More companies eliminating pensions

back

Want to support Global Action on Aging?

Click below:

Thanks!

More companies eliminating pensions

By Marilyn Geewax, Palm Beach Post

May 25, 2003

WASHINGTON - Millions of Americans are looking forward to getting more than a gold watch when they retire. They are expecting monthly pension checks based on their pay and years of service to employers.

But increasingly, U.S. companies are eliminating traditional pension plans. The share of workers depending on pensions as a primary income source in retirement plunged from 39 percent in 1975 to just 21 percent by the late 1990s, according to the General Accounting Office, the auditing arm of Congress.

And companies that do continue to offer pension plans are finding themselves struggling to keep fund assets growing to meet projected obligations, following three years of falling stock prices and low interest rates.

When projected shortfalls exceed an Internal Revenue Service formula, companies are supposed to make minimum contributions to shore up pension plans. But until they get far out of balance, companies have considerable leeway in making up deficits.

Many companies are now just coasting along, with their pension plans containing only two-thirds or three-quarters of the money they'll need to pay future retirees.

Recently some large companies, including General Motors Corp., Boeing Co. and SBC Communications Inc., have begun contributing cash to bring pension plans closer to fully funded levels. But because these contributions can reduce earnings and hurt stock prices, many companies remain reluctant to address underfunding problems.

Others are deciding to bail out of traditional pensions entirely, converting to "cash balance" plans. In these plans, workers are credited each year with a percentage of pay and interest earnings, much like a 401(k) savings plan.

Older workers benefit less

When workers retire, they receive the money in a lump sum, which they themselves must invest wisely to provide steady income.

Since years of service aren't included in the benefit formula, older workers tend to benefit less from the plans than younger people. Critics also say the plans offer far less security over all, because retirees who invest their lump sums poorly may quickly wipe out their life savings.

Even Americans who still have traditional pension plans are discovering that their employers' pledges can mean little when hard times hit.

"I got shafted," said David Leasure, a Vietnam veteran who worked for 25 years at a steel mill in northeastern Ohio. When he retired, Leasure said, "I was supposed to get $700 a month, and I'm not going to get that. And to me, that's a sin."

When his employer, Republic Technologies International Inc. LLC, filed for bankruptcy last year, its pension promises evaporated.

The Pension Benefit Guaranty Corp. serves as the backup for underfunded

pension plans. Created by Congress in 1974 and financed by employer-paid insurance premiums, the PBGC's mission is to make sure retirees receive promised cash benefits of up to $43,977 per year, even when employers default.

But during a wave of steel industry bankruptcies last year, the PBGC refused to provide the "shutdown" pensions of Republic Technologies' middle-aged workers.

In the event of a plant shutdown, a union contract was supposed to have secured modest monthly checks for long-time employees whose age and years of service added up to at least 65. PBGC adopted a different standard, terminating pension pledges made to workers under age 62.

Similarly, after US Airways Group Inc. filed for bankruptcy last year, the PBGC assumed control of the pilots' pension plan. Now many of the 6,000 pilots will see a significant drop in benefits promised under union contracts.

Agency posts record deficit

With so many huge companies filing for bankruptcy, PBGC itself is facing problems. In 2002, the agency assumed control of a record 144 pension plans, running up a record deficit of $3.6 billion after exhausting the previous year's surplus of $7.7 billion.

PBGC Executive Director Steven Kandarian recently told a Senate committee that the deficit, "even though it is the largest in history, does not create an immediate liquidity problem for PBGC."

But the situation is worsening. "With $29 billion in benefit liabilities and only $25 billion in assets, we should not wait to put the insurance program on a sound financial basis," he said.

As concerns grow about pension plans, Congress is considering possible reforms. The bill getting the most attention on Capitol Hill is the Pension Preservation and Savings Expansion Act of 2003, introduced in April by Reps. Rob Portman, R-Ohio, and Ben Cardin, D-Md. Congress is expected to vote on the bill early this summer.

Retiree advocates say the bill often goes too far in protecting the interests of companies rather than workers. For example, it would let companies calculate their pension obligations in ways that would allow them to reduce payments to their pension funds and pay out smaller lump sums to departing workers.

But it also would benefit workers by letting them contribute more money to tax-advantaged savings accounts. It would raise the annual limit on Individual Retirement Account contributions from $3,000 to $5,000 and on 401(k) contributions from $11,000 to $15,000.