That is the way our free labor market is supposed to work; mobile workers go where the demand is strongest as measured by compensation. We also know that most such new jobs will be short-lived. Many of them, especially those in defense-related manufacturing, are pension-covered jobs. Indeed, pension coverage is quite concentrated in the work so readily affected by defense production and services (e.g., shipping). Moreover, pressure to avoid inflationary wage increases causes heavier than usual emphasis upon fringes, particularly pensions.

We are going through again what we experienced in the two prior war periods, expansion and, now, improvement of plans (with predictably higher than normal employer contributions). However, large numbers of those now classed as participants will have nothing to show for having been under the plans. The funds will go to employers, in effect, by enabling them to reduce future contributions (or to raise benefits at lower cost) or they may be recaptured, in part at least, by renegotiation. In any event, masses of employees, from whose wages the contributions were subtracted, will not benefit in retirement income. Such patterns of disrupted employment adversely affect both pension eligibility and benefit amounts, which so frequently vary in accordance with length of service.

PURPORTED IMPROVEMENTS

Many reply to the critical analysis of my book with the assertions that much of my data derives from the 1940's and 1950's, when so many forces of change were loose, particularly two wars. However, "normalcy" is never with us. Today we have another war and the other forces of change move more rapidly than ever.

And, the pooh-poohers go on, "Plans have been young." They say: "You saw the acne and gauntness of adolesence, but note how mature plans are filling out in vesting and survivorship provisions, and benefits are putting on weight. The family is growing at a marvelous rate, before long most jobs that can be covered will be covered by one of these plumper, clear-skinned plans.”

Let us take a look at the purported progress.

Vesting and Multi-Employer Plans

The standard litany of the business-as-usual pension advocate is that a newborn plan concentrates a large portion of its skimpy resources upon benefits for those who will retire early in the plan. Generally speaking, that is an accurate description and the proper priority. As it matures, a plan is supposed to add vesting, which becomes more and more liberal, i.e., the conditions are easier to satisfy and will lead to a larger percentage of employees actually qualifying.

My book was among the first to point out that vesting provisions are more wide-spread than had been assumed, if consideration is limited to single employer plans. The problem is not how pervasive vesting is, but what good the formulas in common use will do.

The most liberal formulas in general use require ten years of service, the most liberal general improvement of the last several years has been the elimination of an age requirement, formerly required in addition to the years of service. Both developments have been pioneered by the United Auto Workers. A lot of ground must be covered before the UAW formula comes into general use. Contrary to the formerly widely held view, an age requirement superimposed upon a length of service condition, can make achievement of vesting significantly more difficult. About half the plans with vesting require 15 years of service and a very large proportion of 10, 15 and higher service conditions are yoked with an age requirement (some so high as to be early retirement provisions).

Perhaps most importantly, the great bulk of those who could qualify for vesting will not, because they will qualify for normal or early retirement instead. An exception is those caught in mass separations; and some of these involve large groups of fairly short service employees, as in the Kaiser Auto shutdown of the early 50's. The great area of need, if vesting is to render real aid, is in vesting for short service of as little as 3 or 2 years. Indeed, the goal should be immediate vesting, or very close to it.

Yet, the Cabinet Committee Report offers the worst possible of two worlds. On the one hand, it advocates compulsory vesting for all plans, thereby eliminating their adaptability to varying conditions and raising hackles on a mas

sive scale. Those hackles, however, are raised in vain, because the level of vesting called for, 50 per cent at 15 years, progressing to 100 per cent after 20 years of service, would benefit an infinitesimal minority. Of course, it would "establish the principle" and "open the door." But, starting at such a level, progress toward meaningful vesting would take a very long time. The proposal seems unpromising because it will be difficult to legislate and, if enacted, of marginal value for the foreseeable future.

Some resistance might be eliminated if multi-employer plans were treated separately, with vesting required only if predicted failures to qualify, based upon actual samples, exceeded a specified percentage of employees, and requirements of continuous service were liberalized.

For single employer plans, the Cabinet Committee, or some other significant public or private group, might declare that any plan in existence more than 10 years should ordinarily provide for 10 years vesting, with 5 year vesting after 15 years and even more liberal vesting thereafter. (The figures are illustrative only; the conditions might well be more liberal.) Nonmandatory bench marks might be more effective than mandatory ones. Once stated, bargaining committees would begin to press for them, just as they started demanding earlier retirement after the UAW "won" that change in 1964 (more about that shortly).

