Broken promises Underfunded plans may hit retirees, taxpayers hard

In a four-part series, the Rocky Mountain News explores the problems facing the U.S. pension system and the millions of workers and retirees who still count on it for their retirement. It's a portrait with staggering numbers and sobering truths.

After toiling on the tarmac for nearly 36 years at United Airlines, Jim Anthony finally received his payoff: a pension of almost $3,000 a month.

Now the former ramp supervisor and operations planner could see that amount cut to $2,000 if the airline moves ahead with plans to end its pensions next year.

The change could force Anthony, who is 60 and hampered by a bad knee and other ailments, to return to the work force.

"What this does is put a hell of a lot of strain on us," said Anthony, who retired in 2001 and lives in Centennial with his wife, Barbara. "It's a heck of a lot of money to have to pick up."

Generations of Americans have counted on their pensions to carry them through the golden age of retirement. Yet increasingly they have discovered an unsettling trend: There are no guarantees.

It's a reality that hit workers at CF&I Steel in Pueblo more than a decade ago, and one that is now rippling through the ranks of United Airlines.

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One after another, corporations have thrown in the towel on their traditional pension plans, seeing the funds as too costly and too volatile to bear.

Steep downturns in industries such as airlines and steel have sparked a rash of bankruptcies, forcing many to default on their pensions or threaten termination.

"Companies see all this risk," said Paul Klauder, managing director of SEI Investments, whose recent survey said that three quarters of chief financial officers believe that pensions are negatively affecting the financial health of their companies. "And now they have settled on an easy answer."

The bottom line: Companies are making workers invest on their own, sometimes matching a portion of those savings. Most workers now face retirement without the security of a pension.

Twenty years ago, there were more than 114,000 federally insured U.S. pension plans. Today the number is closer to 30,000. Of those, a research group says 81 percent are underfunded — by $450 billion, according to the Pension Benefit Guaranty Corp., the quasi-federal insurer of corporate pension plans.

The PBGC is a safety net, set up by Congress 30 years ago to rescue failed plans. The agency has taken over 16 plans in Colorado alone.

But the pension insurer is dealing with its own financial troubles. In the past year, the PBGC saw its deficit double to a staggering $23.3 billion.

America's pension system faces a crisis, and taxpayers may be called on for a massive bailout to resolve the mess.

About 4,000 people in the state are getting checks from the pension insurer instead of their ex-employers. The payouts to Coloradans in the past year: $26 million.

The PBGC, in one example, is paying the benefits of 320 former employees of Mobile Tool International, the now-defunct Westminster maker of equipment for the telecommunications industry.

In that case, retirees are getting what they expected. Not everyone is so lucky.

The PBGC has limits imposed by Congress in how much it can pay out, which means some retirees will get less than what they were promised.

Take United Airlines. Struggling to get out of bankruptcy, the airline has signaled it will terminate its pension plans. The federal agency would take over, but would only cover $6.4 billion of the company's estimated $8.3 billion pension shortfall.

The difference — $1.9 billion — would be the amount of benefits lost by plan members, thousands of whom live in Colorado.

For many who worked at CF&I Steel, now the Rocky Mountain Steel Mills, it's a familiar story. When the insurer saved the company's pension in 1992, it was able to cover only $221 million of a $270 million gap, leaving many with less than they had bet on.

"You feel a bit shortchanged," said Herb St. Clair, 57, who recently retired from the company, now part of Oregon Steel.

There are a host of factors colliding, driving corporations away from the defined-benefit pension system, in which retirees are promised fixed monthly payments for the rest of their lives.

With baby boomers leaving the work force and people living longer in retirement, pension costs climb as more folks are ready to collect. In 1985, there were about three U.S. workers for every retiree. Now it's close to 1-to-1.

The severe stock market declines between 2000 and 2002, combined with low interest rates, drove pension funds into the red. And many companies have had to spend heavily to shore up their underfunded plans, straining their finances.

"It's the worst of all worlds," said Kirk Maldonado, an attorney at Sherman & Howard in Denver who specializes in employee benefits.

