Trends in retirement eligibility and pension benefits, 1974-83
Reduced age requirements for retirement and improved pension payments emerged as major changes between 1974 and 1983 in a sample of pension plans analyzed by the Bureau of Labor Statistics. A group of 187 pension plans either fully or partially paid for by employers was studied. The plans covered approximately 6.7 million workers in 1982, and were mainly those of large employers.1 Eighty-seven percent of the pension plans studied covered 5,000 workers or more in 1982, with 33 percent covering at least 25,000 workers.
The plans were all those common to two BLS sample surveys: (1) a 1974 survey of pension plans whose provisions were filed with the U.S. Department of Labor under the terms of the Welfare and Pension Plan Disclosure Act of 1958, as amended; and (2) the 1983 Employee Benefits Survey of medium and large firms.2 Although the plans in this analysis are not a representative sample of all pension plans, they do cover a large number of union and nonunion workers and illustrate the changing provisions for retirement during the 1974-83 period.
Age and service requirements
Pension plans typically require employees to have attained a certain age, a certain number of years of service, or both, to qualify for retirement benefits. Or, they may specify that the sum of the employee's age and years of service equal a certain number, such as 85. Pension plans often specify more than one requirement; that is, they have "alternative requirements.' In such cases, this analysis uses the requirement allowing retirement at the earliest age.
Normal retirement. Over the period studied, many of the plans lowered their age requirements to permit normal retirement prior to age 65. In 1974, 103 of the 187 plans provided for such benefits and by 1983, the number rose to 149. (See table 1.) Increased length-of-service requirements, however, typically accompanied the lowered retirement age. In 1974, 59 plans had no service requirement, whereas 30 plans required 30 years of service. By 1983, the pattern was reversed: 40 plans had no service requirement, while 50 required 30 years of service.
Where an age 65 requirement was eliminated from a plan, the new age was usually 62 or less. The following tabulation summarizes the changes in age and service requirements, using age 62 as a point of reference:
In 1983, most of the 148 plans allowing normal retirement at age 62 or earlier fell broadly into two groups; those permitting retirement at 55 with no more than 30 years' service (55 plans) or those requiring age 60 or 62 (83 plans). The largest growth between 1974 and 1983 occurred in the first group--rising from 29 to 55 plans, or from 16 to 29 percent of the plans studied.3
Alternative requirements. In many instances, plans reduced the normal retirement age to what previously had been an early retirement age. But, as noted above, more years of service were required at these younger ages. At the same time, the plans retained the prior requirements--such as age 65 and no stipulated years of service--as alternatives. This protected older employees with short service.
A total of 131 plans had alternative age and service requirements in 1983, a 54-percent increase from 1974. Usually, age 65 was the alternative retirement age in plans with normal benefits at age 62; retirement by age 62 or 65 was often an alternative in plans with normal benefits prior to age 62. Most plans did not specify any length-of-service requirements for retirement at age 65, but retirement at age 62 typically required 10 to 15 years' service.
Early retirement. Nearly all the plans in 1974 and 1983 permitted retirement before the normal retirement age, but with a reduction in benefits. However, as table 2 indicates, many plans revised the age and service requirements for early retirement during this period.
The overall effect was to lower age and service qualifications. Twelve fewer plans in 1983 required employees to be at least age 60 before being eligible for early retirement, and none required age 62. In 1983, 158 plans allowed retirement at age 55, up from 143 in 1974. Among plans permitting early retirement at age 55, the average years-of-service requirement dropped from about 10 years and 3 months to about 7 years and 2 months in 1983. These developments are shown in the following summary of age and service requirements for early retirement:
To permit evaluation of changes in pension benefit formulas, we calculated normal and early retirement benefits for hypothetical employees retiring at age 65 on January 1, 1975, and January 1, 1983, after 20 or 30 years of service.4 Benefits were computed using three earnings assumptions for the employees' final year to work. For the 1983 retirees, $20,000, $30,000, and $40,000 were selected to represent workers at lower, middle, and upper earnings levels in 1982, the last year before retirement. For the 1975 retirees, earnings of $11,000, $16,500, and $22,000 were derived by adjusting the 1982 figures downward to reflect the 81-percent average earnings growth from 1974 to 1982 as calculated by the Social Security Administration.5
Table 3 summarizes our computations for three employee groups: 1) professional and administrative employees; 2) technical and clerical employees; and 3) production employees. To develop data by employee group, we averaged calculated benefits for individual pension plans across all plans covering employees in that group. (Averages were not weighted by the number of plan participants.6) Also included in the table are replacement rates, which express the pension benefit as a percentage of preretirement earnings. Replacement rates yield insights into the adequacy of pensions in maintaining the worker's preretirement standard of living. In this analysis, the calculated pension payments were divided by the corresponding final-year earnings levels chosen for each year.7
Normal retirement benefits. Private pension benefits replaced, on average, a higher portion of preretirement income in 1983 than in 1975. For blue-collar (production) workers retiring at age 65, replacement rates typically increased by 5 or 6 percent over the time span reviewed. For example, the replacement rate for production workers with 30 years of service was 25.5 percent for the middle earnings level in 1975, compared with 27.0 percent in 1983. For white-collar workers (professional-administrative and technical-clerical), replacement rates were relatively unchanged at the lowest earnings level, but increased 2 to 3 percent at the higher levels. Replacement rates for technical and clerical workers with 30 years of service, for example, rose from 29.3 percent for the middle earnings level in 1975 to 30.1 percent in 1983--an increase of 3 percent. (See table 3.)
