1). 2). Linkages Between Social Security and Private Pensions Are Explicit and Implicit

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. Employers consider Social Security provisions in designing pensions that complement their human resource and other business strategies. 3). An important implicit linkage with Social Security is pension plans’ specification of a normal retirement age. Traditional Social Security Reforms Could Affect Pension Plans by Changing the Incentives Facing Employers and Workers

Traditional reform options, such as reducing benefits or increasing payroll taxes, will likely affect the provision of employer-sponsored pensions. Employers will likely respond to reforms that change their compensation costs or reasons for sponsoring plans. Employers may respond to these changes in a variety of ways. 3). Some evidence indicates that employers might respond by seeking to retain the effectiveness of their retirement incentives.Although some employers will want to continue to use pensions as a tool to reduce or adjust the composition of their workforces, recent evidence indicates that some employers may now want to retain older workers.For example, some firms have been developing pension structures in which workers accumulate benefits more evenly over their careers, in contrast to the “back-loading” typical of traditional defined benefit plans.The introduction of “hybrid” arrangements such as “cash balance plans”could have the effect of reducing early retirement subsidies found in traditional defined benefit plans and could make it more attractive for firms to retain older workers in the future.Thus, to the extent that employers are implementing pension plan provisions that encourage workers to retire later, the potential effects of raising the Social Security retirement age on private pensions may be mitigated. Employer responses such as reducing plan benefits or terminating a plan could depend in part on the size of the firm. Implications for the private pension system will depend on how the individual account is structured (e.g., how it is financed and administered), its scope (e.g., whether it has voluntary or universal participation), and its interaction with other reform provisions (e.g., whether other benefits are reduced). Like more traditional reforms, the effects of an individual account reform feature on the pension system will occur through explicit and implicit linkages between Social Security and pensions and employer and worker responses to specific reforms. In this instance, the net effects on the private pension system would depend on the other provisions included in the reform and the structure of the individual account feature. Some arise from the explicit and implicit linkages between Social Security and pensions and will depend on the responses of employers and workers. Implementing Individual Accounts Presents Challenges and Opportunities

Individual accounts raise a broader set of issues for private pensions compared with traditional reforms. Our retirement income institutions operate in a dynamic environment where workers, employers, and policymakers interact to pursue the goal of retirement income security. The limited knowledge we have of these influences and the complexity of instituting policy change suggests that any reform should be taken with caution and careful deliberation. At the same time, establishing agreement on the fundamental principles underlying the reform should be emphasized. These principles should include ensuring retirement income to those who most need it and encouraging the development of new opportunities to secure and expand the retirement income of future generations.
Why GAO Did This Study

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.

What GAO Found

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.