THOUSANDS OF workers are losing badly needed retirement dollars because of a pernicious pension practice that robs from the poor to give to the rich. Congress has the chance to solve this problem once and for all, but it looks like they're going for a compromise.
"Pension integration," as it's called, is a sophisticated way for pension plans to pay disproportionately large benefits to higher-paid workers at the expense of the lower-paid. At its worst it can even eliminate the pension entirely.
In its simplest form, integration means that a pension plan takes into account an employe's Social Security when calculating the pension benefit. When employes are told that they are earning benefits under a pension plan, they don't realize that Social Security may be figured into the total amount of those benefits. They believe that what is being paid into the pension fund on their behalf will be used to "buy" a pension. In fact, it may be buying a pension for the higher-paid workers, leaving lower-paid workers to discover that Social Security provides the bulk of their pension.
The practice may be little known, but it's widespread: 9.7 million people, more than half of the employes in pension plans in medium and large companies, are affected by integration. Most employes in small businesses are also in integrated plans. (Most union-negotiated plans do not use this practice.)
A typical formula might subtract 50 percent of the Social Security payment from the pension benefit. Marge Boley, of Columbus, Ohio, worked 20 years as a sales clerk for the J.C. Penney Co. and expected a pension based on all her years on the job. Only when she retired did she discover that the company subtracted an amount equal to 50 percent of her Social Security from her small pension, wiping out her pension completely. (J.C. Penney has since modified the integration formula. According to the company, under the new plan, she would have gotten $17.50 a month.)
Pension integration is so complex that the few workers who learn of it usually find out about it the same way Marge did -- after retirement.
The tax proposal by Sen. Bob Packwood (R-Ore.) now before Congress includes provisions that would modify integration.
However, rather than eliminating integration completely, the proposal resorts to a compromise that would clear up the worst abuses while leaving intact the basic unfair structure of integration -- and one that necessarily discriminates against low-income workers.
Essentially, the Packwood proposal would prevent situations such as Marge Boley's by ensuring that an employer who integrates a plan cannot take away more than half of an employe's pension benefit.
Similar provisions are included in the Retirement Income Policy Act (RIPA) which was introduced by Sens. John Heinz (R-Pa.) and John Chafee (R-R.I.) and Rep. William L. Clay (D-Mo.).
Let's look at how the legislation would work in a real situation. Mrs. B. worked for a bank in California and retired with a monthly benefit of $82.37, after 50 percent of her Social Security was taken into account. Under RIPA someone in Mrs. B's situation would get approximately $149.00 a month. Certainly any increase helps. However, it is still relatively little compared to what she would have gotten if no integration were used -- $298 a month, about 3 1/2 times the size of the pension she is entitled to now.
Employers argue that they have the right to skew benefits to the higher-paid employes because the Social Security system pays a higher proportion of the benefits that the lower-paid employes get.
This argument is absurd. Higher-paid employes have an abundance of assets -- stocks, bonds, savings, real estate, tax shelters -- that low-income people don't have. These extra assets more than make up for the "tilt" in Social Security toward the lower-paid. Social security is now averaging just $5,736 a year for the typical worker and recent studies show that savings for most low and moderate wage earners are almost nonexistent.
Integration advocates further say that they are aiming for a "retirement income goal" that takes into account both pensions and Social Security. They say if they didn't integrate the plan, an employe could conceivably get more in retirement than while working. If this rare event should occur -- which is only possible if someone spends a lifetime with one company -- then the plan could provide a "cap" only if the expected pension is more than the worker's pre-retirement earnings.
Finally, pension-plan consultants and actuaries -- who make a bundle selling integrated plans -- charge that if integration were eliminated, companies would stop setting up plans. They contend that pensions must serve management objectives. Companies must be able to use pensions to attract, retain, and finally ease out higher-paid employes as suits their business needs. If they had to pay bigger pensions to the rank and file, they say, pension plans would be too expensive and employers would opt out of the system.
It is this argument which sent the sponsors of the Retirement Income Policy Act on their compromising course.
Each time a new pension law is proposed, the consultants insist that companies will stop providing plans. But this is just another "cry wolf" tactic. Most employers, in fact, have continued to offer plans because there are plenty of economic incentives to do so, including handsome tax breaks, and hefty pensions for top executives -- just to name a few.
Pension integration belongs to a bygone era, when pension plans weren't much more than gifts to a few long-term employes.
But times have changed. Pensions are acknowledged deferred wages earned by employes to guarantee them decent income in retirement. Americans pay taxes to encourage private pension plans that get a subsidy of $35 billion in tax breaks -- the largest of all federal tax subsidies.
These expensive tax incentives are meant to encourage employers to set up and contribute to pension plans for their rank-and-file workers -- not to perpetuate a Robin-Hood-in-reverse policy.
If Congress is serious about developing a long-range pension policy that will protect future generations of retirees, then this outdated practice must be stopped.