The growth of income replacement rates was much more pronounced when Social Security benefits were added. Total replacement rates (private pension plus Social Security) typically increased by 12 to 14 percent for blue-collar workers and 10 to 14 percent for white-collar workers. For example, the total replacement rate for production workers with 30 years of service was 48.5 percent for the middle earnings level in 1975, compared with 55.2 percent in 1983. During these years, the Social Security taxable wage base was increased from $13.200 to $32,000. In addition, Social Security benefits were periodically improved and the method used to determine average earmings (which affects benefit calculations) was modified.
Table 3 also shows that pension replacement rates tended to decline for blue-collar workers as earnings increased-- just opposite the pattern for white-collar workers. This reflects differences in the pension benefit formulas between the two groups. Most blue-collar workers were covered by dollar-amount benefit formulas, which yield pensions independent of earnings levels. These plans base the monthly pension benefit on a specified dollar amount (for example, $20) for each year of service. Most white-collar workers, however, were in plans with terminal earnings benefit formulas, which increase pensions as earnings rise. These plans base the pension benefit on the worker's earnings in the last or highest few (usually 3 or 5) years of service.
Benefit reductions for early retirement
Early retirees receive less benefits than their counterparts retiring at the normal retirement age because, on average, they are expected to receive plan payments over a longer time, and their pension funds have accumulated for fewer years. Early retirement benefits are determined by first calculating the normal retirement benefit payable, given the employee's earnings and service, and then applying a "reduction factor' to this annuity. Reductions are either "actuarial' or "arithmetic.' Actuarial reductions adjust fully for the longer payment period by considering the employee's age and life expectancy at retirement. Arithmetic reduction factors (which include uniform percentage reductions for each year prior to normal retirement age, reductions varying by age bracket, reductions varying by service, or some combination of these) are not actuarial--although in some instances their effects may approximate the results of using actuarial tables.
Considerable change occurred between 1974 and 1983 in the approach used to calculate reductions for early retirement. As table 4 indicates, most of the 1983 plans specified uniform percentage reduction factors for each year below a specified age; in 1974, the most common approach called for reductions varying by age.
Nevertheless, the changes that occurred had little effect on the rate of reduction. For employees taking early retirement at age 55 after 30 years of service, the average reduction in 1983 was 4.4 percent for each year between normal retirement age and age 55, about the same as in 1974 (4.3 percent).
The total percentage reduction (as distinguished from the reduction per year below normal retirement age) did decline, however, because of a drop in the normal retirement age from age 63.5 on average in 1974 to 62.6 in 1983. In the plans studied, pensions for early retirement in 1974 at age 55 after 30 years of service were, on average, 36.6 percent less than normal retirement pensions for the same length of service. The comparable reduction in 1983 was 33.5 percent.
On must consider, therefore, the joint effect of reduced age requirements for normal retirement and changes in early retirement reduction factors. The following sections examine changes in benefits to employees retiring at specified ages--62 and 55. The changes, of course, also reflect alterations in formulas for calculating benefits.
Benefits for retirement at specified ages
Age 62. Pensions are usually lower for workers retiring at age 62 rather than age 65 because, for some plans, age 62 is an early retirement age, thereby triggering reduction factors. Total retirement benefits (pensions plus Social Security) are also lower because Social Security benefits at age 62 are only 80 percent of those payable at age 65.(8) For these reasons, the benefit levels and replacement rates shown in table 5 are lower than those shown in table 3.
However, the pace of increase in age 62 private pension replacement rates was double that for workers retiring at age 65. Pension replacement rates grew by 9 to 11 percent for blue-collar workers and by 4 to 12 percent for white-collar workers retiring at age 62. For example, the replacement rate for production workers with 30 years of service was 24.0 percent for the middle earnings level in 1975, compared with 26.2 percent in 1983--an increase of 9 percent. This stems largely from the lowering of age requirements for normal retirement. Because many of the plans in the study lowered the normal retirement age from 65 to 62 or below, more workers could retire at age 62 with unreduced benefits in 1983 than in 1975.
