1. IS SOCIAL SECURITY'S FAMILY BENEFIT APPROACH UNFAIR TO SECOND EARNERS AND DIVORCED SPOUSES? The steady increase in the number of working women and the rising divorce rate are factors exerting substantial pressure for change in social security. The impacts of these trends have highlighted the equity problems of a social security system built to serve a more traditional population of intact, one-earner families. Working women who contribute to the system often earn little more in social security benefits in their own right than they would have received anyway as nonworking wives (who receive 50 percent of the amount of their husbands' retirement benefits without any prior contributions). There have been two liberalizations of the original rule that denied spouse benefits to divorced spouses, but there will no doubt be continued pressure for more generous treatment of former spouses. There is also likely to be increased pressure to provide benefit entitlements for nonworking wives independent of entitlements accrued by their working husbands. The basic issue is the extent to which social security should provide individual entitlements based solely on past work without regard to past or present family and dependency relationships. However, that issue may be resolved, there remains a problem of coverage for divorced spouses with no retirement credits on their own accounts. 2. DO PRIVATE PENSION POLICIES LIMIT COVERAGE AND BENEFITS FOR WORKING WOMEN? 9 Currently, older women receive little income from private pension plans. (Only 9 percent of white women age 65 or older and 2 percent of aged black women received private pensions in 1975.) Since pension plans generally have required many years of full-time work before vesting (that is, before pension income was guaranteed, regardless of future employment status), most women have not qualified. Although the standards specified in the Employee Retirement Income Security Act (ERISA) of 1974 should improve the chances of all employees, including women, to receive pension benefits, women will remain at a disadvantage if: (1) Most pension plans continue to require long-term job continuity to receive substantial benefits; and (2) pension coverage is not broadened in the female-dominated sectors of the labor market. The current structure and coverage of the private pension system reflects not only its traditional emphasis on career employees but also the greater relevance of pensions in the past to male-dominated employee groups as a bargaining objective and as an achievable benefit. Since women have longer lifespans on the average (18 years of life expectancy at age 65 compared to 14 years for men), they will suffer greater loss in real income due to the lack of inflation indexing for private pensions benefits. Given inflation at 5 percent yearly, a $1,000 monthly pension benefit at age 65 retirement would be worth only $416 in real dollars at time of death for the average woman who expects June O'Neill and Jean Vanski, "Sources of Income of the Elderly, With Special Reference to Women," Crban Institute working paper (forthcoming). to live on that pension for 18 years compared to $505 for the average man who expects to live 14 years. Differences in longevity also have raised another pension issuewhether women should receive lower benefits than men in defined benefit plans, or pay greater contributions than men in defined contribution plans due to their longer average life expectancy. Women argue that such a distinction based on sex is unfair since comparable differentials based on factors such as race, education, income level, and marital status are not applied, even though these factors are also related to life expectancy. Courts have ruled against benefit differentials, but contributions differentials are still being contested. 3. DO PENSION AND WELFARE RULES LIMIT COVERAGE AND BENEFITS FOR MINORITY GROUP MEMBERS? Problems of inadequate income tend to be worse for the aged in minority groups than generally. Census data for 1977 indicated that 36 percent of the black aged and 22 percent of the Hispanic aged had incomes below the poverty line, compared to 12 percent for elderly whites. Differences in pension coverage play a role in these income differences. The private pension system covers less than half the workers employed in private industry and provides retirement benefits to an even smaller proportion of workers. Although many workers are not protected by private pensions, black workers are especially ill-advantaged. Among workers surveyed while aged 58-63 in 1969, only 20 percent of black workers, compared with 43 percent of white, had been covered by a private pension on their longest job. Of those covered workers who had retired completely by 1974, when they had attained age 63-68, 52 percent of the black group and 77 percent of the white group received private pension benefits.10 The proportion of all black men age 65 or older receiving private pensions in 1975 (13 percent) was half the recipient rate for all white aged men (26 percent)." Some of the racial differences in private pension coverage and receipt appear to result from substantial differences in job characteristics. Black workers were much less likely