Boom in Pensions

Said the Washington Post: "One of the many forms of tax avoidance encouraged by high wartime taxes is the establishment of private pension funds for highly paid executives." But top-bracket executives were not the only ones to benefit. U.S. industry is enjoying a boom in pension plans. Plans have flowered in one war-rich corporation after another, providing financial cushions for the old age of $30-a-week janitors, as well as $2,500-a-week movie stars.

The pension boom was directly related to the sky-high U.S. taxes. It began at the time the first whopping wartime tax bill was passed, in 1942. Up until then, pension plans were relatively rare; in the entire U.S. there were only 400. In the last two years pension plans have spread at the rate of over 200 a month, and in most of them, the corporations foot the bill.

A typical plan is that of Loew's Inc., which controls M.G.M. Fortnight ago, Loew's made eye-catching news with an announcement that all its top executives would voluntarily take huge pay reductions. M.G.M.'s Louis B. Mayer, who has been the highest paid executive in the U.S.

for the last seven years, was to take a cut of $560,000, reducing his pay to $500,000.

President Nicholas M. Schenck (1943 pay: $512,391), Vice Presidents Sam Katz ($370,139) and Edgar J. Mannix, along with five other executives who in addition to their salaries, shared Loew's profits, would level off at $200,000 each. The cash saved ($1,450,000) would go into a pension fund for Loew's 4,300 eligible employes, including Stars Spencer Tracy and Clark Gable.

More Later. The salary cut was a smart move for most bigwigs. For example, Vice President Katz would take a $154,000 cut.

But his net income after taxes would be reduced by only $25,000. Meanwhile Loew's would drop $45,000 into the pension fund for him. Thus a big pay cut now, when taxes are skyhigh, means only a small net reduction in his income.

Later he will get back the net cut and then some, if taxes have been substantially reduced. Regardless of tax rates, Mayer and Schenck will actually net less.

For the corporation the pension plan may be just as shrewd business policy. On its books, Loew's will write down the pension cost as $2,000,000 a year, in addition to the cash saved in salaries. The actual cost will be far less. Loew's contribution will be deductible for tax purposes. Net cost to Loew's: $400,000 a year.

Payment Deferred. If this was a scheme to avoid paying taxes, Congress had aided and abetted it. For 30 years. Congress has ruled that pension, payments, like wages, are deductible for tax purposes, and thus encouraged the establishment of pension plans. Thereby some abuses began, i.e., paying top executives deferred bonuses in the form of pensions. Congress tried to chink up these loopholes in the 1942 Revenue Act. Now in practice the Treasury must approve all plans (it approved Loew's) before tax deductions are granted. In effect, the corporations whose pension plans were avoiding taxes were doing what Congress has been trying to get them to do all along.

In addition to the obvious tax advantages, the pension plans provided another answer to a pressing corporation problem: how can corporations keep top talent from straying? The practice of granting stock options as a form of incentive pay (TIME, June 5) had been one answer. Pension plans are a far more popular one.

But there is one hitch. Many a corporation now hastily setting up such a plan may find it disastrously expensive in the long run. The well-heeled "war babies" can now pay the whole pension cost very cheaply. But when earnings and taxes drop, such corporations may find their pension plans far too expensive to continue--and very difficult to drop.

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