However, the normal benefit formulas of many private pension plans take into account the payments to be received by the retired worker under the Federal program, by the use of a "social security offset."

Slightly less than a third of the 100 plans studied contained offsetting provisions (all, half, or a stipulated amount) applying to either the basic or minimum formula or both. This feature has an impact on the amount of benefit paid by the plans if changes in Federal primary social security benefits are later enacted. If total benefit levels are fixed under such plans, any increase in social security payments results in a decrease in the amount of money paid from the private plan. To illustrate: A plan provides $140 monthly, including primary social security benefits, at age 65 with 30 or more years of service. If the worker's primary social security benefit amounts to $108.50 (the present maximum), the plan will pay $31.50. It is obvious that any increase in primary social security benefits would decrease the amount paid by the private plan. Under plans in which only half of the social security benefits were offset in the benefit formula, the worker will benefit, to some extent at least, by any future increase in 30cial security benefit levels. Another approach was to freeze the social security deduction on the basis of the law in effect at the time the plan was established or negotiated. In this manner, all future increases in social security benefits will accrue to the worker.

Without such a direct offset, the benefit formula may be designed to take into account differences in the amount of social security benefits that workers at different earnings levels may expect to receive. This was accomplished in the normal benefit formula of some plans by application of a smaller percentage (e. g., 1 percent) to the first $3,000, $3,600, or $4,200 of annual earnings, and a larger percentage (e. g., 2 percent) to earnings above such amounts, for each year of credited service. The usual reason for this approach is to counteract the relative advantage of lower paid workers under the social security benefit formula in terms of the proportion of preretirement income received after retirement. In some cases, benefit formulas of this type did not keep pace with changes in the maximum taxable wage base under the Social Security Act. On the other hand, some plans were amended to allow automatic adjust

ment of the benefit formula in case of any future changes in the maximum taxable wage base. For example, one plan provided "a monthly contributory annuity equal to 1 percent of [the worker's] basic monthly salary in excess of the amount subject to social security tax. . . .

Variable Annuity and Cost-of-Living Plans. New types of plans receiving increasing attention in the pension planning field include variable or equity annuity plans and escalator plans which adjust annuities to changes in the Bureau's Consumer Price Index. One plan of each type was included in this study.

The variable or equity annuity plan consists basically of two parts-the benefit formula, which follows the usual pattern and provides a fixed benefit, and a variable benefit formula which adjusts the amount of benefit in accordance with the investment experience of the fund allocated to this portion of the plan.

In the cost-of-living-type plan, the normal benefit formula is geared to the Consumer Price Index. In the plan studied, the annuity resulting from application of the basic benefit formula was adjusted at retirement, and periodically, thereafter, to reflect changes in the Consumer Price Index. In a broader form (not covered in this study), a cost-of-living plan may adjust benefits as they are accrued to reflect changes in the price index as well as adjust retirement income after retirement, as just described.

Amount of Normal Retirement Benefits. In order to evaluate and compare pension plans, it is necessary to compute the amount of benefits that the plans are expected to yield, assuming uniform conditions and certain arbitrary standards so that plan benefits are on a comparable basis. For this study, the following conditions and standards were adopted:

1. The worker retires at age 65.

2. The assumed service periods are in terms of future service (e. g., a worker retiring 25 years from now). Pension plan yields were projected into the future because past service credits may vary among workers covered by the same plan and because the procedure of dealing with past service varies so widely among plans.

3. In order to provide illustrative amounts, benefits were computed on the basis of arbitrarily

selected average annual earnings levels (assumed to be constant throughout the period of service) and specific periods of credited future service. Selected for this purpose were average annual earnings levels of $3,600, $4,200, and $5,000, and future service periods of 25, 30, and 35 years. Current maximum primary social security benefits for the selected average annual earnings levels ($98.50 for average annual earnings of $3,600, and $108.50 for $4,200 and $5,000) were included to provide the combined private-Government level of retirement benefits.

