Summary: Social Security and private pensions are key sources of retirement income that are linked through the employer costs associated with the compensation provided to workers. Many plans incorporate Social Security benefits into their plan design, and plan provisions may be linked to Social Security's normal retirement age or eligibility criteria for disability benefits. The effect of any specific Social Security reform will depend on the nature of the change (e.g., increase in payroll taxes, a cut in benefits, and a time frame for implementation). Factors such as the firm's size, the type of pension offered, and the economic status of the worker will shape employers' and workers' responses to reform. In reaction to increasing the normal retirement age for Social Security, employers could face added pension costs for subsidizing early retirement and may redesign their plans. Workers may respond to reforms that increase contributions or reduce benefits by increasing participation in 401(k) plans or saving through other vehicles. As for the design and implementation of individual accounts, they will affect employer costs and could present substantial challenges in coordinating pension plans with individual accounts within the current regulatory framework for pensions.
