Social Security Reform:

Implications for Private Pensions

HEHS-00-187: Published: Sep 14, 2000. Publicly Released: Sep 14, 2000.

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Pursuant to a congressional request, GAO provided information on the interactions between Social Security and private pensions, focusing on the: (1) primary linkages between Social Security and private pensions and the way they interact to provide retirement income for workers and families; (2) effects of traditional Social Security reforms on the structure of employer-sponsored pension plans through changes in the costs and incentives faced by employers and workers; and (3) effects of nontraditional reforms, such as individual accounts, on the structure of the private pension system.

GAO noted that: (1) Social Security and private pensions are key sources of retirement income that are linked through the employer costs associated with the compensation provided to workers; (2) because pension plans serve as a supplement to Socal Security, many plans are integrated--that is, they explicitly incorporate Social Security benefits or contributions into their plan design; (3) employers also implicitly consider Social Security provisions in designing pensions that complement their human resource and other business strategies; (4) traditional reforms in the Social Security program, such as changing benefits or taxes or raising the normal retirement age, may alter the incentives of workers and employers, which could prompt adjustments in private pension plans; (5) the effect of any specific reform will depend on the nature of the change its magnitude, its time horizon for implementation and its interaction with other provisions that comprise a comprehensive reform proposal; (6) employers' and workers' responses to reform will be shaped by a variety of factors, including the firm's size, the type of pension plan offered, and the economic status of the worker; (7) employers will respond to reforms that affect compensation costs or the incentives for sponsoring a plan; (8) the introduction of individual accounts raises a broad set of issues for private pensions, depending on how such a reform is structured, its scope--whether it is voluntary or universal--and its interaction with other reforms as part of a broader reform proposal; (9) like more traditional reforms, the the effects of an individual account feature on the pension system will depend on the explicit and implicit linkages between Social Security and pensions and employers' and workers' responses to specific reforms; (10) the nation's retirement income institutions operate in a dynamic environment where workers, employers, and policymakers interact to pursue the goal of retirement income security; (11) the complexity of making policy change suggests that any reform should be taken with careful deliberation; (12) the complexity of making policy change suggests that any reform should be taken with careful deliberation; and (13) at the same time, ensuring retirement income for those who most need it and encouraging the development of new opportunities to secure and expand the retirement income of future generations should be emphasized.

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