value of postretirement pension increases in private plans is discussed by Donald G. Schmitt in "Postretirement increases under private pension plans," Monthly Labor Review, September 1984, pp. 3-8. Trends in retirement eligibility and pension benefits, 1974-83 Although annuity increases benefited retirees at all ages studied, the rate of increase was greater for those retiring at ages 55 and 62, than at 65 DONALD BELL AND WILLIAM MARCLAY Reduced age requirements for retirement and improved pension payments emerged as major changes between 1974 and 1983 in a sample of pension plans analyzed by the Bureau of Labor Statistics. A group of 187 pension plans either fully or partially paid for by employers was studied. The plans covered approximately 6.7 million workers in 1982, and were mainly those of large employers.' Eighty-seven percent of the pension plans studied covered 5,000 workers or more in 1982, with 33 percent covering at least 25,000 workers. The plans were all those common to two BLS sample surveys: (1) a 1974 survey of pension plans whose provisions were filed with the U.S. Department of Labor under the terms of the Welfare and Pension Plan Disclosure Act of 1958, as amended; and (2) the 1983 Employee Benefits Survey of medium and large firms.2 Although the plans in this analysis are not a representative sample of all pension plans, they do cover a large number of union and nonunion workers and illustrate the changing provisions for retirement during the 1974-83 period. Age and service requirements Pension plans typically require employees to have attained a certain age, a certain number of years of service, or both, to qualify for retirement benefits. Or, they may specify that the sum of the employee's age and years of Donald Bell is an economist in the Division of Occupational Pay and Employee Benefit Levels, Bureau of Labor Statistics. William Marclay was an economist in the division. service equal a certain number, such as 85. Pension plans often specify more than one requirement; that is, they have "alternative requirements." In such cases, this analysis uses the requirement allowing retirement at the earliest age. Normal retirement. Over the period studied, many of the plans lowered their age requirements to permit normal retirement prior to age 65. In 1974, 103 of the 187 plans provided for such benefits and by 1983, the number rose to 149. (See table 1.) Increased length-of-service requirements, however, typically accompanied the lowered retirement age. In 1974, 59 plans had no service requirement, whereas 30 plans required 30 years of service. By 1983, the pattern was reversed: 40 plans had no service requirement, while 50 required 30 years of service. Where an age 65 requirement was eliminated from a plan, the new age was usually 62 or less. The following tabulation summarizes the changes in age and service requirements, using age 62 as a point of reference: Glossary of pension terms Analysis of pension plan provisions is complicated by technical terms which permeate the pension literature. Some of the technical terms used in this article are defined below. Dollar-amount formula: A formula for calculating benefits that yields pensions by crediting specific dollar amounts per year of service, sometimes limited to a specified maximum number of years. For example, a formula which provides $20 a month per year of service for 30 years would yield $600 per month. Early retirement: Retirement before the normal retirement age. Early retirement pensions depend on earnings and service, but are reduced for each year prior to the normal retirement age. Integrated pension plan: A private pension plan that is explicitly coordinated with Social Security. Normal retirement: Retirement at the earliest age specified in a pension plan which entitles retirees to all accrued benefits by virtue of earnings and service, without reduction because of age. Offset plan: An integrated pension plan that reduces private pension payments by a portion of the retiree's Social Security benefit. Old-Age, Survivors, and Disability Insurance (OASDI): The old-age insurance program established by the Social Security Act, referred to as "Social Security" in text. "Open-windows" for early retirement: Temporary offers for employees to retire early if they have met certain years-ofservice, and age qualifications. These may be the same as or more liberal than early retirement. The incentives include pension benefits more liberal than those provided under a plan's In 1983, most of the 148 plans allowing normal retirement at age 62 or earlier fell broadly into two groups; those permitting retirement at 55 with no more than 30 years' service (55 plans) or those requiring age 60 or 62 (83 plans). The largest growth between 1974 and 1983 occurred in the first group-rising from 29 to 55 plans, or from 16 to 29 percent of the plans studied.3 Alternative requirements. In many instances, plans reduced the normal retirement age to what previously had been an early retirement age. But, as noted above, more years of service were required at these younger ages. At the same time, the plans retained the prior requirements—such as age 65 and no stipulated years of service-as alternatives. This protected older employees with short service. A total of 131 plans had alternative age and service requirements in 1983, a 54-percent increase from 1974. Usually, age 65 was the alternative retirement age in plans with normal benefits at age 62; retirement by age 62 or 65 was often an alternative in plans with normal benefits prior to age 62. Most plans did not specify any length-of-service requirements for retirement at age 65, but retirement at age 62 typically required 10 to 15 years' service. Early retirement. Nearly all the plans in 1974 and 1983 permitted retirement before the normal retirement age, but with a reduction