Today's pension plans: how much do they pay

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

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Inclusion of Social Security benefits also changes the relationship between the size of the replacement rate and the preretirement earnings level. Private pension plans, on average, yield slightly higher replacement rates for white-collar workers, when earnings rise above $20,000 (table 3). After adding Social Security benefits to the replacement rate calculation, however, the highest replacement rates are at the lower earnings levels. As already noted, the Social Security benefit formula provides higher replacement rates to lower wage earners.

If the retired worker has a husband or wife age 65 or over who is not eligible for a Social Security benefit on his or her own account, an additional benefit from Social Security equal to 50 percent of the worker's benefit is payable to the spouse. Adding this benefit to the worker's private pension and Social Security payments results in the average replacement rates presented in table 6. Here, except in the high income and short service examples, the data typically show replacement rates of 60 percent or more. Indeed, workers with relatively low earnings and long service may have all or nearly all of their preretirement income replaced by combined private pension and Social Security benefits when the latter includes an additional amount for the spounse.

APPENDIX: Analyzing pension plans

This study of pension benefit levels follows one of a number of alternative approaches to examining private pension plan provisions. A common approach is to review individual plan provisions, such as vesting requirements, early and normal retirement ages, benefit formulas, and pre- and post-retirement survivor options. This approach provides a wealth of detail about plan provisions but does not permit summarization on an overall plan basis.

Such summarization is possible through examination of amounts employers spend on funding their pension liabilities, either in terms of dollars per employee per year, cents per hour worked, or percent of total compensation outlays. Employer cost levels, however, are commonly influenced not only by plan provisions, but also by such characteristics of the covered work force as age, length of service, and earnings history and the actuarial assumptions used in financing individual plans.

The approach used here looks at the level of benefits available under plans in effect in 1984. It focuses on the pensions payable to workers retiring on January 1, 1984, under the latest (current service) benefit formulas of their pension plans at that time.

Aside from the pension formula itself, retirement benefits may be affected by possible coordination of private benefits with Social Security payments, limits on years of credited service, and minimums and maximums on benefits. These were takne into account in calculating retirees' pensions for this analysis. Also, many plans had more than one pension formula, and specified use of the formula providing the highest benefit for each worker's circumstances. When multiple formulas were found, each alternative within a plan was examined and, for each combination of years of service and earnings considered for study, the formula selected was the one yielding the highest pension.