By Bill Fortsch

You’ve scrimped and saved and stayed with the corporation for more than 25 years to be able to enjoy an early retirement or even possibly a second career. Then, suddenly, you are astonished to learn the pension—your pension!—is worth only half what you thought. Is it legal? What happened? Do you have any recourse?

Unless government action is taken very soon, bankrupt employers’ pension funds may not be able to pay retiring employees their hard earned pensions. Due to a downturn in the stock market cycle and mismanagement on the part of overpaid chief executives and their boards of directors, companies’ pension fund bankruptcy is occurring at a rapid rate.
Furthermore, the Pension Benefits Guaranty Corporation cupboard is bare. Pension benefits to approximately 42 million employees are in serious jeopardy.

Many employees’ 401k plans have shrunk to the point where they can no longer provide adequate supplements to Social Security income. It is estimated retirees are being underpaid by $85 million to $199 million annually!

Types of Pensions

Company pension plans break down into two broad categories: defined benefits and defined contributions.

Defined benefit pension plans are traditional employer-paid plans in which benefits are determined by both the employee’s salary and years of service. Defined benefit plans are not usually portable and cannot follow an employee to subsequent employers. In defined benefit plans, benefits are increased dispropor-tionately during the last 10 years of an employee’s work with a firm.

In defined contribution plans, the employee manages his own retirement assets via his investments and varying employer contributions.

Investment Choices

Overloading 401k plans with employer’s stock runs counter to the common wisdom of creating a diversified portfolio. It also exposes employees’ retirement plans to undue risks—risks which have become obvious in the last two years when the stock in a poorly run or corrupt company leaves nothing for workers. Yet the corporate culture has strongly encouraged investment in one’s own firm.

Multiple factors, other than the stock market, work toward the good or bad economic health of employees’ retirement savings—time in the work force, family emergencies, employment history and general physical health all affect how much employees can save and invest toward retirement.

Pension Philosophy

Pension plans were originally designed by companies to encourage long service and loyalty from trusted employees. Employers discovered that employees would work for a smaller salary when a pension plan was provided, because they felt well assured of income in their old age. It was a mutually beneficial arrange-ment when employers and employees stuck to the bargain.

To strengthen the pension bond, employers staggered a larger share of pension benefits to employees’ last few years of service. Some employers would dutifully keep pension funds fully paid up and insured against an unfunded liability, while others would skimp on pension fund contributions and then find themselves short.

Bad Decision for Workers

During the Reagan administration, the courts ruled that pension fund monies belonged to the employer and not the employee who earned his or her benefits. Curiously, when pension funds became the sole property of the employer, firms started claiming the funds as assets! Not surprisingly, an enriched balanced sheet can make a firm desirable for a takeover. For example, virtually the only reason the former Atlantic and Pacific Tea company was acquired was its pension assets.

Forced Conversion and Draconian Decisions

Recently, many companies wanted to change from a defined benefits pension plan to a cash balance pension plan, which offered employees a choice between receiving money in lieu of continuation of the previous plan and leaving the company, or staying in the current job but receiving fewer benefits.

It is clear to see why employees might feel indignant when, toward the middle or near the end of their careers, methods of pension calculation were changed, cutting their retirement benefits by 25% to 40%.

In their pleas for cash balance pension plans, plan advocates maintain that these are similar to 401k plans. The claim is only half true, since 401k plans are purely voluntary while many employees are forced to accept membership into cash balanced pension plans.

IBM’s employees successfully resisted conversion of their pension credits into cash balance pension plans, but many other companies’ employees probably lacked the organizing skills and strength in numbers to resist the pressure.

To the average employee who had accrued pension benefits, it was as if, having worked many years for $10 per hour in pension benefits, he had only earned $6 to $7.50 per hour.

Wrong Leadership

“There are more than 800 age discrimination complaints pending before the government over cash balance conversions,” one congressional official said. “In a letter to the President, more than 200 members of the House of Representatives and Senate urged the administration to withdraw the pension changes which it proposed in December.”
Senators and Congress persons were very concerned about the successful nomination of John Snow for Treasury Secretary. They even considered blocking him from confirmation should they fail to get assurances on worker pension protections.

Representative Marcy Kaptur (D-Ohio), stated, “Treasury Secretary Snow had become wealthy at CSX [a Richmond, VA-based railroad corporation] while denying railroad employees proper benefits.”

How cash balance pension plans fare in the future critically depends on whether an IRS regulation is rewritten to establish that those workers protesting the coerced cash balance pension plan changes can legally be fought on the basis of age discrimination. If the regulation is changed in favor of employers, all of Snow’s assurances to Senators Durbin and Harkin to do otherwise will have been for naught.

The Nation writer Robin Blackburn wrote in “The Great Pension Crunch” (February 17, 2003), “The most likely outcome is one that would allow employers to convert DB (defined benefit) schemes to a DC (defined contribution) logic, using “cash balance” or some kindred formula, but shortchanging employees in this way would create legal as well as political difficulties.”

Treasury Secretary Snow is under pressure to take the concerns of several lawmakers into account before the Treasury puts the employer-favored rule into effect.

The Pension Benefit Guaranty Corporation (PBGC), created by the Employee Retirement Income Security Act of 1974, a.k.a. ERISA, insures the pension plans of 44 million workers and retirees, but collects only $19 premium per year from each insured worker.
Pressure is on to protect the corporations from increasing premiums.

“Imposing additional premiums at this point would be both premature and potentially quite harmful,” said Janice Gregory, vice president of the Erisa Industry Committee, a trade association that represents employers.

“The PBGC has had a tough year,” she said, “but it has an unquestioned ability to pay benefits for years into the future.”

Corporate assurances notwithstanding, pensions are at great risk at this point. As of February 2003, Bloomberg News reported that U.S. corporations are short of some $300 billion in funding their pension plans. The Senate Finance Committee has been told that “inadequate requirements have led to the enormous gap, and the administration is drafting proposals in response.”

A Viable Solution

Were there not a ready and satisfactory resolution to the retirement pension crisis, our nation would have to spend much time soul-searching and problem-solving to create an action plan. Blackburn suggests shoring up the assets of the Pension Benefits Guaranty Corporation with 10% of corporate profits without adding to labor costs, and passing on the cost to consumers.

Additionally, for those involved in making continued pension payments a reality, we have a standard against which to measure a successful transition. Critics will be able to watch our House, the Senate and the executive branch struggle with the problems of making needed but almost painless changes to our pension system.

It may be a tough battle, however. Generally, conservatives traditionally rule out any changes that do not serve their interests; they give their opposition only a little leeway in which to deal with well defined and serious problems.

The U.S. successfully adopted the Social Security solution for care of the aged, so there is a history of success to model after. Organizing positive forces in favor of share levies is a critical step in achieving a welcomed change in the way that pensions are financed. Our leaders must give an appropriate priority to pensions, so that every retiring person receives the pension he or she earned.

The pension story is just one of many crisis issues that are now confronting this country. CMW is deeply troubled by the growing national deficit which has reached $300 billion, the largest deficit in 30 years. With the Iraq invasion plunging us further into a financial black hole, with the constant stream of layoffs and growing unemployment lines (2.5 million people lost their jobs in 2002), the future looks bleak.

Meanwhile, Bush continues to push for unjustified tax breaks for the wealthiest. We see a skewed set of priorities that many economists predict can do permanent damage to our future.

It’s time for all of us to pressure both the Republicans and the Democrats to take a closer look at what all our children and grandchildren—not just the wealthiest—will require in order to have their basic needs met in the future.