Fewer firms provide for retirement

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Fewer firms provide for retirement

By Kathleen Pender, San Francisco Chronicle
October 28, 2003

The percentage of U.S. companies offering retirement plans has dropped sharply since the late 1990s, according to a new study of Census Bureau data.

The percentage of employees participating in retirement plans has fallen by roughly the same amount.

Although the decline is partly a result of the economic slowdown, "part of it is more of a long-term trend" that may not reverse course when the economy recovers, says Patrick Purcell, a researcher with the Congressional Research Service who did the study.

Normally during slowdowns, small firms are more likely than large ones to drop their pension plans. This time, the cutbacks "have been concentrated in large firms," says Purcell "That's very unusual."

Purcell's study comes on the heels of a separate study released last week by the Commonwealth Fund that showed a surprising rise in the percentage of employees at large companies who lacked health insurance.

That increase was not caused by large companies eliminating health plans. Instead, it was more a result of companies increasing copayments and eligibility requirements, thus making health coverage too expensive or unavailable for some low-income, part-time or short-term workers.

The drop in pension and health care coverage is coming at a time when Americans are living longer, retiring earlier and having fewer children to contribute to Social Security and support them in old age.

The proportion of working-age people to people 65 or older continues to shrink -- from 5.7 in 1960 to 4.8 in 2000 to an estimated 3.0 in 2025, according to Purcell's study of census data.

Unless employers and employees drastically increase their pension sponsorship and participation rates, more Americans will have to continue working past normal retirement age, says Purcell.

His study showed that in 2002, 62 percent of all private-sector employers offered some type of pension plan to full-time, year-round workers.

That was down from a peak of 66.9 percent in 1998. It was also down from 64.9 percent in 1994, when the economy was climbing out of a recession.

The overall decline was caused mainly by a falloff among large employers.

Last year, 76.8 percent of companies with 100 or more employees offered a pension plan of some kind (defined benefit and/or defined contribution). That was down from 82 percent in 1998 and 81.8 percent in 1994.

Small employers, those with fewer than 25 employees, also cut their sponsorship rates since the late 1980 and are still much less likely to offer a retirement plan than large firms.

Over the longer term, however, small firms have increased their pension- plan sponsorship rates -- to 27.3 percent in 2002 from 22.8 percent in 1004.

That was the only positive news in the report, says Purcell. "Even with losses in coverage in the last couple years, pension participation among small firms is still higher than it was in the mid-'90s."

He attributes that increase to new laws and programs that encourage small companies to offer retirement plans.

"The surprising and rather discouraging finding is that among larger firms, there has been a significant decline" in both sponsorship and participation rates.

Pension exerts cite several possible reasons for the decline:

Global competition. "Firms today are trying to cut costs desperately because they are competing with low-cost countries," says Purcell. "One place they can cut costs is health care. Another is pensions."

Transition from manufacturing to services. The U.S. manufacturing sector, which is more likely to provide pensions, is shrinking, while the service sector, which is less likely to provide pensions, is growing.

Skyrocketing medical costs. "Health care is operating contrary to the rest of the economy, with double-digit inflation at a time when the (consumer price index) is rising 2 percent," says James Klein, president of the American Benefits Council, which represents employers. For companies that provide health care coverage, "that's chewing up a lot of things, including pensions and wage increases."

Fewer unions. The percentage of Americans represented by unions, which have been staunch defenders of pension and healthcare benefits, continues to decline.

Management incentives. In the past decade, executive compensation has been focused on stock options, which pay off when the stock price increases. The best way to get the stock price up is to get earnings up. When revenue growth is sluggish, the best way to increase earnings is to cut costs, and that includes pension costs, says Christian Weller, an economist with the Economic Policy Institute, a think tank that gets some funding from labor unions.

"If you don't engage in that behavior, your company becomes a takeover target," says Weller. "It's do or die."

At least one expert says Purcell's study understates the number of employees covered by pension plans.

The survey asked employees if their employer offers a retirement plan. But "a lot of companies do not use the word 'retirement' in their defined contribution plan," says David Wray, president of the Profit Sharing/401(k) Council of America.

A company may call it a savings or profit sharing or capital accumulation plan. Asked if they have a retirement plan, some workers at that company will say no, according to research done by Wray's group, which represents employers.

Purcell's study says almost 25 percent of companies with more than 100 people don't offer a retirement plan.

"I've challenged people to show me a company more than three or four years old with more than 100 employees, that doesn't offer some kind of retirement plan," says Wray.

So far, no one has taken up his challenge. "Our view," he says, "is that nearly all of them do" offer a retirement plan.