Compensation and Working Conditions Spring 1998 12

Family Retirement

Benefits

BY WILLIAM J.WIATROWSKI

William J. Wiatrowski is an economist in the Division of Compensation Data Analysis and Planning, Bureau of Labor Statistics. Telephone (202)

606-6255.

While different methods are used by retirement plans to compute

spouse benefits, ultimately it is the amount of the basic retiree

benefit that has the largest effect on the amount of spouse benefits.

This publication and others have

long debated the worth of retirement plans and ways to

compare benefits coming from widely

different plans. Past articles have explored plan provisions, replacement

rates, and employer contributions. The

question of how much retirement plans

pay has usually been examined from

the perspective of benefits for the individual employee. Consider an alternative: what does the method by

which a plan provides spouse and family benefits — generally thought of as

an ancillary provision to the basic pension formula — reveal about the worth

of the plan? In fact, widely varying

treatments of these ancillary benefits

has a large effect on the total payment

available to the retiree and family.

The first objective of public and

private retirement plans is to provide

income to workers during retirement.

But often retirement income comes in

the form of an individual benefit, a

spouse benefit, and a child benefit.

Perhaps it is the sum of these benefits,

and the change in benefits that occurs

when one spouse dies, that must be

used in comparing the worth of one

plan with another.

What is a family benefit? In essence, it is the total amount of pension received by a retired worker, a

spouse, and possibly dependent children. This benefit is typically different than that available to a single retiree. Family benefits are typically

greater while both spouses are alive;

upon the death of one spouse, total

benefits are usually reduced — although this reduction may differ based

on which spouse dies first. This article explores the methods that public

and private pension plans use to provide family benefits and works through

some benefit calculations.

Major types of family retirement

benefits

Social Security. This Nation’s largest

retirement program is Social Security,

with just over 40 million beneficiaries

currently receiving payments and

nearly 150 million workers currently

paying into the system.1 Social Security provides a direct family benefit,

in the form of spouse and dependent

children pensions paid in addition to

the worker’s pension.2

Under Social Security, the employee’s Primary Insurance Amount

— the basic benefit a worker receives

if retirement occurs at normal retirement age3 — is determined by earn-
13 Compensation and Working Conditions Spring 1998

ings history. A spouse receives 50

percent of the employee’s benefit and

dependent children each receive 50

percent of the employee’s benefit. (The

50 percent spouse benefit assumes the

spouse is not eligible for Social Security benefits from his or her own earnings. In a case where a spouse is eligible for their own Social Security,

they receive the greater of their own

benefit or the spouse benefit.) Total

family benefits are subject to a maximum of about 175 percent of the

employee’s Primary Insurance

Amount.4 Variations in the amounts

occur if the retiree or spouse is younger

or older than age 65. Dependent children benefits are only available for

children up to age 18, or up to age 19

if the child is still in elementary or

secondary school.

Upon the death of either spouse,

the Social Security benefit for the surviving spouse is 100 percent of the Primary Insurance Amount – equal to the

basic benefit of the retiree. (Again,

this assumes only one spouse is eligible for benefits from earnings.) Regardless of which spouse dies first, the

surviving spouse receives the full benefit. Benefits for dependent children

increase to 75 percent of the deceased’s Primary Insurance Amount,

and continue to be subject to the maximum age restrictions. Total surviving spouse and children benefits also

continue to be subject to the maximum

family benefit.

There is no additional cost to the

employee for family protection under

Social Security. That is, employee

contributions to Social Security do not

differ based on the expectation that

spouse and child benefits will be paid.

The benefit is automatic.

Throughout this article, the percent

of the basic benefit received by retirement income recipients will be referred

to as the “payment factor.” In all cases

the basic benefit as calculated by the

retirement plan, before accounting for

survivor protection, would have a payment factor equal to 100. Table 1

shows the Social Security payment factors for various beneficiaries.

Private pension plans. While Social

Security coverage is nearly universal,

slightly more than half of all workers

are covered by an employer-provided

retirement plan.5 In general, these

plans have two alternative designs, one

providing individual accounts that are

typically paid in a lump sum at retirement and one providing periodic payments during retirement.6 It is these

latter plans that are relevant to this

comparison of family benefits.

