Pension changes straight ahead

Staying Ahead

November 02, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

AMERICA'S retirement system is a vast web. Touch it in one spot and the pressure is felt in the farthest corners. When Social Security benefits are changed (note that I said "when," not "if"), the private pension system will be profoundly affected, too.

About 40 million workers are covered by traditional pensions, according to the Employee Benefit Research Institute (EBRI) in Washington.

When they retire, they'll get a fixed monthly benefit, depending on how much they earned and how long they worked for the company.

Roughly 46 million workers have 401(k)s and similar contributory plans.

The probable changes coming in Social Security have been telegraphed for several years. Payroll taxes may rise; benefits may grow more slowly than they do today; the retirement age may be increased; there may be private investment accounts.

But so far, the private sector hasn't paid much attention. Call it the Scarlett O'Hara syndrome (after the heroine of "Gone with the Wind"). "I'll think about it tomorrow," Scarlett says. "Tomorrow is another day."

Well, tomorrow is practically today.

Here are some of the changes proposed in Social Security that could cause private plans to change:

Lower future Social Security benefits. Nearly half the employees in large and midsize companies have pension plans that are integrated with Social Security in some way, says Kelly Olsen, a senior researcher for EBRI. These companies do not pay the entire pension you've apparently earned. Instead, they subtract part of your Social Security benefit from your pension amount, and pay you the difference.

In theory, integrated company pensions ought to rise if Social Security benefits drop. But corporations aren't likely to shoulder this extra burden. They'll probably adjust their plans to keep your payments from going up.

A later retirement age. Today, Social Security pays early-retirement benefits at 62. Not coincidentally, more people retire at 62 than at any other age, statistics show.

If the early-retirement age goes up, many employees will probably work a little longer.

Some companies might welcome this, given the smaller pool of younger workers today. Keeping workers on the job would also minimize the potential rise in corporate pension costs.

But older workers raise the cost of health and disability insurance -- which employers may pass on to you.

"Larger companies tend to encourage workers to retire in their late 50s," says Sylvester Schieber, director of research for the consulting firm Watson Wyatt Worldwide and a member of the government-appointed National Commission on Retirement Policy. "I'm not convinced that raising the Social Security retirement age is going to change long-term attitudes automatically."

Some companies ease workers into early retirement by paying them "bridge benefits" -- a form of temporary pension that tides ++ them over until 62.

They'll have to decide whether to extend these benefits, if early retirement doesn't click in until, say, 65.

Under current law, in 2000 the full-retirement age begins a gradual rise to 67 from 65 today. But companies have hardly begun to contemplate that, and we've had 17 years to get ready, says Janice Gregory, vice president of Employee Retirement Industry Committee (ERIC), a trade association in Washington that represents 130 large companies.

Investing part of each worker's Social Security tax in an individual account. Depending on the plan's design, this could add to the company's administrative costs. Employers might compensate by slowing the rise of pensions and pay.

Some proposals provide for additional, voluntary Social Security contributions, to be managed along with your private account.

This might encourage workers to drop out of 401(k)s -- especially if the company didn't match the money in their 401(k)s.

If fewer lower-paid workers belong to a 401(k) plan, higher-paid workers aren't allowed to contribute as much.

More investment risk for individuals. With private accounts, part of your Social Security benefit would depend on how wisely you invested, and also on whether you retired at a fortunate time.

People who invested in stocks and retired when the market was high would do better than people who retired when stocks were low.

This might rekindle interest in traditional pension plans, where benefits are fixed, Gregory says.

If government benefits aren't fully guaranteed, workers might seek more guarantees in the workplace.

"One thing is clear," Schieber says. "We would be better off if companies were planning for these changes now."

In 2002, the edge of the baby boom starts retiring. At this pace, a reformed pension system may wind up affecting only Generation X.

Pub Date: 11/02/98

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