12 Compensation and Working Conditions Fall 1998

WILLIAM J. WIATROWSKI

Social Security

in the United States

and Chile

The United States is once again debating the future of the

Social Security system, and several reform options have

been advanced. Experiences in Chile over the last two

decades provide insights for the U.S. debate.

William J. Wiatrowski is an economist in the

Division of Compensation Data Analysis and

Planning, Bureau of Labor Statistics.

Telephone: (202) 606-6255

E-mail: Wiatrowski_W@bls.gov

Social Security systems, world

wide, are in financial trouble.1

This stark reality has many

causes, including increased life expectancy—meaning that retirees are collecting benefits for longer periods—

and decreased fertility rates—meaning

fewer workers are paying into the system compared to those receiving benefits.2 In the United States, the ratio

of employees to Social Security recipients was 42 to 1 in 1945. Today it is

less than 4 to 1 and is projected to drop

to 2 to 1 or less by the mid-21st century.3 Chile faced a similar fate in the

late 1970s and chose a radical approach to reforming the system. This

article discusses the Social Security

dilemma in the United States and explores options for alleviating its problems. It also discusses the Chilean

system and the relationship between

Social Security programs and other

sources of retirement income.

The Social Security debate

The current debate about the U.S. Social Security system comes at an unusual time in our Nation’s history.

After 30 years of Federal budget deficits, policy makers have recently been

faced with the possibility of a budget

surplus. According to the U.S. Office

of Management and Budget, for the

fiscal year ending September 30, 1998,

the U.S. government will have its first

surplus since 1969.4 This surplus, and

projected future surpluses, results from

a number of factors, including low inflation and interest rates, sustained

growth, higher than expected tax revenues (due in part to low unemployment and stock market increases), and

changes in national spending and tax

priorities.5 Therefore, policy makers

face a challenge they have not faced

for many years: Deciding how to use

these anticipated surpluses. While

many spending increase and tax cut

proposals have been offered, a great

deal of attention has been given to

use at least part of any fiscal surplus

to strengthen the financial structure of

Social Security.

Policy makers and others have offered many proposals to solve the So-
 Compensation and Working Conditions Fall 1998 13

Social Security

cial Security dilemma, but three basic

choices have been given the most attention. These choices, described in a

1997 Social Security Task Force report, range from traditional ideas such

as revising tax and benefit schedules

to more radical notions that would

overhaul the basic doctrine of the system. One of the more radical proposals is to move away from social insurance (where a benefit is guaranteed for

life) and toward a system of individual

accounts (where contributions are

placed in accounts specifically for an

individual and benefits are drawn from

those accounts), similar to what was

done in Chile in 1981.

Social Security in the United

States—1930s-70s

The U.S. Social Security system has

been debated since its inception in the

1930s. The system was designed as

income protection for older Americans.7 With the retirement age set at

65 and average life expectancy below

70, benefits were generally paid for a

short period of time. The initial tax

rate was 2 percent of earnings up to

$3,000 (1 percent paid by both the

employer and employee). Through the

1950s and 1960s, debate centered on

expanding benefits to include early

retirement, disability, and a system of

health care for older Americans—

medicare. (Medicare is funded separately from Social Security and, while

policy makers are also discussing its

future, it is not a part of this discussion.) The era of expanded benefits

ended in the 1970s, when the debate

turned to the increased demands on the

system by the expanded benefits and

the accruing liabilities for the “baby

boom” generation. This population

group born from the late 1940s

through the early 1960s will strain the

system in the early years of the 21st

century.8

Changes in the system—1980spresent

The concern for the financial health

of the Social Security system was addressed in 1983, when reform recommendations from a bipartisan panel

were enacted. The 1983 changes included: An acceleration in the timing

of scheduled increases in taxes that

support the system, limits on cost-ofliving adjustments to beneficiaries, an

increase in the retirement age for future recipients, and a tax on the benefits of wealthier beneficiaries. In addition, new employees working for the

