The retirement crisis.

A call to arms for Congress and the American public: The failure of the U.S. retirement system can be averted if we streamline regulations, fund pensions fully, and increase saving.

If you don't sit up nights worrying about the looming retirement-security crisis, you should. Even if your company has a decent and responsible retirement package, you'll find it impossible to hide from the funding emergency lurking around the corner of the next century.

America's retirement system is headed for a fall. It is underfunded, overregulated, and about to be challenged by unprecedented growth in the retirement-age population. If no changes are made, the tax burden needed to pay promised retirement benefits will become unsustainable, and millions of American workers will find themselves without the resources to maintain even a semblance of their current standard of living.

A decline in retirement savings also threatens basic U.S. economic growth, since retirement savings comprise such a large part of the national resource pool. National saving (the sum of saving for retirement and all other purposes by individuals, business, and government) has fallen to record low levels in recent years. The national saving rate has averaged less than 2 percent of GDP so far in the 1990s, down from 4 percent in the 1980s and about 8 percent in previous decades. A low saving rate signals weak productivity growth and weak wage growth - not a happy scenario for future retirees and workers.

TROUBLED TIMES

Before long, a whole series of retirement-funding problems will grow beyond control. Each alone would be serious; together they create a virtual tidal wave of trouble. Such problems include:

* An aging population: The baby boom generation will begin to reach retirement age in little more than a decade. This group, which includes about 76 million individuals born between 1945 and 1964, will swell the ranks of the retired population from roughly 12 percent of the total population to 20 percent by 2030.

Meanwhile, the ratio of "payers" to "payees" will plunge from the current level of 3-4 workers for each retiree to 2 workers per retiree [ILLUSTRATION FOR FIGURE I OMITTED]. Consequently, a heavy burden will be placed on the younger, working members of society unless older, retired workers are prefinanced by a combination of private pensions and their own savings. Unfortunately, America has not chosen this course.

* The disappearing private pension: Total private pension contributions declined in constant 1987 dollars from $1,470 per worker annually to $1,140 in 1991. The employer component declined in real terms from $1,039 per worker in 1980 to $506 in 1991 [ILLUSTRATION FOR FIGURE II OMITTED].

* Underfunding: Funding limits enacted by the federal government in the 1980s have placed many pension funds at risk in the event of unexpected economic change. Underfunding of private pensions reached $71 billion in 1993, and the actuarial deficiency for government civilian and military pensions combined is estimated at $1.5 trillion. Much of the blame for the current instability in employer pensions can be placed squarely at the feet of government regulation. Over the past 10 years, government regulation has sharply raised the cost of administering plans and significantly limited pension contributions [ILLUSTRATION FOR FIGURE III OMITTED].

The complexity and chilling effect of current pension regulations cannot be exaggerated. A proliferation of myopic pension laws threatens current workers' economic future and our nation's economic security.

* Inadequate private saving for retirement: Private saving per worker is only about one-third of what will be needed to maintain accustomed living standards during retirement. Given current conditions, it is likely that a majority of baby boomers actually will have a lower retirement standard of living in absolute terms than their parents now enjoy [ILLUSTRATION FOR FIGURE IV OMITTED].

* Social Security: Many of us think Social Security always will provide a minimum standard of living. In reality, however, the Social Security system has made promises to future retirees that it can't keep without additional prefunding or significantly higher taxes. Social Security does have a reserve, but it will be exhausted as early as 2012. When the reserve runs out, all Social Security benefits will have to be paid by current workers.

If no changes are made, by 2030 combined Social Security and Medicare taxes would take nearly 28 percent of a worker's paycheck, and Social Security costs would comprise nearly 11 percent of GDP.

Clearly, those who think Social Security can continue as it has are in denial. Benefit cuts - most likely in terms of higher retirement ages, lower cost of living adjustments, and more benefits taxation - are inevitable.

DUCKING THE TIDAL WAVE

A retirement policy should aim to ensure retirees' economic security by encouraging retirement saving, full funding of pensions, and widespread pension coverage. For the past two years, I have chaired a working group of the Committee for Economic Development, which has examined how the nation can avoid the coming pension disaster. Our conclusion: If we act quickly on several fronts, the goal can be achieved.

First, the federal government must remove the barriers and disincentives to increased private pension coverage. This includes streamlining and simplifying regulatory and tax policies. Government also should quickly legislate sensible changes to preserve Social Security.

Second, business and government should fully fund their pension promises and should be encouraged to increase the average retirement age for many of their workers.

Finally, it is the individual worker who ultimately is responsible for his or her own retirement. Employees must have better information about retirement options and must take greater responsibility for the spending, savings, and investment decisions they make.

