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Potomac Sources
These are financially perilous and confusing times in the world of corporate pensions, which hold the promise of retirement income for an estimated 50 million workers in the United States. With members of the leading edge of the boomer generation in their late 50s and heading toward retirement, the solvency of pensions will be a powerful economic, legal and political issue. A July federal district court decision involving older workers at IBM spotlighted the complications looming over this issue. Each of the two major categories of pensions has a serious set of problems. First, traditional defined-benefit plans, which provide a predictable amount based on a worker's salary and years of service, were the heart of the pensions adopted by large corporations after World War II, when unions made pensions a key demand at the bargaining table. For big unions in the automobile, steel and other heavy industries, the slogan was "30 and out," a generous pension after three decades of hard, sweaty work. The key to these pensions is that the risk is borne by the employer while the worker has a guarantee.
SHIFTING RISK
One type of defined-contribution account is the increasingly popular cash-balance plan. These accounts are not invested by individual workers, as they are in 401(k)s, but are actually pooled and managed by the company. A big advantage of cash-balance pensions is that workers don't have to wait decades for retirement to get their hands on the money. They can take the money with them when they move to another job, and may roll it into an Individual Retirement Account, or invest it in the new employer's pension plan. This option appeals to younger workers who are more likely to move among different jobs throughout their careers.
HUNDREDS OF CORPORATIONS
The problem with the defined-benefit plans is described in one word: under-funded. Companies are obligated to fund them to meet future pension responsibilities, a task that was easy when financial markets were booming and a small contribution was swelled by the rapid run-up in stock prices. But the market crashed, eroding the value of the pensions and turning big surpluses into huge deficits. Each year Towers Perrin, a major benefits consulting firm, surveys 300 major companies with defined-benefit plans. In 1999, these corporations could meet 120% of their pension obligations. By 2002, plan assets covered only 77% of future commitments. These plans have to make up the difference, even if it means moving substantial shares of company revenues and profits into pension investments rather than into new investments in factories and equipment that could increase productivity or generate jobs. Big industrial companies with aging workforces and growing numbers of retirees see bolstering their pension plan as a major economic burden. The General Motors pension plan, for example, is underfunded at an estimated $25 billion. The company sold $13 billion in bonds in June to raise money for the fund. The average company in the Towers Perrin survey pumped $164 million into its pension plan in 2002, a huge increase from the $64 million contributed in 2001.
PBGC FACES $35 BILLION DEFICIT
Corporations and unions in heavy industry want relief from the weight of future pension requirements. They are backing legislation in Congress that would change the way companies calculate their obligations for the years ahead--a change that would reduce the amount firms must pump into the funds in the short run. The nightmare for members of Congress, who already voted for massive tax cuts that will generate giant deficits, is a crisis in pension plans that would dump tremendous losses and obligations onto the lap of the pbgc. The realm of defined-contribution plans is also unsettled. Legions of companies with millions of workers have shifted to cash-balance plans. For older workers, the key issue is what will happen to their benefits when a company switches to a cash-balance pension. IBM adopted a cash-balance plan in the 1990s, and was greeted with vociferous protests from many older workers. They complained that the new plan would cause major erosion in benefits for veteran workers who had spent their entire careers with the company. During the Clinton Administration, the U.S. Treasury, which regulates the tax-deductible aspects of pension plans, imposed a temporary moratorium on the conversion of company pension programs to cash-balance plans. The ban was lifted under the Bush Administration, and companies appeared ready to resume making the switch.
FEDERAL COURT FINDING
"This is a very significant ruling," said David Certner, director of federal affairs at aarp. "This is a court saying what we have said all along--these plans discriminate against older workers." The ruling threatens numerous cash-balance plans being used at hundreds of companies, according to the erisa Industry Committee, which represents employers. It's a fluid and confused situation for both major forms of pension plans, as well as for the millions of workers who will depend on them for a measure of economic security during retirement. Robert A. Rosenblatt is a writer and editor based in Washington, D.C. He regularly contributes "Potomac Sources" to Aging Today. A former Washington correspondent for the Los Angeles Times, he is a Senior Fellow of the National Academy of Social Insurance and a columnist for the California HealthCare Foundation's Health Currents.
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