Table 3. Projected pension increases under ad hoc post-retirement increases, after 10 years of retirement,

+ selected 5-year periods, 1977-88.
Percent change | Percent change
Percent change | in average in average
Five year period (December 31 to December 31) in Consumer monthly pension monthly pension
Price Index | of $250 at start jof $1000 at start
‘of period of period
1977-1982 ST 2 19
1978-1983 52 23 7
1979-1984 4 2 18
1980-1985 31 a 22
1982-1987 18 15 4 12
1983-1988 19 10 8

NOTE: Increases were averaged by using the number
of current full-time plan participants, not the actual num-
ber of retirees, as weights. CP! changes were calculated

by comparing the BLS Consumer Price Index for Urban
IWorkers,

Wage Earners and Clerical’

ber Index.

December to Decem-

Compensation and Working Conditions Fall 1997

50


Employee Benefits

Post-retirement
Pension Increases

BY HARRIET WEINSTEIN

Inflation erodes the purchasing power of pension ben-
efits available to retirees in their retirement years. The sig-
nificance of this declining real income with age is height-
ened by the rise in longevity over this century. The number
of the aged will soon explode, as the “baby boomers” reach
retirement age, and they will live longer. In 1900, the life
expectancy of someone born in the United States was 49;
today, it is 76. An awareness of the aging of the population
has raised concerns regarding how retirement years will be
financed. Retiree income comes from three main sources:
Social Security; employer-provided pensions; and personal
savings and investments. This article looks at the extent of
post-retirement pension increases based on data obtained
from the Bureau’s Employee Benefit Survey (EBS).'

There are two types of employer-provided retirement
plans: defined contribution and defined benefit plans. De-
fined contribution plans generally specify the level of em-
ployer contributions to the plan, but not the actual benefits
that will be paid upon retirement. Because defined contri-
bution plans generally pay a lump sum at retirement, there
is no provision for adjusting benefits for inflation. In con-

“ trast, defined benefit plans obligate employers to pay retir-
ees an annuity at retirement, based on a formula specified
in the plan. The size of the benefit is typically based on
salary and years of service. Some of these retiree benefits
are protected from the loss of purchasing power over retire-
ment years by automatic increases specified in the pension
plan, discretionary adjustments (ad hoc), or both.

The EBS survey provides data on the prevalence of au-
tomatic post-retirement provisions, as well as ad hoc
creases granted during the 5-year period prior to the sur-
vey.2. Because the survey counts the number of current
employees covered by the defined benefit plans and not the
number of retirees, the survey cannot specify the propor-
tion of annuitants actually receiving post-retirement pen-
sion increases.

Harriet Weinstein is an economist in the Division of Compensation Data
Analysis and Planning, Bureau of Labor Statistics. Telephone (202) 606-
6237.

47 Compensation and Working Conditions Fall 1997

Pension plan formulas calling for cost-of-living
(COLA) increases are typically linked to changes in the
BLS Consumer Price Index (CPI). Frequently, restric-
tions limit the size of the adjustment to a portion of the
CPI change. Plans with COLAs most often provide an-
nual adjustments.

Pension plan administrators consider several factors in
deciding to grant ad hoc increases. These factors include
general economic conditions (such as the rate of inflation),
pension fund investment performance, and the firm’s fi-
nancial position. Ad hoc increases are not directly linked
to a price index. Instead, retirees’ current pensions are
typically raised by a percent of the present benefit, which is
commonly a uniform amount. For example, pension plan
administrators may decide to provide a 3-percent increase
to all those who are receiving an annuity. Other plans may
call for larger pension increases for individuals who have
been retired longer.

Post-retirement pension increases are more widespread
during periods of high inflation. Table 1 shows the propor-
tion of full-time workers participating in defined benefit
plans that provided post-retirement increases, ad hoc in-
creases in the prior 5 years, and COLA increases, as well as
the CPI change in the corresponding period. For example.
in 1983, the first year these data are available, 54 percent
of full-time workers in medium and large firms participated
in pension plans with post-retirement increases, compared
to 10 percent in 1993; while the corresponding changes in
the CPI during the previous 5 years, were 57 percent and
23 percent, respectively. While the prevalence of automatic
increase provisions is relatively stable over time, COLA
provisions are more likely to trigger an increase in benefits
during periods of rapidly rising prices. Ad hoc increases.
however, vary with changes in the general price level, as
plan administrators recognize the need for benefit increases
when there is a dramatic drop in purchasing power.