Federal Government were generally

required to join the system, and currently covered State and local governments could no longer opt out of the

system. These reforms were designed

to spread the burden between retirees

and working Americans. Although

these reforms were intended to provide

long-term financial solvency for Social Security, 15 years later there are

new financial concerns.9

Each year, the Social Security Administration issues a report on the financial status of the system. According to the 1998 report, current

projections have benefit payments exceeding revenues by 2013. At that

time, the system will have to begin

paying benefits out of trust fund interest and assets. By 2032, the assets will

be depleted. The system will have to

pay benefits out of current Social Security tax revenues, which would only

provide enough funds to pay benefits

at about three-fourths of the current

levels.10

Three reform options

The Social Security Act states that an

advisory council must be convened

periodically to review various aspects

of the Social Security system. The

most recent council, which concentrated on long-term financial issues

and submitted its report in 1997, identified financial concerns and offered

three options for reform. One option

mirrors the traditional approach taken

in 1983—tax increases and benefit adjustments would distribute the burden

to a wide range of Americans. The

other two approaches are variations

on the concept of moving away from

a system of social insurance toward a

system of individual accounts.11

These options are described below.12

Maintenance-of-benefit. Of the three

options recommended by the Social

Security Advisory Council, the maintenance-of-benefit option is the one

that makes the fewest changes to the

current system. Much like the 1983

reforms, this option keeps the Social

Security tax and benefit structure intact. The main feature of this plan is

to change the way benefits are taxed.

In the beginning, Social Security benefit payments were not subject to income tax. This changed in 1983, when

income taxes were imposed on benefits for higher income recipients.

Today, most retirement income benefits (excluding Social Security) are

taxed in the same way as other sources

of income, that is, all income in excess of already taxed contributions is

subject to taxation.13 (This is the same

principle as the taxation of a capital

asset upon its sale, where all income

in excess of the cost of the asset is taxable.) The maintenance-of-benefit

option for reforming Social Security

would apply this tax principle to Social Security benefits. This is a change

from current procedures, whereby only

recipients above a certain income level

are taxed on their benefit. Another

change advocated by the supporters of

this option is to place all revenues from

income taxes on Social Security benefits into the Social Security trust

funds. Currently, some of this tax revenue is used to fund medicare.

The maintenance-of-benefit option

also includes the expansion of Social

Security coverage to all new State and

local government employees. According to the Bureau of Labor Statistics,

about three-fourths of State and local

government employees with employer

sponsored retirement income coverage

are also covered by Social Security.14

Other changes include slight adjustments to the benefit calculation formulas and a small increase in payroll

taxes, but not until the 2040s.

Finally, this option supports a plan

to study the investment of a portion of
14 Compensation and Working Conditions Fall 1998

Social Security assets in stocks of private companies, indexed to the broader

stock market. Historically, all Social

Security assets have been invested in

government bonds. The Advisory

Council acknowledged the higher

long-run rate of return of stocks over

government bonds, but also acknowledged the potential risk.

Individual account. This option combines a variety of traditional reform

measures (such as increasing the age

at which retirees are eligible for benefits) with the establishment of an individual account that would form a

portion of an individual’s retirement

income. Proponents of individual accounts frequently cite the low savings

rate among Americans and consider

individual accounts as one way of increasing personal retirement savings.15 Under this option, workers

would make a mandatory contribution

of 1.6 percent of their Social Security

covered earnings to their individual

account.16

Accumulated funds in the individual account would be converted to

an annuity at the defined Social Security retirement age. The annuity would

include a minimum guaranteed payment, assuring that a minimum benefit would be paid even if a recipient

died soon after retirement. The Advisory Council offered two alternatives

for the taxation of benefits—either

make contributions tax-deferred until

withdrawn or taxable when deposited

and not when withdrawn.17

This individual account is essentially separate from the existing Social Security system, and does not solve

existing financial problems. Therefore, proponents of the individual account option would increase the age

of eligibility for retirement benefits,18

reduce benefits gradually for middleand high-wage workers, and vary the

formulas used to compute spouse and

survivor benefits.

Other changes are the same as those

found in the maintenance-of-benefits

option, including the changes for taxing and computing Social Security

benefits and the coverage of all newly

hired State and local government employees.

Personal security account. The third

option expands upon the notion of individual accounts. In this case, employer contributions and a small portion of employee contributions would

be used to fund Social Security benefits. The Social Security benefits

funded from these contributions would

be the first tier of the system, providing minimum benefits. This minimum

would be set at $410 per month (indexed to wage growth).

Employee contributions equal to 5

percent of covered earnings would be

deposited into a mandatory “personal

security account” for each individual;

proceeds from this account would

supplement the first tier of this system (the Social Security benefit). Personal security accounts would be individually owned and managed, with

a choice of investment options. Employee contributions would be made

with after-tax funds, but all benefits

received during retirement, including

those resulting from account earnings,

would not be subject to income tax.

Other changes include: An accelerated increase in the retirement age,

changes to dependent and survivor

benefit formulas, and the inclusion of

all new State and local government

employees.

