America has a crisis mentality. Once it was bombs that threatened to bury us, then babies, now it's old people, doomsayers warn. Fifty years from now one fifth of the population will be over 65. There will be one retiree supported by every three workers, compared with every six today.
While this time machine ticks away, Congress seems preoccupied with adjusting the mechanism of the traditional old gold watch.The last session produced mainly technical changes in Keogh. Individual Retirement Account, and deferred compensation plans a hike in military benefits, plus funding for District pensions, which the President vetoed. After delaying a year, the administration finally jumped into the quartz age by appointing the first blue ribbon commission to develop a national retirement policy. The next century is left to academe.
The coming year promises more fine tuning with slight chance of important legislation but a major Supreme Court decision, later retirement as an inkling of the future, more Social Security controversy, and pension power as a political force.
The creation of the first presidential commission on pension policy attests to the growing importance the subject of retirement is commanding at high levels. Its impact will depend upon how narrowly or how broadly it interprets its role. The president announced creation of the commission at a news conference in which he railed against double dipping. While its chairman. Xerox's chief executive C. Peter McColough, and Thomas Woodruff, its executive director, can be expected to look into such highly publicized abuses of the pension system, it remains to be seen whether they will tackle tough or technical issues like portability and integration of pensions and Social Security.
Woodruff has announced the commission intends to start by studying all the different types of pension systems. In an interview with Pensions & Investments, he said the commission also would look at the relationship of pension funds to one another and to capital formation, their effect if any one the redistribution of income, the equity of tax treatment of contributions to funds, the problems of women and minorities, and unfunded liabilities.
He has also said he would welcome input from volunteers with expertise in macroeconomics and individual market issues. Active participation is expected from the recently formed Citizens' Commission on Pension Policy, a Ralph Nader group that intends to make sure the president planners do not back off from what he considers "their basic mission of making sure that American workers have an adequate income when they retire."
Its two-year life span may or may not allow the commission to explore more philosophical questions such as the percentage of the GNP that can be set aside for pensions without hurting the economy, and how much of that should be from Social Secrity and how much from the private sector.
The mandated rise in Social Security payroll taxes, up to $22,900 taxable income next year and higher thereafter, may create as many problems as it solves. So far as the economy is concerned, the hike is considered a "two-edged sword," by the President's chief inflation fighter, Alfred Kahn. On the one hand, he said, it will inflate costs, but on the other it will withdraw demand from the economy by lowering take-home pay. In the pension field, the movie is calculated to put Social Security back on a firm financial footing, but it inevitably will increase integration, which often has the effect of decreasing the lower wage earner's retirement benefits.
Social Security benefits are weighted in favor of lower income workers i.e., those at the bottom of the wage scale collect a much higher percentage of their final salary - though not necessarily a higher dollar amount - upon retirement than do those at the top. The rationale is that rich people will have other funds - investments, savings - with which to finance retirement.
Integration erases that tilt. In simplest terms it menas lumping Social Security benefits together with private pension plan benefits. There is a growing feeling in the corporate world is that the greater the amount an employer has to pay out in payroll contributions 6.13 percent in 1979, the greater the share of a retiree's benefits Social Security should be, or conversely, the smaller the amount the employer should have to kick in under a private plan. A well-integrated plan, according to private pension consultants, can be "an effective way of rewarding those who account for pofit."
It is also a way of assuring that low income retirees do not receive more than their final wages in retirement pay.
In 1974, the Congressional Research Service estimated between 25 and 30 percent of all private pension plan participants were affected by integration. A 1978 study by Bankers Trust of 86 of the Fortune 500's pension plans for salaries workers showed that 87 percent of the non-union plans were intergrated. Most collectively bargained plans add private pension benefits to Social Security. For the few low paid employes with many years of service at the same job whose combined pension and Social Security income at retirement exceeds an agreed minimum, the unions negotiate a cap.
A recent study based on data from 1974 plans by Brandeis University professor James H. Schulz and associates shows how integration aids the higher income worker. Private plan benefits replace a third of final wages in industries like communications, utilities, finance, insurance and real estate, almost twice the average replacement rates in the service, construction and mining industries. Whereas the miner receives 17 percent of his final pay from his employer, when Social Security benefits are added, only one married miner in 20 reaches 70 percent of his last take home pay. The person in finance receives 34 percent of last pay from his employer.When Social Security is added, 87 out 100 financiers with spouses over retirement age collect at least 70 percent of last pay. Sixty to 80 percent of final pay is the amount considered necessary to retain one's standard of living after retirement.