4. Although some benefit formulas were independent of primary social security benefits, the private plan benefit was combined with maximum primary social security benefits in all cases, so that all plans would be on a comparable basis."

Of the 100 plans covered (which include 14 contributory plans), more than half will provide the $3,600-a-year man with 25 years of service with a total retirement income (including the primary social security benefit) equal to at least half of his pay prior to retirement. (See accompanying table.) At the $5,000 level, with the

• Subtracting $98.50 and $108.50 from the illustrative amounts shown in the accompanying table will not necessarily provide the benefit amount paid by the plan itself to an individual worker. Under plans which provide a benefit level including primary social security benefits, workers who do not receive maximum primary benefits may receive more from the private plans than such subtraction would indicate.

same service, about a fourth of the plans assure the retiree of half or more of his pay. At 30 and 35 years, a similar disparity in proportion of income received by lower and higher income workers prevails in general. The relatively favorable treatment of the lower paid workers under the social security benefit formula accounts, in part, for this difference. Other factors include the influence of uniform benefit plans and plans relating benefits to service alone.

Early Retirement Benefits

In almost all of the 71 plans which contained early retirement provisions, the normal benefit formula was used in the computation of the benefit amount. In most cases, the figure determined by the use of this formula was then reduced to reflect the longer period of benefit payment which would result from early retirement and the shorter period of fund accumulation for the worker involved. This reduction was either an actuarial reduction (i. e., computed from actuarial tables) or a mathematical reduction. A mathematical reduction may reflect a true actuarial reduction, or it may be determined through collective bargaining on other grounds. For example, a plan provided a normal retirement benefit equal to $2.25 multiplied by years of

credited service, exclusive of primary social security benefits. For a worker who retired prior to age 65, this benefit was reduced 0.6 percent for each month his age was under 65. Under this plan, a worker who retired at age 60 with 25 years of service received $67.50 reduced by 36 percent, or $43.20 a month.

When the normal retirement formula included primary social security benefits, the provisions of some plans provided that the estimated social security payment to which the worker would be entitled upon reaching age 65 would be deducted from the computed normal benefit level, subject to the type of reduction for early retirement previously described. Although early retirement benefits were payable immediately in all plans, a significant number of plans allowed the worker to postpone receiving retirement benefits until he reached the normal retirement age stipulated in the plan, at which point the normal benefit formula would apply, with service credits calculated up to the date of actual retirement.

The early retirement provisions of 20 plans contained a level retirement income option (i. e., a social security adjustment option). The purpose of this optional method of computing the benefit is to provide a level income throughout retirement, although primary social security benefits are not available until age 65 (age 62 for women). A larger plan benefit than is actually due under the regular formula is granted until the primary social security benefit is received, so that monthly payments received prior to that time are equal to those received under the reduced plan benefit together with the primary social security benefit.

Disability Retirement Benefits

In the 70 plans providing disability retirement benefits, there were many variations in the formulas used to determine these benefits. Similar to early retirement provisions, some plans based the benefit on the normal benefit formula, either in full or in reduced amount. Most plans in this study, however, adopted other approaches. Some plans provided uniform monthly benefits; others multiplied a uniform amount by years of credited service. In addition, many plans provided for minimum monthly benefits. Generally,

the disability benefit formulas were more liberal than those under early retirement provisions, presumably because the disabled worker is forced to retire for reasons beyond his control.

The amendment to the Social Security Act in 1956 providing disability benefits for the first time to qualified workers from age 50 to 65 had a definite influence on the disability formulas of many private pension plans. Some plans in this study reduced plan disability benefits by all or a part of any social security disability benefit the worker would receive. For example, plans in the basic steel industry provided that the worker receive the greater of three separate calculations: (1) $90 including the social security disability benefit; (2) 1 percent of average monthly earnings during the 120 months immediately preceding disability multiplied by years of continuous service, less the smaller of $85 for the social security disability benefit or the actual social security benefit in a workmen's compensation case, or (3) $2.50 times years of service after October 31, 1957, $2.40 prior to such date (years not to exceed 30), exclusive of the social security disability benefit. At age 65, under the plans, the benefit is recomputed on the normal retirement basis.

