Uncle Sam wants individual to chart his own financial future

Self-reliance. These have become more important words for those looking to their retirement income. In the past, many employees counted on corporate pensions, coupled with social security and their own savings, to see them through their retirement years.

With the high inflation of recent years and the fuss over the financial condition of the social security pension system (experts say it is actually sound now), many aren't so sure whether they will have adequate funds at retirement. So, many people want to do more to safeguard their financial position. Individuals can find ways do that, but they may have to do much more of it on their own.

Corporations and the federal government are offering more tax-advantageous ways to save for retirement - such as ''cafeteria'' plans, tax-sheltered savings plans, individual retirement accounts (IRAs), and annuities. But the decisions over just what and how to save are often being left to the individual, who may or may not have the financial experience to make the best choices.

''I call it the end of paternalism,'' says Joshua Young, a vice-president in the trust department at Boston's State Street Bank. ''We're seeing that in the trust business more and more . . . there is a shift of responsibility to the consumer.

''The government is also taking a hands-off policy. It is adding more options and tax breaks, but then saying, 'You're on your own, folks.' ''

Many financial planners, however, do not think the individual is completely alone. They point out that the retirement system can be illustrated by a three-legged stool, with the legs representing the company, social security, and the employee.

''I see it as a move from total paternalism to a sharing of responsibility,'' observed Dallas L. Salisbury, executive director of the Employee Benefit Research Institute, in Washington. ''We now have a much more balanced environment that gives you more freedom to move from one investment to another as your needs and the economy change.''

In the new paternalism, Mr. Salisbury says, the employer may provide a set pension plan as a ''base,'' then provide a tax-sheltered savings plan, a payroll-deduction IRA, or some other savings method for the employee to put on top of the base, as well as some professional help in selecting the right plan.

In a sense, says George Barbee, executive director of the Consumer Financial Institute, a financial-planning firm in Newton, Mass., the three-legged stool has come about because of the uncertainty of two of the traditional legs, pensions provided by the employer and the government.

''The government is telling people they're going to do less and the other two have to do more,'' Mr. Barbee notes. ''So the government had to do something to encourage more self-reliance.''

In the last two years, this has mainly been done in two ways: through the Economic Recovery Tax Act of 1981, all wage earners, even those with a company pension plan, can open IRAs, and, with the approval of new regulations, employers can set up salary reduction plans - known in the industry as the 401 (k). These plans, similar to the 403(b) plans already available to teachers and employees of nonprofit organizations, permit workers to have the company take money out of their paychecks - before any state or federal taxes are deducted - and put it in a variety of tax-sheltered investments.

Congress has also come to the ''rescue'' of the social security system, partly by taxing some benefits and cutting back on some others.

Employers, for their part, have shifted heavily from the more traditional defined-benefit plans, where a worker has a fixed pension and little say as to how any of the money is invested or distributed at retirement, to ''defined contribution'' plans, where the individual has several investment and payment options. Although nearly 70 percent of all pension plans are the defined-benefit type, fewer than one-fourth of those set up in recent years are of this variety.

An important reason for these changes is to give people a more flexible way to cope with the uncertainties of inflation. Americans can be forgiven if they view the current period of under 5 percent inflation with skepticism. The rampant inflation of the 1970s ravaged the savings of many people who thought they were retiring on adequate incomes a decade or so ago. A person who retired on an annual income of $20,000 in 1970, would have needed $42,500 in 1980 to maintain the same standard of living, estimates Action for Independent Maturity, a division of the American Association of Retired Persons. By 1990, that same standard of living would cost $90,200, assuming an 8 percent inflation rate.

Even though it now seems possible the 1980s will end up with a lower average annual inflation rate, the fresh memory of the previous decade may be one explanation why billions of dollars have been put into both IRAs and 401(k)s in less than two years.

That inflation also made it more difficult for employers to assure retirees that they would be able to offer periodic cost-of-living adjustments on pension payments.

''Employers realized they could not afford to index their pension plans any more,'' says Marvin Levins, president of the group pension division at the CIGNA Corporation, the insurer based in Hartford, Conn. ''Then, employees realized they had to make some contribution to their own retirement.''

Mr. Levins estimates retirees need 70 to 75 percent of their last working year's earnings to provide for a comfortable retirement. But again, this does not account for the effects of inflation during retirement.

Fortunately for workers, the realization of the need to take over more of the responsibility for retirement savings coincides with a dramatic growth in the variety of investment tools for IRAs. They can put those savings in a bank, savings and loan association, insurance company, credit union, brokerage, or mutual fund. If their employer is offering a 401(k), they usually can choose between a fixed-interest annuity; a couple of mutual funds; and, perhaps, company stock. Some choose to spread their money among several investment vehicles.

In most cases, notes Sophie Korczyk, a research associate at Employment Benefit Research Institute, people are taking the conservative approach. About 80 percent of IRA money is going into certificates of deposit at banks and S&Ls, where deposits are insured by the federal government or, in some cases, by the states.

As for companies offering 401(k)s, they are offering a different kind of paternalism, Ms. Korczyk says. To help workers understand the investments, make intelligent choices, and make changes as personal and economic circumstances change, many companies have added financial counselors, who may work out of the personnel department. At one such company, she noted, participation in the 401 (k) program increased to 88 percent of the employees. Participation in the old ''thrift'' savings plan, which also did not use pre-tax money, was about one-third of the workers.

Beyond helping employees select the right savings alternatives, these companies must also do what they can to relieve workers' fears and uncertainties about retirement. ''There's a danger in scaring people about how poor they might be,'' says Donna B. Brown, senior trust officer at State Street Bank. ''You can't operate out of fear. What we're trying to do is educate people as to what is available and what they can do. We talk to people about goals and objectives, then structure a portfolio they can live with.''