DUNDALK, MD.--For 36 years, whenever his boss at now defunct Bethlehem Steel asked, Edmond Groff worked overtime. Double shifts--16-hour workdays--at the company's Sparrows Point plant near Baltimore were common. Sometimes the steelworker drove home, showered, donned fresh clothes, and returned for a third shift. The reason: Bethlehem had a long-standing contract with the union to increase the pensions of steelworkers who put in a lot of overtime. "I worked to get money so my wife and I would have time to be together and travel," says Groff, now 56.
That sacrifice went unrewarded because shortly after Groff retired in 2002, Bethlehem handed off its underfunded pension plan to the federal Pension Benefit Guaranty Corp. But the PBGC backs only standard pension benefits, not those awarded as overtime bonuses. So it cut Groff's pension from $2,520 a month to $1,420, nowhere near enough to cover his mortgage, car payment, and health insurance. Groff had little choice but to go back to work. He was lucky, he says, to find a $12-an-hour job processing insurance claims, a $20-an-hour cut from his steelworker pay. "This was supposed to be the time for us," says Groff. "Now I'm working, but I don't like it."
The great majority of the 44 million Americans who have earned a private pension aren't likely to suffer Groff's plight. Still, with concerns being raised about Social Security's fiscal health, there is also alarm about the second most important source of financial support for retirees--private pensions. In the past several weeks, United Airlines and US Airways have handed off underfunded pension plans to the PBGC, which announced in November it faced a future $23.5 billion shortfall. Analysts now fear a stampede of corporate copycats could threaten millions more pensions. And that would create pressure for a massive taxpayer bailout. "We have a huge pension underfunding problem," says Rep. John Boehner, the Ohio Republican who chairs the House committee that oversees private pensions.
The Bush administration last week unveiled its reform plan, but the few specifics released were quickly questioned. Unusually for Washington, the battle over pension reform will most likely not be fought along party lines. On one side, economic purists say the proposals don't go far enough to stop firms and executives from gambling with workers' pensions. On the other, a bipartisan alliance of executives and union leaders argue that pension providers need far more flexibility and help.
Phaseout. The reason for urgency is clear: Corporate America, which boasted more than 112,000 pension plans in 1985, has since terminated about 80,000 of them. As a result, the share of working Americans earning a pension has dropped from more than 35 percent in 1980 to less than 20 percent today. That decline may even accelerate, as companies say it is no longer in their interest to reward longevity on the job with an old-age stipend. IBM, for example, is winding down its pension plan by limiting all employees who started after Jan. 1, 2005, to a 401(k) savings plan.
The corporate shift from pensions to 401(k)'s usually results in lower payments to retirees. A recent Urban Institute analysis found that fewer than half of today's 30-something workers will collect any 401(k) retirement payments, either because they don't participate in a plan or they cash out early when switching jobs. Because of small corporate contributions and subpar investment returns, the average 30-something who does manage to collect from a 401(k) will get less than $400 a month (in 2003 dollars) on turning 67, the institute predicts. The average 70-year-old pensioner today gets more than twice that.
What's more, remaining pensions are in danger. Corporate and union pensions owe workers $600 billion more than they've set aside. To conserve cash, the PBGC has put ceilings on payouts and limited the kinds of pensions it will guarantee. These limits affect perhaps 100,000 of the 1 million retirees for whom the PBGC is now responsible, ranging from early retirees like Groff to some highly paid pensioners like pilots. Even so, an analysis by the independent Center on Federal Financial Institutions (COFFI) predicts that the PBGC will zero out its bank account in 2020.
Or even sooner. United and US Airways have gained such a price advantage by ditching their pensions that competitors like Delta, which owes workers and retirees about $5 billion, and Northwest, which owes over $3 billion, will probably have to follow suit, say industry experts. "They have no choice," says Vaughn Cordle, a 49-year-old United pilot and CEO of consulting firm AirlineForecasts. "They either terminate their pensions or liquidate." Now, young and midcareer pilots like him can no longer dream of retiring with a $140,000 annual pension. Cordle figures he'll only get the current PBGC maximum for 60-year-olds (the mandatory retirement age for pilots) of $29,648 a year. "Our generation will bear the brunt of overpromised pensions," he says.
It will indeed. If all the major airlines asked the bankruptcy court to free them of their pensions, the PBGC's deficit would probably soar to $100 billion, jeopardizing the pensions of perhaps 4 million Americans, COFFI estimates. Although the PBGC is not technically backed by the federal government, Democrats and Republicans alike say privately that the government would not let it fail. A taxpayer bailout of $100 billion would be America's second biggest, behind that of the savings and loan industry in the 1980s.
