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Pension
shortfalls add uncertainties over retirement By Albert
B. Crenshaw, The
During his 35-plus working
years at Bethlehem Steel in But
Schmeizer's retirement plans were knocked out cold last year, when "Well,
the sky did fall," he said. In
fact, the sky is falling for a number of American workers. The country's
entire retirement-income structure is being battered by an unprecedented
wave of demographic and economic changes. Just
as Social Security's pay-as-you-go arrangement is being pressured by the
rising number of retirees and the shrinking number of active workers, so
established companies that sponsor traditional pensions are increasingly
paying huge retiree costs when newer competitors have none. In
addition, the stock-market plunge that began in 2000 has combined with low
interest rates to reduce asset values and boost liabilities for traditional
pension plans. In many cases, this has triggered painful new funding
requirements for employers. General Motors, for example, said that it has
poured $13.5 billion into its pension funds recently and may kick in as much
as $6 billion more in the coming months. Companies
are increasingly shifting to 401(k) and similar plans in which workers
and/or employers contribute to an investment account. Theoretically, such
plans assume that the workers will make good investment decisions and
contribute faithfully for years. How
many workers will manage to harvest adequate retirement assets from such
plans remains to be seen, but many experts worry, especially about
lower-paid workers. The
private system today is complicated and costly in terms of tax revenue and
it covers only about half the work force at any one time, said Peter Orszag
of the Brookings Institution, which held a pension conference this year. The
increasingly popular 401(k) and other such plans offer generous tax benefits
for saving, but those breaks go disproportionately to high-income households
that would save anyway, he said. At
the same time, Orszag said, the system allocates too much risk to workers
individually instead of spreading it across a company's work force, or the
work force in general. Congress,
employers and workers, union and nonunion, have been trying for years to
come up with a set of policies that would provide adequate and secure
retirement for more people. But retiree security has often taken a back seat
to revenue considerations, leaving what the Treasury Department's benefits
tax counsel, William Sweetnam, recently called "a crazy quilt" of
rules that don't serve anyone well. The
lessons of Enron The
collapse of Enron two years ago focused new attention on the risks of
401(k)s, and the recent fears expressed by employers and the PBGC about the
funding of traditional plans, often called defined benefit plans, put them
on the front burner. So
far, it is only those at each extreme of the debate who think there are easy
answers. Some in Congress and the administration seem to feel that everyone
ought to save for retirement, while others want to lock employers into
certain types of traditional pensions. But
if the pension ship is sinking, bills currently being considered in
Congress, critics say, amount to little more than rearranging the deck
chairs on the Titanic. Most seek only to patch up problems in the present
system. The Bush administration has called for fundamental reform of
defined-benefit pensions but hasn't specified exactly what that would look
like. The House recently approved a measure calling for reform to be studied
and enacted within the next two years. But critics argue that the
government's track record on fundamental reform, when it is not driven by
crisis, is uneven at best. Recent
tax law changes have boosted the amounts that workers can set aside in
401(k) and similar plans, but little else has been done. Shrinking
traditional plans Traditional
pensions — operated by employers, backstopped by the government and
promising a lifetime stream of income — have been in sharp decline. Since
1986, some 97,000 such plans covering 7 million participants have been
terminated. Today, only about 32,500 of these pension plans remain. But
because the surviving plans are very large, they continue to cover about 44
million workers. Many
of the surviving plans are underfunded, meaning that their assets would not
be sufficient to pay promised benefits if they were terminated today. This
situation has alarmed the government's pension insurance agency, the PBGC,
whose own balance sheet has plunged deeply into the red in the past three
years. Like
GM, many of these companies will soon be required to pour large amounts of
cash into their pension plans. In part, this is because an old rule tying
liability calculations to the interest rate on the 30-year Treasury bond has
magnified the cost of these pensions. Combined with the stock-market slump,
this rule has pushed many plans that were fully funded a few years ago
deeply into the red. Employers
warn that if they do not get relief, many will freeze their plans, a step
that would bar workers from earning higher pensions as they work more years
and would keep new hires from joining the plan. By some estimates, up to 25
percent of existing plans are already frozen. Companies
in a position to do so may choose to terminate their plans altogether. The
companies warn that they will have little choice. Some, like the Others,
such as International Business Machines, compete with new companies, such as
Microsoft, that never had traditional pensions. New firms typically offer
workers stock-purchase, profit-sharing, 401(k) plans and other
less-expensive retirement arrangements, generally lumped together as defined
contribution plans. Unions
and employers with big pension plans have allied in an effort to win breaks
from funding requirements for companies in order, the unions hope, to
preserve defined-benefit pensions. Some 69 percent of union workers in the
private sector have traditional plans, vs. 14 percent of nonunion workers. On
the 401(k) retirement account side, the Enron debacle exposed an array of
problems. Workers
at the failed energy giant were heavily concentrated in their employer's
stock and saw their retirement accounts melt away when Enron went into
bankruptcy. Calls
for reform There
was an outcry after Enron's collapse, but so far few of the recommended
reforms have become law. Members
of Congress disagree on whether to limit the amount of employer stock that a
401(k) participant can hold in his or her account. The
House has passed a bill that would let workers diversify out of employer
stock, but voluntarily. And in the middle of all this, there is a heated
dispute over a kind of hybrid pension — called a cash-balance plan —
that has aspects of both a defined-benefit and a defined-contribution plan. Under
these plans, workers accrue benefits more evenly over their working lives
than under traditional plans, in which benefits spike in the final years of
a long career. The accrued benefits can be converted to cash when a worker
quits or retires. Copyright ©
2002 Global Action on Aging
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