As shown in table 1, ad-hoc increases are more common
in private industry than in government, but the opposite is
true for automatic increases. Overall, the availability of
post-retirement increases is greater for State and local gov-


ernment workers than those in private industry. Public sec-
tor pension plans frequently call for automatic benefit in-
creases, typically ( but not always) linked to changes in the
CPI. In part, this reflects the absence of Social Security
coverage to supplement retirement benefits for one-fourth
of these government workers. In comparison, almost all
workers in private industry are covered by Social Security.
(Social Security benefits are adjusted annually to reflect
increases in the cost-of-living.)

A study of defined benefit plans in medium and large
firms in 1993 demonstrates that it is unlikely retirees re-
ceived an increase in their pension benefit after retirement
during this period of stable price changes. Plans for 90
percent of the full-time workers did not provide a post-re-
tirement increase in the previous 5-year period. As shown
in table 2, the prevalence of pension benefit increases var-
ied litfle among major occupational groups, major industry
groups, or union status.

EBS data collected in.the 1980s show that ad hoc pen-
sion increases were, on average, about one-third to one-

half of the inflation rate. Detailed data were collected on
ad hoc adjustment provisions, and pension increases were
projected for various retirement periods and monthly pen-
sion amounts. Table 3 shows the projected increases after
10 years of retirement, for pensions that were initially $250
and $1,000 per month. For example, in pension plans grant-
ing one or more ad hoc increases from December 1977 to
December 1982, annuities rose an average of 25 percent for
persons retired for 10 years with a monthly pension of $250
in 1977, and 19 percent for those with a pension of $1,000
in 1977.

In general, even those receiving a post-retirement pen-
sion increase do not recover the full loss of purchasing
power, While adjustments are more likely during periods
of high inflation, the cumulative effect of several years of
low inflation can also severely erode the value of pension
benefits. Thus, despite post-retirement pension increases,
retirees never recover the buying power of the benefit they
receive at the onset of their retirement.

—ENDNOTES—

"The Employee Benefit Survey obtains information from establishments,
excluding agriculture and the Federal government, on the incidence and char-
acteristics of employer- provided benefits for those currently employed. Three
surveys are conducted—one of establishments with 100 or more workers,
which BLS refers to.as “medium and large” establishments; another of small
establishments with fewer than 100 employees; and a thitd of State and local

ments.

? For detailed discussions of post-retirement increases sce, Donald G.
‘Schmitt, “Postretirement Increases Under Private Pension Plans,” Monthly
Labor Review, September 1984, pp. 25-30; and William J. Wiatrowski, “Fac-
tors Affecting Retirement Income,” Monthly Labor Review, March 1993, pp.
25-35.

Compensation and Working Conditions Fall 1997 48


Table 1. Post-retirement pension increases trom defined benefit pension plans and changes in the Consumer Price Index in
5 year period, selected years, 1983-94
(Percent of full-time participants in pension plan = 100)

Discretionary ad . Percent change in
Year Post-retirement hoc increases Automatic Consumer Price
increasestoretirees _to retirees cost-of-living Index in
intast 5 years adjustments previous 5 years
Medium and large establishments
54 51 3 57
49 47 3 50
a 4 4 37
38 35 3 . 7
29 26 4 18
28 22 7 19
an 7 5 22
10 6 4 23
Small private establishments
9 7 2 20
8 4 4 2
‘State and local governments
7 33 St 18
59 16 50 20
59 10 $2 2
62 13 e 21
‘in 1988, the sample size was expanded, particularly in the ser- NOTE: The CPI changes were calculated by comparing the De-

vice industries. Corresponding data based on the old sample shows ember to December BLS Consumer Price Index for Urban Wage
33 percent with post-retirement increases available, 30 percent with Earners and Clerical Workers.
ad hoc increases, and 4 percent with COLAs.
? 45 percent based on rise in CPI, 9 percent other automatic
increases.

Table 2. Post-retirement pension increases from defined benefit pension plans, full-time participants, medium and large
private establishments, 1993

{in percent)
Post-etirement iScratonary 8d) putomatic | No post-
Total ‘increases ‘orettocs cost-ofliving | retirement
available in last 5 years adh increases
100 10 6 4 90
‘ groups:
Professional, technical, and related employees .. 100 10 6 4 90
Clerical and sales empioyees ... ae 100 8 4 4 92
Blue collar and service employees. 100 Wt 7 4 89
100 13 7 6 87
100 9 6 3 92
100 12 1 1 88
100 9 3 6 91
100 1 10 1 89
100 9 3 6 91

NOTE: Sum of individual items may not equal 100 because of
rounding.

49 Compensation and Working Conditions Fall 1997