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Today's pension plans: how much do they pay

Monthly Labor Review, Dec, 1985 by Donald G. Schmitt

Under pension plans of medium and large firms, employees retiring on January 1, 1984, at age 65 after 30 years of service would have received monthly pensions averaging from $385 for those earning $15,000 in 1983 to $886 for those earning $40,000. The corresponding range for employees retiring after 20 years of service was $263 to $623. Social Security benefits, however, would significantly raise these levels of retirement income.

these data were calculated from benefit formulas of 832 pension plans in the 1984 Bureau of Labor Statistics survey of employee benefit plans. The annual study covers the United States (excluding Alaska and Hawaii) and private industry establishments employing at least 50, 100, or 250 workers, depending on the industry. The 1984 survey sample consisted of 1,499 establishments, designed to statistically represent 21 million employees in 45,000 establishments.

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BLS field representatives obtained from survey respondents the written descriptions of pension plans that, under the Employee Retirement Income Security Act (ERISA), plan administrators are required to provide to covered employees. These descriptions include the formulas used in calculating employee benefits. Using the benefit formula for current service, BLS calculated pensions that would have been paid to employees retiring on January 1, 1984, under each plan by making alternative assumptions regarding the retirees' length of service and earnings history. (See appendix.)

According to the 1984 survey, 82 percent of the active workers in medium and large firms were covered by private retirement pension plans financed wholly or in part by their employers. The plans include defined benefit plans, money purchase plans, and career contribution plans. The money purchase and career contribution plans, each accounting for only 2 percent of the total pension plan participants, were excluded from this analysis. Approximately 16.5 million workers participated in plans used in the calculation of the basic retirement benefits discussed here. Supplemental pension plans, available to a small number of workers in addition to their basic plan, also were excluded.

Finally, capital accumulation plans are not represented in this analysis. The number of these plans--which include profit-sharing, savings and thrift, and various stock plans--has increased in recent years. Except for profit-sharing, these plans are relatively new, and it is difficult to determine their impact on retirement income. Moreover, many allow employees to obtain some portion of the benefits prior to retirement.

Pension levels

Table 1 shows averages of monthly private pension payments calculated from the benefit formulas of plans surveyed in 1984. Because the formulas take account of length of service and, commonly, preretirement earnings as well, annuities under each plan were determined for 42 combinations of service and earnings. In all cases, the data apply to workers retiring on January 1, 1984, at age 65.

Average benefits varied widely among the age-service combinations. The range for all pension plan participants was $137 monthly for retirees with 10 years of service and earning $15,000 in 1983 to $1,075 for retirees with 40 years of service and final earnings of $40,000.

Nevertheless, patterns did appear in the findings. Average payments increased, for examle, with each rise in service and earnings. The amount of increase, however, grew smaller as the length of service increased, particularly for service beyond 30 years. This decreasing return for extra years of service mainly reflects provisions that limit the number of years credited in the payment calculation. One-third of all pension plan participants were covered by such provisions. Also contributing to this result are formulas that provide a lower benefit rate after specified years of service, for example, 1.5 percent of earnings per year of service up to 20 years, and 1 percent thereafter.

At each service period examined, benefits increased with the assumptions of higher final earnings. Moreover, at the all-participant level, for a given increase in earnings, the dollar amount of the pension rise was greater at higher earnings levels. Thus, for employees retiring after 30 years of service, the average pension increased by $71 a month when earnings rose from $15,000 to $20,000 and by $114 when earnings moved from $35,000 to $40,000. In relative terms, when worker earnings increased from $15,000 to $20,000 (33 percent), benefits went up by 18 percent; the considerably smaller percentage growth in earnings from $35,000 to $40,000 (14 percent) was accompanied by a 15-percent increase in pensions.

The relationship between benefit levels and earnings reflects the influence of a number of pension plan features. Benefits as a percent of preretirement earnings (replacement rates) are raised for retirees at the lower end of the earnings distribution when pension plans guarantee minimum benefit levels. Benefit replacement rates are also raised for low-wage earners when plans contain dollar-amount benefit formulas that provide annuities independent of prior earnings. Conversely, provision for maximum benefit levels reduces the return to retirement plan participants with relatively high earnings. High-wage earners do have an advantage when so-called step-rate excess formulas are in effect; these formulas calculate benefits as a percent of prior earnings and specify a higher percentage return on that part of earnings above a specified level than below that level.

Business Services Industry

Today's pension plans: how much do they pay

Monthly Labor Review, Dec, 1985 by Donald G. Schmitt

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