Pension Roulette: Millions of Americans are Losing Promised Benefits
By: Tim Gray Source: AARP Bulletin Today Date Posted: July 2005
When five United Airlines flight attendants lost their pensions in May, they decided to show their anger—and a bit more—by posing for a 2006 calendar titled “Stewardesses Stripped (Of Their Pension).” The women, ages 55 to 64, appear in far less than their uniforms to get across their message that “no retirement fund is completely secure and there is a definite crisis in the pension guaranty system.”
“People are just so angry,” says Connie Baker (Ms. June and Ms. August), who organized the calendar project. Baker, 59, of Fountain Hills, Ariz., is one of 121,500 United workers and retirees whose pensions were slashed during the company’s bankruptcy proceedings, the biggest pension termination in history.
United’s $9.8 billion pension obligations were assumed by the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures the traditional pension funds of companies and pays benefits when the companies can’t. But the PBGC has financial problems of its own: a $23 billion shortfall on pensions that it now administers. The agency estimates that total underfunding of traditional pensions is about $450 billion, including $96 billion for defaults it calls “reasonably possible.”
The United default and the alarm raised by Baker, her United colleagues and millions of other workers and retirees have put the spotlight on a growing list of pension failures, including 20 companies that defaulted on pension funds of more than $100 million each in the last three years. The weakened state of the traditional pension system reflects the intense economic pressures that have engulfed industries like steel, textiles and airlines. At the same time, attention has focused on corporate use of accounting loopholes and prompted calls for greater transparency.
For both workers and retirees, the consequences have already been stark: postponed retirement or new jobs, delayed or deferred medical care and already-tight family budgets squeezed even tighter. “It doesn’t end with the airlines,” said Senate Finance Committee Chairman Chuck Grassley, R-Iowa, at a recent congressional hearing on the United bankruptcy. “Across dozens of industries, there are hundreds of billions of dollars of pension promises unfunded. The facts are alarming.”
The facts are that about half of private-sector workers are covered by some type of retirement plan, a figure that has held steady in recent decades. Roughly 34 million people—about 20 percent of the work force—are in defined benefit plans that guarantee retirement income, down from about 40 percent in 1980. More than 40 percent are in defined contribution plans such as 401(k)s. Some workers are in both.
“Since its invention, the 401(k) has been the plan of choice because it exposes employers to much less risk and it’s less costly to administer,” says Brigitte Madrian, an associate business professor at the University of Pennsylvania’s Wharton School. “There have been no new corporate defined benefit plans for the last 15 or 20 years.”
About 7 million workers are covered by cash-balance plans, hybrids of traditional plans and 401(k)s that allow employees to accrue benefits steadily over the years. Critics say converting to such plans hurts longtime workers who lose out on the spike in benefits that they would get in traditional pensions in the last years on the job. Indeed, the rule of thumb for traditional plans has always been the longer you stay, the better deal you get. Unless, of course, your employer goes bankrupt and dumps your pension.
When this happens, the PBGC, which is financed by premiums paid by U.S. businesses, takes responsibility for administering the pensions. That task now involves 3,520 defunct plans with more than 1 million recipients. The PBGC’s own shortfall has raised the question of who would bail out the PBGC, employers or taxpayers.
President Bush has proposed requiring companies to fund their pension plans in line with promised benefits and to pay higher premiums to shore up the PBGC. “We need comprehensive reform of the rules governing defined benefit plans,” says Bradley Belt, executive director of the PBGC.
Many experts maintain the PBGC is sound. “We live in a panic-induced society, and just because a pension is underfunded doesn’t mean you’ll lose it all. The PBGC is facing a long-term financial challenge, but there is no danger that it will run out of money,” says Karen Friedman, policy director for the Pension Rights Center, a consumer advocacy group in Washington. “It’s a matter of trying to find a rational solution to the problem.”
What’s happening? Economists blame a combination of factors—the stock market’s fall from 2000 through 2002, which lowered the value of pension funds; low interest rates that forced employers to increase contributions to their plans; and a recession that meant companies were earning less. Of all workers, experts say, those most likely to feel the effects of the pension system’s upheavals are boomers in their 50s—those who are not old enough to have earned a large, protected pension benefit, but not young enough to build a new nest egg. Those who are already retired are usually safer.
“Historically, 90 percent of those who get a benefit from the PBGC get the full amount that they have earned,” says PBGC spokesman Jeffrey Speicher. But younger workers—even if they have a larger pension—typically get less. Payouts are capped at $46,000 annually for those who retire at 65; at 55 the cap is $20,526.
“The whole retirement system is suffering terrible pains,” says Olivia Mitchell, executive director of the Pension Research Council at Wharton. “Many people will get a lower benefit than they expected.”
Many experts, however, say that overall the system is not in immediate crisis. James Klein, president of the American Benefits Council, an employer group, says that most companies remain committed to providing a secure retirement for their employees.
“There’s clearly a problem in certain industries,” says AARP’s director of federal affairs, David Certner, “but PBGC can pay benefits for many years, and most plans have sufficient assets to pay full benefits.” But, he adds, as the work force ages and traditional plans grow older, the risks and costs of such plans increase. “Once again we’re reminded of the critical role that Social Security plays in ensuring a guaranteed benefit level of retirement,” he adds.
United is the latest in a growing list of pension failures. The company was squeezed by stiff competition from low-fare carriers, soaring fuel prices and the growing burden of meeting past pension promises. Northwest Airlines President Douglas Steenland and Delta President Gerald Grinstein have warned that their companies might default on their pensions unless Congress extends a 2005 deadline for scheduled pension payments.
“What’s important to remember,” says Friedman of the Pension Rights Center, “is that even if you have a good pension plan now, employers reserve the right to change that plan at any time. But you also need to know that your pension is insured by the PBGC and that most people wind up getting most of their benefits.”
But not all. Connie Baker and her fellow flight attendants expect big cuts in their benefits once the PBGC settles their claims. “We trusted the company we worked for,” Baker says. “I used to look at the world through rose-colored glasses, thinking that things would be fair. Now I feel I have to take those glasses off.”
Tim Gray is a Philadelphia-based freelance writer who covers business and investing.
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