Facing the Pension Dilemma

By Alexander L Taylor III

Some serious worries about the level of company retirement benefits

Suddenly more and more Americans are asking themselves a haunting question: Will I have enough money to live on when I retire? Social Security is in serious financial trouble; President Reagan twice this year has considered cutbacks in retirement benefits. Meanwhile, inflation continues to eat away at the value of money people had saved for their old age--and at the amount that can be saved. Says Frances Wegner, 53, who now lives off the proceeds from the sale of her house and a widow's Social Security benefits: "Both my feet are planted on shifting sand. I hold on to every professional contact I can because I must be in a position to get back into the labor force at any time. There is no such thing these days as a worry-free retirement."

Most elderly Americans traditionally believe that security in their later years rested on a three-legged stool of Social Security, private pensions and savings. An average retired couple has an income of about $14,700 per year, of which 33% comes from Social Security, 13% from private pensions and 17.5% from savings, stocks or other assets. But now that stool looks shakier than a dairy farmer's milking perch.

Social Security, which in nearly 50 years has become the lifeline of older Americans, is close to bankruptcy because there are not enough workers paying into the system to cover the current level of benefits.

This situation will likely grow even worse in coming years.

According to the Census Bureau, as many as 23% of Americans will be over the age of 65 by the year 2040, as against only 11.2% at present. While there are now 3.2 workers supporting every retiree, the Social Security Administration estimates that there will be only about two workers for every retiree by the year 2040. The agency's own actuaries predict that the system will be out of money by 1984. Other experts say it could happen as early as next year. While Congress will certainly not let the system go broke, it may soon be forced to reduce benefits, increase Social Security taxes or borrow from other Government funds.

Personal savings are no longer considered a secure nest egg. Inflation has wiped out much of the purchasing power of money in the bank, and most people cannot afford to save enough during their working lives to provide for their old age.

With two of the three legs of the retirement stool wobbly, people are looking more closely at their private pension programs. There are about half a million private employer pension plans that cover more than 75% of America's nonfarm workers over age 25. Unlike Social Security, private pension plans are not directly affected by the problem of the aging labor force because companies build up their employees' retirement funds during the employees' working years. Explains Barnet Berin, of William M. Mercer, a New York-based compensation consulting firm: "The private pension system puts in contributions that are invested over the years prudently to build up reserves sufficient to make the payout. The fact that the population ages does not really matter. Even though there is a smaller working population and a larger retired population, the private system should be O.K."

Company pension plans, however, have other problems. Most firms invest about 8% of their payroll costs in a pension fund to meet retiree requirements, but some cash-short companies have cut back on pension fund contributions. The result is a shortfall in the amount of money needed to meet pension obligations.

Three of the largest U.S. companies--Chrysler, International Harvester and Bethlehem Steel--together have unfunded pension liabilities that now total billions of dollars.

Seven years ago, Congress enacted legislation to assure that private pension programs will pay workers the benefits they are promised. If a company goes bankrupt, the Government-backed Pension Benefit Guaranty Corporation will make payments. But the failure of a large firm like Chrysler could virtually drain the $332 million now available to bail out private pensions.

A far greater problem is that private pensions have not fully faced up to inflation. The Committee for Economic Development, a business study group, warned last month that future retirees may face "insecurity and hardship" unless Social Security is reformed and private pension plans find a way to expand benefits. Said a CED report: "A retirement disaster is on the way early in the 21st century."

Unlike Social Security, almost no private pension program automatically takes inflation into account in calculating post-retirement benefits, even though price increases can wipe out the value of a pension. An annual inflation rate of 10% will halve the buying power of a retirement check in about seven years. Someone who lives 15 years after retirement at 65, the normal lifespan today, would be receiving a pension worth only about 25% of its original value at the time of his death. Concedes John Balch, vice president and treasurer of the Jewel Companies, a supermarket and drugstore chain: "In most cases right now, pensions end up being inadequate." Edward O'Gorman of Houston worked as an accountant for a steel-fabricating firm for 30 years and luckily invested well. Says he: "I couldn't go a week on my pension without other financial support. Everyone I know uses other income to supplement his pension."

A few companies are beginning to design plan options that provide at least partial inflation protection. If a worker chooses to take a lower initial retirement benefit, for instance, his pension checks will be increased each year by a fixed percentage of the rise in the Consumer Price Index. H.J. Heinz Co. has already introduced an indexing option, and several other companies are considering it.

Many large companies have voluntarily increased the pensions of their retirees. Exxon, for example, last year boosted the annual benefits for 21,000 former employees. Similar steps have been taken by RCA, the Continental Group and New York's Chemical Bank.

Another way to strengthen retirement benefits is to make a greater return on pension fund investments. Private plans, which control nearly $300 billion in assets, traditionally have been conservative in placing their money. At the end of last year, half was in common stocks. Now corporations are looking for more exotic investments for their pension plans. Says Martin McKerrow, vice president of pension consultant A.G. Becker: "They are willing to search the field for a wider variety of assets, such as real estate, international investments and stock options."

The tax-cut legislation Congress passed in July will help workers currently employed prepare for retirement. One provision permits any person to set up an Individual Retirement Account, even if he is already participating in a company pension plan. Previously only self-employed people or those working for companies without a retirement program could establish such accounts. An individual will be able to put up to $2,000 into a tax-deferred account created by his company, or by a financial institution, such as a bank or brokerage house. The money is usually not taxed until the employee retires, when he is expected to be in a much lower tax bracket.

Employees can set up the new IRA accounts starting on Jan. 1, and retirement experts believe that they will be widely used. Says James Dockerty, who manages pension benefits for 35,000 Shell Oil employees: "IRAS will become very popular."

Companies could make the IRAs even more convenient by combining them with their pension, profit-sharing or payroll-savings plans. By doing so, employee contributions to such plans would be made tax-free until the worker retires. No major corporation has yet established this type of IRA, largely because of the bookkeeping problems involved. The IRA deposits cannot be mixed with existing pension funds, and so companies would have to keep two sets of records: one for the regular company plan and another for each employee's IRA.

When Social Security was founded in 1935, it was supposed to be a supplement, rather than a substitute, for private pension plans and retirement savings. But over the years, generous Government benefits made it possible for most retirees to look largely to Washington for income in their old age. Now America's aging work force will almost certainly reduce the role of Social Security and make company pension programs more important than ever. --By Alexander L Taylor III.

Reported by Mary Earle/New York

With reporting by Mary Earle/New York

This file is automatically generated by a robot program, so viewer discretion is required.