That’s too bad, because guaranteed lifetime incomes shouldn’t be thrown away lightly. They can offer better returns than you’ll ever get from your investments, and more personal security, too.
But more on that later. Pensions currently face an obstacle even more serious than waning worker interest, and that’s underfunding. Current pension rules allow companies to contribute less than they should, even though they have the money. In a few cases, they can’t afford to pay the benefits they promised. The federal Pension Benefit Guaranty Corporation, which picks up part or all of the payments owed by bankrupt plans, warns that its deficits are alarmingly large.
To fix the system, the U.S. Senate and House of Representatives are hammering out a pension-reform bill. It could be ready as early as next month. But it’s a strange “reform.” All parties agree that it will push many more companies into freezing or dropping their plans. (A frozen plan won’t cover new employees and may also end benefit increases for current workers.)
You don’t want to know the bill’s technical details (trust me on this!). In brief, the reforms require firms to put more money into their plans. Underfunded plans will have to make up their shortfalls faster. There will also be changes in the way all companies calculate how much they owe. In 2005, the industry Committee on Investment of Employee Benefit Assets asked pension executives what they’d do if at least two of the provisions passed. Sixty percent said they’d freeze their plans. “Private pensions are going the way of the dodo,” says David Wyss, chief economist for Standard & Poor’s. “The more that’s required of plans, the sooner they’ll go extinct,” along with the future benefits of 17 million workers.
Ironically, part of the pension-funding problem no longer exists. Plans are coming back to a sounder footing, thanks to rising interest rates, massive corporate catch-up contributions to their plans, limitations on benefits and the recovery in the markets. The premiums that companies pay for PBGC insurance were raised earlier this year, so its deficit should shrink, too. “PBGC has enough assets to pay benefits for a couple of decades easily,” says John Ehrhardt, a principal at Milliman, a consulting firm. A recent report by the Government Accountability Office put the odds at 90 percent that the PBGC could cover all failed plans at least until 2020. In short, the funding crisis may have been oversold.
But fears that government would be on the hook for failed plans has “scared the heck out of everybody,” says Congressman Earl Pomeroy, one of the few pension experts in the House. He favors reform at a slower pace to encourage willing companies to keep their plans going. But even if Congress lightens up on the funding burden, accounting changes expected next year will make the plans less attractive to their corporate sponsors.
“Traditional plans have reached a tipping point,” Ehrhardt says. Most of them will freeze and eventually terminate. A few firms, however, will still find it useful to keep their plans to attract and retain talented workers in mid career.
When companies freeze plans, they usually sweeten workers’ 401(k)s. But that probably won’t make up for what you lost. The Employee Benefit Research Institute studied what would happen if pension plans were frozen or ended and workers depended on their 401(k) investments. In a typical plan, it might take an annual company contribution of 15 percent to make at least three quarters of the long-career workers whole, says EBRI’s Jack VanDerhei. When the company pays less, as it usually does, you’d wind up with a lower retirement income or else would have to save substantially more yourself.
In another study, the consulting firm Watson Wyatt found that the value of pensions grew substantially in the past five years. In a typical plan, the retirement benefit for someone 65 today might have grown 97 percent since 2000, and 244 percent for a 40-year-old (that counts both market changes and additions due to aging). And that’s a frozen plan. A “live” one would have gained much more.
Pension plans also earn more on their investments than a typical 401(k) due to better management and lower expenses. “We’re moving from an efficient retirement system to a less efficient one,” says Watson Wyatt’s Kevin Wagner. It’s a loss.
But that’s only if you’re a working stiff. Top executives are not only keeping their pensions, their payoffs are leaping even as yours are being pared. Tough luck. Today, the money flows to the “deserving rich.”