But vesting will not come unless large groups demand it. Some opinion evidence exists that younger workers are becoming more interested in greater assurance of pension eligibility. Unions have been somewhat less than eager in pressing for pension improvements, preferring other more immediate improvements (some quite dubious like "earlier" retirement). Union, as institutions, understandably have some difficulty in seeing to importance of benefits for those who will be ex-members, in preference to gains for those who remain in the fold. Only if employes, incited perhaps by insurgent union groups or a more widespread realization of the present unreliability of plans, press their organizations, will union demands for really liberal vesting emerge.

Professor Melone has written a thoughtful analysis of vesting problems. He believes that employers lack motivation to liberalize vesting, in the absence of strong union pressure, because they do not see any advantage to themselves. The argument that Social Security will take over more of the retirement income field if liberal vesting does not proliferate, carries little force with employers, he avers. This, he says is because they do not strongly prefer the private to the public plan and they do not believe that they can affect their relative roles by their private decisions. Many employers, however, do prefer the private to the public system because (1) they get "credit" for the former, subjectively from the employees and in wage-setting and bargaining; (2) many employers can participate advantageously in the private plans; and (3) they enjoy a degree of control over private funds.

Moreover, the Melone arguments overlook the dynamics of pension plan change. Only a few large employers need adopt a provision for it to be launched toward near-universal adoption. Large employers well might see advantages in large scale liberal vesting, for example, offsetting severance pay and bringing new employees to them with vested (and funded) credits, thereby relieving them of the sole burden of providing a fairly decent retirement benefit.

The problem of benefit achievement under multi-employer plans might be separately considered. Arguably, they provide a measure of vesting. But as the Joint Economic Committee hearings show, they do not thereby assure that a high percentage of participants will achieve benefits.

Benchmarks for vesting, separate vesting treatment for multi-employer plans and other alternatives to the Cabinet Committee Report should be studied and proposals made. Once the storm of indignation breaks, it will be too late to concoct new schemes.

Pension Coverage-The Present, The Potential, The Projections

Dan Holland's analysis of the coverage provided by private plans, (almost 50 per cent of the non-agricultural, non-government payroll), echoed in the Cabinet Committee Report, overstates the situation. One reason is because, it

Since this paper was presented, the Federal Inter-Agency Task Force reportedly has undertaken consideration of this suggestion, apparently with a view to mandatory standards. Joseph J. Melone. "Implications of Vested Benefits in Private Pension Plans," Journal of Risk and Insurance XXXII (1965), p. 559.

compares coverage to jobs, a more static quantity, whereas several million more people move in and out of these jobs each year.

Moreover, he eliminates almost 14,000,000 people as "clearly" not appropriately within the area of potential pension coverage. Most of those excluded are young people and part-time workers. I suggest that he is quite wrong to exclude them. If young people could accumulate pension credits, however small, they would be extremely valuable, producing benefits at lower contribution cost. Moreover, for those who will be seriously disabled early in working life, such early credits are absolutely crucial to a decent benefit.

As to part-time workers, some are students, to whom the same reasoning applies. Perhaps more importantly, many part-time workers are second wage earners in a family, usually wives, upon whom a family's standard of living so often depends. Indeed, these supplementary earnings provide, for many, the difference between what we regard as the American standard of living and want. If that standard is not to be unduly impaired after retirement, a substitute for those supplementary incomes must also be found. Typically, OASDI wives' benefits exceed those they earn in their own right, hence their former earnings provide no such supplement via Social Security.

It is far from "clear" that part-time workers should be excluded from what is considered the proper area of pension coverage. On the contrary, with the fast and steady growth in work by women in the 40's and 50's, income substitutes for their earnings will become steadily more urgent.

Projections of pension coverage by the Cabinet Committee start with a 1963 base of 23.5 million and predict that private plans will cover about 34 million employees in 1970 and 42.7 million in 1980, excluding annuitants. To this must be added 5.5 million projected annuitants in 1970 and 8.3 million in 1980 (as compared with 2.4 million in 1963). (Of course a sizable additional group of those presently at work will reach beneficiary status and then die before 1970 and 1980.) The retirees will necessarily come for the most part from those now under plans.

To account for these additional 19 million plan participants and 4 million retirees, plan coverage will have had to add some 23 million, or about double present coverage, by 1980. The average annual net increase of plan coverage would therefore have to be about 1.4 million. Indeed the projections call for larger increases in the next few years and a slower rate of growth later.

Practically all of the additional pension participants will come from the establishment of new plans because employment in the area of heaviest plan coverage today is either static, (as in manufacturing) or declining (as in mining). Moreover, the employment outlook in some areas, e.g. textiles, hardly seems encouraging.

