Retirement, Squeezed

The costs of maintaining such plans have climbed sharply in the past six years because companies have been forced to put more money into pensions to compensate for lower-than-anticipated returns on investments stemming from low interest rates and declines in stock market values, said Matt Moore, senior analyst at the National Center for Policy Analysis, a nonpartisan think tank in Dallas.

As a result, employers are increasingly embracing other options, especially "defined-contribution plans," the most common of which is the 401(k). Under such plans, companies contribute a set amount each month, ask employees to bear the responsibility of deciding how that money will be invested and then hand over a check at retirement for whatever each account is worth at that moment. In 1978, only 17 percent of the workforce had a defined-contribution benefit. By 2003, the latest numbers available, it was 56 percent.

A smaller number have converted pensions to "cash-balance plans." They work like a pension because a worker gets a specified amount at retirement, but also like a 401(k) because the company puts in a set contribution for each worker -- regardless of age or seniority -- and specifies how the money will increase in value, for example at 1 percent above the interest on 10-year Treasury note. Thirty years ago, no pension plan had been converted to a cash-balance model. Today, an estimated 5.5 million people have converted to a cash-balance program.

Cash-balance plans appeal to a younger, more mobile workforce for two reasons, said J. Mark Iwry, a lawyer who is a senior fellow at the Brookings Institution and a one of the co-founders of the nonprofit Retirement Security Project. Benefits accrue steadily rather than accelerate sharply after a worker has been at one company for 20 or 30 years. And they are portable: Workers can take what they've accrued when they change jobs.

Those shifts mean that some workers with pensions have the added benefit of a second plan, such as a 401(k), though VanDerhei said that no one knows exactly how big the overlap is. Even so, a sudden drop in the future value of a person's traditional pension can change the retirement picture. Workers have only three options to close or at least narrow the gap between what they thought they would get and what they will get, financial planners say: Postpone retirement and work longer, save more to make up the difference, or accept a lower standard of living in retirement.

Prepare for the Worst

The good news for workers with traditional pensions, retirement experts say, is that most plans are fully funded and will probably pay out as expected. And even if a plan isn't fully funded -- which means the employer has not set enough aside to pay all promised benefits -- there is a federally run safety net called the Pension Benefit Guaranty Corp., which ensures that workers owed a pension get at least something. If a firm goes into bankruptcy protection and is permitted under its reorganization to dump its pension, the PBGC will pay retirees a portion of what they are owed, up to an inflation-adjusted maximum of $47,659, for those who leave the workforce at 65.

Except for well-publicized instances, such as in the airline industry -- where pilots and others at carriers under bankruptcy protection have had to take a cut from the six-figure retirement packages they were owed -- 90 percent of workers paid by the PBGC get 100 percent of what they were due, said PBGC spokesman Randy Clerihue.

The bad news, though, is that no one can bank on a pension benefit continuing to grow as originally promised. So while many private-sector retirement experts say pension holders have many reasons to justify hoping for the best, they recommend preparing for the worst.

Pension holders should have sound estimates of how much they will need during retirement and how much they can expect from their pension, Social Security and personal savings, including 401(k)s and IRAs. Financial planners can help calculate that number and offer advice on how to adjust savings, if necessary. Internet-based retirement calculators are also available on the Web sites of many mutual fund companies and securities firms and some nonprofit consumer groups.

Retirement experts say workers often underestimate what they need. A paper published last week by EBRI concludes that an old rule of thumb that retirees need 75 percent to 85 percent of their pre-retirement income to live comfortably is outdated. A person today probably needs closer to 100 percent, said VanDerhei, the paper's author, because people are living longer and they need to include money for health care not covered by Medicare.

Workers also should check the financial health of their company's plan. The new law requires employers to send workers regular pension statements in plain English -- without misleading accounting tricks -- but not until the end of April 2009, according to the ERISA Industry Committee, a trade group representing the nation's biggest employers on benefit issues. Until then, workers will have to put in extra work to get a clear picture of their pensions. They should contact their company's benefits department for information, though it may be hard to decipher the numbers, retirement consultants say. Employees concerned about their company's plan might consider pooling resources to hire an outside pension consultant to analyze the data.

Clerihue, the PBGC spokesman, said workers also should remember that a fund that looks healthy today, even under the stricter requirements of the new pension law, can quickly fall behind, depending on the economy's, or an industry's, health. He said that in 2000, using an agency calculation that is more conservative than what most companies use, the PBGC had a $23 billion shortfall for about $1.3 trillion in owed pension benefits. Within three years, however, the underfunded amount had grown to $450 billion of $1.6 trillion owed.