Social security changes could raise costs of many private pension plans

Many of the private pension plans in the United States may be affected by the coming political battle over social security.

These innocent bystanders could be dragged into the fray because they are integrated with the social security system. Over the long run, changes in social security taxes or benefits could well raise their costs.

''We must recognize that significant changes in social security will trigger some changes in private pensions,'' Quentin Smith, chairman of Towers, Perrin, & Forster, told the National Commission on Social Security Reform earlier this year.

Over half the private pension plans in the US are integrated systems, whose formulas for determining benefits take social security into account in one way or another. Such systems are based on the belief that public and private retirement systems should operate in a unified way, a belief reflected in the fact that Congress allows public and private benefits to be added together when determining whether a pension plan discriminates against low-income workers.

Many integrated plans (from 20 to 66 percent, depending on whom you talk to) use the simple ''offset'' method.

Under an offset plan, retired employees receive a set pension benefit minus a percentage of their social security check. For instance, a typical pension benefit might be 50 percent of an employee's final salary, minus 50 percent of his annual social security benefit.

Offset plans, which are relatively easy to administer and relatively easy to explain to employees, help lower the costs of a pension system. Of integrated plans, they are also the most vulnerable to changes in social security.

''It's the offset plans where you would see the direct effect,'' says Tom Leavitt, a research associate at Brandeis University.

As social security benefits became relatively more generous over the last five years, the projected costs of offset plans sank. But, if social security checks become relatively less generous, the costs of such plans would rise.

Thus changes in social security that are in effect long-term cuts in benefits - such as raising the retirement age from 65 to 68 - would increase the projected pension expenses of firms with offset plans. Reducing the rate of growth in social security benefits, by checking cost-of-living-increases, would also have an effect.

Firms could find themselves paying out more in pension benefits than they had projected.

''A lot of plans would start to look less well funded,'' says Dr. Sophie Korczyk, research associate at the Employee Benefit Research Institute.

Since no one in Congress, or on the National Commission on Social Security Reform, is talking about short-term reductions in benefits, offset pensions are in no danger of facing an immediate strain. No one really knows to what degree any specific change would affect offset plans.

''It's safe to say there's more than a little money involved,'' says Dr. Merton Bernstein, principal consultant to the National Commission on Social Security Reform. ''The timing is terribly important. The greater the delay (in implementing social security changes), the less impact there will be on private plans.''

So if Congress decides to raise the social security retirement age to 68, but phases the change in gradually over the next 30 years (as would undoubtedly be the case if such an alteration were made) private pension plans would have plenty of time to adjust.

But it is also impossible to predict what the employers' response would be to such changes. They might simply shrug their shoulders and plan to pay more money into their pension funds. Or, if firms felt their pension plans were becoming too onerous a burden, they could simply reduce absolute benefit levels. This could cancel out the negative effects of any change in social security - but would undoubtedly be less than popular with workers.

''The employers' response is the wild card,'' Dr. Korczyk says. ''So much of it is a question of P.R. [public relations] with their employees.''