While the numbers of plans approved set new records, the numbers of new plan participants falls far short of the projected pace of expansion. In each of 1964 and 1965, I.R.S. newly approved pension plans covered roughly 700,000 new employees, at best. If deferred profit-sharing plans are included, the totals of new participants increases to about one million in 1965. Social Security estimates put the pension coverage advance at 800,000 in 1964.

No employee data are available for the numbers of employees who had been under the plans that terminated (e.g., Studebaker shut down in 1963 and the plan terminated in 1964) or the numbers of employees involved in shutdowns of units under plans that continued in operation. Yet the projection calls for no less than 1.4 million new employees in these years, indeed more, because plotted plan growth was to be heavier in the earlier years of the projection and taper off toward the end.

It is suggested that even the modest projected expansion of coverage from roughly 50 per cent of the non-agricultural, non-government employment to 65

These projections derive from the National Bureau of Economic Research studles under Roger Murray's direction and executed by Dan Holland. As noted later, the N.B.E.R. study made several projections based upon differing assumptions. For some inexplicable reason the Cabinet study produced only one projection, as if coverage were not subject to innumerable unpredictable contingencies. Some of these possible contingencies could be legislation to tighten up on plans or to encourage them, new devices for plan coverage, evolving unemployment patterns, emphasis of defense production or disarmament, etc.

8 One study of a significantly large group of plans reports that in 1959 these 93 plans had 5.3 million non-retired participants and in 1964 their coverage had inched up to 5.4 million. Joseph Krisolov, "A Study of Pension Funding," Monthly Labor Review, Vol. 89 (1966), p. 638. n. 1.

Alfred M. Skolnick, "The Years of Employee Benefit Plans," Social Security Bulletin, Vol. 29 (April 1966) p. 3 at p. 6, Table 1.

per cent in 1980 may be unduly sanguine. The projections, although most conscientiously done, are based upon assumptions that are necessarily impressionistic, as Professor Holland recognized. Moreover, on some of the alternative assumptions he made in his underlying studies, the projected growth would be very substantially below those used in the Cabinet Committee Report.

Contrary to the Report's prediction, pension coverage may have expanded in recent years less rapidly than the labor force and non-farm private employment have. Coverage may be less extensive now than it was a few years ago, as a percentage of such employment. If, as the Cabinet report and the Holland analysis assume, the rate of expansion of coverage slows down between now and 1980, the proportion of employees covered well may be less by 1980 than today.

Benefits

Controversy over coverage and eligibility has obscured another vital area in which private plans now are weak. The benefits of those who qualify, even when added to typically larger Social Security payments, will not save most retirees from serious reduction in their standard of living. Many will be below the BLS modest-but-adequate 1959 budget level, which I regard as blushingly modest and decidedly inadequate to comfort and independence.

10

While lower paid workers will achieve a higher percentage of their preretirement earnings, even among those fortunate enough to attain benefit status, the overwhelming likelihood is that, under present arrangements, most pension beneficiaries will replace less than half their pre-retirement earnings or be under the B.L.S. budget.

Those who do not escape the latter fate require credited service of more than 25 years and high levels of earnings. Even such length of service will, on the average, produce well under 50 per cent of an individual's former earnings. Of course, the portion of family earnings replaced is even less, since there seldom is a substitute for a working wife's former wages.

It can be concluded that benefits per year of service are low. Just as importantly, many years of work do not count toward benefits, so that the total benefits are just that much more modest. That is why a method must be found to preserve practically all credited pension service and to translate it into benefits.

This is all the more crucial for disability benefits; for the disabled necessarily have fewer years of credited service, if they can qualify at all.

Widows, already skimping along on miniscule OASDI benefits, often are excluded from meaningful pension plan help because joint and survivor options are so infrequently exercised. Their design, often requiring election before retirement, hardly enhances that option; and the further voluntary reduction in the retiree's benefits required by the election.

Earlier Retirement

In the summer of 1964, retirement before age 65 without actuarial reduction of the normal benefit (what is here called "earlier retirement") looked like the wave of the future. A dubious means of creating job openings, the device assures lower public and private plan benefits." Although many U.A.W. members flocked to earlier retirement apparently few steelworkers have." The momentum may have gone out of the drive, but more information is required. When employment anxiety returns among pension-covered workers, this expensive device let us hope, will be hard to revive.

13

In the case of the U.A.W., employers pay some skilled workers both retirement benefits and regular wages. Surely, there are more pressing demands upon pension funds.

