This is exactly the problem Social Security is going to face 10 years from now–a bulging and costly retiree class. In this respect, private pensions are like canaries in the coal mine, because the change in the environment affects them first. Unlike Social Security, corporations have to set aside money for pensions in advance. They’re saying they can’t pay it–an early warning that government will be dialing back on future benefits, too.
Traditional pensions–known as “defined benefit” plans–aren’t as prevalent as they used to be. Still, they cover some 23 million workers in the private sector. They are funded entirely by the company. At retirement you get a lump-sum payment or monthly check, usually based on how long you worked and how much you earned in the final years of your career. Most plans include a subsidy for early retirees.
But these types of pensions are going the way of the dodo. They bore young workers and multiply the cost of maintaining an aging work force. Besides, it’s bad policy to encourage early retirement, given the labor shortage likely in the years ahead.
Cutting costs grew more urgent after the stock-market decline. Pension funds lost big money on their investments, while the price of providing pension annuities rose. At the end of 2001, 261 companies had $111 billion less in their plans than they needed to meet their obligations, reports the Pension Benefit Guaranty Corp. (PBGC), which insures private pensions. The true shortfalls are probably worse, because shifty accounting can mask a loss.
Most plans will eventually haul themselves back into balance. Between September and December, “more money went into pension plans than in the past 10 years,” says Sheldon Gamzon of the consulting firm PricewaterhouseCoopers. But a few plans won’t make it. Ethan Kra, chief actuary at Mercer Human Resource Consulting, predicts that the combo of underfunding and recession will drive a handful of companies into bankruptcy this year.
The PBGC bailed out 150 bankrupt plans in the past year, compared with 104 the year before. The size of your insured benefit depends on when you retire and what kind of pension you take. Workers can get up to $3,665 a month if they quit at 65 with a single-life pension. But if you retire at 55 with a lifetime annuity for your spouse, your maximum drops to $1,484. The PBGC does not insure state and local government pensions, where underfunding may be twice as bad as in the private sector. Taxpayers blindly defer this cost.
While corporations have to fund for pension benefits already promised, they don’t have to keep those benefits going. So they’re solving their problems by converting traditional pensions into something called a “cash balance” plan.
Cash-balance plans give you a visible, annual pension account that grows with time. But they favor the young over senior employees. Workers who quit after just a few years get more money to take away than the old plans paid, while workers in their 50s typically get less. They lose early-retirement options plus the higher benefits formerly promised for their last few years of work. At 55, “you might find the pot of gold at the end of the rainbow looted just before you get there,” says University of Alabama law professor Norman Stein.
The Treasury put a moratorium on conversions to cash-balance plans in 1999, when older workers shouted that they were unfair. Last month the plans got a green light, subject to certain regulations. About 500 companies already offer them, and many more are in the pipeline.
There’s nothing inherently wrong with a cash-balance plan, says Mark Iwry, a former Treasury official and benefits specialist. The question is whether companies treat older workers fairly in a conversion. Some do, some don’t. In many cases you may have to work for several years before adding anything to the pension benefits you previously had, Iwry says. (For more info, check cashpensions.com.)
Even if you retire without a hitch, how do you know you’re being paid correctly? Have your annuity or lump sum checked by the National Center for Retirement Benefits (ncrb.com or 800-666-1000). You pay zero for the analysis and 20 percent of any extra money you can collect. The NCRB’s Allen Engerman finds underpayments more than 30 percent of the time.
Note that pension cutbacks are strictly for the peons. Halliburton Oil gave CEO Dick Cheney early-retirement benefits when he left to run for vice president, even though he hadn’t earned them. CSX Corp. credited CEO (and Bush’s future Treasury Secretary) John Snow with 44 years of service, even though he worked only 25. You got the message: it’s good to be the king.
