As I See It: The Problem with Pensions
by Victor Rozek
I have a friend who flies the big jets for United Air Lines. This December he will command his last flight, as he nears the mandatory retirement age of 62. Having successfully navigated the friendly skies for nearly three decades, he was looking forward to a cozy retirement. And for a while things looked very bright, indeed. Over the years he had accumulated a sizeable nest egg of United stock that was valued at roughly $500,000. But then events conspired to create the perfect pension storm.
The most conspicuous element of the storm was the Sept. 11 terrorist attacks, but not simply because fewer people were flying. The event exposed the structural and managerial deficiencies of air travel providers. United had too many routes, too many planes, inefficient operations, extravagant union contracts, and poor management. When the carrier filed for bankruptcy, all of its stock had to be liquidated. When my friend cashed out his pension, his half-million-dollar retirement fund was worth a mere $5,100, a loss of almost 99 percent.
It's not much to live on for the next 20 years, but it's more than most workers in the private sector receive. Over half of those currently employed will receive no pension whatsoever. And many companies that do provide pensions are looking to reduce benefits, and plan to decrease matching contributions to their employees' 401(k) accounts. According to columnist Arianna Huffington, some of the biggest employers in the nation have already decided to contribute nothing at all; among them are Ford, Goodyear Tire, and Charles Schwab.
It is equally troubling for those who are actually expecting a pension that the overwhelming majority of employee pension funds are underfunded. (Management pensions are another story that I will get to shortly.) According to Huffington, "of the 343 S&P 500 companies that offer traditional pension plans, close to 90 percent of them are running a deficit." As the stock market plummeted, the value of pension funds fell right along with it. General Motors, for example, now finds itself over $25 billion short of its projected obligations. Ford is also more than a quart low, with a shortfall of $15.6 billion. "All told," reports Huffington, "the S&P companies are $206 billion in the hole."
Perhaps the most astonishing thing is how quickly the hole got so deep. As of 1999, "the same pension funds had a collective surplus of $251 billion." That's a swing on almost half of a trillion dollars--money that will not be paying retirees' mortgages or medical costs.
But if underfunding is bad, so is overfunding. If pension funds become bloated, a company may simply discontinue the program, claim the excess funds, and start anew--a practice that almost guarantees underfunding, should the stock market decline.
A notable exception to the underfunding trend is IBM, whose shortfall was a comparatively trifling $3 billion. The computer maker announced in December of last year that it would replace the deficit with cash and stock, wanting to address the problem sooner rather than later. But many companies either cannot or will not address their growing pension gap, looking instead for ways to escape their obligations.
An alternative to traditional pension funds, favored by the government, corporations, and some workers, are so-called cash-balance funds. Conventional funds such as 401(k) funds receive defined contributions from employers, take voluntary contributions from employees, and offer workers the benefits of tax-deferred savings. Participants typically have some say in the way their money is invested (usually in stocks and bonds), and they have the freedom to adjust their investments as market conditions dictate. Choice is great, of course, except when you choose wrong or fail to diversify. Then, as we have seen in the collapse of Enron and WorldCom, those whose retirement savings were invested exclusively in company stock suffered the vicissitudes of market volatility, not to mention fraud.
Cash-balance accounts, on the other hand, offer a guaranteed return, because employers agree to pay a fixed rate of return on monies invested. So regardless of what the market does or how depressed interest rates become, employee benefits do not fluctuate. Employees like it because returns are predictable and the account doesn't need to be managed. Corporations love it because the money set aside is a portion of the employees' salary and typically includes little or no matching funds. So think of cash-balance as a glorified savings account.
Whether this is good or bad depends on whom you talk to and how close to retirement age you are.
Traditional pension plans were designed during a time when many workers could expect to spend their entire careers with a single company. Under such plans, years of service and one's salary level at the time of retirement were the primary determining factors in how much money a retiree could expect to receive. Under that model, anyone approaching retirement (even seven to 10 years out) could ill-afford to change jobs, fearing a substantial loss of benefits, which increase rapidly as retirement age nears.
Now, however, job-hopping is the rule rather than the exception. Most entry-level workers can expect a minimum of six or seven job changes during their careers. Under the traditional model, they would be penalized. Under cash-balance, however, they simply take their retirement savings with them when they leave and reinvest with the new company.
The problem is that a whole generation of boomers is creeping toward retirement and corporations would dearly love to dump their Cadillac pension funds and replace them with the serviceable but cheaper cash-balance Chevy. To what extent they will succeed depends in part on the will of Congress, which has a current predisposition toward accommodating the interests of business. But some legislators are beginning to express concern, perhaps because, if their own pension funds were converted to cash-balance, their balance would be cash poor. They point out that House Majority Leader Tom DeLay--a strong proponent of cash-balance, for others--would not do well himself under the new model. Huffington reports that his generous $608,000 payout "would be cut by 60 percent," leaving him with a paltry $251,000.
But a study for the nonpartisan Urban Institute (the institute publishes studies but does not necessarily champion their conclusions) paints a different and perhaps more complete picture. "Replacing defined benefit plans with cash-balance plans would shift pension wealth to individuals who held a series of relatively short-term jobs and those who had pension wealth from jobs held early in their work lives. . . . Overall, most individuals near the bottom of the defined-benefit wealth distribution would fare better in cash-balance plans than in defined-benefit plans, while most workers near the top of the defined-benefit wealth distribution would fare worse."
When taking the entire workforce into consideration, the study suggests that cash-balance "would increase median lifetime pension wealth in the total covered population, and more people would gain, rather than lose, pension wealth." Which is great, unless you're one of the losers, particularly if you've worked your entire life for something that is about to be snatched away.
In the meantime, while top management plots ways of depriving a generation of workers of their full pensions, company directors in rarified boardrooms are plotting ways of increasing the pensions of top managers. The latest scheme is adding non-existent years of service to a retiring CEO's tenure. Huffington reports that Leo Mullin of Delta Airlines worked less than six years but got credit for having worked 28 years. Another airline executive, US Air's Stephen Wolf, got paid for 24 years he didn't work. In Wolf's case, he "made off with a $15 million pension cash-out six months before the company filed for bankruptcy." Then there is the heartwarming story of American Airlines, whose executives demanded over $1.5 billion in wage and benefit concessions from employees while awarding themselves lucrative bonuses and siphoning off $41 million from the ailing company's assets to secure their own pensions.
The list is long and dispiriting and is not limited to the airline industry, but suffice it to say that it is not uncommon for executives who have driven a company into the ground to collect million-dollar annual pensions for life. If there is a connection between performance and retirement compensation for top managers, it would take a forensic scientist to find it.
If the Urban Institute study is correct, the next generation of workers will fare better under the cash-balance pension model. Let's hope so. But for the generation of people who have worked nearly a lifetime, the future is uncertain. It is unconscionable that the greed of so few has the potential to deprive so many of what they worked in good faith to earn over decades. A person who has labored a lifetime should not live his declining years in fear and want.
Ernest Hemingway believed that retirement was the ugliest word in the language. That needn't be true.
Contact the Editors
|Copyright © 1996-2008 Guild Companies, Inc. All Rights Reserved.|