10 The most comprehensive and up-to-date analysis of benefits probably is Ronald J. Staats, "Normal Benefits Under Private Pension Plans." Monthly Labor Review, Vol. 88 (July 1965), p. 856. Unfortunately it suffers seriously from the usual BLS defect of computing sample benefits using only the future service portion of the benefit formula, thereby overstating them, both in absolute and in percentage of improvement terms.

11 A fairly detailed critique may be found in Bernstein. "The Arguments Against Early Retirement," Industrial Relations, Vol. 4 (May 1965), p. 29.

12 "Retirement Response: Few Steelworkers Take Opportunity to Get Pensions Early," Wall Street Journal, July 15, 1966, 6:4.

13 Future B.L.S. surveys should provide the data on plan provisions. We also will need information about experience under them. For example, under the du Pont plan, almost half of those eligible have availed themselves of the liberalized option to retire before age 65, even with actuarial reductions. Speech by Kenneth Meyer before the American Pension Conference, April 20, 1966 (processed).

PROJECTION OF FUTURE CONTRIBUTION OF PRIVATE PENSIONS

It is hoped that serious students of this subject will give earnest consideration to a study entitled, "The Future Economic Circumstances of the Aged." " Simulation techniques were employed on a computer to project the amounts and distribution of Social Security, private pension and private asset income for the aged in 1980. Dr. Schulz used the Cabinet Report pension projections (critically discussed above) and many other assumptions which I regard as unduly biased in favor of pension eligibility achievement and benefit levels.1 Even still, his conclusions are not encouraging."

15

In quite brief summary, the Schulz analysis shows that the present dismal pattern of mass penury among the elderly would be somewhat improved by 1980, but that private plans would make only a slight contribution to the improvement. The major progress forecast derived from larger asset holdings; this assumption in turn stems largely from the expectation that home ownership will expand and equities increase; and he projects larger financial asset holdings. But both assumptions, as he concedes, are quite debatable, especially that concerning home ownership. In my book it is suggested that the larger percentage of home ownership in 1960 by couples over 75, as compared with the 60-64 age group, might reflect the vestiges of farm ownership, which is diminishing.

Even with the assumed improvement in holdings and income, the projected financial situation of the elderly, based upon a modest but adequate budget reflecting the changed living standards of 1980, would be only slightly better. As Schulz points out, using the current Social Security poverty index ($2,460 and $1,745 for a non-farm couple and individual respectively) about half of the retired couples and two-thirds of the single individuals dwelled in 1962 at the poverty level. Of course, many more hovered just above it, some 70 per cent were below the dreary standard of the 1959 B.L.S. Budget ($3,000 for a couple).

Assuming modest increases in output and prices, the 1980 poverty levels would be $3,500 and $2,500 (for couples and single individuals, respectively) and the Retired Couple Budget $4,200. The couples would be in about the same relative condition as in 1962; individuals would be somewhat better off, but primarily because of assumed larger savings, a matter of some doubt.

Income compared with then current general living standards surely is the appropriate test. Progress in real benefits will stem from greater productivity and higher living standards. In 1980, pension performance will be measured in terms of the living standards then, not in terms of our present levels. If the elderly are comparatively little better off than today, the projected progress seems insufficient.

Changes obviously are in order.

A CLEARING HOUSE

The basic defects of private pension plans are that their coverage is not sufficiently extensive to supplement Social Security benefits (the principal gaps are among small employers), only a minority of plan participants will actually achieve benefits, benefits are too low, often because too few years of work result in benefits, and widows' benefits are practically non-existent.

If private plans are to play a major role for more than a minority of workers, they must cover more employees and something close to immediate vesting

By Professor James H. Schulz of the University of New Hampshire, to appear in the summer (1966) issue of Yale Economic Essays. The article is based on Dr. Schulz's dissertation in economics, "The Future Economic Circumstances of the Aged: A Simulation Projection of Aged Pension Income and Asset Distributions--1980.” (1966).

15 For example, he assumed that all individuals reaching retirement age under a plan were eligible for benefits. Probably more serious was the assumption that all job changes by an individual in a multi-employer plan resulted in a move to another job under the same plan. The projections of the Western Conference of Teamsters, described in the recent hearings conducted by the Joint Economic Committee, show such an assumption to be much too optimistic. It seems especially inapplicable to work which is arduous, dangerous or disagreeable. For example in longshoring a less than total disability can lead out of the industry.

16 Dr. Schulz used B.L.S. data which, as pointed out earlier, often seriously overstate benefits by using only the future service part of the benefit formula. Building on that erroneous base, he also assumed that benefit levels will follow the past trend of benefit improvements, which is at least debatable.

17 He also assumes that Social Security benefits will improve by reflecting rising wage levels, assumed to be 4 per cent a year as in recent times.