As a result of the changes in provisions, the average reduction for retirement at age 62, compared with benefits at age 65, was less in 1983 than in 1975. Pensions for age 62 retirees with 20 years of service were typically 88 to 96 percent of the pensions for age 65 in 1975, compared with 94 to 99 percent in 1983. (See table 5.) A similar pattern held for workers with 30 years of service.9
Age 55. For most plans, age 55 is an early retirement age. However, Social Security benefits are not payable to workers until they reach age 62. Thus, the benefit levels for age 55 retirees in table 6 are significantly lower than those shown for age 62 retirees in table 5.
Between 1975 and 1983, increases in pension replacement rates for workers retiring at age 55 varied considerably. For workers with 20 years of service, replacement rates increased by 3 to 6 percent for blue-collar workers and 2 to 7 percent for white-collar workers--both substantially below the rate of increase for age 62 retirees. For workers 55 years of age with 30 years of service, replacement rates increased by 11 to 14 percent for blue-collar workers and 11 to 17 percent for white-collar workers. These divergent trends are primarily attributable to plans permitting unreduced pensions for workers with 30 years of service. In 1983, 55 plans permitted normal retirement benefits to employees age 55 or younger with 30 years' service, compared with 29 plans in 1974. Unreduced pensions were provided to employees age 55 or under with less than 30 years' service by only two plans in 1983 and three plans in 1974.
Again, a similar pattern emerges when comparing pension benefits payable at age 55 with those payable at age 65. (See table 6.) Over the period studied, improvements in benefits at age 55 resulted from (1) the increase in plans applying early retirement reduction factors from ages 60 or 62 to age 55 rather than from ages 62 or 65 to age 55 (for example, 25 plans had such changes for professional and administrative employees), and (2) the increase in plans providing normal benefits at age 55 and 30 years' service rather than at age 62 (12 plans for professional and administrative employees).
Supplemental pension benefits
Some retirees receive benefit payments in addition to those provided by their pension plan's regular benefit formula. These supplemental pension benefits help to compensate early retirees for the lack of Social Security payments.10
Plans providing supplemental benefits for early retirement at employee option covered 11 percent of all plan participants in the BLS 1984 Employee Benefits Survey, and plans providing supplements for normal retirement prior to age 62 covered 10 percent of all participants in BLS' 1982 survey.11 Such plans usually offered supplemental payments for employees retiring at age 55 or prior to receipt of reduced Social Security benefits at age 62. Supplemental benefits were frequently equal to or more than the Social Security amount, and either compensated for early retirement reductions, or for the absence of Social Security benefits. The effect was to provide approximately the same total benefit before and after receipt of Social Security benefits.12
Finally, some employers offer "open-windows' for early retirement, typically at age 50 to 55 with 10 years of service, either with supplements to age 62 or more liberal early retirement benefits. Such inducements are offered for temporary periods ("windows') of 2 to 6 months at a time. These opportunities are provided to cut payroll costs during periods of recession, adverse business conditions, or corporate reorganizations. For example, a recent Conference Board survey reported that 36 percent of surveyed respondents offered such "open-windows' at least once from 1970 to 1983. Two of five companies offering such retirements had made more than one offer, with a concentration of the most recent offers in 1982 and 1983.(13)
While financial inducements to retire prior to age 62 do not always make up for the absence of Social Security benefits, a significant group of plans does offer compensating benefits. These include plans with full benefits at age 55 and 30 years' service, plans with normal or early retirement supplements to age 62, plans with temporary "open-windows,' and plans with "special early retirement' clauses.14
A 1985 update
Of the 187 pension plans in this study, 123 reappeared in the 1985 Employee Benefits Survey sample. Changes in age/service requirements for early or normal retirement and in early retirement reduction factors were infrequent since 1983. However, changes in benefit formulas affected 36 plans. A total of 32 plans improved benefits--26 by increasing dollar amount formulas. Changes in benefit formulas affecting three plans could have a negative effect on pension payments, by lowering formula yields or deleting alternative formulas. Although most of the 26 plans with improved dollar-amount formulas raised the rate of benefit accrual by less than 10 percent, nine improved benefits by an average of 48 percent.
1 1982 was the last year in which participation data were available for most plans from the files of the Department of Labor's Pension and Welfare Benefits Administration.
