OLD AGE PENSIONS: How Big? Who Should Pay For Them? Will They Cripple Business? Can "Security" Be Guaranteed?

"The harvest of old age," said Cicero, "is the recollection and abundance of blessings previously secured." Cicero wrote of the blessing of serenity achieved by a mellow and philosophical mind. Modern industrial man has a different blessing in view: economic security. And, like Cicero, he feels that it should be "previously secured."

This is easier said than done for two reasons: medical science has made it possible for men to live longer at the same time that high taxes and high prices are making it harder to save a nest egg for old age. Since the turn of the century, 18 years have been added to the average life expectancy at birth, which is now 65.5 years for the white male infant, 71 for the female; the average man (white) now 65 can expect to live to 77.4, the average woman to 79.4. The number of people in the U.S. past 65 years old has increased from 3,000,000 in 1900 to 11,500,000 today. Though total U.S. savings are near their alltime peak ($170 billion), more than a third of all U.S. families are saving nothing at all--and they are mostly families in the lower-income brackets who will need savings most in old age.

The drive for old age security caused two of the biggest strikes of the postwar era. Last fall nearly 500,000 steelworkers were out for more than a month to get a $100 pension. The bitter Chrysler strike, for a $100-a-month pension, ended last fortnight, after 100 days of idleness. The two strikes, costly to both management & labor, had one significant point in common: they were fought over the method of paying for the pension, not over the pension itself. The U.S. is so security-minded that the real question asked about pension plans is no longer "Why?" It is "How?"

Who Started Them?

The history of pensions in the U.S. throws some light on the "how." The first industrial pension plan was set up by the American Express Co. in 1875. It provided company-paid benefits (maximum : $500 a year) for incapacitated workers over 60 whom the company deemed worthy and who had been with the company for 20 years or more. The railroads soon followed; by 1908, railroad retirement plans covered two-thirds of all U.S. railroad workers.

Manufacturers who installed pension plans at the time did so on a highly informal, unilateral basis. "The company," one of the early plans stipulated, "may cancel any pension whenever . . . the pensioner displays a decided lack of appreciation . . . or is guilty of other serious misconduct . . ." By 1929 industrial pension plans covered 1,451,485 workers. Most of the benefits were paid entirely by the employer, and employees contributed nothing; most of the plans were on a pay-as-you-go basis, i.e., the benefits were paid out of current earnings.

When the Depression put the pension plans to their first great test, many flunked it. As profits vanished, so did the pay-as-you-go pensions. Even the long-standing railroad plans faltered and had to be taken over by the Government.* When thousands of elderly workers finally realized the chilling fact that they would probably never find jobs again, a spate of fuzzy-brained solutions sprang up, e.g., the Townsend Plan, Upton Sinclair's E.P.I.C. (End Poverty in California). It was partially as a counterattack to them that federal Social Security--handled by the Government and paid for by both the employer & employee--was born.

Of the 61.6 million men & women in the U.S. working force today, only 35 million are currently earning credits (i.e., putting more aside) under Social Security. But millions more are covered by other public programs. Some 3,000,000 veterans and their widows and dependents are now covered under tax-supported pension plans. The Federal Government has a complex system for its 2,300,000 employees; special plans also cover members of Congress,* the foreign service, the armed forces, and a sprinkling of minor bureaus from the Tennessee Valley Authority to the Office of the Comptroller of the Currency. State and local governments also provide for 2,100,000 of their workers; most policemen, firemen and teachers have retirement and welfare programs of their own.

How Much a Year?

Once the U.S. had accepted the idea of pensions on a broad scale, private industrial plans spread rapidly, notably during World War II when the sky-high excess-profits tax made it possible for an employer to put $1,000,000 into a pension fund at a net cost of only $150,000. Today U.S. corporations have 13,000 retirement plans covering some 7,000,000 workers. On their own initiative, Americans have individually bought annuities that will pay them at least $750 million annually in their declining years, and are adding to this prospective income at a rate of $25 million each year.

The result of this patch-quilt cushion for old age is that some workers are not covered at all, while some will enjoy as many as three or four pensions. The big reason a worker has to lean on other plans in addition to Social Security is that after 15 years, Social Security benefits are still too small to give security.