TACKLING THE RETIREMENT PROBLEM

To begin, government must clear the regulatory swamp of the debris that is strangling pension participation and formation. The 1974 Employee Retirement Income Security Act - the basic U.S. pension law - initially was created to protect pensions. However, over the years, numerous amendments have been added, many straying far from ERISA's original mandate, that have raised costs and discouraged the formation of new plans.

Complicated anti-discrimination rules - which seek to eliminate all potential for abuse - instead have created a regulatory nightmare. The nondiscrimination rules, more than 600 pages long, require complex calculations for every employee each year. To ensure compliance, plan administrators of all companies of all sizes must hire lawyers, actuaries, and accountants who often seem to be the only beneficiaries of the legislation. There are penalties for putting too much or too little into a plan, for taking too much or too little out, and for receiving benefits too early or too late. Some experts feel the regulations are now so complex that it is impossible for any plan to ever fully comply with all of ERISA's provisions.

In 1982, the Tax Equity and Fiscal Responsibility Act reduced by one-third, and then froze for many years, the maximum annual contribution to defined contribution plans and the maximum annual benefit that could be paid by a defined benefit plan. And every year, Congress has added more and more regulations on benefits and contributions.

From a national saving perspective, the most serious attack on retirement saving came with an Omnibus Budget Reconciliation Act of 1987 provision, which limited the funding companies could provide for their defined benefit plans. This change forced many firms to stop funding their plans for several years.

In 1995, with a legislative climate that is receptive to regulatory reform, Congress has a golden opportunity to streamline pension regulation and to provide simpler, more appropriate nondiscrimination guarantees.

It can accomplish this, for example, by replacing current regulations with a simple requirement that all employees who meet the same, nondiscriminatory age and service requirements be covered and be subject to the same ratio of employer pension contribution.

Federal regulation also needs to encourage full funding of private pensions. Companies can ensure the health of their defined benefit plans only if they have the flexibility to spread the cost of funding in a way that reflects the plan's expected liability and a firm's ability to make contributions. The full funding limit for defined benefit plans should be restored to its pre-1987 level of 100 percent of projected plan liability.

To encourage more saving and the formation of new plans, Congress should raise the annual limit on allowable plan contributions and benefits to more reasonable levels. An important reform would be to base retirement saving tax preferences on accumulated lifetime income rather than on current year income only. This would allow people to make up for an inability to save in their early (and often poorer) working years and would be much fairer to those who temporarily leave the labor force to care for children or other family members.

Individual contributions to 401(k) plans should be subject to the same limits that apply to other defined contribution plans. Congress needs to improve the solvency of the Pension Benefit Guaranty Corporation and the status of the pension plans it insures. The PBGC premium structure and benefit guarantee should be aligned more closely with the actual risks posed by pension plans. In addition. the PBGC should have stronger compliance authority to ensure adequate funding levels, and amortization periods for unfunded liabilities should be simplified and shortened.

The PBGC should be given more power over underfunded private plans. Anti plans sponsored by federal, state, and local governments should be fully funded anti subject to appropriate disclosure standards.

SAVING SOCIAL SECURITY

Congress must face the responsibility of preserving the Social Security system and not placing an unfair burden on future generations of workers. The least painful way to do this is including all Social Security benefits that exceed past contributions in taxable income. Congress also should raise the qualifying retirement ages beyond those already legislated and increase the limits on earnings for retirees. And it should consider reducing cost of living adjustments and/or implementing a gradual phase-in of lower replacement ratios.

PRIVATE SECTOR'S RESPONSIBILITY

While Congress has much to do, it is a mistake to think government alone will solve our country's pension problems. Responsible legislation can remove barriers, but it is up to us as employers to provide retirement plans for workers, or at least give employees the opportunity to build tax-sheltered accounts from their own income.

Right now, American workers are poorly informed about what they can expect from their employers and from Social Security. They also have little awareness about the need to provide retirement resources on their own. With the right kind of information, many more individuals will look on their pension contributions and savings not as burdens, but as assets and investments.

If policy changes succeed in encouraging individuals to save and invest for their own retirement, and if more anti more employers make and fully fund pension promises, then the baby boomers and even the Generation Xers who come after them can have some assurance of a dignified, comfortable, and economically sustainable retirement.

Lawrence A. Weinbach is managing partner-chief executive of New York-based Arthur Andersen & Co, SC, whose business units - Arthur Andersen and Andersen Consulting - comprise the world's largest professional-services firm with revenues of $7 billion-plus. He sewed as chairman of the pension reform group of the Committee for Economic Development, a nonpartisan business research and education organization. CED's statement on retirement policy, "Who Will Pay for Your Retirement? The Looming Crisis." was published in May.