2 The latter study is part of a series of annual surveys conducted in private sector establishments employing at least 50, 100, or 250 workers, depending on the industry. Industrial coverage includes: mining; construction; manufacturing; transportation, communications, electric, gas, and sanitary services; wholesale trade; retail trade; finance, insurance, and real estate; and selected services. Findings for 1983 are reported in Employee Benefits in Medium and Large Firms, 1983, Bulletin 2213 (Bureau of Labor Statistics, 1984). For information on the background and conduct of the survey, see Robert Frumkin and William Wiatrowski, "Bureau of Labor Statistics takes a new look at employee benefits,' Monthly Labor Review, August 1982, pp. 41-45.
3 This group includes plans specifying age or service requirements, or both, and those calling for a designated sum of age and service.
4 The 1974 survey studied plan provisions in effect as of September 1974. Because January 1, 1975, was closer to this reference date than January 1, 1974, it was chosen as the hypothetical retirement date. Similarly, January 1, 1983, was chosen as the retirement date closest to the plan provisions surveyed in March of 1983.
5 Social Security Bulletin, Annual Statistical Supplement, 1983-1985 (U.S. Department of Health and Human Services, Social Security Administration), table I, p. 30.
6 Where a pension plan contained more than one formula, the formula used was that which provided the greatest benefit at a given earnings level and length-of-service combination.
7 See the appendix to the article by Donald G. Schmitt, "Today's pension plans: how much do they pay?' Monthly Labor Review, December 1985, pp. 19-25, for an explanation of the methodology and assumptions used in calculating pension benefits at age 65. The tabulations in the present article differ from Schmitt's mainly by inclusion of formulas based on contributions as well as other benefit formulas.
8 Social Security benefits are reduced by 6.7 percent for each year payments begin prior to age 65.
In an effort to modify the trend towards earlier retirement, the Social Security Act was amended in 1983 to move the normal retirement age to age 66 and age 67, commencing in the year 2000. See the Social Security Bulletin, Annual Statistical Supplement, 1983, p. 12.
9 The other patterns noted previously for age 65 retirees were generally found for age 62 retirees: replacement rates declined as earnings increased for blue-collar workers but rose for white-collar workers; replacement rates increased even more sharply for workers with 30 years of service compared with those with 20 years; and replacement rates were higher for blue-collar than white-collar workers at the lowest earnings level, but the opposite was true at the two highest earnings levels.
10 According to a 1982 survey by Charles D. Spencer & Associates, monthly supplements were the "most frequently offered inducement' for early retirement. See EBPR Research Reports, January 1983, pp. 110.11.1-11.
11 See Employee Benefits in Medium and Large Firms, 1984, Bulletin 2237 (Bureau of Labor Statistics, 1985), p. 12, for supplements for early retirement. Information on normal retirement supplements is based on unpublished tabulations from the 1982 Employee Benefits Survey.
12 Such benefits are separate from level income options, which reduce pension benefits at age 62 to compensate for higher benefits during the initial years of retirement. Another 4 percent of plans in the BLS 1981 Employee Benefits Survey had formulas integrated with Social Security, but for early retirees the Social Security offsets were delayed to age 62 or 65. Such provisions had the effect of offering a supplemental benefit for the period of such postponement, and frequently compensated for the reductions required for early receipt of benefits. See Donald Bell and Diane Hill, "How Social Security payments affect private pensions,' Monthly Labor Review, May 1984, p. 20.
13 Shirley H. Rhine, Managing Older Workers: Company Policies and Attitudes, Report No. 860 (New York, The Conference Board, 1984), pp. 10-11. See also Elizabeth L. Meier, Early Retirement Incentive Programs: Trends and Implications, Public Policy Document, 8604 (Washington, American Association of Retired Persons, December 1986).
14 For a discussion of trends toward earlier retirement and the implications for public policy, see Employee Benefit Research Institute, Economic Incentives for Retirement in the Public and Private Sectors, EBRI Issue Brief No. 57 (August 1986); and General Accounting Office, Retirement Before Age 65: Trends, Costs, and National Issues, Report GAO/HRD-86-86 (Washington, 1986).
Table: 1. Minimum age and associated service requirements for normal retirement under 187 private pension plans, 1974 and 1983
Table: 2. Minimum age and associated service requirements for early retirement under 187 private pension plans, 1974 and 1983
Table: 3. Average retirement benefits for hypothetical employees retiring under 187 private pension plans at age 65 on January 1, 1975, and January 1, 1983, with 20 and 30 years of service by specified final year's earnings
Table: 4. Early retirement reduction factors in 187 private pension plans, 1974 and 1983
Table: 5. Average retirement benefits for hypothetical employees retiring under 187 private pension plans at age 62 on January 1, 1975, and January 1, 1983, with 20 and 30 years of service, by specified final year's earnings
Table: 6. Average retirement benefits for hypothetical employees retiring under 187 private pension plans at age 55 on January 1, 1975, and January 1, 1983, with 20 and 30 years of service, by specified final year's earnings…