Bill Syverson, a 49-year-old senior engineer at International Business Machines Corp., was looking forward to a pension of $40,000 a year when he became eligible to retire after 30 years at the company.
A few months ago, he learned that as a result of IBM's decision to switch its pension to a "cash balance" plan, his benefit would be more like $20,000.
Syverson, of Colchester, Vt., was outraged. "I'd have to work 10 to 15 years longer to get back to $40,000," he said.
Thousands of other IBM employees felt the same way, and their complaints quickly reached the ears of policymakers and members of Congress and got some results in Washington.
Sen. James M. Jeffords (R-Vt.), chairman of the Senate Health, Education, Labor and Pensions Committee, has scheduled hearings on pension issues today, while Rep. Bernard Sanders (I-Vt.) plans to introduce legislation ensuring that employees have a choice when companies seek to implement a cash-balance plan.
At the same time, the Internal Revenue Service, which is a key regulator of pensions because of their favorable tax treatment, has ordered field offices to confer with national headquarters before approving any new cash-balance plans. That shift took place after Sanders's office obtained an internal IRS memo raising questions about possible age discrimination in the plans.
In addition, the federal Equal Employment Opportunity Commission is looking into the question of whether such changes in pensions result in age discrimination.
To top it off, last week IBM announced that it would allow thousands more workers to remain in the old pension plan, not merely those within five years of retirement, as originally provided.
Although the workers' campaign targeted IBM, the computer company has been only the most visible symbol of wholesale changes that have been sweeping through the nation's pension system. "It's very much a part of a trend," said Karen Ferguson of the Pension Rights Center here.
"The real questions are, one, can these plans provide an adequate supplement to Social security" for lower-income workers, "and, two, are they just a way station--are we going to see gradual reduction" in benefits going forward, she said.
Beginning in the 1980s, thousands of companies adopted tax-deferred savings plans, such as the well-known 401(k) plan. These plans acted as a supplement to the traditional pension, but at smaller companies they often became the only retirement savings vehicle.
These savings plans, sometimes called defined-contribution plans, are usually funded by a combination of worker and employer contributions. They appeal to younger workers because they are easily portable, but since their benefit is simply what the contributions and investment earnings total at retirement, all the investment risk falls on the worker.
Now the second shoe is falling. Over the past five to seven years, hundreds of major corporations that had continued to offer traditional pensions have moved to transform them into cash-balance plans, which more closely resemble defined-contribution plans.
Employers argue that the shift is necessary to compete with other firms offering less-generous pensions, and to appeal to younger workers, especially in the high-tech arena, who prefer other types of compensation, such as stock options, and who expect to change jobs numerous times over their working lives.
"As a general matter, companies are evaluating whether their benefit dollars are being spent in the most appropriate way. Are they getting the most bang for the buck?" said James Delaplane, vice president for retirement policy at the Association of Private Pension and Welfare Plans, an employer group here.
Though cash-balance plans can be structured to provide the same retirement benefits as a traditional pension, that doesn't always happen. And if it does, there is still an important difference in the way those benefits are earned.
In traditional pension plans, benefits are determined by a formula that typically combines years of service with average pay in the last few years of work. Since pay is usually highest in the final years, workers in these plans earn most of their benefits toward the end of their careers, and long-term employees get the largest pensions.
A cash-balance plan works differently. The employer contributes a fixed percentage of the worker's pay--usually 3 percent to 7 percent--to a hypothetical account in the worker's name and guarantees that the account will grow at a fixed rate, such as 5 percent.
The result is that the benefit accumulates in a more linear fashion than with a traditional plan. Most important for younger workers, the account builds up faster in the early years and is usually transferable if the worker takes a new job.
But older workers may have to stay on the job longer to obtain the benefits they expected under their old pension plan, as Syverson discovered.
While it is legal for companies to alter their plans as long as employees do not lose accrued benefits, future benefits are not similarly protected. In other words, pension benefits are earned over time, and the ones you have already earned, and that you would get if you left the company now, are locked in by law. But the ones you calculate you would receive years from now at retirement can be reduced.
Similarly, a change to a cash-balance plan can hurt older workers who had already earned more benefits than the new plan entitles them to. In such cases, the employees will have to work for years without gaining any new benefits until the new formula catches up.
These issues have led to complaints that cash-balance plans violate federal age-discrimination laws. But experts acknowledge that the issues are complex, and individual companies have been able to implement cash-balance plans and protect older workers.
Also, cash-balance plans remain defined-benefit plans and as such are guaranteed by the government.
And companies say they need them because they fit the wants and needs of the workers they are seeking.
"Companies are seeing substantially increased mobility in some industries," Delaplane said. "They are asking what plan design best suits that new work force."
The IBM case, though, has touched off an outcry that will not easily be stifled, Ferguson said. She said her group is receiving numerous calls from employees of other firms where benefit reductions loom.
The IBM case "is the beginning of a recognition that these people had reasonable expectations, had what they thought was a promise, and it's fundamentally unfair to break that promise," Ferguson said. "I think that's resonating with a lot of people."