One concern about moving toward

a system of accounts, especially in this

case where about half of all contributions would be diverted away from traditional Social Security payments, is

the cost of moving to such a system.

The current pay-as-you-go system requires current contribution revenue to

pay for current beneficiaries. Those

advocating the personal security accounts describe a system that is phased

in over many years. Individuals under age 25 would be completely covered by the new system. Those between the ages of 25 and 54 would

receive benefits based on their accrued

work experience under the old system;

for future years of service they would

receive benefits under the new system

and be required to invest in their personal security account. However,

those age 55 and over when the new

system begins would remain under the

old system. A combination of increased taxes (other than the payroll

tax) and Federal borrowing would

help fund the costs associated with the

transition.

The Chilean experience

Chile’s social security system dates to

the 1920s, when it was created as part

of a series of labor reforms. Eventually over 150 separate systems existed.

By the early 1970s, these systems covered more than 75 percent of the

nation’s workers and included, for certain occupations, such add-on benefits

as health care and low-interest home

purchase loans.19

Financial concerns and the lack of

coordination among the systems led to

reform efforts in the late 1970s. Options such as raising the retirement age

or increasing taxes were considered

but rejected. Instead, Chile chose to

move toward a system of individual

accounts. Under the leadership of Secretary of the Labor and Social Security, Jose Pinera, privately run pension

companies and pension savings accounts (PSAs) were created.

The PSA system in Chile

This new system of individual accounts is intended to provide near universal coverage to the Chilean work

force. All new workers are required

to participate. They must contribute

at least 10 percent of the first $22,000

of annual wages, but they may make

additional contributions. Funds are

deposited into individual employee

accounts and are tax-deferred.

About 20 competitive private companies, known as AFPs (Administradoras de Fondos de Pensiones, or

pension fund administrators), manage

the system. Each AFP operates like a

mutual fund, investing in a variety of

stocks, bonds, and other securities.

Employees choose their AFP based on

their investment objectives and are

allowed to change their AFP. These

fund administrators are regulated by

the government and must abide by
 Compensation and Working Conditions Fall 1998 15

Social Security

certain investment rules that emphasize diversification and reduced risk.

The “legal retirement age” under

the PSA system is 65 for men and 60

for women. Employees have two payout choices at retirement: Purchase an

annuity or set up a system of periodic

withdrawals from the account. All

benefits drawn at retirement are considered taxable income, although recipients do benefit from the lower tax

rates applied to older individuals.

The PSA system is designed to provide a benefit equal to 70 percent of

the employee’s final salary. This is

based on a 10-percent savings rate and

a 4-percent rate of return over a typical worklife. Workers who have made

contributions for at least 20 years but

whose fund is not sufficient to provide

the 70 percent targeted benefit receive

a benefit from the state once their account is depleted. Welfare-type pensions, at a lower rate, are available to

those without 20 years of contributions. Accounts that exceed the targeted benefit threshold can be used to

retire early, purchase additional benefits, provide spouse or survivor protection or both, or provide a lump sum

to the retiree in addition to periodic

pension payments.

When the PSA system began, those

receiving pensions were not affected.

Those already in the workforce were

given the option of staying in the existing social insurance system (with

the requirement to pay both the employee and employer contribution) or

joining the new system. Individuals

who chose the new system received a

“recognition bond,” which acknowledged their contribution to the old system. This bond could be redeemed for

a lump-sum benefit at retirement.

Because no new contributions were

coming into the government, the cost

of these bonds, plus the cost of social

insurance annuities for those who remained in the old system, was borne

by the government.

As of 1995, the Chilean system is

paying old-age pensions that are 40 to

50 percent higher than those paid under the old system. Resources administered by the private pension funds

amounted to $25 billion, or around 40

percent of gross national product. The

PSA system is credited with bringing

about lower unemployment, higher

savings rates, and increased economic

growth. The PSA is usually the main

asset of a Chilean worker.

There are concerns about the Chilean system, however. For example,

there are reports of workers (those in

the workforce before the new system

began) being threatened by job loss by

their employers unless they participate

in the new system. In addition, not

all Chileans under the new system

have regular contributions made to

their PSAs, because they cannot find

work or because their employer does

not deposit their contribution.

Changes in oversight rules have been

enacted to attempt to eliminate these

problems.20

Social security reform efforts are

not limited to Chile. Following the

Chilean model, several South American countries moved toward systems

of personal retirement accounts. In

addition, Great Britain and Australia

have also moved in that direction. For

example, Great Britain moved to a

two-tiered social security system: A

flat-rate benefit, plus an earnings-related benefit. This system allows

workers to invest a portion of their

payroll taxes in private investments.

