Introduction

Highlights

Contents

B Tables


    B. PENSION BENEFITS

    Percentage of workers and retirees receiving pensions. The receipt of private pension benefits is strongly associated with pre-retirement income levels, the size of the primary employer, and the educational attainment of the individual.

    Pension receipt rates have a strong relationship to pre-retirement earnings. They range from a low of 12% for those individuals with pre-retirement earnings of less than $10,000 annually to 68% for those who earned $40,000 or more during their last year of work.

    Pension Benefit Receipt Rates for Retirees 55 and Over
    by pre-retirement wage levels

    Employer size is also an important predictor. Only 11% of retirees formerly employed in firms with fewer than 25 workers receive pensions compared to 68% of former employees of firms with 1,000 or more workers.

    Pension Benefit Receipt Rates for Retirees 55 and Over
    by firm size

    A similar association is evident in relation to education level. The incidence of private pension benefits ranges from 33% for those without a high school degree to 62% for those with a master's degree or higher level of educational attainment.

    Pension Benefit Receipt Rates for Retirees 55 and Over
    by education level

    The characteristics which the survey data show to be most strongly associated with the receipt of employment based benefits have a considerable degree of overlap. Workers with lower education levels are, to a significant extent, those with lower earnings. To a somewhat lesser degree the employees of smaller firms tend to have lower wages than those of larger firms. These correlations, however, are far from perfect. Each of these factors appears to have had a significant effect on the likelihood of current retirees to be receiving private pension benefits.

    The rate of private pension receipt among current retirees ages 55 and over is substantially lower than the proportion of workers nearing retirement that earlier survey work has found to be participating in an employer sponsored plan. The April 1993 supplement to the CPS indicates that over 60% of private wage and salary workers approaching their retirement years are either accruing a benefit on their current job or have already earned a benefit in a previous job.

    Percent of Workers with Current Pension Plan Coverage and/or Prior Plan Vested Benefit

    This difference between reported participation rates and receipt of benefits during retirement is notable, particularly in light of the fact that the overall proportion of private sector workers participating in an employer sponsored pension plan has been essentially static for two decades.

    The difference between reported participation rates and benefit receipt is most likely a consequence of part-time employment, workers who spend only a short time in the labor force, and workers who have made frequent job changes. This will result in many who report that they are participating in a pension plan, but not achieving sufficient time with an employer to ultimately receive a benefit. Among all persons who were at one time participants in a former employer's pension plan 23% report that they do not expect to receive any benefits.

    It is also, however, reflective of the trend toward defined contribution plans which has been one of the most pronounced characteristics of the private pension system since 1980. As the following data on the use of payouts from these plans indicate a significant portion of the benefits accrued in individual account arrangements may not be translated into retirement income.

    Shifts in the form of pension benefits. The most direct indication of the recent evolution of the private retirement income system may be found in the survey data indicating the form in which benefits are being received. In the past, receipt of pension benefits usually meant the promise of a steady stream of income throughout the remaining life of the recipient. These annuity type benefits were generally provided through a defined benefit (DB) plan financed entirely by the employer.

    This has been changing rapidly over the last decade. One of the most striking findings of the survey is the dramatic change that has occurred over a relatively short period in the receipt of lump sum distributions.

    The magnitude of this shift in the form of benefits is illustrated below. Among persons 40 and over who have been employed in the private sector and received a pension benefit resulting from this employment, 10% report receiving both an annuity and a lump sum distribution, 38% received only an annuity and 51% received only a lump sum distribution. This distribution in the form of benefits is substantially different than what was reported just five years earlier. In 1989, 60% of recipients reported the receipt of an annuity. The recent change results in a greater likelihood of a worker being provided with a single lump sum payment rather than a lifetime annuity benefit from a private pension plan.

    Distribution of Pension Recipients
    by type of benefit, 1989 and 1994

    The aggregate numbers associated with this evolution in benefit type provide further illustration of the scope of the trend. In 1989, 7.5 million private sector retirees and workers were receiving annuity benefits and 6 million had received lump sum payments from pension plans at some earlier point. In 1994, the number of annuity recipients had decreased by 4% to 7.2 million, while the number of lump sum recipients had increased by 50% to 9.1 million.

