NU Online News Service, Jan. 16, 3:43 p.m. – The Internal Revenue Service should look more at contribution levels than ultimate retirement income when deciding whether defined-benefit pension plans are fair to older workers, according to Eric Lofgren, a benefits consultant at Watson Wyatt Worldwide, Washington.

Employers calculate contributions for cash-balance defined-benefit plans one year at a time, without considering how long workers will stay.

Employers calculate contributions for traditional plans using actuarial formulas that assume workers will stay with their employers for many years. Employers make smaller contributions for younger workers than for veterans, based on the belief that cash contributed for younger workers will have more time to accumulate interest and investment income.

Because of the different investment time horizons of 65-year-olds and 25-year-olds, the “present value,” and price, of an annuity that will pay one level of retirement income to a 65-year-old at retirement could be more than 10 times as much as the present value of an annuity that will pay the same level of income to a 25-year-old at retirement, Lofgren says.

The new proposed IRS age-discrimination rules would simply require sponsors of cash-balance plans to contribute at least as much for older workers as for younger workers, Lofgren says.

But Lofgren says the IRS would still require sponsors of other types of defined-benefit plans to provide equal or better retirement income levels for older workers.

Requiring employers to provide benefits for older workers that might cost 10 times as much as the same benefits for younger workers is unfair, Lofgren says.

Social Security itself would probably fail the test if it were subject to the proposed rules, because younger workers who participate can accrue benefits faster than older but otherwise identical workers, Lofgren says.