to have possessed job characteristics in which there is a high probability of pension coverage and, conversely, were more likely to have been in jobs where private pensions are not common. They were also less likely to have the long tenure and recent employment necessary for the receipt of pension benefits upon retirement.12 Liberalization of the participation and vesting requirements in private plans under ERISA may result in expanded coverage and in higher receipt rates for black workers with shorter tenure and more discontinuous work histories. Greatly expanded coverage of these workers, however, will come only with their movement into jobs where private pensions are prevalent. Life expectancy raises the opposite issue for blacks as that discussed above for women. No retirement system pays differential benefits 10 Gayle B. Thompson, "Black-White Differences in Private Pensions: Findings from the Retirement History Study," Social Security Bulletin, vol. 42, No. 2, February 1979. 11 June O'Neill and Jean Vanski, op. cit. based on life expectancy by race. Since life expectancy for nonwhite males is only 64 years at birth and 72 years for nonwhite females, compared to 69 years at birth for white males and 77 years for white females, the existence of benefit differentials would increase pension benefits for blacks relative to whites. Their absence means that, for workers with a given job history, blacks are subsidizing the pension system for whites. In the welfare system, State supplementation of SSI produces a significant variation in available benefits, with the lowest payment levels occurring in the States with the highest concentrations of nonwhite recipients. For example, nonwhites account for 35 percent of aged SSI recipients nationwide, but in the jurisdictions with no supplementation of the Federal benefit, the black proportion of the caseload ranges up to 58 percent in Mississippi and 75 percent in the District of Columbia. 13 4. ARE RETIREMENT BENEFITS FOR PUBLIC SECTOR EMPLOYEES MORE GENEROUS THAN FOR THEIR PRIVATE SECTOR COUNTERPARTS? Public employee pension plans tend to be more generous than private plans in several respects: -Work force coverage is more complete. -Early and disability retirement provisions are more liberal. -Cost-of-living adjustments occur automatically for Federal retirees, and State/local retirees are more likely to have some degree of automatic inflation protection than are private pension beneficiaries. If public employee plans are more generous, such generosity may reflect the willingness of legislatures to defer costs to be borne by later generations of taxpayers and to use early retirement options to keep the average age down in the relatively stable State/local work force. While a completely accurate comparison of public and private pensions does not exist, it is claimed by private pension analysts that liberal pension features in government plans force private employers to offer costly liberalizations of their plans to remain competitive for labor. A realistic private-public comparison is not easy to delineate. First, the range of employees in terms of skill and wage levels is narrower in the public sector, with the private sector including people at both extremes of the skill and wage distribution. Second, most public employees contribute to their pension plans and most private employees do not, so overall compensation must be considered. Third, some public employees do not have social security coverage, so their pensions are not supplementary to social security as private pensions are. Fourth, some private employers also offer profit sharing and other forms of retirement savings which the public sector does not offer. And, of course, the generosity of pensions within the public sector varies a great deal depending on the level of government, the employee category, the size of the government, its tax base, and the degree of employee unionization. 13 Arthur L. Kahn and Richard A. Bell, "Distribution of Beneficiaries under the SSI Program, by Race, June 1975," Social Security Administration, Research Statistics Note No. 25, Dec. 15, 1976. 5. ARE RETIREES TREATED DIFFERENTLY BY AGE OR COHORT? Retirement policies and pension rules often treat individuals differently by age or by cohort. Examples include: The mandatory retirement age limit (now 70, raised from 65); the social security retirement test (benefit reductions for postretirement earnings are less after age 65 than before, and do not apply at all after age 72); transitional provisions and old law/new law dichotomies that exist in many pension plans because of the difficulty of uniformly applying changes in laws or rules to all participants. Thus, pension amounts and the amounts of financial gain from work vary by age and create income disparities among subgroups of the aged population. Transitions in retirement systems create differential effects among younger age groups as well. The most important example of this effect has to do with the costs and benefits of social security to workers at different ages. Workers already retired or near retirement will likely reap much more in benefits relative to the taxes they paid into the system as compared with workers now