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Surviving Spouse's Benefits in Private Pension Plans

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Surviving Spouse's Benefits in Private Pension Plans Surviving spouse's benefits in private pension plans Most private pension plans offer a lifetime minimum annuity to surviving spouses of about two-fifths of a worker's accrued benefits; however, many spouses may receive a smaller share, or may not be covered, according to a BLs analysis of plans in 1981 DONALD BELL AND AVY GRAHAM When an active worker or retired employee dies, what ben- of monthly payments to the spouse is reduced by the number efits does the spouse receive from employer contributions of pension payments already received by the retiree . to a private pension plan'? While the Bureau of Labor Sta- This article is based on data from the Bureau's 1981 tistics has no data on actual annuity payments and the num- survey of employee benefits in large and medium firms. 2 A ber of beneficiaries receiving them, a representative sample sample of 1,505 establishments across most private indus- of medium and large companies shows that, as required by tries yielded data on the detailed provisions in 914 pension law, the plans offer a surviving spouse a lifetime annuity . plans . Results of this survey provide representative data for However, both eligibility requirements for this benefit and 21 .5 million employees in 43,325 establishments . Eighty- the size of monthly payments depend on when death occurs . four percent of the employees were covered by private pen- If death is before retirement, the spouse usually is eligible sion plans-79 percent were under plans fully paid for by for an annuity if the employee had sufficient age and service their employer, and 5 percent paid part of the cost. to qualify for early retirement benefits ; the size of the annuity depends on the pension the worker would have received if ERISA requirements he or she had opted for early retirement.' (See chart 1 .) If Spouse benefit provisions of private pension plans reflect the employee had retired, the typical plan would provide the influence of the Employee Retirement Income Security for a spouse's annuity equal to about two-fifths of the work- Act of 1974 (ERISA) . Pension plans are not required by law, er's accrued benefits . but once established, ERISA requires that they provide for A few pension plans offer "death benefits," as well as annuities to spouses of deceased employees. The require- annuities . While annuities provide a lifetime income, death ments differ for death before and after retirement . benefits are paid either in a lump sum or for a specified Pension plans must now include a "postretirement" an- number of months . The most common lump-sum payment nuity arrangement which pays a surviving spouse regular is $ I ,000; monthly death benefits most often are paid for 5 income equal to at least half of the pension paid to the years . However, if death occurs after retirement, the number retiree . To do this, the plan may reduce the pension paid to the retiree . This reduced annuity is called a "joint-and- survivor annuity ." A married worker must be given an Donald Bell is a labor economist and Avy Graham is a social science research analyst in the Office of Wages and Industrial Relations . Bureau opportunity not to participate in a joint-and-survivor an- of Labor Statistics . nuity-that is, not to accept a reduced annuity . However, 23 MONTHLY LABOR REVIEW April 1984 " Surviving Spouse's Pension Benefits Chart 1 . Proportion of normal pension typically paid under various options' Death before retirement' 171 = pension paid Survivors pension Retirement at normal age Retirement at an early age" No survivor coverage Employees pension Employees pension Employee's pension Employees pension Survivor's pension' Survivor's pension' ' A ''normal" pension is that paid to an employee who retires at a plan's ' Assumes employee dies 10 years before normal retirement age with 30 normal age and who elects not to take the joint-and-survivor annuity option years of service and is eligible for survivor coverage This is the maximum pension available to the employee for a specific length of ' Paid to spouse after death o1 emoleyee based on St -n-cen' cn ".ion service . This chart compares the amount typically paid under other options ' Assumes employee retires 10 years before normal retirement age with 30 with this normal pension . years of service and pension is reduced 5 percent for each year 24 if the participant fails to elect another form of annuity, the joint-and-survivor option automatically becomes effective Table 1 . Provision for postretirement survivor annuity in . private pension plans, medium and large firms, 1981 Under plans which do nor reduce the retiree's annuity as Plans Annuity the price of continuing payments to a surviving spouse, the Number Percent survivor may be paid less than 50 percent of the retiree's annuity provided the rate does not produce a smaller pro- Total . 