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Corporate America Pulling Back Pension Safety Net
By Peter G. Gosselin, The Los Angeles Times
May 15, 2005
Last week's court decision permitting United Airlines' parent to dump its pensions on the federal government is part of a sweeping trend that could make the nation's employers more competitive, but at the cost of leaving workers and their families bearing big new risks.
In a nutshell, a broadening swath of corporate America is retreating from the safety-net business and is shifting responsibility to employees.
The decision by a Chicago bankruptcy court focused on the problems of a company strapped with $6.6 billion in pension costs. But the court's solution is one that even healthy firms are seeking to copy in one fashion or another, shifting benefit costs away from themselves and making fewer promises to their employees.
"People like to think of employers as social welfare organizations, but they're not," said Sylvester Scheiber, a partner with the financial consulting firm of Watson-Wyatt and a member of President Bush's 2001 Social Security Commission. "In an increasingly competitive world, they don't have room to do much else but focus on the competition."
Most U.S. companies have accomplished by other means much of what United Airlines did by defaulting on its pension obligations.
Employers of almost 30% of the nation's private sector workforce no longer offer the kind of pension where responsibility for managing retirement money and delivering benefits rests with the company. Instead, these firms make contributions to employees' retirement savings, perhaps through tax-deferred 401(k) accounts, but it's up to individuals to manage the money and suffer the shortfalls if any occur.
Employers of half of the workforce offer no retirement help whatsoever. The remaining 20% of workers are enrolled in traditional pensions, a percentage that has fallen by half in the last 25 years, according to Labor Department statistics and estimates by Boston College's Center for Retirement Research.
Many firms have begun to beat a similar retreat from employer-provided healthcare insurance.
The number of big company employees (those with 200 or more workers) in line for retiree health benefits has plunged from 66% in 1988 to 36% last year, according to the Kaiser Family Foundation, a nonpartisan health research group in Menlo Park, Calif. With health insurance rates for current employees posting double-digit jumps, employers have shaved an estimated 5 million workers from their insured rolls since 2001. And they have passed along many of the recent cost increases by nearly doubling the amount - to $222 a month - that employees must kick in for a typical family plan, according to Kaiser.
In addition, some companies have turned to health savings accounts. These were proposed by the president and approved by Congress in late 2003 and became available last summer. They have some of the same characteristics as 401(k) accounts in limiting firms' responsibilities and leaving it up to individuals to manage the money in them.
The number of people covered by health savings accounts has more than doubled from 438,000 last September to more than 1 million, according to America's Health Insurance Plans, the industry's Washington-based trade organization.
In a little-noticed report last year, the American Benefits Council, chief lobbyist for large corporations on benefit issues in Washington, offered a 10-year vision of employees replacing employers as the chief providers of retirement plans and health insurance.
"Individuals should assume primary responsibility for their own financial security," the report said. "Employers should be primarily responsible for sponsoring programs that help workers . in their efforts to achieve and maintain personal financial security."
Such an approach appears to be cut from the same cloth as the president's "ownership society" agenda. A key element of that is his proposal to let most Americans divert a portion of their Social Security payroll taxes into individual investment accounts in exchange for a reduction in traditional benefits. In both the corporate and administration plans, individuals would bear bigger responsibilities and could reap bigger rewards for making good financial decisions.
"We're moving from a benefit system that's employer-controlled and -provided to one that is employee-controlled," said benefits council president James A. Klein.
"That's frightening in some respects," he said, but quickly added, "It's encouraging too, because we're going to help individuals be prudent health and retirement consumers."
Some analysts find that prospect dubious.
"We're moving back to a world that existed in the early 20th century when only an elite group of companies provided pensions and some degree of career employment," said Sanford Jacoby, a UCLA economist and author of "Modern Manors," a study of employer-provided safety nets. The only reason firms can drop pensions, Jacoby said, is that "they have the fig leaf of 401(k)s."
Kaiser foundation executive vice president Diane Rowland said the theory behind cutbacks in employer-provided health insurance "is that putting consumers on the front line of healthcare consumption will constrain costs." But, she added, "what works when you're purchasing a car or buying a toaster may not work when you're making choices about life and death."
In part, companies are constrained from completely getting out of the safety-net business by the billions of dollars in tax breaks built into the system.
Washington will spend more than $200 billion this year on breaks for pension plans, 401(k)s and employer-provided health insurance. And taxpayers could be on the hook for more if efforts to shore up the strained Pension Benefit Guaranty Corp. don't work.
The federal agency, which insures private-employer pensions and will take over four of United Airlines' under-funded plans, suffered from a $23.3-billion mismatch of assets and long-term obligations last year, more than double the previous year's gap.
The other constraint is political. As the president's difficulties in selling his Social Security plan demonstrate, Americans have grown increasingly insecure as greater economic risk has been shifted to them over the last 20 years or so. They show little appetite for taking on more.
The dimensions of that shift can be seen in the widening swings of working families' income.
An analysis by The Times last year of a long-term, government-financed database of 5,000 families found that most families experienced income swings of no more than 16% in the early 1970s. But those swings had nearly doubled by the start of this decade. The greater the swings, the greater are the chances that a family will be in the midst of a downdraft when a crisis such as a layoff or illness hits. Then it can be very difficult to bounce back.
For some families, the first hint of the new risks they'd taken on came with the discovery that their two-earner incomes put them no further ahead than when they lived on the wages of one. For others, it was the recessions of the early 1990s and early 2000s when college-educated, white-collar workers who thought themselves immune to layoffs were suddenly in the economic bull's-eye.
But for millions, the tip-off was what happened to their 401(k)s in the aftermath of the 2000 stock market bust. The reversals left many skeptical of employer calls that they shoulder more financial responsibility for their retirement and doubtful about Bush's proposal for worker-controlled accounts in Social Security.
"I haven't been persuaded there's a crisis in Social Security, and I don't know that more accounts are the answer," said Virgil Young of Knoxville, Tenn., a retired FBI agent who describes himself as a staunch conservative. "It just doesn't seem to have clicked with people."
Although overshadowed by the Social Security debate, the shifting responsibility for bearing health costs is also a brewing political issue because it hits people of all income levels.
At the low end, health costs have risen so much that they now take a major bite out of minimum-wage workers' paychecks. Some workers must choose between a living wage and no insurance, or coverage and poverty.
At the high-wage end, studies show the lion's share of companies' benefits are paid to a small group of usually older, less productive workers. But as competition heats up, firms want to train their spending on those who contribute the most - which sets the stage for requiring older workers to bear greater costs.
In the end, said Stanford economist John B. Shoven, "risk is a sort of irreducible thing. It stays in an economy and has to be borne by somebody. So it keeps getting tossed around like a hot potato."
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