US:
$400 billion deficit in pension plan funding
By
Jamie Chapman, The World Socialist
25 September 2003
The head of the federal Pension Benefit
Guaranty Corporation (PBGC) raised the specter of a crisis in the
government-insured pension system that could make the savings and loan
bailout of the 1980s pale in comparison.
In testimony before Congress earlier this
month (September 4), Steven Kandarian, the federal pension insurance
agency’s executive director, estimated the total underfunding of pension
obligations at a whopping $400 billion at the end of 2002, up from a
previous record $150 billion in 2001. These huge shortfalls result in large
measure from losses on pension funds invested in the stock market along with
record low interest rates. With their focus on the bottom line, companies
have held back making payments to restore depleted pension funds.
Kandarian also noted that the PBGC’s own
accounts had gone from a surplus of $7.7 billion in 2001 to a deficit of
$3.6 billion at the end of 2002. The one-year loss of $11.3 billion is five
times larger than the largest loss ever previously incurred in the 28-year
history of the agency. Preliminary figures show that the deficit has
continued to skyrocket in 2003, standing at $5.7 billion as of July 31.
The record loss occurred due to the aggressive
use of bankruptcy filings by major corporations to offload their liabilities
and sharply reduce labor costs. Bankruptcy court judges authorized three
steel companies—National Steel, LTV Steel and Bethlehem Steel—to
terminate their pension plans, forcing the PBGC to assume unfunded
liabilities of $7.1 billion for these three plans alone. The companies then
sold their assets to competitors, free of responsibility for their former
workers.
In March 2003, the PBGC took over pension
payments to 6,000 US Airways pilots, as part of the company’s negotiations
to emerge from bankruptcy. The plan’s deficit was estimated at $2.5
billion, although only some $600 million of that amount is covered under the
PBGC program. The maximum benefit insured by the PBGC is $44,000 a year,
leaving highly paid workers such as airline pilots with significantly
reduced payments. In addition, the federal insurance program excludes extras
such as early retirement supplements, often used by corporations as
incentives to reduce their workforce.
Kandarian described the effects of a pension
takeover: “[T]he burden often falls heavily on workers and retirees. In
some cases, participants lose benefits that were earned but not guaranteed
by the pension insurance system. In all cases, workers lose the opportunity
to earn additional benefits under the terminated pension plan.”
The PBGC pays only those benefits accrued at
the time of termination. Nor does the PBGC—or any other government
agency—pick up retiree medical benefits that are reduced or eliminated
when companies go bankrupt.
The PBGC was set up under the Employment
Retirement Income Security Act (ERISA) of 1974, a comprehensive measure
regulating both private and public employee pension plans. The agency
insures nearly 44 million workers and retirees covered under some 32,000
defined benefit plans—those that promise to pay a specific amount for life
based on a formula usually involving age, years of service and final salary.
Employers are expected to set aside enough funds to meet their pension
obligations, based on actuarial assumptions about the life expectancy of
their retirees as well as assumptions about the rate of return they will
receive from investing the funds they set aside.
Since the 1980s, hundreds of companies have
converted their defined benefit plans to “cash-balance” plans—similar
to 401(k)s—under which the employer makes no promises as to future
benefits. At the time of conversion, the company estimates the value of the
defined benefits already accrued for each employee and sets the money aside
in a cash account, to which they add a defined amount—usually a percentage
of salary—plus interest, for as long as the employee works for the firm.
At retirement, however much money has accumulated in the employee’s
account is simply paid out and the company walks away, ridding itself of the
investment and mortality risks associated with defined benefit plans.
In a conversion, older workers in particular
find their benefits reduced—often as much as 50 percent—because the
cash-balance plan places no premium on longevity. The defined benefit
formula, by contrast, gives extra weight to years of service and salary in
the final and presumably highest earning years.
Not only do companies with an older workforce
save money by reducing benefits paid, but all companies that convert receive
an earnings boost because they no longer have to account for their future
pension obligations as liabilities on their balance sheet.
In 1999, in one of the largest conversions to
date, IBM Corp. saved some $200 million a year on its pension costs. Last
July, a federal judge ruled the conversion illegally discriminated against
older employees, in a wording broad enough to place the legality of all such
conversions in question.
