How social security payments affect private pensions, (EXCERPT), Monthly Labor Review Online, May 1984

How social security payments
affect private pensions

Donald Bell and Diane Hill

Many workers look forward to receiving benefits from private pension plans as well as from social security. Half of all full-time wage and salary workers in private industry in May 1979 were covered by pension plans;¹ nearly all of them were also under the social security system. This dual retirement income has fostered interest in coordinating public and private plans. Often, social security payments are considered when setting the terms of private pension plans.

There are two types of private pensions plans: defined contribution plans, which require an employer to contribute a specified amount of money into a pension fund; and defined benefit plans, which provide specified benefits according to a formula taking into account an employee's years of service, or earnings, or both. A defined contribution plan does not promise a predetermined level of benefits—the benefits paid at retirement depend on the amount credited to an employee. In a defined benefit plan, pension benefits are predetermined and the employer must make contributions adequate to finance those benefits. Both types of plans may reflect the existence of social security (Old-Age, Survivors, and Disability Insurance) either implicitly, by informally providing lower annuities than would be the case if social security benefits were not available; or explicitly, by formally recognizing the existence of social security.²

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Footnotes

1 An additional 10 percent of the full-time workers in the private sector were employed by firms with retirement plans, but were excluded from participation primarily because they failed to meet age or service eligibility requirements or both. See Patterns of Workers Coverage by Private Pension Plans (U.S. Department of Labor, Labor-Management Services Administration, Pension and Welfare Benefit Program, 1980), pp. iii, v. This report is based on data collected in the Current Population Survey, conducted by the Bureau of the Census.

2 The concepts of implicit and explicit coordination of private and public benefits are developed in Dan M. McGill, Fundamentals of Private Pensions, 4th ed. (Homewood, Ill., Richard D. Irwin, Inc., 1979), p. 177.

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