Pension crisis goes beyond 401(k)
By Karen Gibbs
Sept. 18, 2002
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Don't get caught up in the hype over pension reform. The myopic focus on 401(k) plans only deals with one part of the battle.
There are two other prongs to consider: millions of people, mostly retired, that depend on a defined-benefit pension plan that is either under-funded or on the verge of bankruptcy, and expect to be bailed out by a nearly busted Pension Benefit Guarantee Corporation (PBGC); and the 51 percent of U.S. workers that have no plan whatsoever and will depend on Social Security to help them make ends meet in their golden years.
The U.S. retirement system was structured so retirees could count on three sources of income: Social Security; pension benefits; and personal savings. Current pension reform legislation slowly working its way through Congress will do nothing to alter this three-tiered system, but we need to look at this problem in a holistic sense, treating the entire problem instead of just symptoms of the disease.
Good old pensions
Before 401(k) plans or defined-contribution funds, employees had defined-benefit pension plans that pay a specific amount to each person who retires after a set number of years of service. The plans paid no taxes on their investments, and in some cases all contributions were made by the employer. These were popular until the 1980s, when they fell out of favor and were gradually replaced by the 401(k) as the stock market roared.
Defined-benefit plans were dominated by old economy, heavy industry companies involved in the production of steel, autos and textiles. Then came Studebaker automobile company's bankruptcy, which resulted in about 4,000 workers losing some or all of their promised benefits. That gave rise to federal reforms, including the 1974 Employment Retirement Income Security Act or ERISA, which eased pension eligibility rules, set up the Pension Benefit Guarantee Corporation, and established guidelines for the management of pension funds.
The Pension Benefit Guarantee Corporation is a federal agency that insures and protects benefits in defined-benefit plans. Currently it covers nearly 45 million workers and retirees in approximately 35,000 pension plans.
The PBGC is also responsible for the benefits of almost 270,000 people in nearly 3,000 pension plans that have ended. And if you include people who have yet to retire, the PBGC is responsible for the current and future pension of almost 625,000 people.
For the first 21 years, the PBGC operated at a deficit. Since 1996, it has operated at a surplus thanks to a strong economy, legislative reforms, good investment returns and no major pension plan terminations. But clouds are gathering on the horizon.
The surplus is shrinking with the well-documented termination of LTV Steel's pension plan involving 82,000 employees. And many well-known companies -- including General Motors, Exxon Mobil, Pfizer and airline parents AMR and UAL -- face pension-funding shortfalls. By law these companies are required to fund their pension plans before investing in research and development, marketing or new plant and equipment, so these pension shortfalls will put a huge strain on profits as employers shift cash into the plans.
The House Education and Workforce Committee estimates that under-funded liabilities of corporate pension funds approaches $111 billion. PBGC estimates that it may have to take over another 220,000 pension funds in fiscal year 2003, which starts Oct. 1.
Social Security hardly secure
If you think that's bad, take a look at the Social Security System and its beneficiaries. Social Security was never designed to fully support workers in retirement. It now faces a 75-year deficit and, according to the Employee Benefits Research Institute (EBRI) 44 percent of retirees say Social Security is their primary source of income.
Gender plays a nefarious role. I don't look forward to growing old and alone in this country. Women, on average, live longer but earn less, save less and are less likely to have pension.
Even married women are behind the eight ball. Married women who work and pay into social security taxes find that they are required to choose between their husband's benefits and their own. Since their husband's benefits are typically larger, they take his benefits, but get nothing for all the taxes they paid into the system.
Efforts to level this playing field meet resistance from employees due to costs and paperwork. Just look at the resistance in Congress toward restructuring Social Security, and the resistance in the general population against providing equal pay to women and assistance to female caregivers. In the private pension arena, laws have been changed to prevent men from opting for a higher pension annuity that ends with his death, leaving the widow with nothing. Today, the wife must agree, in writing, to such a choice.
At least the wife has a choice. But 51 percent of the American workforce has no employee-sponsored retirement plan. Their retirement security net is limited to Social Security and whatever personal savings they may have accumulated, including their Individual Retirement Account or IRA, which in many cases is subject to the vagaries of the stock market.
So while the Enron debacle has sparked a move toward 401(k) reform, it's time to look at the entire package and see if there is some way we can derail yet another retirement crisis -- one that has impact on everyone's standard of living, not just retirement hopes.
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