You've got a lot on your mind these days. You're probably still picking away at Thanksgiving leftovers and thinking about the winter holidays. Meanwhile, corporate pension bean counters are engaged in their own December rituals, which are considerably less fun. They're calculating how sound their companies' pension funds are. Or aren't.
It's a sophisticated version of the exercise you do when you plug numbers into Web site calculators to see when you can afford to retire. (You know the drill. Earning 40 percent a year on your investments, you can retire young and rich; if today's market continues, you can't retire until 12 years after you've died.)
For the first time in years, lots of companies have to do something about their pension funds, most of which got fat and happy during the great bull markets of the 1980s and '90s. Pension funds have lost money for three straight years because stock prices have fallen so sharply. Now the bill is coming due. Trevor Harris, chief accounting analyst at Morgan Stanley, estimates that the 360 of the Standard & Poor's 500 companies that still have "defined benefit" pension plans will have aggregate pension deficits of $240 billion at the end of this year. That's compared with a slight surplus at the end of last year, and a $263 billion surplus at the end of 2000. Think of it: a half-trillion-dollar swing in just two years. Even by federal government budget standards, that's serious money.
The reason the problem has taken so long to surface is that accounting rules for pensions smooth out gains and losses over several years to keep companies' profit-and-loss statements and balance sheets from fluctuating wildly. This lets many companies show pension profits for the past few years even though their pension funds' assets were shrinking.
I'm not trying to scare you by invoking all those big numbers and make you think the world is ending. It's not. In the early 1980s many companies had pension problems far worse than those facing most corporations today. But what today's shortfalls mean is that lots of companies feel compelled to do something about their plans. In earlier, more benevolent periods, "something" would consist of putting more money or company stock into pension plans. And some companies are doing that. But I suspect many companies that have pension shortfalls -- and that don't have to deal with unions before changing benefit packages -- will try to shift pension risk away from themselves to their employees.
One way to do that is to switch from traditional pension plans, in which workers are promised a benefit based on salary and years of service, to "cash balance" pension plans, which typically involve the company's putting a fixed amount into a worker's account. If the account makes a lot of money, the employee can have a nice pension. If the account makes only a little money, the pension's not so nice. The worker, rather than the company, bears the investment risk. By contrast, if a company promises you a fixed pension, it's the company's problem to make sure the assets it puts into its pension funds produce enough to pay you the benefits it promised.
These days, no company wants to risk having investors dump its shares because of a perceived pension-plan problem. And it doesn't want its credit rating downgraded because credit analysts are worried about its pension obligations. So, to the extent they can, many companies that still have traditional pension funds will probably do what comes naturally and transfer pension risk from themselves to their employees.
Shifting retirement risk from employer to employee started in the 1980s, when many companies eliminated or scaled back traditional pension plans and introduced 401(k) plans, whose holders get all the reward if their investments do well and bear the risk if they do badly. This worked great for many workers until the spring of 2000, because the bull market produced average stock returns of 20 percent a year, beyond anyone's wildest expectations. But retirement investors have given back a big part of that windfall over the past 33 months.
I don't think that corporations are going to default on pension obligations en masse. Even if some default, the federal agency that insures pensions covers most workers' benefits up to about $43,000 a year. But it just feels creepy to contemplate taking on more retirement risk when accounts have been clobbered so badly.
Not long ago, many people wanted to plow all their retirement assets -- including Social Security -- into the market so stocks would make them rich. But now we see there's something to be said for letting someone else take the investment risk while you collect the checks. And what of Social Security, whose looming shortfalls make corporate pension-fund problems look like rounding errors? Let's try to make it to New Year's before getting depressed.
Sloan is Newsweek's Wall Street editor. His e-mail address is firstname.lastname@example.org.