When a disability pensioner reaches age 65, the benefit received is to be recomputed on the basis of the normal benefit formula in more than a third of the plans. However, subsequent to the 1956 amendment to the Social Security Act providing disability benefits to qualified workers, some plans were amended to provide for recomputation at the time the worker receives a social security disability benefit. For example, plans in the automobile industry provided a disability benefit from the plan of $4.50 times years of credited service; but the disability benefit is to be recomputed when the worker receives social security disability benefits or at age 65, on the basis of the normal benefit formula of $2.25 times years of credited service, exclusive of any social security benefit.

Vesting

In addition to the retirement provisions previously described, 54 of the 100 plans contained provisions for vesting. Vesting may be defined as a guarantee to the worker of a right or equity

in a pension plan based on all or part of the employer's contributions made in his behalf should his employment be terminated before he becomes eligible for regular retirement benefits." This equity, of course, would not be as large as if he had worked until normal retirement age.

The predominant type of vesting found in this study was deferred full vesting (45 plans). Under this provision, the worker retains a right to all accrued benefits after he attains a certain age and/or completes a specified period of employment or participation in the plan. A deferred graded vesting provision (9 plans) gives the worker a right to a certain percentage of accrued benefits after he fulfills specified requirements. This percentage increases as additional requirements are fulfilled, until the worker is entitled to the full benefit. For example, a plan required 10 years of participation for the worker to acquire vested rights to 50 percent of the employer's contributions; an additional 10 percent was vested for each year of participation thereafter, until full vesting was attained after 15 years of participation. None of the plans contained provisions for immediate full vesting of benefit rights upon participation in the plan.

Vesting usually took the form of assurance of a retirement benefit commencing at normal retirement age. A number of plans offered the option to receive such benefit at an earlier age (usually the early retirement age) in reduced amount. For example, one plan provided that the worker shall:

receive a deferred pension commencing at age 65 and equal to the normal pension to which he would have been entitled on the basis of his credited service and contributions to the date he ceased to be a member, or a pension of the same actuarial value, commencing at such earlier date as the member may designate, provided such date be not prior to his 55th birthday and not less than 1 year after the date on which such designation is made.

However, a few plans offered the terminated worker the choice of receiving deferred retirement benefits or an immediate cash payment. Two plans granted only cash benefits upon fulfilling the requirements for vesting.

Under all the contributory plans in this study, the worker was permitted to withdraw his own contributions, with or without interest, when terminated. However, in all of these plans, withdrawal of contributions meant loss of benefits purchased by employer contributions. Also, in some of the contributory plans the terminated non vested worker could elect to leave his own contributions in the plan and receive a benefit purchased by his own

contributions.

The requirements for vesting varied greatly among the plans. All of the programs specified certain service requirements before the worker was vested. Most of the plans required 10 or more years of service, with 10 years being the predominant standard. Sometimes the worker was limited to actual years of participation in the plan, which required, in some plans with preparticipation requirements, an additional 1 to 5 years of employment before vesting was attained. Over half of the vested plans required attainment of a certain age in addition to meeting the minimum service requirements.

In addition to age and service requirements, the nature of the termination or separation was an important factor in determining eligibility for vesting. Most of the plans permitted vesting in case of termination for any reason. However, some programs permitted vesting, the worker having otherwise qualified, only under certain circumstances. For example:

any employee who shall be laid off and not recalled within 2 years, or whose employment shall be terminated as a result of a permanent shutdown of a plant, department, or subdivision thereof, and who at the end of such 2 years or the date of his termination shall have reached his 40th birthday and at such time shall have 15 or more years of continuous service, shall be eligible, upon making application therefor as specified herein, to receive a deferred vested retirement pension.