    The shift toward payment of pension benefits in the form of lump sums parallels the strong growth in pension coverage under defined contribution (DC) plans. Small firms adopting initial plans are now overwhelmingly choosing DC plans, generally a 401(k) type plan. Medium and large firms with existing DB plans often adopt DC plans to provide supplemental benefits. In contrast to the growth in DC plan participants, the number of DB plan participants has gradually but steadily decreased over the last several years, due both to large numbers of plan terminations among small employers and downsizing of employment among medium and large firms with DB plans.

    One important difference between DB and DC plans is the form of benefit payment, with DB plans generally providing pension benefits through a life annuity while virtually all DC plans permit retiring or terminating employees to receive a lump sum distribution of the vested value of their account. Given the continuing shift in coverage toward DC plans, we can expect the trend toward more lump sum benefits to accelerate in the future as the current workforce nears retirement.

    When compared to firms with DB plans, firms which provide pension coverage through a DC plan are more likely to be much smaller in size and to employ a work force that is lower paid and more mobile. These types of firms also tend to have a higher percentage of women employees than larger firms with DB plans. This relationship is reflected in the much higher percentage of women recipients (63%) than male recipients (44%) receiving benefits only in the form of a lump sum distribution.

    Distribution of Pension Recipients
    by type of benefit and gender


    This evolution of the retirement system imposes a far greater responsibility on the worker to make decisions about how much to put into a DC plan, how to invest the contributions, and how to effectively manage the assets when the distribution is made. Although DC plans may in fact have a number of advantages for many workers, they require individuals to take a greater role in planning for their retirement.

    This is particularly the case with regard to the need for workers offered a 401(k) plan to begin contributing to the plan at an early age. Although participation rates are improving, one-third of workers provided the opportunity currently do not participate. While many in this group are young workers who will eventually begin to contribute, delays in participating in the plan can lead to substantially reduced retirement benefits.

    Pension receipt rate of workers with a prior private sector job. From 1989 to 1994, among all those ages 55 and over who either retired from a private sector job or who left a private sector job but remained in the labor force, the pension receipt rate increased from 33% to 37%. The pension receipt rate for retirees remained relatively stable over this period at about 41% 4. Thus the entire increase in overall pension receipt rates resulted from an increase in the number of workers with pensions received from a prior job.

    The pension receipt rate for workers ages 55 and over increased from 16% in 1989 to 28% in 1994. This change partially results from an increase in labor force activity among workers in their 50s and early 60s leaving firms with an early retirement pension 5. It also results from an increase in the number of workers who changed jobs at an earlier age and received a lump sum payment from their former pension plan. Among all workers ages 55 and over, the receipt rate for annuity benefits increased from 8% in 1989 to 12% in 1994, while the receipt rate for lump sum only benefits almost doubled from 8% to 15%.

    Percent of Workers Ages 55 and Older with Pension Benefits

    It is unclear whether workers who retire with annuity benefits from one job remain in the labor force or return to the labor force after a period of retirement. It may be that the inability of most retirees to receive continued employment based health coverage or the lack of indexation of most private employer provided pensions causes some retirees to return to the work force.

    While benefit amounts received by workers with both annuity and lump sum benefits were lower than those received by retirees with both benefits, median annual amounts received by workers with only annuity benefits ($6,120) were higher than those received by their retiree counterparts ($5,100). Annuity only recipients, however, made up only one-third of all workers with pension benefits compared to almost two-thirds of retirees with pensions. For 56% of all workers ages 55 and over with pensions, and for 64% of workers ages 55-64 with pensions, benefits consisted only of lump sum distributions.

    Median lump sum distributions received by both workers and retirees were fairly modest, averaging $10,840 for workers and $12,630 for retirees. The median age of receipt of lump sum benefits was 50 for workers, compared to 60 for those now retired.

    The recent trend toward higher receipt rates of pension benefits in the form of lump sum distributions by active workers was spurred by the substantial growth of 401(k) plans occurring since the mid-1980s. The short time period many of these plans have been in effect has not permitted a substantial buildup in the value of accounts being taken by most workers changing jobs. The increase in receipt rates of these benefits among older workers therefore appears to have had little influence on retirement decisions. This may change as the 401(k) plan system matures and workers are provided a longer period for asset buildup in their accounts.


    4An additional 1% to 2% of retirees report entitlement to benefits from deferred vested pensions. The total pension receipt rate for retirees from annuities, lump sum distributions, and deferred pensions was 43% in both 1989 and 1994.

    5See Diane E. Hertz, "Work After Early Retirement: An Increasing Trend Among Men", Monthly Labor Review, U.S. Department of Labor, Bureau of Labor Statistics, April 1995.

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