years concerning what recognition should be given to earnings or service and the consideration that is to be given to minimum needs.

It is argued by those who favor benefits related to service but not earnings that such a formula operates to assure the lower-paid workers of receiving a more adequate pension. For example, under a formula providing $12 per month for each year of service, a 30-year worker would receive $360 per month in addition to his or her Social Security benefits. If this worker's earnings prior to retirement were in the neighborhood of $1,500 a month, his or her total pension (at age 65) including Social Security would be in the neighborhood of two-thirds of earnings prior to retirement but the replacement ratio would decline as wages exceeded this amount.

The argument is made that higher-paid employees who might consider such a pension inadequate are in a better position to supplement their pensions through private savings including Individual Retirement Accounts and other deferred compensation arrangements. Thus, a benefit formula that relates benefits to service follows the trade union tradition of being more considerate of the needs of lower-paid employees.

On the other hand, it is argued that workers tend to judge the adequacy of their pension in relation to what they have been earning before retirement. Thus the benefits should bear some reasonable relation to normal earnings The negotiation of a pension plan must take into consideration the fact that money being set aside currently in a pension fund will be utilized to pay benefits at some future date. A young worker may not retire for 40 years and, in that time, much can happen and generally does. Younger workers can expect that both their dollar and real income will greatly increase by the time of retirement.

Many unions feel a formula based on a percentage of earnings would appear to offer better protection in the long run. The argument that the formula based upon service operates in favor of the lower-paid worker is met, in part, by the fact that Social Security benefits are weighted in favor of lower-paid workers. A private pension plan formula which provides for benefits related to pay and which is added to (and not inclusive of) Social Security would seem to partially meet the objections raised by those who favor a formula based on service alone.

In addition, when the benefit formula is related to a worker's earnings, it is essential to devise a benefit formula which uses the final earnings in the years before retirement as the base for computing the benefit. This relates the benefit to the level of pay and living standards to which the worker has become accustomed at the time he or she begins drawing a pension.

Relating retirement benefits to final earnings does not solve the problem of retirees who experience reductions in the purchasing power of benefits due to increases in the price level. Obviously, this problem can be solved by adjusting retiree benefits partially or fully in accordance with increases in the cost of living. Though desirable, this kind of a cost of living formula is difficult to achieve. The cost implications do not escape employers and, in view of recent experience with inflation, they vehemently oppose cost of living provisions. Unions are also aware that such a provision will result in much higher costs and active workers often prefer higher wages or improvements in still inadequate basic pension plan provisions.

Early retirement.-The AFL-CIO favors a flexible retirement policy with no age requirements as a desirable objective. Organized labor feels there is no ideal age for retirement. Individuals differ greatly in their capacity for work in their later years. In addition, automation, technological change and economic decline taking place in many industries require that unions use early retirement as one way to help deal with these problems. Best estimates are that at least two-thirds of workers covered by negotiated pension plans retire before age 65.

Pension plans should, to the extent possible, avoid using specific retirement ages and attempt to use flexible retirement options. For example, a plan may state an employee is entitled to unreduced benefits regardless of age when age and service total 80. The objective is to make the retirement decision an individual one. Workers would then base that decision on such factors as the physiological and occupational characteristics of the job, their health, employment prospects and retirement income without age being a significant factor in the decision. The early retirement provisions of collective bargaining agreements have moved in that direction in recent years.

Obviously, to provide adequate benefits at earlier ages requires that the plan subsidize early retirement since the actuarial equivalent pension at age 60 or 55 will be drastically reduced-from two-thirds to less than one-half of the earned benefit. The ultimate objective is for the plan to provide for early retirement without an actuarial reduction. Even though it is expensive, it is a very desirable feature, particularly in an industry where employment is declining.

Vesting. One of the most important developments in private pension plans, now required by law, is that the retired employee has a non-forfeitable, legally binding right to a pension after a specified period of service. Organized labor was a strong supporter of the vesting provisions that were incorporated in the Employees Retirement Income Security Act (ERISA).

Lower vesting requirements has long been a collective bargaining goal of organized labor. Employers on the other hand have looked to pension plans as a way to reduce employee turnover. To them, liberalized vesting was looked upon largely as an additional pension cost factor with little or no advantage to an employer.

Lower employee turnover may be a good thing for an individual employer but it is not necessarily good for workers nor is it something that unions should be interested in promoting. Restrictions on labor mobility will inevitably have a depressing effect on wage levels. And, such restrictions are not good for the economy of the country as a whole which depends upon a high degree of mobility on the part of the labor force for maximum efficiency.

Aside from the somewhat abstract question of the effect of a pension plan on the mobility of workers, there is a more direct consideration which argues for liberal vesting provisions for workers. That is the simple fact that the pension credits are properly theirs. They have paid for them through services performed at wages lower than they would have been without a pension plan.

Thus, many unions push for more liberal vesting provisions than those mandated by ERISA but rarely for full and immediate vesting or even 5-year vesting. For immediate vesting can greatly increase the cost of a pension plan, particularly if withdrawal rates are high, and yet provide nothing more than a trivial benefit amount for short-service workers. Because of the unique economic problems faced by particular unions and employers, the AFL-CIO does not advocate or support amending ERISA to mandate more liberal vesting provisions than those now required by law. We feel this question is best left to collective bargaining.