Employer-provided pension plans,

whether through private employers,

labor organizations, or Federal, State,

or local governments, typically use the

“joint and survivor annuity” approach

to providing family and survivor benefits. In general, this approach is similar to the Social Security approach —

a larger benefit is paid while both the

retiree and spouse are living, with a

lower benefit paid for the surviving

spouse. But in fact, these benefits are

quite different.7

A joint and survivor benefit, as the

name implies, consists of two parts –

a joint benefit for both spouses and a

survivor benefit for the remaining

spouse. Unlike the added family benefits found in Social Security, however,

no additional benefits are paid to the

spouse while the retiree is alive. Under a joint and survivor arrangement

the joint benefit for both spouses is

equal to the basic benefit (or often less

than the basic benefit), and the surviving spouse benefit is equal to some

portion (commonly 50 percent) of that

joint benefit.8

Under most employer-provided

plans, the employee essentially must

“pay” for the survivor benefit through

a reduction in his or her basic benefit;

this reduction typically amounts to 10

percent or less. Thus, the retiree and

spouse might receive joint pension

benefits equal to about 90 percent of

the basic benefit; following the death

of the retiree, the typical surviving

spouse’s benefit, 50 percent of the joint

benefit, would be about 45 percent of

the basic benefit. An advantage, perhaps, under the employer-provided

plan, comes if the spouse should die

first. In this case, the employee continues to receive, for the rest of his or

her life, the joint benefit that both

spouses had been receiving (and not

the lower survivor benefit). The retired employee continues to receive

about 90 percent of the basic benefit.

The benefit typically does not “popup” to the 100 percent mark, however,

even though the survivor benefit will

never be paid. Table 2 shows payment

factors under employer-provided pension plans.

Railroad Retirement System. The

Railroad Retirement System, which

predates Social Security, provides pension benefits for employees in railroad

and related industries. By design,

Railroad Retirement contains features

of both Social Security and a private

pension plan. It consists of two portions known as Tier I and Tier II.

Covered employees and employers do

not pay into Social Security. Instead,

Tier I provides identical benefits to

those provided by Social Security, including the spouse and children benTable 1. Social Security payment factors

for various beneficiaries

Single individual...............

Married individual ............

Spouse ............................

Children ...........................

Family maximum .............

Surviving

 Retiree ...........................

 Spouse ..........................

 Children .........................

 Family maximum ...........

 100

 100

 50

 50

 175

 100

 100

 75

 175

Beneficiary Payment

factor

Table 2. Employer-provided pension plan

payment factors for various beneficiaries

Single individual...............

Married individual

 who selects a joint and

 survivor benefit ..............

Surviving

 Retiree ...........................

 Spouse ..........................

 100

 90

 90

 45

Beneficiary Payment

factor
 Compensation and Working Conditions Spring 1998 14

efits described above.9 Tier II functions as a private pension plan, but

provides both a spouse and child addon to the basic benefit (like Social Security) and a joint and survivor provision (like a private pension plan).

Under Tier I, a spouse receives 50

percent of the retiree’s Tier I basic benefit. Dependent children also receive

50 percent of this basic benefit, with

total family benefits subject to the family maximum. These benefits are in

addition to the retiree’s Tier I benefit,

just like under Social Security.

In addition, under Tier II, the

spouse receives 45 percent of the

employee’s tier II basic benefit. Again,

this is in addition to the retiree’s Tier

II basic benefit. There is no children’s

benefit under Tier II while the retiree

is alive.

Upon the death of the retiree, the

surviving spouse receives 100 percent

of the retiree’s Tier I benefits — just

like Social Security — plus a percent

of the deceased employee’s Tier II

amount — just like a private pension.

Tier I benefits for surviving children

are the same as under Social Security.

Under Tier II, should the retiree predecease the spouse, the spouse’s addon benefit is dropped in favor of a survivor benefit. This surviving spouse

benefit is 50 percent of the employee’s

Tier II amount; each eligible child receives 15 percent of the employee’s

Tier II amount. There is a family

maximum of 80 percent. However, the

total survivor benefit to the widow or

widower cannot be less than the

amount he or she received prior to the

retiree’s death. If the spouse predeceases the retiree, the retiree’s benefit

is unchanged.

