Social Security and the Private Pension System: The Significance of Integrated Plans

Abstract

Since the enactment of Social Security, the concept of with Social Security has been a feature of the private pension system. Integration permits employers to take their contributions to Social Security into account and reduce the benefits of low-paid workers in their tax-qualified retirement plans. Prior studies suggest that (1) integration is declining among defined benefit plans and (2) integration among defined contribution plans is rare. This study contradicts those findings. Using Form 5500 data obtained from about 1,000,000 plans from 1993 to 1997, this research finds that integration is a persistent and stable feature of the private pension system. One out of every four plans is integrated, and their numbers increased by 7% between 1993 and 1997. The number of participants covered by integrated plans grew by 11% to about 24,000,000 by 1997. Slightly less than one out of every three defined benefit plans is integrated. As measured by the number of participants, integration in such plans does not appear to be decreasing. Integrated defined benefit plans tend to be large and represent almost half of all plans with 2,000 or more participants. Their assets grew to $774 billion by 1997, equivalent to about 42% of the assets in non-integrated defined benefit plans. Annual employer contributions fell from $11 billion in 1993 to $9 billion in 1997, about half the amount contributed to non-integrated defined benefit plans in that year. Integrated defined contribution plans represent the wave of the future for integrated plans. Integration in such plans is not rare. As measured by the number of plans, about one in four of all defined contribution plans is integrated, and their numbers increased at the same rate (14%) as non-integrated defined contribution plans from 1993 to 1997. As measured by the number of participants, some 5,600,000 people participated in an integrated defined contribution plan by 1997. Integrated defined contribution plans tend to be small with 75% having fewer than 20 participants. Even so, the number of participants in integrated defined contribution plans of all sizes increased in every year from 1993-1997. Moreover, yearly employer contributions increased to about $6 billion by 1997 while their total assets were about $205 billion, a 63% increase over 1993 values. Regression analyses were reasonably successful in estimating the likelihood of integration in defined benefit plans but defined contribution plans remain a puzzle. Understanding which employers choose to integrate their defined contribution plans and why will require additional research with relevance beyond the integration context. This research suggests that integration may make plan sponsorship more attractive to small employers where pension coverage issues are most acute. More research could contribute to an enhanced understanding of the dynamics of pension coverage. In addition, learning more about integration in defined contribution plans is critical to the debate over Social Security reform. The primary effect of plan integration is to make low-paid workers even more dependent on Social Security for retirement income, and responsible proposals for reform will need to take that consequence into consideration.