Disability-One of the pension objectives of the trade union movement is to include a disability pension for those who are forced out of the labor market because of sickness or accident. Permanent or long-term disability is a major catastrophe wherever it strikes. Loss of the earning power of the family provider disrupts family relationships, interrupts family plans for the future and may create social depend

ency.

At the present time, the Social Security law is very restrictive in granting benefits for disability and generally without supplemental benefits is inadequate. A great many people have difficulty in finding suitable employment because of disability although they are deemed employable by Social Security standards. Thus, unions feel a real need exists for supplementary pension plans to provide benefits for disabled workers who cannot qualify for Social Security benefits.

It is for these reasons that unions have pressed in collective bargaining for disability benefits. Where such benefits are provided, they are usually payable for permanent and total disability and the benefit formula is subject to considerable variation. Most plans have a service or a combination of service and age eligibility requirement to reduce the cost impact of the benefits. Service requirements are usually 10, 15 or more years which may be associated with age requirements of 40, 50, or 55 years.

Organized labor believes the disability benefits of a private pension plan should be equal to the retirement benefit that would be payable if the worker were able to continue working to the normal retirement age and eligibility should begin when the employee becomes vested for the retirement benefit. Increasingly, unions are pushing for separate disability programs because the disability benefit in the regular pension will often be inadequate even at the level of accrual assumed at age 65 if the worker is not eligible for Social Security disability benefits.

Survivor's benefits.-The most common method of providing for survivor protection is the joint and survivor option. This is an annuity payable for life of the retired employee and continued in whole or in part after his or her death to a named contingent annuitant until the latter's death. The contingent annuitant is usually the husband or wife and the option is usually provided at no cost to the plan through an actuarial reduction. On an actuarial equivalent basis, the reduction is substantial, particularly if the spouse is relatively young.

A major problem with the joint and survivor option is that a majority of pension retirees opt not to take it. The result is tragic situations where a widow after 30 years of marriage discovers after her husband's death that she is not entitled to any pension benefits from his pension plan. Pension equity legislation now pending in Congress would require the written consent of both participant and spouse to waive a survivor annuity option. The AFL-CIO supports this provision which seems likely

www

to become law in the near future. The joint and survivor option should also be made available for deferred vested pensions and such a requirement, which is supported by the AFL-CIO, is also part of the pension equity legislation.

Because of the importance of the option and because the actuarial equivalent benefit is so much less than the normal life annuity, unions have pushed to subsidize the joint and survivor annuity by letting the plan absorb a substantial part of the cost.

A major gap in pension programs is a general failure to provide annuities to spouses when the worker dies before being eligible for a retirement benefit. This gap works a hardship on the family in many cases. It is also inequitable. No doubt the reasons for the unsatisfactory treatment of the survivor's benefit in pension plans is the high cost involved. The problem, therefore, of negotiating a meaningful survivorship benefit for spouses within the cost limitations as determined by the collective bargaining situation is very real. Thus, where such benefits are provided, plans frequently provide spouses benefits under both the insurance and the pension program with insurance bearing the main cost in early years before an employee has acquired many credits toward retirement and the pension plan carrying the main burden of cost in later years.

Among such plans, cost-reducing techniques such as restricting eligibility for benefits to those with considerable service and after a certain age (20 years service and 50 for example) may help resolve the cost problem but not the social problem. Regardless of cost, however, the lack of protection for spouses remains a major gap and we feel it important to make some start in this direction even if initial programs fall considerably short of the ideal.

Employee contributions.-Unions maintain that a pension should be financed solely by the employer and oppose contributions by employees. When a pension plan is negotiated, both parties thereby acknowledge that it is, in fact, a part of the wages and conditions of employment which workers are to receive in exchange for their labor. Workers do not get something for nothing. They earn it.

Employer contributions represent tax free dollars since pension costs are tax deductible but employee contributions are taxed since employees pay taxes on their gross income. Dollar for dollar, employer contributions will provide more pension benefits than those of an employee. Thus, it makes sense for the employer to finance the plan and contributory plans are rare among collectively bargained pension plans.

Administration.—Unless the bargaining unit is too small, unions generally prefer a self-administered trustee plan-one in which contributions to a pension plan are deposited with a board of trustees having responsibility for investment and payments to eligible employees. In addition, workers whose deferred wages pay for these pension funds should have a voice in the decision making process. Pension funds are now largely managed by employers and labor seeks a more effective voice in their administration.

Negotiated pension plans can be classified into two major types-multiemployer plans and single employer plans. Mutiemployer plans are craft-wide and area-wide retirement funds to which all employers under contract with the union contribute. These kinds of plans have joint administration by unions and employers. Single employer plans are negotiated with one employer. The union negotiates the level of benefits but, with rare exceptions, has left the administration of the plan to the employer.