in benefits. However, as table 2 indicates, early retirement provisions, a lump sum bonus, or both a bonus payment and special ad hoc pension increases to the early retirement amount. Percent of contribution formula: A formula for calculating benefits that yields pensions equal to a specified percent of the employee or employer career contributions or a specified percent of yearly contributions times years of service. Replacement rate: Retirement annuity or total retirement benefits (pension and Social Security) as a percent of earnings in the final year of work. Special early retirement: These are usually normal benefits, or reduced benefits plus supplements paid up to age 62, for employees retired by the employer because of layoffs, plant shutdowns, disabilities which did not qualify for disability retirement, or in situations of mutual consent of the employer and employee. Supplemental benefits: Benefits added to the early retirement amount which expire at age 62 or 65. They range from specified flat amounts to amounts varying by age at the time benefits are paid and by years of service. Supplements may also be available at normal retirement, but these are usually added on only for retirements prior to receipt of Social Security benefits at age 62 or 65. Taxable wage base: The maximum wage or salary subject to Social Security payroll taxes. The wage base was $32,400 in 1982, the last year of earnings covered by this study. Terminal (final) earnings formula: A formula for calculating benefits that yields pensions based on average earnings in the final years of credited service—often the last 3 or 5 years. many plans revised the age and service requirements for early retirement during this period. The overall effect was to lower age and service qualifications. Twelve fewer plans in 1983 required employees to be at least age 60 before being eligible for early retirement, and none required age 62. In 1983, 158 plans allowed retirement at age 55, up from 143 in 1974. Among plans permitting early retirement at age 55, the average years-of-service requirement dropped from about 10 years and 3 months to about 7 years and 2 months in 1983. These developments are shown in the following summary of age and service requirements for early retirement: MONTHLY LABOR REVIEW April 1987 ● Retirement Eligibility and Pension Trends for hypothetical employees retiring at age 65 on January 1, 1975, and January 1, 1983, after 20 or 30 years of service.4 Benefits were computed using three earnings assumptions for the employees' final year of work. For the 1983 retirees, $20,000, $30,000, and $40,000 were selected to represent workers at lower, middle, and upper earnings levels in 1982, the last year before retirement. For the 1975 retirees, earnings of $11,000, $16,500, and $22,000 were derived by adjusting the 1982 figures downward to reflect the 81percent average earnings growth from 1974 to 1982 as calculated by the Social Security Administration.5 Table 3 summarizes our computations for three employee groups: 1) professional and administrative employees; 2) technical and clerical employees; and 3) production employees. To develop data by employee group, we averaged calculated benefits for individual pension plans across all plans covering employees in that group. (Averages were not weighted by the number of plan participants.6) Also included in the table are replacement rates, which express the pension benefit as a percentage of preretirement earnings. Replacement rates yield insights into the adequacy of pensions in maintaining the worker's preretirement standard of living. In this analysis, the calculated pension payments were divided by the corresponding final-year earnings levels chosen for each year.7 Normal retirement benefits. Private pension benefits replaced, on average, a higher portion of preretirement income in 1983 than in 1975. For blue-collar (production) workers retiring at age 65, replacement rates typically increased by 5 or 6 percent over the time span reviewed. For example, the replacement rate for production workers with 30 years of service was 25.5 percent for the middle earnings level in 1975, compared with 27.0 percent in 1983. For white-collar workers (professional-administrative and technical-clerical), replacement rates were relatively unchanged at the lowest earnings level, but increased 2 to 3 percent at the higher levels. Replacement rates for technical and clerical workers with 30 years of service, for example, rose from 29.3 percent for the middle earnings level in 1975 to 30.1 percent in 1983-an increase of 3 percent. (See table 3.) The growth of income replacement rates was much more pronounced when Social Security benefits were added. Total replacement rates (private pension plus Social Security) typically increased by 12 to 14 percent for blue-collar workers and 10 to 14 percent for white-collar workers. For example, the total replacement rate for production workers with 30 years of service was 48.5 percent for the middle earnings level in 1975, compared with 55.2 percent in 1983. During these years, the Social Security taxable wage base was increased from $13,200 to $32,000. In addition, Social Security benefits were periodically improved and the method used to determine average earnings (which affects benefit calculations) was modified. Table 3 also shows that pension replacement rates tended to decline for blue-collar workers as earnings increasedjust opposite the pattern for white-collar workers. This reflects differences in the pension benefit formulas between the two groups. Most blue-collar workers were covered by dollar-amount benefit formulas, which yield pensions independent of earnings levels. These plans base the monthly Table 1. Minimum age and associated service requirements for normal retirement under 187 private pension plans, 1974 and 1983 |