There is no cost for family protection under Railroad Retirement. That

is, employees are not required to contribute toward the cost of providing

family benefits from these plans nor

is there a reduction in the employee’s

benefit to account for the spouse and

survivor payments. Table 3 shows

benefits under Railroad Retirement for

various beneficiaries, based on a payment factor of 100 for each tier for

single individuals.

Are there two retirement systems?

From the vantage point of family benefits, there appear to be two systems:

One increases total family benefits at

no cost while the other reduces family

benefits at a cost. Is this fair? Is it

fair for unmarried retirees to receive a

lower benefit under Social Security or

Railroad Retirement than their married counterparts, with no difference

in contributions? Is it fair for workers

under an employer-provided pension

plan to have to take a reduction in benefits to fund protection for their spouse,

while those under Social Security and

Railroad Retirement have no such reduction and in fact get a “free” spouse

benefit?

While there may be prima facie evidence that Social Security and Railroad Retirement are a better “deal” for

families than employer-provided

plans, there are other factors to consider. Two important variables are the

amount of basic benefit each plan provides and any combinations of benefits

beneficiaries receive. By design, each

plan provides a different level of basic

benefit. In addition, these plans are

typically received in conjunction with

one another. Considering combinations of benefits, there are, in essence,

three benefit possibilities: Social Security only, Social Security plus a private pension, and Railroad Retirement

(Tier I plus Tier II).

Comparison of benefit amounts

Neither Social Security (and Railroad Retirement Tier I) nor employerprovided retirement plans provide a

single benefit level for all beneficiaries. That is what makes comparisons

so difficult. Social Security benefits

are designed to provide a greater percentage of prior earnings for lower income than for higher income workers.

Employer-provided retirement plans

vary in how benefits are provided, although many provide a fixed percent

of final earnings.10 Only Railroad

Retirement Tier II has a fixed benefit

amount — 0.7 percent of earnings

times years of service (or 21 percent

of earnings after 30 years).

To make comparisons, therefore,

typical basic benefits will be used. For

Social Security and Railroad Retirement Tier I, a benefit of 1.1 percent of

earnings times years of service, or 33

percent after 30 years, is used. While

Social Security benefits vary with earnings, this amount is typical. Employer-provided retirement plans provide an average of about 30 percent of

final earnings after 30 years (1.0 percent per year), while plans providing

benefits based on a percentage of earnings average about 45 percent of final

earnings after 30 years (1.5 percent per

year).11 Calculations of family benefits include private retirement plans

paying both 30 and 45 percent of final

earnings. These different basic benefits — ranging from 21 to 45 percent

of final earnings after 30 years of service — may help to explain the difference in family benefit approaches.

Table 4 shows the percent of earnings per year and after 30 years from

Social Security (and Railroad Retirement Tier I), employer-provided pensions (1.0 and 1.5 percent), and Railroad Retirement Tier II. The table also

shows the dollar amount of the benefit received by an employee retiring

after 30 years of service based on final

earnings of $30,000. Also shown is a

“payment factor,” which indicates the

percent of the retiree’s benefit that will

be received by various beneficiaries.

These data indicate that the payment factor does not correspond with

the amount of benefit received, because

of differences in the basic benefits. For

example, the employee and spouse

Table 3. Railroad Retirement payment

factors for various beneficiaries

Single individual.........

Married individual ......

Spouse ......................

Children (max.) ..........

Family maximum .......

Surviving

 Retiree .....................

 Spouse ....................

 Children (max.) ........

 Family maximum .....

100 100

100 100

50 45

50

175 145

100 100

100 50

75 15

175 80

Payment factor

Tier I Tier II

Beneficiary
15 Compensation and Working Conditions Spring 1998

Table 4. Yearly percent of earnings, 30-year percent of earnings, 30-year benefit, and payment factor for typical basic

retirement benefit plans

Social Security

(or Railroad Retirement Tier I)

 Employee .................................................................... 1.100 33.00 9,900 100

 Employee and spouse ................................................. 1.650 49.50 14,850 150

 Surviving retiree .......................................................... 1.100 33.00 9,900 100

 Surviving spouse ......................................................... 1.100 33.00 9,900 100

Employer-provided pension (1 percent per year)

