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Promises To Keep
Bernard Wasow, The Century Foundation
August 11, 2004
Following the Enron-led debacle in 401k retirement plans, the current tumult over traditional private pensions raises a fundamental question: what can working people count on for their retirement?
United Airlines recently announced that it will not contribute to its employees' pension plans this year. The Pension Benefit Guarantee Corporation (PBGC), a quasi-governmental federal agency that guarantees traditional pensions, has raised a red flag over this decision.
The agency's concern is understandable. If United Airlines joins US Airways, Bethlehem Steel and other major corporations that have defaulted on their pension promises, the already dicey situation of the PBGC will worsen. Besides United, a number of other older airlines may go bankrupt and shed their pension promises. With net liabilities over assets estimated at about $10 billion, the PBGC would be bankrupt today, if it were a private company. But everyone expects the government to mount a bailout. After all, nobody wants the ax to fall on retired mechanics.
Only a few years ago, when the "new economy" meant that the stock market would rise forever, there was a widespread belief that any reasonable person would opt for a private pension over the Social Security system. Maybe it's time to look at those ideas about private versus public pension guarantees one more time.
First, how secure are private pensions? As we see, traditional pensions are only as good as the companies that make pension promises. A private company can lower benefits or raise health insurance contribution levels when it chooses. Today, the PBGC estimates that private pension funds are more than $375 billion underfunded. Some of these underfunded pensions are for companies that are doing well today, like Ford and Motorola. But LTV Steel and Pan American Airways were once industry leaders, too. Today, they are long gone and the PBGC is paying their retirees' pensions.
If a company fails, or sheds its pension promises as part of a reorganization under Chapter 11, it is the PBGC, not the magic of the market, that the retiree must rely on. And if the PBGC fails…. Then the retiree must rely on the government, on his or her fellow citizens, to ensure some pension benefits actually flow.
Are 401(k) plans better? In fact, 401(k) plans are inherently very risky. Even good investors generally do badly in a bad market. In a good market, many investors still do badly because they fail to diversify adequately and trade too much. In an average market, many workers can be expected to do well with their private accounts, and many can be expected to do poorly.
One study of 60,000 investors over six very good years (1991-1996) found that the average investor made nearly 18 percent per year over this period, a bit below the market average. Yet a large proportion of the investors did much worse, and ten percent of them actually lost money.
Sure, in the boom years most investors did well and many did very well, but 6,000 of these investors ended up below where they started.
Retirees need a foundation of income they can count on. They need to know that when they die, their survivors will have incomes. Today, the average Social Security benefit is a little less than $10,000 per year. The Social Security system can continue to meet its modest benefit promises through 2052, according to a recent Congressional Budget Office report.
After that, the Social Security system will require additional revenues to meet all of its commitments. It is hard to predict what voters will do over the next five decades, but it seems almost certain that they will support themselves and their parents through an increase in revenues to the Social Security system. Why would they shortchange the Social Security system when they are likely, in the near future, to favor spending public money to secure the private pension promises, through the PBGC, of bankrupt firms?
Eventually, the Social Security system will need additional funding. That is because America is an aging society. Unfortunately, and in contradiction to what many people think about government programs, there is no fat to cut in the Social Security system. It is run on a lean management diet, costing far less than the typical pension plan or mutual fund.
It is about time that we turned the conventional wisdom on its head. Private pensions? Maybe they will be there for you when you retire; maybe not. The only program you can count on, the rock on which to build your retirement plan for at least the next fifty years, is Social Security.
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© 2002 Global Action on Aging
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