Under the deferred wage concept, private pensions are viewed as:

   A. Gratuities or rewards to employees for long and loyal service to an employer

   B. A systematic and socially desirable method of releasing employees who are no longer productive members of an employer’s labor force

   C. Part of a wage package that is composed of cash wages and employee benefits

   D. Annual charges against an employer’s revenue for depreciation of human machines

   E. The fulfillment of a moral obligation on the part of an employer to provide for the economic security of retired workers

C. Part of a wage package that is composed of cash wages and employee benefits

Which of the following is (are) (an) income tax advantage(s) of all qualified pension plans?

   I. Within limits, employer contributions are tax-deductible to the employer.

   II. Investment income on plan assets accumulates tax-free until distributed.

   III. Benefits at retirement are tax-free to a retired employee.

A. I only

B. I and II only

C. I and III only

D. II and III only

E. I, II and III

B.  I and II only

All the following are reasons for the growth of private pension plans EXCEPT:

   A. Desire by business for increased productivity

   B. The favored tax status of “qualified” plans

   C. The demands of labor unions

   D. The sales efforts of funding agencies

   E. The requirements of federal legislation

E. The requirements of federal legislation

What are the basic economic problems facing the aged?

(a) The desire of aged individuals to maintain, to a high degree, their preretirement standard of living in their retirement years

(b) The declining employment opportunities available to the aged

(c) The relatively low individual savings of the aged because of higher income taxes, increased consumption patterns, inflation pressures in the recent past and other factors

(d) The improvement in longevity experienced during the 20th century.

Why is the assumption that the financial needs of an individual decrease after retirement valid?

The retired individual often does not have dependent children, and a home and its furnishings generally have been acquired by retirement age. The actual decline in the financial needs of a retiree, though, has probably been overstated. An individual’s expectations and preferences discourage significant change in one’s standard of living upon retirement; and, increasingly, retirees remain fairly active, particularly in terms of civic, social, travel and other recreational activities. Also, urbanization, geographic mobility, demographics and changing culture minimize the prospect of retired parents moving in with their children.

Why is there such a low labor force participation rate among the elderly?

There are many reasons for the withdrawal of the aged from the labor force:

(a) Many older workers want to retire and do so voluntarily.

(b) Many individuals are physically unable to perform work duties as efficiently as they could at younger ages.

(c) Industrial and technological advances operate to the disadvantage of older persons.

(d) Though created to alleviate the financial risk associated with excessive longevity, the Old-Age, Survivors, Disability, and Health Insurance (OASDHI) program and private retirement plans have tended to institutionalize age 65 as the “normal retirement age.”

Note that 1986 amendments to the Age Discrimination in Employment Act (ADEA) banned mandatory retirement (at any age) for most employees.

What is the value of home ownership for the economic security of the aged?

Studies indicate that a substantial proportion of the homes owned by the aged are clear of any mortgage. Since normal maintenance costs and taxes tend to be less when a home is owned than when comparable housing accommodations are rented, home ownership enhances the economic security of the aged. Estimated maintenance costs for an unencumbered home are

about 33% to 40% less than the costs of renting a similar home. Also, there is the possibility that the home can be used as an income-producing asset or that a home equity loan can be used to provide additional cash. There is growing interest in reverse annuities. With a reverse annuity, the homeowner receives a lifetime monthly income in exchange for the title to the

home at the homeowner’s death. The equity in the home and life expectancy of the homeowner will determine the amount of the monthly annuity payment.

What are the forces at work that have restricted the growth of savings in this country?

Advertising, installment credit availability and the media of mass communications encourage individuals to set their sights on a constantly increasing standard of living. This competition from consumption goods for current income dollars results in a lower priority being placed on

the accumulating of savings for retirement. Also, the high levels of federal income taxes reduce an income earner’s capacity to save. Though tax rates were reduced by the Tax Reform Act of 1986 (TRA ‘86), they subsequently increased. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) reduced income tax rates once again, although not as dramatically as TRA ‘86 did. In the not very recent past, inflation was an additional deterrent to increased levels of savings. Inflation is a particularly serious threat to the adequacy of savings programs of persons who already are retired. For employed persons, increases in the

cost of living may be offset, in part or in whole, by increases in current earnings; however, inflation protection is likely to be less comprehensive for most older persons. Therefore, they are faced with the alternatives of accepting a lower standard of living or more rapidly liquidating their accumulated savings.

Why have private retirement plans grown so rapidly in the last four decades?

The primary reason for the phenomenal growth experienced in the private retirement area is that private retirement plans offer substantial advantages to both employers and employees.

In addition, the specific factors listed below are generally considered to have created the impetus for the growth of private retirement plans over the last several decades.

(a) The increased productivity and morale of the employee group when a formal retirement plan is offered

(b) Tax considerations, especially the significant tax advantages associated with qualified retirement plans

(c) Wage stabilization programs enacted during World War II that limited higher wages but allowed establishing benefit programs including retirement plans

(d) Pressures from unions for additional and expanded fringe benefit programs

(e) The necessity of business firms to offer employer retirement plans in order to attract and retain qualified human resources in a competitive labor market

(f) The desire of employers to reward employees for long periods of service

(g) The efficiency of the formal group savings approach in providing economic security for the aged

(h) The sales efforts of funding agencies such as insurance companies, bank trust departments, corporate trustees and mutual funds.

What alternatives exist for an employer dealing with superannuated employees?

The employer has several courses of action if an employee can no longer meet the requirements of the job.

(a) The employer can terminate the employee without any further compensation or retirement benefits once the value of the employee’s services drops below the salary being paid. This course of action is seldom taken by employers.

(b) The employer can retain the less productive, superannuated employee in his or her current position at the same level of compensation, with the difference between the employee’s productivity and salary being absorbed by the employer as a cost of doing business. This approach would be the most expensive method of dealing with less productive, superannuated employees, would engender longer range indirect costs from the resultant inefficiencies and lead to poor morale among productive, active workers.

(c) The employer could retain the less productive, superannuated worker and transfer the worker to a less demanding job at the same or a reduced level of compensation. The direct costs in the former case would be similar to alternative (b), but the indirect costs would be reduced because a more capable person would now be staffing the more demanding position. If the employee’s salary were reduced, the direct costs of superannuation also would be reduced. A difficulty with this approach is that few firms have a sufficient quantity of these less demanding jobs matching their needs for less productive workers.

(d) The employer can establish a formal retirement plan to provide less productive, superannuated employees with an acceptable alternative to continued employment

in a humanitarian and nondiscriminatory manner, and the inefficiencies associated with retaining employees beyond their productive years are reduced. The sense of security derived from the knowledge that provision is made for their retirement income needs, at least in part, should increase the morale and productivity of the employees. Also, systematic retirement of older workers keeps the channels of promotion open, thereby offering opportunity and incentive to the younger employees—particularly those aspiring to executive positions. Therefore, a retirement plan should permit an employer to replenish the workforce.