Since it began benefits in 1935, Social Security has paid out $3.1 billion in pensions. But the average payment to a man who has reached 65 is only $26 a month. If his wife is also over 65, he gets more; the average payment is $41. Yet Government agencies have reckoned that in 13 major cities an elderly couple needs at least $120 a month to squeak by.

The C.I.O. Auto Workers' President Walter Reuther puts the figure much higher. Said he: a $2,089 annual budget (more than to times the average Social Security old-age payment to married men) is the minimum for an elderly couple who are "too old to work and too young to die."

How Big a Reserve?

To Congressmen and some industrialists, the first objective is to improve Social Security. Under a bill passed by the House and revised by the Senate Finance Committee, coverage would be extended to another 9,500,000 U.S. workers, including domestics, state and local government workers (on a voluntary basis), employees of nonprofit enterprises and the self-employed (except for ten categories ranging from doctors and lawyers to publishers and engineers). Still excluded: 7,900,000 farmers and farmhands. The new bill would double the present benefits, boosting the average individual payment to about $50 a month and setting a family maximum at $150. To pay for the new benefits, employer & employee contributions would be stepped up from 3% of all wages up to $3,600, to 7% by 1970, split evenly between employee & employer.

But many a Senator contends that the step-up in contributions is not needed, and that larger pensions could be paid out of current Social Security receipts. The Federal Government is now taking in $3 for every $1 it pays out in benefits. It has already built up a reserve (in Treasury certificates) of $12 billion. While outgo from Social Security contributions would rise as the U.S. population gets older, the contributiosn would rise much faster under the new bill. By 1990, according to Congress' own estimates, the reserves would be more than $90 billion, while outgo in that year would be $11 billion. Although the reserve would start dropping after that, some businessmen doubt that such an enormous reserve fund would be necessary.

In fact, some feel that in a free-enterprising economy, which depends upon a constantly increasing supply of capital to finance expansion and create jobs, a siphoning-off of $90 billion in cash, plus the reserves of private funds, might be dangerous. Thus, there are prospects that if & when the Senate finally approves the new bill, Congress may start another study to decide whether Social Security should move towards a pay-as-you-go basis, with only a modest reserve for emergencies.

How Many Plans?

While Social Security is a basically simple pension system, private industry plans vary greatly, and are enormously com plex because of the varying ages of workers, employment turn over, profits, and a score of other factors in every company.

In general, industrial pension plans are either contributory (employer & employee share the cost of the plan), or noncontributory (employer pays the full cost). Theoretically, either system may be financed and maintained on a pay-as-you-go basis, or funded (a reserve fund is set up to guarantee payments in good & bad years alike). Some plans--usually the contributory type--allow an employee to build up credits ("vesting"), and cash them in if he leaves the company before retirement. Still others permit an employee--should he leave the company before retirement--to leave his vested share in the company plan, collect a reduced pension when he gets to retirement age. Some offer a combination of pensions and profit-sharing.

Of all the employee retirement plans, one of the most spectacularly successful has been the profit-sharing system of Sears, Roebuck & Co. Under Sears's 34-year-old plan, an employee may contribute 5%--up to $250--of his annual pay. The company, for its part, contributes anywhere from 5% to 9% of its net profits each year. The employee's contribution is kept in cash or Government bonds, thus guaranteeing that he will get back at least what he put in. The company's share is used to buy Sears any thus the employees benefit from dividends and any increase in the stock's value. (The pension fund owns 21% of Sears stock, and is the company's largest stockholder.)

As the company has expanded and dividends have increased, thanks partly to the employees' interest in making the company more successful, the payoffs to retiring employees have jumped sharply. Sample payoff last year: a $4,600-a-year clerk who had contributed $3,561 to the fund in 34 years got $95,626. The technical drawback to the plan is that most of the employees' pension eggs are in one basket. But under the circumstances, Sears and its employees are not worried: they do not know where they could find a more productive basket.

The biggest--and among the oldest--of the noncontributory plans are those of the Bell system--A.T. & T. and its subsidiaries--which roll sickness, accident, disability, death and pension benefits all into one jumbo package. Bell started the plans in 1913 on a pay-as-you-go basis, but in 1927 started setting up a reserve fund for pensions ("funding") because it thought the method sounder. (A.T. & T. now has more than $1 billion in its pension funds.) In computing Bell pensions, an employee's length of service is taken as a percentage (e.g., 20 years = 20%) and multiplied by his average annual pay for his ten highest-paid years (usually the ten years preceding retirement). The minimum pension, including Social Security: $100 a month.