The system gives workers the opportunity to own their retirement account, but

also maintains a minimum safety net.21

Shifts in other retirement income

plans

Changes in Social Security, toward

plans that emphasize individual accounts, mirror changes taking place in

employer-provided retirement plans.

In many ways, the development of

Social Security and employer-provided

retirement plans in the United States

have paralleled each other, and employer plans are often designed with

Social Security in mind.22 Therefore,

if there are changes in the Social Security system, it is possible that

changes in employer plans will follow.

Traditionally, employer retirement

plans have provided a guaranteed benefit for the retiree’s life, much like a

traditional Social Security benefit.

The risk associated with these plans,

known as defined benefit plans, is

borne entirely by the employer. In

much the same way as Social Security, there is a guarantee of a benefit

without regard to the employee’s contribution.23 In fact, most of these plans

are funded entirely by employers.

Table 1 provides information on the

percent of employees participating in

a defined benefit pension plan that requires them to contribute toward the

plan costs.

In 1980, about 6 out of 7 full-time

workers in larger establishments were

covered by an employer-provided retirement plan, nearly always a defined

benefit plan.24 A shift away from

TABLE 1. Percent of full-time employees participating in defined benefit pension plans who

are required to contribute toward plan costs, United States, selected years, 1979-96

1979 ................................................. 11 - -

1982 ................................................. 7 - -

1985 ................................................. 10 - -

1987 ................................................. - - 78

1988 ................................................. 6 - -

1990 ................................................. - 5 75

1991 ................................................. 5 - -

1992 ................................................. - 3 72

1994 ................................................. - - 72

1995 ................................................. 3 - -

1996 ................................................. - 3 -

 NOTE: Medium and large private establishments are those with 100 or more employees.

Small private establishments have fewer than 100 workers. Dash indicates no data for this

category.

State and local

governments

Private establishments

Selected years Medium and

large

Small
16 Compensation and Working Conditions Fall 1998

these traditional plans began in the

early 1980s and continues today, as

defined benefit plans have become less

prevalent and, in their place, defined

contribution plans have emerged.

Similar to the individual account alternative mentioned in the Social Security debate, defined contribution

plans emphasize individual savings,

decision-making, and responsibility.

The typical plan in the late 1990s

gives the employee the option to contribute on a pre-tax basis, with some

of those contributions matched by the

employer. Employees may choose to

invest funds in a variety of vehicles.

Distributions at retirement are frequently in the form of a lump sum,

although alternatives may be available.

In cases where contributions were on

a tax-deferred basis, all distributions

from the plan are taxable.

The move away from defined

benefit plans

This shift from defined benefit to defined contribution plans has been discussed extensively. Causes for this

shift include: Changes in tax laws,

strong financial markets, shifts in

employment away from traditional

manufacturing and goods-producing

industries toward more service-oriented industries, and an increased

awareness among workers of their retirement income needs.25

While defined benefit plans have

not been eliminated entirely, features

found in some newer plans reflect the

movement toward individual accounts.

For example, the typical defined benefit pension plan has a formula for

computing retirement benefits based

on length of service and salary. There

is no individual account and it is difficult for employees to place a “value”

on their benefit while they are working.26 A new defined pension plan

known as a “cash account pension

plan,” uses a formula that allows employees to determine the current value

of their plans at any time. Each year,

an employee’s account is “credited”

with a percent of his or her earnings

plus a fixed rate of return.

For example, an employee earning

$30,000 per year in a plan that credits

3 percent of earnings would see a credit

of $900 in his or her account. Each

year, earnings on that $900 would also

be credited to the account. At retirement, the benefit received would be the

annuity purchased from the cash value

of the account. While these plans appear to resemble defined contribution

plans, they are actually funded like

other defined benefit plans. The employer is required to deposit sufficient

funds to pay the expected future benefits. If investments do well, the employer may not have to make a contribution in a given year.

Another recent shift in defined benefit plans has been the movement away

from integration of these plans with

Social Security. As mentioned earlier,

defined benefit plans often work in

tandem with a retiree’s Social Security pension. Integration features are

intended to eliminate the employer’s

obligation to pay for both Social Security and pension benefits at lower

income levels.27 This is done by reducing the employees’ pension benefits for that portion of their earnings

that are subject to Social Security

taxes. Changes in tax law and the

move toward defined contribution

plans have lessened the overall incidence of integrated plans in recent

years.28 (See table 2 for the percent of

employees participating in integrated

pension plans.)