 Employee .................................................................... 1.000 30.00 9,000 100

 Employee and spouse ................................................. .900 27.00 8,100 90

 Surviving retiree .......................................................... .900 27.00 8,100 90

 Surviving spouse ......................................................... .450 13.50 4,050 45

Employer-provided pension (1.5 percent per year)

 Employee .................................................................... 1.500 45.00 13,500 100

 Employee and spouse ................................................. 1.350 40.50 12,150 90

 Surviving retiree .......................................................... 1.350 40.50 12,150 90

 Surviving spouse ......................................................... .675 20.25 6,075 45

Railroad Retirement Tier II

 Employee .................................................................... .700 21.00 6,300 100

 Employee and spouse ................................................. 1.015 30.45 9,135 145

 Surviving retiree .......................................................... .700 21.00 6,300 100

 Surviving spouse ......................................................... .350 10.50 3,150 50

Percent of final

earnings for 30

years of service

Plan and plan beneficiary

Percent of final

earnings1 per

year of service

30-year benefit

with final

earnings of

$30,000

Payment

factor

Table 5. Yearly percent of earnings, 30-year percent of earnings, 30-year benefit, and payment factor for combinations of

retirement plans

Social Security only

 Employee ................................................................... 1.100 33.00 9,900 100

 Employee and spouse ................................................ 1.650 49.50 14,850 150

 Surviving retiree ......................................................... 1.100 33.00 9,900 100

 Surviving spouse ........................................................ 1.100 33.00 9,900 100

Social Security and employer-provided pension

(1.0 percent per year)

 Employee ................................................................... 2.100 63.00 18,900 100

 Employee and spouse ................................................ 2.550 76.50 22,950 121

 Surviving retiree ......................................................... 2.000 60.00 18,000 95

 Surviving spouse ........................................................ 1.550 46.50 13,950 74

Social Security and employer-provided pension

(1.5 percent per year)

 Employee ................................................................... 2.600 78.00 23,400 100

 Employee and spouse ................................................ 3.000 90.00 27,000 115

 Surviving retiree ......................................................... 2.450 73.50 22,050 94

 Surviving spouse ........................................................ 1.775 53.25 15,975 68

Railroad Retirement Tier I and Tier II

 Employee ................................................................... 1.800 54.00 16,200 100

 Employee and spouse ................................................ 2.665 79.95 23,985 148

 Surviving retiree ......................................................... 1.800 54.00 16,200 100

 Surviving spouse ........................................................ 1.450 43.50 13,050 81

1

 Most retirement plans specify a definition of earnings that

does not equate exactly to final year earnings, such as an average of the last 3 years' earnings. The examples presented hereare simplified for comparison purposes.

Plan and plan beneficiary

Percent of final

earnings1 per

year of service

Percent of final

earnings for 30

years of service

30-year benefit

with final

earnings of

$30,000

Payment

factor

1

 Most retirement plans specify a definition of earnings that

does not equate exactly to final year earnings, such as an

average of the last 3 years' earnings. The examples presented

here are simplified for comparison purposes.
 Compensation and Working Conditions Spring 1998 16

have a higher payment factor under

Railroad Retirement Tier II (145) than

under the 1.5-percent employer-provided pension plan (90), but the employer-provided plan provides a higher

dollar amount than Railroad Retirement Tier II plan. Similarly, the lowest payment factor for surviving retirees—90 under the 1.5-percent

employer-provided plan—corresponds

with the largest benefit: 1.35 percent

per year, or $12,150 after 30 years.

Thus, the effect of the payment factors, which are determined by the plan

provisions (that is, family add-on benefits versus joint-and-survivor protection), is outweighed by differences in

basic benefits among the retirement

systems. The more generous the basic benefit, the more generous the family benefits. For this reason, payment

factors do not correspond with the

monetary value of the benefits.