IBM has vowed to appeal, but is thought to be
waiting for the US Treasury Department to issue new regulations that are
expected to sanction the conversion process. The Treasury Department is
headed by John Snow, until January the CEO of the transportation giant CSX
Corp., which adopted a cash-balance plan for new employees earlier this
year.
Cash-balance conversions have become so
controversial that the Treasury Department has imposed a moratorium pending
issuance of its new regulations. A measure to block the lifting of the
moratorium passed the Republican-controlled US House of Representatives by
258 to 160. Business groups seeking to defeat the amendment went so far as
to take out a full-page ad in the New York Times claiming that it
would “destroy
America
’s pension system.”
Corporate moves to close out defined benefit
pensions further aggravate the PBGC’s deficit, since fewer companies pay
in premiums to the agency. The total number of plans insured has dropped 20
percent since 1999.
In his testimony, Kandarian stated that
benefit payments in 2002 exceeded $1.5 billion and would rise to nearly $2.5
billion in 2003. This compares with premium income of only about $800
million in each of the last three years.
Chronically underfunded companies are required
to pay a penalty premium, but the formula is written so favorably to
employers that even Bethlehem Steel had not been required to pay the penalty
in any of the five years preceding the termination of its plan. Its 2001
estimate of pension plan assets stood at 84 percent of current liabilities,
but on takeover in 2002, the PBGC found assets covered only 45 percent of
liabilities, with the deficit amounting to $4.5 billion.
Even worse, US Airways pilots found that their
terminated pension plan covered less than one third of liabilities, even
though the company’s last filing had indicated that the plan was 94
percent funded.
In spite of the favorable treatment of pension
liabilities that companies receive under the current system, many are now so
far in the hole that regulations will require them to make substantial
“catch-up” payments by year-end. This has led to cries for relief, with
corporate lobbyists threatening that if companies are asked to pony up too
much, many of them will drop their pension plans altogether.
Under the guise of pension “reform,” a
number of measures have been introduced to artificially reduce the
calculation of pension liabilities, and thus the size of company payments
required to cover them. The Bush administration has proposed an increase in
the interest rate used to figure the estimate of investment income that will
be earned on pension accounts. Greater investment income would mean lower
company contributions.
In addition to the interest rate increase,
this week the Senate Finance Committee also approved a measure allowing
companies in deficit to suspend “catch-up” payments altogether for three
years. Other proposals involve amending the mortality tables to recognize
the shorter lifespan of blue-collar workers—while leaving unchanged the
tables used for white-collar workers, who live longer. Another would provide
special exemptions for airlines, and yet another for manufacturers, allowing
them to amortize their “catch-up” payments over 20 or even 30 years,
with payments not even beginning until 2008.
In still another bit of financial sleight of
hand, the Treasury Department recently granted an exception to its ban on
using company stock to fund pensions, allowing Northwest Airlines to make up
$223 million of its $1 billion shortfall by contributing stock in its
regional subsidiary Pinnacle Airlines. Of course, if Northwest goes under,
its subsidiary’s stock is likely to be worthless as well, leaving workers
and the PBGC holding the bag.
The AFL-CIO unions—acting as accomplices of
the corporations—generally support the various schemes to reduce employer
requirements for pension funding, absurdly claiming that leaving the
companies with more cash on hand will allow them to negotiate larger wage
increases. Never mind that the lower funding level increases the likelihood
that the workers will never see the pensions that their unions have
negotiated!
All of these “reform” measures are aimed
not at securing the retirement of American workers, but at postponing the
day of reckoning, at which time the pension crisis will have inevitably
deepened. And there is no guarantee that
Washington
would organize a bailout should the PBGC run out of money.
Even as ordinary workers’ retirement has
never been in greater jeopardy, corporate executives are pushing more and
more of their multimillion-dollar compensation packages into their pensions,
which generally come under less scrutiny at a time when the public is in an
uproar over obscene levels of CEO pay. Of the $140 million taken home last
month by the now-dismissed chairman of the New York Stock Exchange Richard
Grasso, some $80 million had accumulated in his multiple pension plans.
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2002 Global Action on Aging
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