Shifts in Social Security could further change the complexion of integrated employer retirement plans. For

example, if Social Security contributions are diverted to individual accounts, and basic Social Security benefits are proportionately reduced, the

amount offset from an employer pension plan due to Social Security may

likewise be reduced. Alternatively, if

Social Security contributions are increased or if the retirement age is increased, meaning employers will have

to pay greater contributions for longer

periods, there may be a move toward

greater Social Security offsets from

employer pension plans. At this time,

it is impossible to speculate just how

changes in Social Security will effect

employer pensions.

The future of Social Security

The move toward individual accounts

and increased responsibility for one’s

own retirement income has changed

the face of employer pensions over the

last 2 decades. While it is not yet

known in what direction changes in

Social Security will go, the knowledge

gained from existing systems here and

elsewhere in the world will be important to policy makers as they debate

the future of Social Security.

TABLE 2. Percent of full-time employees participating in defined benefit pension plans

with Social Security integration provisions, United States, selected years, 1980-96

1980 .............................................. 45 - -

1982 .............................................. 45 - -

1985 .............................................. 61 - -

1987 .............................................. - - 18

1988 .............................................. 62 - -

1990 .............................................. - 49 8

1991 .............................................. 54 - -

1992 .............................................. - 46 10

1994 .............................................. - - 4

1995 .............................................. 51 - -

1996 .............................................. - 44 -

 NOTE: Medium and larger private establishments are those with 100 or more employees.

Small private establishments have fewer than 100 employees. Dash indicates no data for

this category.

Selected years State and local

Medium and Small governments large

Private establishments
 Compensation and Working Conditions Fall 1998 17

Social Security

1

 For a detailed discussion of financial problems among Social Security programs, see Zvi

Bodie, Olivia S. Mitchell, and John A. Turner,

Securing Employer-Based Pensions: An International Perspective, Philadelphia: The Pension

Research Council, 1996. 2

 For example, life expectancy in the United

States has risen from 68.2 years in 1950 to

slightly over 75 years in the early 1990s. For

more information, see U.S. Department of Health

and Human Services, Public Health Service,

Health United States, 1994. Fertility rates, the

average number of children born to American

women, declined steadily through the first half

of the 20th century. This trend was reversed during the “baby boom” period (roughly 1946

through 1964) when fertility rates reached 3.7

children per woman. Since that time, fertility

rates have once again dropped, to a current rate

of 1.98 children per woman–below the “replacement rate” of 2.1 children per woman needed to

keep one generation as large as the previous. For

a thorough discussion of fertility rates, see Ben

Wattenberg, “The Grandchild Gap,” Think Tank,

Public Broadcasting Service, 1997. 3

 Social Security Administration, 1996 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 1996. 4

 See John F. Harris, “Higher Surplus Data

Renew Budget Spat,” The Washington Post, May

27, 1998, p. A4. 5

 For a detailed discussion of the Federal budget, see “The Economic and Budget Outlook:

Fiscal Years 1999-2008,” Congressional Budget

Office, January 1998. 6

 “State of the Union Address by the President,” White House Press Release, January 27,

1998. 7

 More information on the history of Social

Security is available in Robert J. Myers, Social

Security, Homewood, Illinois: McCahan Foundation, 1985. 8

 There are currently about 33 million Americans age 65 and older, 12.7 percent of the population. That population cohort is projected to increase to 53 million, or 16.5 percent of the population, in 2020, when those born in 1955 reach

age 65. For more information, see U.S. Department of Commerce, Bureau of the Census, Current Population Reports, 1996. 9

 Details of the 1983 Social Security reforms

may be found in Myers, Social Security. 10 “Social Security Board of Trustees Announce Social Security Solvent Until 2032,”

News Release, Social Security Administration,

April 28, 1998. 11 Information on the options for Social Security reform is from Social Security Administration Advisory Council: Findings, Recommendations and Statements, Social Security Administration, January 1997. 12 Other options have been proposed as well.

For example, Senator Daniel P. Moynihan of New

York offered an approach that would reduce both

the employer and employee payroll tax and allow, but not require, workers to invest those reduced taxes in a tax-deferred account. To offset

the reduced tax revenue, the Moynihan plan

would reduce cost-of-living increases, raise the

retirement age, and tax all benefits once an employee re-coups payroll taxes paid. This final

provision would make the taxation of Social Security benefits similar to that of other forms of

retirement income, that is, all monies received

beyond the amount of contributions paid by the

recipient would be taxable. See James K.