The most extreme form of integration is the practice of an employer refusing to give an employe credit for any wages earned below a given level, for example the cut-off point for Social Security, now $17,700. None of the Fortune 500 companies surveyed by Bankers Trust followed this practice, although they did utilize other less exclusionary formulas for integration.
Thus it appears that those most affected by integration are low paid, non-union workers in small businesses. Recognizing the accelerated pace of integration and its affect on this segment of the work force, the administration last year proposed a formula requiring employers to give one credit for all wages earned below a given level for every two credits granted for wages earned above that level. Large and small businesses successfully lobbied to defeat the bill in committee on the grounds it would be too expensive.
Next Jan. 1 the mandatory retirement age in the private sector will be raised from 65 to 70 with few exceptions, notably highly paid executives. Whereas the social desirability of this action - elimination of discrimination against older workers, freedom of choice to continue working - has been almost unanimously acclaimed, its economic and occupational desirability have yet to be assessed.
From an economic viewpoint, management consultants predict a minimal impact at first. More than half of all workers now retire before age 65, a trend that is expected to continue for another decade. As it is, only 12 percent of the workforce is over 65. The Department of Labor estimates an additional 200,000 elderly people each year will elect to continue working others foresee as many as half a million. A third of those surveyed in a 1974 Harris poll said they would like to remain on the job past 65.
Those who can be expected to delay retirement are primarily white collar workers in professional, technical and managerial work whose jobs bring them other than monetary satisfaction, as well as the poorly paid, like garment workers, who can't afford retirement. Auto, steel and toher wellpaid assembly line workers probably will not delay.
This is bound to have some adverse effect on youth and minority unemployment rates at the start. Yet labor shortages are predicted as early as the mid-1980s after the baby boom generation has been absorbed. The effect on pension and health programs seems less clear. To the extent that retirement its postponed and accrual of benefits does not continue after age 65, the cost of the retirement plan to the employer is reduced by about 8 percent a year. If employers must offer equal health care and insurance protection to older workers, the costs will rise.
Business consultants predict significant changes in management techniques and occupational concepts. Early retirement has always been a gentle way of easing out employes whose skills have slipped. Now that employers have the right to remain until 70 it is expected large numbers of them who are judged incompetent will be forced out in their middle years rather than kept on the payroll so long.There will be a growth market for preretirement counseling and career retaining. Consultant Peter F. Drucker also predicts that close to 40 percent of the American labor force of tomorrow will be composed of parttimers, double the number today.
Phased retirement or gradual slowing down by working fewer hours per day or enjoying more vacation each year is another formula. Sears, Roebuck began exploring such a program after 45 percent of its employes said they wanted to stay after 65. Such programs have been tried in the past but without notable success. Seven government agencies have gradual retirement "on paper." Yet only 1,700 out of 41,600 government employes who retired last year were aged 70. Westinghouse's plan, devised by its chairman to phase out gradually its top three executives by 65, was discontinued in 1977 after their departure "to discourage any skittishness among investors." But the new law, combined with inflation and a future labor shortage, may revive interest in gradual retirement.
Despite difficulties with unfunded liabilities, pension funds prove an embarrassment of riches. The assets of all private plus state and local funds amount to half a trillion dollars. They are growing at an annual rate of nearly 12 pecent, or $100 million a day, and can be expected to provide a large chunk of the outside capital raised by U.S. firms during the next decade. Their very size and power potential through their ability to vote large blocs of stock and target their investments geographically has sharpened the debate over how these vast sums of money should be invested.
The prohibited transactions and prudent-man clauses of ERISA were intended to curb past abuses like the self-dealing by insiders and rash speculation of the Teamsters fund. The foremost criterion must be the economic interests of the plan participants. Now, however, there is a growing sentiment the pendulum may have swung too far, that it may be permissible to use private pension funds to achieve some social and political goals.
The Labor Department recently decided that investing in new, ntried businesses is not imprudent per se. Just as the New York City teachers fund, which is subject to the prudence requirements of ERISA, helped keep that city away from bankruptcy a few years ago, so it is reasoned, union funds from industries in the Northeast should be spent to revitalize that area and not sent to finance largely non-union industry in the Sun Belt. The power of union funds was demonstrated recently when the Textile Workers threatened to cancel their accounts with a bank unless it removed several of its officials from the board of directors of non-union J.P. Stevens Co. Sen. Howard Metzenbaum (D.-Ohio) will conduct hearings Nov. 20-21 on the desirability of regional investment policy.
