Insolvent firms like United Airlines and Bethlehem Steel have dumped their pension obligations onto the government’s Pension Benefits Guaranty Corp, which then savagely marks down the future payout to employees. Profitable companies like IBM and General Motors have used the threat of lower-cost competition to cap defined benefits for workers, eliminate them for new hires, and roll back health coverage for retirees. The article also describes Congressional assent for the habitual manipulation of interest rate and other economic projections by companies to demonstrate actuarial shortfalls in their plans. -------------------------------------------------- The Benefits Trap By Nanette Byrnes Business Week JULY 19, 2004
Old-line companies have pledged a trillion dollars to retirees. Now they're struggling to compete with new rivals, and many can't pay the bill.
June 28 was the day hope ran out for United Airlines' 35,000 retirees. That was the day the government announced it would not guarantee the bankrupt airline's loans -- virtually assuring that if UAL Corp., (UALAQ ) the airline's parent, is to remain in business it will have to chop away at expensive pension and retiree medical benefits. The numbers are daunting. UAL owes $598 million in pension payments between now and Oct. 15, and a total of $4.1 billion by the end of 2008, plus an additional $1 billion for retiree health-care benefits, obligations the ailing airline can't begin to meet. And if United finds a way to get out of its promises, competitors American Airlines (AMR ), Delta Air Lines (DAL ), and Northwest Airlines (NWAC ) are sure to try to as well.
UAL workers are about to find out what other airline employees already know: The cost of broken retirement promises can be steep. Captain Tim Baker, a 19-year veteran of US Airways Inc. (UAIR ), was one of several union representatives sorting through that airline's complicated bankruptcy negotiations in March, 2003. Of the airline's many crises, the biggest was the pilots' pension plan, a sinkhole of unfunded liabilities. Baker reluctantly agreed to back US Airways' proposal to dump the pension plan on the Pension Benefit Guaranty Corp. (PBGC), the government agency that is the insurer of last resort for hopelessly broken plans. It's a move that practically guarantees that retirees will receive less than they were promised, in some cases less than 50 cents on the dollar. But of a raft of bad options, it seemed the only one that could keep the company afloat. "It was the pension underfunding and its future requirements that were going to put in jeopardy the airline's ability to get out of bankruptcy," says Baker. "At some point you have to look around and say that is all there is."
Baker has paid dearly for that decision. He was voted out of his union position by angry fellow pilots and instead of the six-figure annual pension he was promised, when he retires in 15 years he'll get just $28,585 a year from the PBGC, plus whatever he can save in his 401(k).
Stories like Baker's are becoming dreadfully common as employers faced with mounting retiree costs look to get out from under. It's not just troubled industries like airlines that are abandoning their role as retirement sponsors to America's workers, either. The escalating cost of retirement plans is a critical issue at a range of long-established companies from Boeing (BA ) to Ford Motor (F ) to IBM (IBM ), many of which compete against younger companies with little or nothing in retiree costs.
As employers abandon ever-more-costly traditional retirement plans, the burden is falling on individuals and taxpayers.
Why are retirees being left out in the cold? An unsavory brew of factors have come together to put stress on the retirement system like never before. First, there's the simple fact that Americans are living longer in retirement, and that costs more. Next come internal corporate issues, including soaring health-care costs and long-term underfunding of pension promises. Perhaps most important, in the global economy, long-established U.S. companies are competing against younger rivals here and abroad that pay little or nothing toward their workers' retirement, giving the older companies a huge incentive to dump their plans. "The house isn't burning now, but we will have a crisis soon if some of these issues aren't fixed," says Steven A. Kandarian, who ended a two-year stint as the executive director of the PBGC in February. Kandarian is not optimistic about how that crisis might play out, either. "By that time it will be too late to save the system. Then you just play triage."
As industry after industry and company after company strive to limit -- or eliminate -- their so-called legacy costs, a historic shift is taking place. No one voted on it and Congress never debated the issue, but with little fanfare we have entered into a vast reorganization of our retirement system, from employer funded to employee and government funded, a sort of stealth nationalization of retirement. As the burden moves from companies to individuals -- who have traditionally been notoriously poor planners -- it becomes near certain that in the end, a bigger portion will fall on the shoulders of taxpayers. "Where the vacuum develops, the government is forced to step in," says Sylvester J. Schieber, a vice-president at benefit-consulting firm Watson Wyatt Worldwide (WW ). "If we think we can walk away from these obligations scot-free, that's just a dream."
EVIDENCE OF THE SHIFT is everywhere. Traditional pensions -- so-called "defined-benefit" plans -- and retiree health insurance were once all but universal at large companies. Today experts can think of no major company that has instituted guaranteed pensions in the past decade. None of the companies that have become household names in recent times have them: not Microsoft (MSFT ), not Wal-Mart Stores (WMT ), not Southwest Airlines (LUV ). In 1999, IBM, which has old-style benefits and contributed almost $4 billion to shore up its pension plans in 2002, did a study of its competitors and found 75% did not offer a pension plan and fewer still paid for retiree health care.
Instead, companies are much more likely to offer defined-contribution plans, such as 401(k)s, to which they contribute a set amount. In 1977, there were 14.6 million people with defined-contribution benefits; today there are an estimated 62.5 million. Part of their appeal has been that a more mobile workforce can take their benefits with them as they hop from job to job. But just as important, they cost less for employers. Donald E. Fuerst, a retirement actuary at Mercer Human Resource Consulting LLC, notes that while even a well-matched 401(k) often costs no more than 3% of payroll, a typical defined-benefit plan can cost 5% to 6% of payroll.
Despite the stampede to defined-contribution plans, there are still 44 million Americans covered by old-fashioned pensions that promise a set payout at retirement. All told, they're owed more than $1 trillion by 30,000 different companies. Many of those employers have also promised tens of billions of dollars more in health-care coverage for retirees. Even transferring a small part of the burden to individuals or the government can have a profound impact on the corporate bottom line. The decision by Congress to have Medicare cover the cost of prescription drugs, for example, will lighten corporate retiree health-care obligations by billions of dollars. Equipment maker Deere & Co. (DE ) estimates that the move will shave $300 million to $400 million off its future health-care liabilities starting this year.
Full: http://www.businessweek.com/magazine/content/04_29/b3892001_mz001.htm