Which Plan for Unions?

Although union leaders have fought bitterly to impose such noncontributory pensions on management, do the rank & file of unionists really want them? Last month the same C.I.O. steelworkers who had struck last fall for noncontributory pensions at Inland Steel Co. got a choice of a noncontributory plan and one in which they would contribute a small portion (never more than 4%) of their weekly salaries. By a vote of 3 to 1, Inland workers accepted the contributory plan. One reason: under the contributory plan, workers would get a vested interest, and most of them would get bigger pensions.

Experts on pensions, including some labor leaders, agree that there are five basic goals toward which management & labor should work in retirement plans :

P: The benefits should be paid for in part by the employees (i.e., a contributory plan), because such a system generally provides bigger benefits, is less of a financial burden on the company.

P: The plan should provide that an employee may withdraw at least part of the benefits he has earned if he leaves the company before retirement; such "vesting" gives the employee a real sense of security and participation.

P: The plan should be conceived and administered by actuaries ; it should not be worked out by hit-or-miss bargaining.

P: An adequate pension reserve fund, invested largely in Government or top-rated corporate bonds, and to a lesser extent in good common stocks, should be set up to assure the payment of benefits in good & bad years alike. In a feast & famine industry such as textiles, the reserve should be higher than in such steadier industries as chemicals and public utilities.

P: The plan should be flexible. Benefits should vary with length of service and rates of pay. Instead of a mandatory retirement age, the employer should have the option of keeping valuable employees, who are willing to stay, beyond retirement age.

With the great upsurge in pension demands, there is increasing talk about lowering the retirement age. But some economists, noting that the life span is increasing, are beginning to think that the trend should be in just the opposite direction.

"Few retirements," said Harvard's Professor Sumner Slichter, "occur because the worker wishes to quit. The great majority are at the insistence of the employer or because of ... ill health . . . Adequate pensions cannot be provided at moderate cost if the usual pensions age is as low as 65. Employers and trade unions should face that fact without delay . . . Raising the usual retirement age from 65 to 70 . . . would probably increase by at least a million the number of persons between 65 and 70 years of age who are at work. These persons would add nearly one-sixtieth to the national product--in other words, they would increase it by almost $4 billion a year. The whole community would benefit from this additional output."

Lighter Jobs? Lower Pay?

For such a farsighted plan to work, there would have to be much for flexibility in retirement policies and wages for the older man. Management would have to provide lighter jobs for the aging worker; labor might even have to agree, in some cases, to an hourly wage cut for the older man. One thing is certain: higher pensions, like higher wages, will have to be paid for by industry--either by higher prices or higher productivity. And higher prices are not the answer. Said Eastman Kodak Co.'s Treasurer Marion B. Folsom, long an expert on pensions: "If we are to give more goods and services to those who no longer work, those who are working must produce more. Otherwise, everybody's standard of living will fall." That is no new problem. The U.S. economy has met it before, notably in shortening the work week. Since 1909, manufacturing hours have been cut from 52.7 to 40, while wages have risen from $10 a week to $56.33. The U.S. could lick the pension problem without devastating strikes, provided that pensions were regarded not as a gift, but as something to be earned.

No one could guarantee that any pension plan would work perfectly and give workers absolute security in their old age. But since the soundness of all pension plans is based, in the last analysis, on the soundness of the U.S. economy, the expansion of Social Security and spread of soundly financed private pen sion plans would contribute a great deal toward making the economy stronger. They would help iron out the economic ups & downs by putting an enormous amount of buying power in the hands of the elderly 7.6% of the population. In securing for them the good sociological harvest of old age, the U.S. might also help stabilize its economy and benefit everyone.

*Which still operates a pension program for some 240,000 retired railroad workers, collects $286,970,846 a year from roads and employees, pays out around $240 million a year in benefits.

*Harry Truman, who left the Senate before he became eligible for its plan (maximum: $7,040 a year), is entitled to no pension as President. Nevertheless, he can collect $90 a month as a retired colonel in the Army Reserve.

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