914 100 portion of the retiree's unreduced pension than that which Joint-and-survivor annuity' . 856 94 would be achieved by a 50-percent joint-and-survivor op- Surviving spouse receives : tion . 50 percent of joint-and-survivor annuity . 202 22 Prior to enactment of ERISA, most plans provided survivor More than 50 percent of joint-and-survivor annuity . 33 4 only if employee annuities the voluntarily chose the option Retiree's choice of multiple joint-and-survivor options2 . 621 68 at a specified time, such as I year before retirement . If a Share of retiree's pension3 . 34 4 retiree did not act, the surviving spouse was not eligible for Joint-and-survivor annuity plus portion of retiree's pension . 24 an annuity . Also, ERISA prohibits discontinuance of pay- 3 ments if a spouse remarries-a frequent provision before lAn annuity that provides income during the lifetime of both the retiree and the surviving spouse . The accrued pension will be reduced at retirement because of the longer time the law's passage. that payments are expected to be made . Upon the retiree's death, all or part of the reduced pension is continued to the surviving spouse for life . If an employee dies before retirement, ERISA requires that 21ncludes at least one option that continues 50 percent or more of the retiree's reduced "preretirement" survivor pension to the surviving spouse . a annuity be available if the pen- 3These plans do not require a reduction of retiree's accrued pension when employee sion plan gives employees the option of retiring before the and spouse are the same age . Under their provisions, the spouse receives an average of 49 percent of the accrued pension. For 2 out of 3 plans in this group, the retiree's normal retirement age with a reduced lifetime annuity . A or spouse's benefit is reduced if there is significant age difference . preretirement spouse's annuity must be available if a de- NOTE : Because of rounding, sums of individual percentages may not equal totals . ceased worker was eligible for early retirement, was within 10 years of the plan's normal retirement age, and had been pension .) Multiple options thus provide alternatives which married at least 1 year. The minimum annuity is the amount might meet the needs of a married couple for either a higher the spouse would have received it the worker had retired immediate benefit to the retiree and spouse or a higher just before death with early retirement benefits and had benefit later to the surviving spouse . The former alternative elected a joint-and-survivor option . (The normal retirement might be suitable if an employee is in good health or if the age is the point at which the employee could retire and spouse has a separate pension. While the 100-percent sur- immediately receive a pension without reduction due to age . vivor benefit would require a greater reduction for the re- The normal pension is the annuity available at normal re- tiree, it might be a more desirable choice for an employee tirement age if the joint-and-survivor annuity is waived .) in poor health or with alternative income sources. The 1974 law has had a significant effect on potential Although ERISA allows for a reduction in the retiree's protection accorded spouses of active workers. In the sum- pension to finance the survivor's annuity, 4 percent of the mer of 1970, 36 percent of 149 major pension plans provided plans studied offered the survivor benefit without this re- for annuities to survivors of active workers ; virtually all duction . Generally, these plans were in effect prior to the pension plans studied in the 1981 survey offered a prere- law's enactment and were continued because their provi- tirement spouse annuity.` sions met or exceeded ERISA standards . Another small group of plans (3 percent) gave spouses a portion of the retiree's Survivors of retirees pension plus a joint-and-survivor benefit calculated on the As required by the Employee Retirement Income Security balance of the pension.' Act, all of the pension plans studied provided for annuities As discussed earlier, a joint-and-survivor annuity adjusts to survivors of retirees . More than 90 percent offered these the retiree's pension downward to provide a lifetime benefit postretirement spouse benefits in the form of joint-and-sur- to the surviving spouse . Pension payments expected to be vivor annuities .' (See table 1 .) While ERISA requires a plan made during the lifetime of the retiree and the surviving to have a spouse annuity which pays at least 50 percent of spouse approximate the plan's total payments in a straight- the retiree's pension, other percentages also may be avail- life annuity to a single person .
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