Some of the fears may go too far. The picture could improve if stocks rally, and many workers will not lose benefits if their pension plans are axed. In those instances, employers will have the assets to meet the obligations.

Still, workers today are much less likely to have that cushion. It's a fact of life many now know.

Companies are moving the onus of investing for retirement — along with the risk — to the employee. The use of so-called defined contribution plans, such as 401(k)s, has exploded.

The 401(k), named after the section of the tax code that established the savings vehicle, makes employees decide how much to save, and where to invest.

More than one in five companies surveyed last year by Aon Consulting had either frozen pension plan benefits, or at least were considering such a move.

Avaya Inc. is one. The company froze its pension plan for non-union employees last year, facing a shortfall of $800 million in the fund and seeking to cut costs. At the same time, it improved its 401(k) plan.

The communications equipment maker, spun off from Lucent Technologies in 2000, said its employees would not accumulate any extra pension benefits starting in 2004, but would keep what they already had earned.

Changes to pensions often are tougher on mid-career employees because benefits grow the longer people stay on the job.

"This is good for those of us who made it through a long career and retired with an enhanced pension, but does very little for those who have a lot of time in front of them," said Doug Spencer, a former Avaya manager who retired in 2001.

But even Avaya retirees, he said, have reason to be anxious as reeling pensions across America turn into headline news.

"Given the present value of the pension plan assets, it's conceivable we could all end up in the long run at the mercies of the Pension Benefit Guaranty Corp.," the Boulder resident added.

However, Avaya, which employs about 2,400 workers in the state, said the move would strengthen its pension fund's financial condition by reducing obligations down the road.

And the company noted it was making up for the freeze with a more generous 401(k). Avaya now will match up to 6 percent of an employee's salary and bonus. In addition, the company has started a retirement education program to help workers.

Many employees like having control over their money and the ability to take it with them when they move on. These days, people are more likely to skip from job to job, and even career to career. Pensions, which are based on years of service and pay, were designed partly to reward employees who stuck around.

The company, which has 6,200 workers in Colorado, replaced its traditional pension and in 1999 introduced a cash-balance plan, which has features of an old-fashioned pension as well as a defined contribution arrangement.

It was a hardly a smooth transition. A federal judge ruled last year that the changes made in the 1990s discriminated against older workers. IBM plans to appeal the ruling.

Now, IBM says starting next year it will exclude new workers from its contested cash-balance pension plan and offer them only a 401(k) savings plan.

Surging stocks or higher interest rates could vastly improve the situation. But many companies don't want the hassle.

Pension costs, uncertainty about how funding rules could be reformed, and volatility in contributing to the plans have made the defined benefit pension proposition an unappealing one.

Part of the problem are the rules dictating how companies must fund their pensions. Corporations can do it by the book — United Airlines was one — and still get themselves into a mess. Many failed to pump enough into their pension funds during the go-go years of the 1990s.

Some skipped contributions to their plans as stocks climbed because the increased value of their funds covered their obligations. Then, when stocks tumbled in the bear market, many pensions were left in the lurch.

Corporations also can build up credits if they contribute more than they need to in certain years. If they don't have the cash later, they can use credits to make a contribution to the fund — even if it's underfunded because past contributions got zapped in a sinking market.

Bethlehem Steel is a prime example. The steelmaker's minimum contribution to its pension fund in 2001 would have been $270 million without a credit balance. But the company relied on its credits and, as a result, was not required to inject any money into the plan during that year, according to a 2003 Government Accountability Office report.

Companies also have promised more, in some cases offering increased pension benefits in place of pay raises.

"This isn't a result of an inherent problem with pensions. It's that companies made promises bigger than they could really keep," said Don Fuerst, a principal with Mercer Human Resource Consulting in Denver. "If you manage a plan properly, and don't overpromise to employees, you can have an effective program people can appreciate."

Fuerst has said corporations could see the wisdom in keeping defined benefit plans, in part because pensions encourage workers to stay put, which ends up lowering turnover costs.

But the days when workers could depend on full pensions are gone. Many plans have defaulted, and rising numbers are at risk of ending up there.

