Business: Danger: Pension Perils Ahead

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Changing demographics, and high inflation, spell trouble for the funds A pension bomb threatens the U.S. economy. Its fuse may now seem comfortably long, but it is indisputably burning. The toughest issue in the negotiations for a new contract between General Motors and the auto workers was not demands for more pay for the U.A.W.'s 460,000 workers on GM's pay roll, but for increased benefits for its fast-growing legion of retired employees. A big reason why policymakers in Washington are agonizing heavily over Chrysler's petition for federal help is the stark fact that if the company were to close down, the nearly $1 billion in unfunded pension obligations that it would leave be hind could exhaust the private-pension rescue fund that the Government maintains. Before long, the combined pressures of inflation and the changing U.S. demographics will force the problem of supporting the retired into the forefront of the nation's social concerns.

The country is approaching the otherside of the baby boom. Those first postwar children are now 33— or closer to the still common retirement age of 65 than to birth— and the balance of the economy is shifting rapidly. In the future, far fewer workers will be supporting far more retired people. In 1950 the worker-to-retiree ratio was 7.5 to 1; to day it is 5.4 to 1. By 2030, when the baby boomers will be rocking away on the veranda, the ratio will be 3.1 to 1. Under Social Security, payments from current workers back the checks that are sent to former employees. There are now three workers paying into the system for every retired person who is drawing out from it; in about 50 years there will be only two workers for every retiree.

This bleak demographic problem has been compounded by rising prices and the trend toward earlier retirement. Inflation erodes the real worth of the $280 billion that companies and unions have built up in private pension funds and increases the payout needed to keep the elderly out of poverty. A person who began contributing to a pension fund when he was earning a respectable $2,000 per year in 1939 may now be receiving $6,000 a year from that fund and finding it mighty hard to make do. Earlier retirement, mean while, is shortening the period during which people contribute to pension funds and stretching out the years during which they receive benefits. A decade ago, California teachers averaged 28 years in the classroom, but now they are leaving after 21 years. The average Army enlisted man retires at about 40—and then collects a pension for more than 30 years.

Before long, many industries will have to face up to the changing pension demographics that automakers have already encountered. While in 1970 there were seven current auto workers for every retired one, the ratio now is 3 to 1 and will be 2 to 1 by 1990. Masterful union negotiators, going back to legendary President Walter Reuther, have won their employees some of the best pensions in private industry. This year the union fought for another breakthrough that would tie pension benefits to the cost of living, a plum common to public employees but still almost unknown in the private sector. But the pension burden for even the giant automakers is heavy and growing. Total pension expenses for GM were $1.3 billion last year, up from $329 million in 1970.