"We'd have been better off if they had never given us the money in the first place," sighed Margaret Kalb. She is bitter because her husband William is one of 740 retirees from the bankrupt Alan Wood Steel Co. who have been notified that they owe the government $2.3 million in pension benefits to which they were not entitled.

Last November Kalb, 52, received a letter from the Pension Benefit Guaranty Corp, the government agency that insures pension plans, advising him not only that he is not eligible for a pension until 1986 and would receive no further checks, but also asking him to repay $19,000-plus by Jan. 15. That sum represents the entire amount he received in company benefits after the plant ceased operations Nov. 1, 1977. He was further advised that if he did not pay on the spot, the overpayment would be deducted from his benefits when he is eligible to collect them.

"I don't have the money," said Kalb. "We've been living on it for the past two years." Kalb, who put in 28 years with Alan Wood and was earning $500 a week at the end, remained unemployed during the two years. Lukens Steel Co., which took over a small part of Alan Wood's operations, wanted younger men than Bill Kalb. Now he has a maintenance job at a Hilton hotel where his wife Peggy is a maid. Together they bring home $175 a week. "We've got to scratch for bills now. We're getting a little more behind every month," he said.

Although Kalb has the dubious distinction of owing the largest sum of money, some of his former colleagues are also in hock to the government for substantial amounts. Thirty had their pensions stripped. Ten retirees were overpaid more than $10,000, including Frank Katrina, 62. In addition to having his benefits cut from $783 to $488 a month this 40-year steel veteran has been asked to repay $10,835.

"I thought ERISA was supposed to protect me, not the company. There's something in the law that's wrong," Katrina lamented.

ERISA, the Employe Retirement Income Security Act, was passed in 1974 to ensure that workers in private industry receive the benefits to which they are entitled when a pension plan terminates without sufficient funds to pay the benefits it has promised. The Pension Benefit Guaranty Corp. (PBGC) guarantees those benefits within certain limits prescribed by law and provides any additional funds necessary to pay them.

How then did a situation arise in which the PBGC cannot guarantee the benefits promised by industry and is demanding that the workers reimburse the government $2.3 million out of the $9.5 million their company paid them?

Alan Wood Steel Co., the major employer in this blue collar section of Montgomery County, a few miles west of Philadelphia, went out of business Nov. 1, 1977, a victim of the 1974-75 recession and problems endemic to the entire U.S. steel industry. The company notified PBGC in June 1978 that it was terminating its pension plan. When the PBGC took over the trusteeship of the plan in January 1979 following litigation, it found that the plan had only $7 million in assets and was $50 million short of the amount needed to pay promised benefits. Alan Wood officials had neglected to pay into the pension fund for the last two years of the company's life.

During the next 11 months, retirees continued to receive their promised benefits while the PBGC was calculating how much it was authorized by law to pay them. The agency's current ceiling on benefits is $1,159 a month for a 65-year-old retiree but -- and this is where it gets tricky -- PBGC rules do not guarantee all the same type of benefits Alan Wood gave its retirees.For example, the government does not guarantee the lump-sum benefits the company handed out. Nor does it guarantee fully benefit increases that have been in effect less than five years before the plan's termination.

Another stumbling block is the plan termination date. By setting it at Nov. 1, 1977, the court and the PBGC effectively cut off seven months of service needed by some 30 workers, like Kalb, to be eligible for a pension. As a result, some Alan Wood retirees now find themselves too old to get other jobs, yet too young to collect a company pension or Social Security. Other benefits have been exhausted. Lukens hired just 200 former Alan Wood employes, and that was at lower salaries, reflecting their loss of seniority.

The retirees were warned they would get less from the PBGC than from Alan Wood -- and Katrina did admit that if there had been no government insurance they probably would have received a lot less. However, none of them expected the recoupment bombshell. Recoupment is governmentese for getting people to pay back the money Uncle Sam has overpaid them. The PBGC has had 25 previous cases of recoupment, but they involved only 80 persons and $58,000.Alan Wood Steel, presenting a potential recoupment of $2.3 million, is by far the largest case of its kind and is likely to set a precedent for future action.

The retirees solicited help from the United Steel Workers, to which they formerly belonged. The union is questioning the PBGCs calculations excluding certain benefits and its right to oblige retirees to reimburse overpayments they received through no fault of their own. After a meeting with the PBGC, the union indicated it is prepared to sue if necessary to get the government to waive recoupment.

Although the PBGC has the authority to waive recoupment, it has done so only once previously, according to spokesman Pete Kirsch. He feels the agency is caught in the difficult position of having to meet the requirements of the law by getting the money back and trying to make it easy for the retirees to repay by subtracting the overdue amount from future benefits.

The retirees' representatives in Washington, Sen. Richard Schweiker and Rep. Lawrence Coughlin, both Republicans, have asked Labor Secretary Ray Marshall and PBGC Executive Director Robert Nagle for relief.

For their part, the retirees express surprise and bitterness that the government has not tried to recover money from the pension plan trustees.

Gerald Walker, 56, who lost his larynx to cancer although he continued to work at Alan Wood, cannot get either disability insurance or another job. Yet the government says he still owes $4,065. "Who can live on $363 a month?" he asked. "I've got only $300 in savings left. My father-in-law paid for our food and gas." Despite his troubles, Walker, like Fred Lukens -- also disabled and declared ineligible for a pension -- remains optimistic. His finger pointed heavenward, he whispered, "The Guy upstairs took care of me so far; I'm a lucky man."

One who isn't so optimistic is Peggy Kalb. "This time," she said, "we're on our own." CAPTION: Picture 1, William and Margaret Kalb with letter telling him to return $19,000-plus in pension benefits; Picture 2, Fred Luken also is disabled and has been declared ineligible for a pension by the PBGC; Picture 3, Gerald Walker cannot get either disability insurance or another job; Picture 4, Alan Wood Steel Co. plant in Conshohocken, Pa., near Philadelphia. Photos by Larry Morris -- The Washington Post