AFL-CIO policy urges unions to secure an equal voice with management in the administration of their pension funds. This policy was adopted because of our concern about the investment policies of those who manage these funds. There is considerable evidence that much of the industrial policy of the United States is being dictated by professional money managers in banks and insurance companies, who have steered investment of the funds they control, including union pension funds, into anti-union firms in the United States and increasingly overseas.

SUMMARY

As stated earlier, there is no typical or standard plan that can be said to be representative of organized labor's view of what constitutes a good pension plan. The differing circumstances of union members and the economics and unique characteristics of an industry or employer make the possibilities virtually limitless and will dictate what a union can achieve in the way of an adequate pension plan. Nevertheless, I will attempt to summarize what logically follows from my remarks as to what a good union pension plan should contain with the understanding that for most unions they may still be goals and they represent my personal views.

1. A defined benefit plan should be the starting point for designing a pension program.

2. The benefit formula should be adequate to provide a basic retirement benefit including Social Security of at least two-thirds to three-quarters of monthly fulltime wages for employees in the lower and average salary brackets. This proportion may be less for higher paid workers.

3. There should be a flexible retirement policy so as to facilitate early retirement without an actuarial reduction in the benefit.

4. The plan should be solely financed by the employer.

5. Pensions for retired workers should, if possible, provide a cost-of-living adjustment.

6. Unions, where it is feasible, should attempt to negotiate more liberal vesting provisions than those required by the Employees Retirement Income Security Act. 7. The plan should provide disability benefits. The benefits should be equal to the retirement benefit that would be payable if the worker were able to continue working to the normal age of retirement and eligibility should begin when the employee becomes vested for the retirement benefit. Alternatively, a separate disability plan should be established when this approach does not provide adequate benefits.

8. Pension programs should provide survivor benefits superior to those available through a typical joint and survivor option including survivor protection when the worker dies before the spouse is eligible for benefits under a survivor option.

9. Unions should have an equal voice in the administration and investment of pension funds.

These goals may seem unrealistic in view of the recent collective bargaining difficulties faced by unions. But AFL-CIO objectives, in the broadest sense, represent the striving of workers for a better life; a life in which retirement is a promise instead of a peril. There is a long way to go before this nation reaches this goal and even our objectives fall far short of achieving it.

Yet, goals are important. They are important because if we stop striving for them, if we settle for things as they are, we will never achieve them.

DESIGNING NEW SYSTEMS: THE STATE EXPERIENCE

(By Harry L. DuBrin, Jr. and Karl E. Nisoff)

Mr. Stevens, I want to thank you, your committee and staff for inviting me to participate in your study of alternative retirement income programs for new Federal employees.

I have asked one of my colleagues, Karl E. Nisoff, counsel to the New York State Teachers' Retirement System, to join me in this appearance and to assist in answering questions that my comments may generate.

In our preliminary discussions with members of your staff, we were asked to review, for your committee, developments in the design of plans for new employees in the New York State public sector. In doing so, I want to make it clear that I am not here, necessarily, to defend the changes that have been made since 1970 in plans affecting New York State public employees, rather, I am here to explain their evolution as best I can.

For nearly 50 years, from 1920 to the late 1960's, the basic retirement plans for public employees remained practically unchanged. The plans were contributory and, upon retirement, the member received an allowance consisting of an annuity and a pension.

Time does not warrant reviewing the old benefit structures. Those applicable to teachers are set forth in the law pamphlet accompanying this statement.' Persons who vested while these provisions were in effect and now retire, would obtain a benefit calculation based upon the old formulas.

What we want to address is the fact that in the 1960's, a number of benefit improvements were made in the retirement plans covering public employees in the State and City of New York. Oftentimes, these improvements were instituted as an alternative to salary increases. It was also evident that there was a great deal of misconception, even misrepresentation, as to the costs of benefit improvements. Traditionally, public employees received lesser salaries than their counterparts in the private sector. In the minds of some, this disparity justified richer retirement benefits for persons in the public sector. However, in the 1960's, this wage disparity began to disappear, particularly for those workers in the lower job classifications. The trend toward equalization of pay between persons in the public sector and those in the private sector may also have been spurred by enactment, in 1967, of the Fair Employment Act (commonly known as the Taylor Law 2), which permitted public employees to bargain collectively for salary and other benefits. Whatever the reasons for the higher retirement benefit levels, it became apparent that the interfacing of higher retirement benefits and higher basic salary levels made employer retirement costs a serious budgetary problem.

As the pressures for placing a cap on retirement costs mounted, New York addressed the problem in a series of moves, commencing in 1971. That year a law was enacted requiring current payment for any improvement in retirement benefits. This provision was included in a law amending the Fair Employment Act, and was ostensibly a stop gap measure intended to slow down retirement benefit improvements by requiring that any change be funded immediately.' That law also added another statutory provision that became a harbinger of things to come. New Retire ment and Social Security Law, § 431, established ground rules for computing final average salary. These criteria will be dealt with more specifically in our discussion of the new plans. The important thing to mention, however, is the fact that the Legislature and the Governor were concerned about the growing tendency to enrich final average salary in the years immediately preceding retirement. The law also sought to exclude such "goodies" as salary in lieu of unused sick leave, vacation or other forms of termination payments in calculating final average salaries.