Pensions in the U.S. Economy

This volume begins with a series of four papers on retirement saving of individuals and the saving which results from corporate funding of their pension plans. The first paper discusses individual retirement accounts (IRAs). The second considers reasons why more individual retirement saving is not used to purchase annuities. The third examines the reasons for recent reductions in saving through private pension plans. The fourth deals with poverty among retirees, whose saving preparation for retirement may have been inadequate. Following are two papers that address particular aspects of pension plans themselves: The first considers the relative merits of defined benefit versus defined contribution plans from the perspective of the employee wishing to avoid retirement income uncertainty. The second is an empirical investigation of the relationship between pension plan provisions and job turnover.

RePEc: Research Papers in Economics, 1983

Old age income security is one of society's most pressing concerns. A decline in family support of the aged, major increases in the length of retirement, and social security's long-term financial difficulty are all reasons for the growing anxiety. Consideration of current and past socioeconomic data provides a solid basis for this anxiety. Between 1950 and 1970 the fraction of the aged living with their children declined from 31 to 9 percent.' Today fewer than 3 percent of elderly households receive income from their children.z These contributions represent less than 1 percent of the income of the e l d e r l ~. ~ Life expectancy for males at age 25 is 46.9 additional years, up from 44.6 years in 1 950.4 Despite this increase, the average number of years worked by 25-year-old males has declined by 3.13 years.5 Together, these changes have almost doubled the expected duration of retirement and other nonworking periods for males from 5.93 years to 11.47 years. The ratio of nonworking to working years for males is now .32, more than twice the 1950 value. For females, growth in the expected work span, associated with dramatic postwar increases in labor force participation, has exceeded growth in the expected life span by 3.26 years. However, if one measures female work years on a male-equivalent earnings basis, the average young adult's expected nonworking period has increased by 3.60 years.6According to this measure, 25-year-olds can now expect to spend 1.2 years out of the work force for every year they spend in the work force.' Difficulties in financing an extended retirement without major family support have been eased considerably by sizable increases in real social security benefits. These benefits now represent the major source of income for 54 percent of the aged.8 However, the continued reliance on social security benefits as the primary source of old age income support is becoming increasingly unlikely. Demographic changes continue to place the Social Security System in a long-term financial crisis. Changes in fertility rates are expected to lower the ratio of social security contributors to beneficiaries from the current value of 3.2 to 1.5 by the year 2040.9The 1983 social security legislation notwithstanding, unless additional measures are enacted shortly, social security tax rates, including health insurance tax rates, could rise as high as 25 percent by the early part of the next century to meet projected benefit payments.lo The rapid growth of private, state, and local pensions in the 1950% 1960s, and 1970s represents a natural response to changes in family support of the elderly, an expansion of the retirement period, and uncertainty concerning the amount of retirement income one can expect from social security. Special tax incentives, a recognition of the advantages of group insurance policies, and the use of fringe benefits to avoid periodic government wage controls are important additional explanations of pension growth. The American pension system is, however, more than simply the inevitable product of changing social, demographic, and economic conditions. Pensions themselves are playing an increasingly important role in shaping social conditions and altering economic behavior. Pensions and the Economics of Aging 1 1.3 The Emerging Role of Pensions in the American Economy: Postwar Patterns of Growth Private, state, and local pensions now cover over 45.28 percent of the U.S. labor force. In 1950 the figure was 19.93 percent. Coverage of private wage and salary workers more

1984

Pensions influence retirement decisions. The analysis provides a framework for assessing the phenomenon. The qualitative features of most defined benefit pension plans in the United States, as the first section demonstrates, can be used to induce optimal retirement choices. Pensions are viewed as a form of forced savings; their purpose is to enable the worker to "commit himself" by making it in his own self-interest to retire at an appropriate age. The remaining sections examine the use of pensions in populations that are heterogeneous with respect to such features as disutility of work or expected lifespan.

1999