Like those of the savings and loans, the financial troubles of the pension system are rooted in laudable corporate intentions undermined by shortsightedness and greed. When the first pensions were launched in the late 19th and early 20th centuries, some firms tried to buy employee loyalty on the cheap, putting insufficient (or even no) money aside to fund them. After a series of spectacular failures, such as Studebaker's 1964 collapse that left more than 4,000 workers with pennies on their pension dollar, Congress passed laws successively tightening the funding rules. Since 1994, firms have been given just five years to make up any gap in their plans.
But Congress made pensions more costly to companies just as changes in the economy and management strategies appeared to reduce the corporate payoff. Executives concluded that pensions encouraged too many bad employees to stay and too many good ones to leave, says Sylvester Schieber, director of research for the benefits consultant Watson Wyatt Worldwide. They replaced traditional plans, which paid 25-year workers a "defined benefit" of, say, 50 percent of their final year's salary, with plans that gave immediate cash or credit for each year worked. Many of these alternatives, such as "cash balance" pensions and "defined contribution" plans such as 401(k)'s, also happened to save employers big money. The average traditional pension costs a company an added 6.6 percent of payroll. Companies typically cap their 401(k) contributions at just 3 percent of a worker's salary. And while older employees often objected to pension terminations, many younger workers preferred a bird in the 401(k) hand to two in the pension bush, especially given the recent wave of layoffs.
Alarmed, Congress began allowing companies to save cash by contributing things like stock or timberland to their pension funds. Congress also let firms count "credits" from previous years' excess contributions, even if those contributions evaporated in the bear market. Pension managers were also given leeway to invest in a broadly diverse portfolio. But they could (and most did) put more than two thirds of their funds in equities, including many of the 1990s' flimsiest dot coms. By comparison, insurance companies that sell annuities must put the vast majority of their investments in safe, low-paying bonds. What's more, Congress let executives use accounting rules to report earnings on invested pension funds as profits and to smooth out estimated gains and losses over a five-year period.
On paper. Gains from the market run-up of the '90s meant firms had to put little or, often, no extra cash in the fund to keep up with rising liabilities, while estimating big future investment gains in their annual reports. Of course, executives who reported better profits typically got big bonuses and fat, guaranteed pensions. And a recent Harvard Business School study of more than 1,000 firms found that companies with poor independent oversight and executives about to exercise their stock options tended to use higher estimates of future pension fund returns than did other companies. A Federal Reserve study also found that investors were so dazzled by the pension-inflated earnings reported by many companies in 2001 that they overpaid for stocks by about 5 percent that year. In fact, pension accounting has now drawn the scrutiny of the Securities and Exchange Commission. Last fall, it asked for records from six major companies as part of a general look at the way pensions affect profits and stock prices.
When the stock market bubble burst, the total value of the pension funds of S&P 500 firms fell from nearly $1.2 trillion in 2000 to $955 billion in 2002, according to an analysis by Credit Suisse First Boston. But what really launched today's crisis was the skyrocketing cost of pensions. Widespread plant closures forced millions of workers into premature retirement, boosting pension payouts, while falling interest rates raised the cost of the bonds that firms needed to buy to cover future pension outlays.
Now, employers and union pension funds are presenting a surprisingly united front, telling Congress that if they are just given a little more time and flexibility--and a little help from the taxpayer--the rebounding stock market, slowly rising interest rates, and a growing economy will finally reverse the pension free fall. "I don't think you should underestimate the potential that asset values may come back and mitigate some of the problem," says James Klein, president of the American Benefits Council, the chief lobbyist for companies that offer pensions.
Companies and unions are backing Bush's plan to allow cash contributions to pensions even when the funds appear fully funded (the current ban aimed to prevent companies from overshielding profits from taxes), so that they can squirrel away money during good times. But both question the plan to raise annual PBGC insurance premiums for financially healthy employers by 60 percent to $30 per worker, and those of employers with troubled pension funds by even more. "We think that the financial hit would lead to an exodus of employers from the pension system," says Alan Reuther, director of legislative affairs for the United Auto Workers.
No easy fix. The PBGC's actuaries doubt the stock market will rebound enough to clear up corporate pension debts. And some economists question whether even the hefty proposed hikes in premiums would be sufficient to clear the PBGC's massive debt or prod firms to fund their plans. Previous attempts to force troubled companies to fund their plans have been undercut by congressional loopholes, notes Richard Ippolito, former chief economist of the PBGC. And Washington lacks the political will to keep firms from risking pension funds in the stock market, he says. Ippolito favors a cheaper method: Dock the pay and benefits of executives who don't fund worker pensions.
Whatever happens, younger workers will have time to adjust to the new retirement reality. But it will be too late for workers like 51-year-old US Airways flight attendant Eileen Zolinas of Pittsburgh. A bankruptcy judge earlier this month OK'd the termination of the airline's pensions, freezing benefits to what Zolinas has earned so far. "I really thought I was going to retire with this company. I would love to be playing shuffleboard in Florida" at 65, Zolinas says. Her experience has taught her kids to set aside their own money for retirement. But, she says, "people my age are pretty much screwed."
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