The idea, put forth in the book "The North Shall Rise Again: Pensions, Politics and Power in the 1980s" by Jeremy Rifkin and Randy Barber, is sure to have the support of urban politicans and liberals. But it runs against the principles of conservative investment managers who are worried about ERISA regulations as well as by the fact that socially desirable investments, like housing for the elderly, may prove not lucrative. Managers seem far more interested at present in alternatives like more fixed income investments,indexed funds, overseas investments and real estate.
As a consequence of inflation, current rates of return on conventional investments have slumped to the point where some pension plan participants would have been better off investing their nest eggs in savings accounts. How would retirees feel if their benefits were cut because a socially desirable investment turned out economically unsound? And who "owns" pension funds anyway, the trustees or the workers? And should the workers have a say in how their funds are invested? There questions are already the subject of much debate in the pension community.
On the legislative front there was little progress other than technical amendments in the past session of Congress. The most important modification to existing law will permit employers to contribute up to $7,500 a year to an employe's Individual Retirement Account. It is a simplified plan designed to reduce paperwork for employers.
It is expected the next Congress will continue its piecemeal approach, for the administration has requested, and many on the Hill agree, that there should be no fundamental changes in the private pension system until the presidential commission has made its final recommendations two years hence. That would definitely include a bill by Sens. Jacob Javits (R.-N.Y.) and Harrison Williams (D.-N.J.) to create a single pension agency. The president's reorganization plan, which calls for dividing the areas of responsibility for private plans neatly between the Labor Department and the Internal Revenue Service, has support as an interim solution.
Among the bills that may be revived next year are pre-retirement survivor benefits, various forms of supplemental Individual Retirement Accounts for tax deductions for them, and anti-fraud amendment to ERISA if the Daniel decision is upheld, a tax credit for pension plans exceeding ERISA minimum standards, an overall master pension plan employers could use instead of having to fashion their own, a mini Public Employe Retirement Income Security Act requiring reporting, disclosure and fiduciary guidelines but no funding or vesting standards for state and local plans.
Of monumental importance to the pension industry is the case to Teamsters v. Daniel now before the Supreme Court. The issue is whether pension plan rights are covered by anti-fraud provisions of securities laws. In other terms, is it reasonable to assume that an employe in an involuntary defined benefit pension plan to which he did not contribute could have been attracted to the job by the prospects of a return on his pension investment? If a pension is judged a security, the worker applying for a job would have to be told what the odds are against collecting a pension.
Daniel, a truck driver, was denied a pension after 20 years on the job because his employer held that a four-month involuntary layoff constituted a break in service. Daniel countered that he was not told when he was hired of the effect such a layoff would have on his pension and therefore he was defrauded.
If Daniel loses, countless other persons denied pensions may not be able to sue on these grounds. If he wins, the pension industry fears that it might have a billion dollars worth of lawsuits on its hands.
The Pension Benefit Guaranty Corp., a self-financing federal entity that insures the benefits of workers against pensions plan insolvency, is due to release its recommendations 10 days from now for dealing with the problem of underfunded, multiemployer plans. These are plans formed by several companies in one industry through collective bargaining with a labor union. About 160 of the 2,000 existing plans, particularly those in failing industries like millinery and milk delivery, are in financial trouble. Insuring their potential liabilities of $4.8 billion would cost $80 a head in premiums, PBGC has estimated.
Unions objects not only to the costs but to the principle that a prosperous employer should be stuck with someone else's liability. PBGC's executive director, Matthew Lind, said recently, "We think that in the long run, withdrawal liability will strengthen multiemployer plans and reduce (plan) termination insurance affordable." He tepes to get legislation introduced by the beginning of next year so the Congress can pass it before the July 1, 1979, the deadline for mandatory PBGC coverage of multiemployer plan. Due to the extreme technicality of the question, Congress may be obliged to grant another extension.
The private pension industry is awaiting the results of two Labor Department studies on retroactivity and cost of living allowances. The first, soon to be released, seeks to determine the cost of awarding benefits to approximately one million persons who prior to passage of the Employe Retirement Income Security Act of 1974 had fully vested rights but who never received pensions from their employers. Prominent among them are former Studebaker employes. It has been suggested that finanicing could come from a tax of 0.1 percent on corporate income.
The other study, which has not yet been contracted, will examine the financial impact of adding an escalator clause to retirement pay similar to that of Social Security. Only 4 percent of corporate pension plans in 1974 contained inflation adjustments, according to the Conference Board. Yet it has been shown that at current inflation rates, the pensioner on a fixed income without regular adjustment falls behind in very few years.