It's a bitter pill to swallow for folks like St. Clair, the former CF&I Steel worker, and Anthony, who left United Airlines at age 57 in part because he had three herniated discs in his neck.

There is no easy remedy to the nation's pension problem. One solution that could ease the stress — higher insurance premiums for companies that sponsor plans — could lead many to abandon the traditional pension.

Some worry the shift could leave retirees with an insecure future. Americans are notoriously bad savers, and many do not take the responsibility seriously.

And after huge stock declines and corporate scandals like the one that rocked Enron — where employees saw their nest eggs decimated after betting on the company's stock — the steady paychecks provided by pensions would look mighty good.

Bottom line problems with social welfare as it was provided in the New Deal.

1) It was a Ponzi Scheme that required a broad-based pyramid of payers to attend a small number of recipients in order to be fiscally sound. Demographics, economics and sheer lack of physical space for this necessary abundance of payers has put us over the barrel when it comes to meeting our obligations.

2) We try to do way too much with too little. The programs have expanded to the point where we are trying to provide more than we can manage.

Fixing our safety net will require a concerted set of reforms. What President Bush currently doesn't quite have the nerve to push to the sticking point is a nice start but not enough. Here's the .cnI redruM platform for fixing these benefits.

1) Means test all elderly benefits and do not provide them to any senior who's annual income or personal wealth is more than 2 standard deviations above the national median in either category.

2) Allow individuals to begin specifying how they want 50% of the money they contribute to the trust fund to be invested. Limit this to an extent so that the trust fund does not acknowledge a level of risk that actually puts the whole pot in jeopardy. Adding stocks, most corporate bonds and covered put options in the mix would accelerate return on investment without risking the future of the fund.

3) Abolish the practice of purchasing specific commodities as a form of welfare payment. Every time a provider knows the government is paying, the price goes up to reflect the value of the underlying commodity in comparison to the enhanced pile of purchasing power the government brings to the table. Don't be shocked if the prices of drugs now behave like college tuitions did after Pell Grants were introduced. If the government leaves free money on the table, the drug companies will take it with no remorse.

I fail to see why I as a taxpayer have liability for a corporation's failing promises. They over promised, and their workers believed them. Why is making the workers whole a generalized obligation of society? Like most people in their 40s I have no pension at this company, or any of the 1/2 dozen I've worked for. The Government wants to take money from me and give it to others based on promises they believed that the people who made them can not keep.

Pensions are an important obligation of a company, and bankruptcy law should take that into account. But once you've taken what is there and divided it among those who are owed, in some rational way, I think the payouts should be done.

They over promised, and their workers believed them.

That’s what they keep saying, but I can recall dozens of instances where it simply isn’t true (though that is the claim).

Also, despite the fact they keep the slight-of-hand routine going calling everything a “company” pension plan, the biggest loser-plans I’m aware of are UNION pension plans.

The company “contributes” an agreed-upon amount into the plan and the UNION manages it. Then, of course, when it goes tits up it’s a company shortcoming somehow.

And, keep in mind, that those same unionized employees that are having troubles with their union-managed pensions are the same damned dopes that caused the companies they worked for to go out of business. That’s happened PLENTY of times. Guess what, they still expect a pension.

That’s not to say all union-managed plans are bad. The IBT is an interesting example. They have plans that are the worst around. But then, they also have certain (usually the stronger northeastern locals) plans that are some of the best in the world.

You could literally work the same job for the same hourly rate at the same company – if you’re in one plan you might work 30 years and retire with $1,700/month. If you’re in one of the better locals you’d be getting $6,000/month with a bonus “13th” payment in December. Seriously. That, with the company “contributing” the exact same amount per person over the exact same timeframe. Figure that out if you can… I’ve never been able to.

And no, the general public shouldn’t be paying up. But then, my understanding of the PBGC is that it’s the companies that are paying into that (at least to some extent). The companies are shelling out money for pensions and also stuffing some into the PBGC. But then, I’ve not really made a serious effort to “study” them so I could have it mixed-up somehow.

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