in their twenties and thirties. This effect results not only from assumptions about future benefits but also from the fact that social security is not a funded system. Since it depends on current taxes, today's taxpayers, who must support a mature system providing income to an aging population, pay more than did their parents, a difference that is not expected to be compensated for by greater retirement benefits when the younger workers retire. The lack of full inflation protection outside the social security and Federal employee systems creates a particular burden for those who live for quite long periods in retirement. It was shown earlier in this section that a fixed $1,000 pension held for 18 years (the average length of retirement for a woman who retires at age 65) would decline to $416 in real dollars with annual inflation of 5 percent. If she lived for 8 more years to the age of 91, or if she had retired at age 55 and lived the expected 26 years, the $1,000 pension would be worth $281 at time of death. Thus, for those whose retirement income is largely unprotected aganist inflation, achieving a very old age is certain to produce financial hardship unless substaintial assets or intrafamily transfers are available to such individuals. II. FINANCIAL ISSUES C. ARE RETIREMENT SYSTEMS AND PENSION PLANS ADEQUATELY FUNDED? Future cost increases growing from pressures for more adequate and fairer benefits, unless offset by cost savings, will add to funding problems that are already apparent. The inadequate funding of many pension systems, often disguised in prior years by rapid increases in contributing employees and continued economic growth, has now been exposed for all levels of government, for private pension funds, and for social security as well. A recent example was provided by the United Mine Workers pension fund, which had to curtail benefit payments during the 1977-78 coal miners' strike until the strike ended and contributions to the fund resumed. A study by the Pension Benefit Guaranty Corporation found that 40 private multiemployer plans are in danger of collapse within 5 years, and another 200 are financially troubled." It is feared that the cost of meeting ERISA's rules may precipitate plan terminations, with the PBGC proving incapable of meeting the liabilities that would result. State and local taxpayer resistance has prompted numerous efforts to curtail the cost of public employee plans. Congress enacted social security tax increases and benefit reductions in 1977 that will greatly reduce, but not eliminate, a projected trust fund deficit, but taxpayer grumbling has already sparked a search for financing alternatives. The primary funding issues in the three sectors of the pension system are: (1) How to assure the financial integrity of social security; (2) whether or not public employee plans should be fully funded; (3) the degree to which private plans will be able to meet the funding standards required under ERISA; and (4) the financial viability of the PBGC. 1. WHAT MEASURES ARE NEEDED TO ASSURE THE FINANCIAL INTEGRITY OF SOCIAL SECURITY? The substantial increases in payroll taxes enacted in 1977, together with the "decoupling" of the benefit formula from automatic indexing and other benefit changes, largely erased the deficit that had been projected for the social security trust funds. The 1979 trustees' report for the cash benefit programs indicated a remaining long-run deficit of 1.2 percent of payroll using the intermediate assumptions for economic and demographic trends. (Under the extreme cases projected, the long-range balance could vary from a surplus of 0.89 percent of payroll to a deficit of 4.69 percent.) To increase payroll taxes by enough to eliminate the projected deficit under the intermediate assumptions would amount to a 0.98 percentage point increase over and above the taxes already legislated (or a 4.48 percentage point increase under the pessimistic assumptions). However, further legislation to curb program costs could meet all or part of the deficit as well. Savings such as those proposed by President Carter in his 1980 budget would contribute to a reduction of the deficit, for example. And consideration of the long-term financing needed by social security must allow for the tremendous impact that relatively small changes in real economic growth, fertility, mortality, or net immigration have on projected revenues and benefits. Less orthodox approaches to elimination of the deficit that have been discussed recently include: -Enactment of a new tax, such as a value-added tax, dedicated to social security. -Greater use of general revenues to pay for benefits within the current system. Conversion of the financing of some portion of social security (e.g., medicare or disability benefits) from payroll taxes to general revenues; and -A restructuring of the entire benefit system, with general revenues providing a base of old-age income through per capita or needrelated payments, while payroll taxes pay for a strictly earningsrelated retirement benefit. (These financing alternatives are discussed further in sections D and K.) 14 "Multiemployer Study Required by P.L. 95-214," Pension Benefit Guaranty Corporation, July 1, 1978. |