Glassman, “Moynihan’s Social Security Plan,”

The Washington Post, March 24, 1998, p. A19.

For a slightly different approach, see Albert B.

Crenshaw, “Panel Proposes Fixes for Social Security System,” The Washington Post, May 20,

1998, p. A9. 13 While there are several variations on the tax

treatment of employer retirement plans, the basic

concept is that any income that has not already

been taxed is subject to income taxes when received. Thus, if an employee contributes $20,000

to an employer retirement plan over his or her work

life, and those contributions were subject to income taxes when they were earned, only retirement benefits above $20,000 would be subject to

taxation. In some plans, employee contributions

are considered “pre-tax” and are not subject to

income taxes when the contributions are made. In

such a case, all retirement income, whether attributable to employee or employer funds, is subject

to income taxes when received. 14 See Employee Benefits in State and Local

Governments, 1994, Bureau of Labor Statistics,

Bulletin 2477, May 1996, p. 119. 15 Personal savings, as a percentage of disposable income, has ranged from 3.8 to 5.9 percent per year throughout the 1990s, compared

with rates generally between 7 and 10 percent

from the 1950s until the mid-1980s. See U.S.

Department of Commerce, Bureau of Economic

Analysis, Survey of Current Business, 1997. For

a discussion of reasons behind this decline in savings, see “Assessing the Decline in the National

Saving Rate,” Congressional Budget Office,

April 1993. 16 Covered payroll is the amount of earnings

upon which Social Security taxes are paid. In

1998, maximum covered payroll is $68,400.

Maximum covered payroll is indexed to inflation

each year. 17 Both of these methods are currently used in

the taxation of employer retirement plans. Where

contributions are made with taxable income, benefits attributable to those contributions are not

subject to taxation when received. Alternatively,

all benefits attributable to pre-tax contributions are

subject to taxation when received. 18 Social Security provides benefits at the

“normal retirement age” and reduced benefits at

the “early retirement age.” Under current law,

the normal retirement age is age 65 for those born

in or before 1938. For those born after 1938,

the normal retirement age increases gradually to

age 67 for those born in 1960 or later. Early

retirement benefits are available at age 62, with

reductions in benefits for those years before the

normal retirement age that benefits are received. 19 For more details on the Chilean Social Security system and its history, see Jose Pinera, “Empowering Workers: The Privatization of Social

Security in Chile,” The Cato Journal, Volume 15,

Fall/Winter, 1996. See also Barbara E. Kritzer,

“Privatizing Social Security: The Chilean Experience,” Social Security Bulletin, Volume 59, Fall

1996, pp. 45-55. 20 See Carmelo Mesa-Lago, Changing Social

Security in Latin America, Boulder City, Colorado: Lynne Rienner Publishing, Inc., 1994. 21 For a discussion of foreign Social Security

reform efforts, see Bodie, Mitchell, and Turner,

Securing Employer-Based Pensions: An International Perspective. 22 See “Effect of Social Security Act on Company Pensions,” Monthly Labor Review, March

1940, pp. 642-47. 23 Total employee contributions to Social Security and, where required, to employer-provided

defined benefit plans, have no effect on the lifetime guarantee of benefits. However, Social Security and many defined benefit pension plans

base initial benefits on employee earnings, so some

relationship between earnings and benefits does

exist.24 Employee Benefits in Industry, 1980, Bureau of Labor Statistics, Bulletin 2107, September 1981. 25 For a discussion of reasons for the switch

from defined benefit to defined contribution plans,

see Michael S. Gordon, Olivia S. Mitchell, and

Marc M. Twinner, Positioning Pensions for the

Twenty-First Century, Pension Research Council,

1997. 26 For a discussion of the “value” of employee

benefits, see Melissa Famulari and Marilyn E.

Manser, “Employer-Provided Benefits: Employer

Cost Versus Employee Value,” Monthly Labor

Review, December 1989, pp. 24-32. 27 For a comprehensive analysis of pension

benefit formulas integrated with Social Security,

see Avy D. Graham, “Coordinating Private Pension Benefits with Social Security,” Monthly Labor Review, March 1994, pp. 35-38. 28 For information on the 1986 tax law

changes, and their effect on employer-provided

retirement plans, see Graham, “Coordinating Private Pension Benefits with Social Security.”