Optional Forms of Benefit Payment

Benefit payments normally cease when the pensioner dies, unless provisions for continued benefits to a surviving beneficiary are provided under the plan. Increasingly, pension plans are providing optional methods of benefit payments, wherein the worker elects to receive a reduced benefit during his lifetime in order to provide for the continuation of some benefit to a beneficiary after his death. The worker must generally choose the option a prescribed time prior to retirement-usually 5 years.

Of the 100 plans studied, 43 contained joint-andsurvivor option provisions. Under this type of provision, the worker receives a reduced benefit with a guarantee that if he dies while his beneficiary is living, payments at a predetermined rate will continue to the beneficiary for life. The actual provisions under which this option operated varied considerably among plans. For example,

in some plans the beneficiary to be designated was limited to the spouse. Also, the benefit to be continued may be the same, one-half, or, in some cases, any selected percentage of the amount of benefit the retired worker received. For example:

(a) At any time prior to the payment of benefits hereunder, an employee may by a writing filed with the company designate a beneficiary for the purpose of either of the following options: (1) To take a reduced pension payable to the employee for life and to the beneficiary for life, if the beneficiary survives him; or (2) to take a reduced pension payable to the employee for life with one-half of such reduced amount payable for life to the beneficiary, if the beneficiary survives him.

Under a period certain option, provided by 5 plans, the pensioner receives a reduced benefit for life, but if he dies before receiving a specified number of payments (e. g., 120 monthly payments), the balance is continued to his beneficiary. For example:

An employee may elect . . . a 120-payment certain pension providing for a reduced pension payable during his life but if he should die before 120 monthly payments shall have been made, the balance of the 120 payments [shall] be paid to his designated beneficiary.

Other optional forms found among the plans studied were the cash refund (1 plan) and the modified cash refund options (1 plan). The cash refund option provides that if total benefits received by the pensioner are less than the cost of purchasing the benefit at retirement, the balance is paid to a designated beneficiary. The modified cash refund option, on the other hand, provides that if total benefits received by the pensioner are less than the worker's contribution (with or without interest), the balance is paid to a designated beneficiary.

Death Benefits

Most workers covered by a pension plan under collective bargaining are also covered by a group life insurance policy under a separate health and insurance program. Under an increasing number of health and insurance plans, retired workers retain their life insurance coverage.10 However, a pension plan may also provide death benefits as a sort of protection to the equity of the worker in the plan. Thus, this study of pension plans

covered provisions in the plans which would assure some payments to a worker's beneficiary in the event of death before or after retirement, but it must be emphasized that such provisions do not account for all the protection available to the worker before or after retirement.

Few noncontributory plans studied made provision for the payment of benefits to a beneficiary in the event of death before retirement. In all but one contributory plan, under these same circumstances, at least the worker's accumulated contributions (with or without interest) were assured to his beneficiary in the form of a death benefit.

Provisions for death benefits after retirement were provided by about one-sixth of the noncontributory plans. In some plans, the payment of death benefits depended on the type of annuity provided by the pension plan. Some plans, for example, guarantee retirement benefits for a period of 60 months. If the retiree dies within that period, the benefits are continued to his beneficiary until the guarantee is fulfilled. This type of payment was an automatic feature of the plan and not to be selected by the worker. In the multiemployer plans which provided death benefits, the usual approach was to provide a small lump sum death benefit, or a benefit based in some way on contributions made to the plan on the worker's behalf. In contributory plans, beneficiaries invariably were assured the difference between the worker's accumulated contributions (with or without interest) and retirement benefits received up to the time of death. Some contributory plans also provided an additional death benefit.

Involuntary Retirement

One of the more controversial aspects of pension planning is providing for involuntary retirement based on age alone. Two types of involuntary retirement based on age alone are practiced: (1) Compulsory retirement, in which the choice as to whether the worker may continue on the job instead of retiring becomes the prerogative of the employer (and possibly the employer and the union) rather than the worker; and (2) automatic retirement, which irrevocably bans employment beyond a specified age. The following clause, for

10 See Analysis of Health and Insurance Plans Under Collective Bargaining, Late 1955, BLS Bull. 1221.