Benefit combinations

The inconsistency between the payment factor — the percent of the basic

benefit received -- and the actual dollar amount is also evident when the

possible combinations of benefits are

considered. (See table 5.) For example, the employee and spouse receiving an employer-provided retirement plan (1.5 percent of earnings)

plus Social Security have a payment

factor of 115 percent of the basic benefit, compared with 148 percent for

those under Railroad Retirement Tiers

I and II. Yet, the former couple receives a greater benefit — $27,000 —

compared with $23,985 for the latter

couple. Even under the less-generous

1.0-percent of earnings employer-provided retirement plan, similar results

can be found. While the lower payment factor for a retiree and spouse

(121) compared with that for Railroad

Retirement Tiers I and II (148) would

suggest larger Railroad Retirement

benefits, in fact the payments are about

the same ($23,985 for Railroad Retirement and $22,950 for the employerprovided pension). Likewise for surviving spouse benefits, the payment

factor would suggest the Railroad Retirement recipient would have greater

benefits yet in actuality the employerprovided retirement plan recipient has

the greater benefits.

What do these comparisons suggest? Once again, the ability to compare pension plans by focusing on one

or a few key plan provisions must be

questioned. What may on the surface

appear more generous in reality may

not be so. Ultimately, dollar amounts

of pensions, whether for retirees alone

or for spouses and families, may be the

best measure of one plan against another.

1

 Current statistics on Social Security beneficiaries and covered workers are available monthly

in the Social Security Bulletin. More detailed data

are available in the Annual Statistical Supplement

to the Social Security Bulletin. 2

 For a detailed account of Social Security

provisions, see Robert J. Myers, Social Security,

McCahan Foundation, 1985. 3

 The normal retirement age under Social Security, the age at which full, unreduced benefits

may be received, was traditionally age 65. Following enactment of the Social Security Reform

Act of 1983, the normal retirement age was increased to age 67, to be implemented over several

years. Beginning with those individuals who turn

age 62 in 2000, the normal retirement age increases gradually. The normal retirement age will

be age 67 for those who turn age 62 in 2022 or

later.4

 This is known as the Maximum Family Benefit. It is actually determined by a formula that

varies with earnings. In 1997, the maximum was

equal to 150 percent of the first $544 of Primary

Insurance Amount, 272 percent of the next $241,

134 percent of the next $239, and 175 percent of

any additional amount. Under the Maximum Family Benefit, all benefits other than those of the retiree are proportionally reduced. Some benefits,

such as those of divorced spouses, are excluded

from the Maximum Family Benefit. 5

 Data from the Bureau of Labor Statistics,

Employee Benefits Survey, indicate that 56 percent of full- and part-time employees in private

industry and State and local government participated in a retirement plan in 1993-94. See Ann

C. Foster, “Employee Benefits in the United States,

1993-94,” Compensation and Working Conditions, Spring 1997, pp. 46-50.

6

 A defined benefit pension plan specifies a

formula for providing periodic payments to a beneficiary beginning at retirement age for the remainder of his or her life, and often for the life of a

spouse. A defined contribution plan specifies

employer and employee contributions to an individual account. Benefits at retirement are not

specified; they are determined by the value of the

account. Defined contribution plans are often paid

to retirees in a lump sum, although some plans

offer the option to purchase an annuity that will

pay periodic payments, and may include an option to maintain those periodic payments for a surviving spouse. The discussion of survivor benefits from employer-provided retirement plans in

this article is limited to defined benefit pension

plans only. 7

 Employer-provided retirement plans typically do not include specific benefits for children,

although a plan may specify that survivor benefits

are available to any beneficiary named by the retiree, not necessarily a spouse. 8

 Detailed information on joint and survivor

provisions of defined benefit pension plans may

be found in Donald Bell and Avy Graham, “Surviving spouse’s benefits in private pension plans,”

Monthly Labor Review, April 1984, pp. 23-31.

Calculations of joint and survivor benefit payments

may be found in William J. Wiatrowski, “New

survey data on pension benefits,” Monthly Labor

Review, August 1991, pp. 8-22. 9

 Railroad employees and employers pay the

same earnings-based contribution to Railroad

Retirement Tier I that others pay to Social Security.10 Note that most retirement plans specify a

definition of earnings that does not equate exactly

to final year earnings, such as an average of the

last 3 years’ earnings. The examples presented

here are simplified for comparison purposes. 11 See Employee Benefits in Medium and

Large Private Establishments, 1993, Bureau of

Labor Statistics, Bulletin 2456, November 1994.

The average multiplier in terminal earnings formulas that calculate benefits using a flat percent

times years of service is 1.5.

—ENDNOTES—