The grim news coming out of the airline and steel industries about their pension plans and the government agency that insures them is giving Congress, along with older workers across the nation, a sudden case of the jitters.
"We gotta do something" is the phrase du jour on Capitol Hill, and senators and representatives are calling hearings and wringing their hands over the problem.
But as with so many issues today, there are no easy answers. There are lots of proposals and recommendations, but while many would be effective in addressing the part of the problem they are aimed at, they would have side effects -- collateral damage, to use the recently popular term -- that might outweigh their benefits.
Here's a quick look at what's going on:
QWhat are the pensions everyone is worrying about?
AThey are often referred to as traditional pensions, the kind that promise you a lifetime retirement benefit, usually based on the number of years you worked for your employer and how much you were paid. But their technical name is defined-benefit pension, because the plan's formula spells out the benefit you get and it's up to the employer to figure out how to pay for it. These plans are insured by the government's Pension Benefit Guaranty Corp. up to a certain limit, which is currently about $44,000 a year for a 65-year-old.
So, what is my 401(k)?
That's a defined-contribution plan. There are other kinds of defined-contribution plans, but the 401(k) is the best known. In defined-contribution plans, workers and employers can contribute a specific amount of money each year to an investment account, and whatever is in that account when you retire is what you get. Depending on the plan, you may get to choose the investment. These plans are not insured by the PBGC.
What's everybody excited about?
The stock market swoon that began in 2000 and the recent decline in interest rates have combined to shrink the invested assets and boost the liabilities of defined-benefit plans, leaving many of them underfunded. This means that their assets are less than the value of the benefits they promise. At the same time, a number of big, old companies, particularly in the airline and steel industries, have gone broke, leaving behind underfunded plans that have been or will be turned over to the PBGC, which itself is underfunded. So far the PBGC has been able to pay insured benefits, but some worry that someday it may require a taxpayer bailout.
Should I be worried?
The turmoil is relevant mainly to workers and retirees who have defined-benefit pensions. The good news, sort of, is that fewer than 25 percent of workers have such plans -- and, for that matter, less than half of workers have a pension plan at all.
If you don't know what you have, ask your employer. Really. You can't do any planning unless you know.
If you have a defined-benefit plan, it's very hard to get a true picture of its condition. This is a major complaint about the system, and one that may well be addressed by Congress next year. But in the meantime, your company's general economic condition is a reasonable guide. If it is making money and has a good credit rating, it's likely that it can meet its pension obligations, although it may have to borrow to do so. If, on the other hand, your company is shaky, you should be concerned. If your pension is unlikely to exceed $44,000 a year at age 65, the PBGC guarantee is reassuring -- but don't encourage your union to bargain for a better pension in lieu of pay. It may be a hollow promise.
If you don't have a defined-benefit plan, you should worry for other reasons. When employers and the PBGC put aside money to pay future pensions in a defined-benefit plan, they face risk that their investments will not yield enough or will not keep pace with inflation. But in a 401(k) plan, that risk is on your shoulders. This means you have to enroll in your plan, contribute as much as you can (at least enough to get the company's full matching contribution, if there is one) and choose your investments carefully. Otherwise, you're likely to end up with Social Security and not much else.
What are some of the solutions being proposed, and what's wrong with them?
One that gets wide backing is more "transparency" -- in other words, making it easier for workers to evaluate their pension plan's condition. It used to be argued that this would scare workers unnecessarily, but by now they should be plenty frightened anyway.
But that doesn't solve the problem; it just makes it more visible.
Other proposals involve tougher funding rules for pensions. One version would require plan operators to put more money into bonds instead of stocks. They can match the maturities of their bonds to when their obligations are to come due, and bond values go up when interest rates go down, which is what pension liabilities do. Another would make PBGC insurance premiums greater for companies whose condition is shakier and whose pension plan is therefore more at risk of collapse, because healthy plans today tend to subsidize troubled ones.
But while risk-based premiums might encourage cautious investing by employers, imposing them now would be akin to raising the interest rate for a borrower who is having trouble making the payments. And funding changes that would make defined-benefit plans more costly for companies -- and bonds historically have yielded less than stocks over the long run -- would likely encourage companies to terminate those plans and switch to defined contributions.
Already that is happening, and for obvious reasons. Former American Airlines chief executive Robert L. Crandall told the Senate Commerce Committee last week that none of the low-cost carriers has a defined-benefit pension. Thus, for example, JetBlue's 401(k) plan costs the airline 1 percent of payroll, while American's retirement costs when Crandall left ranged from 6 percent for most workers to 17 percent of payroll for pilots.
The competitive advantage of a defined-contribution plan is obvious. So the question that Congress must resolve is whether the defined-benefit system can survive. If it can't, will 401(k) plans do the job? There is a lot of doubt about that, but by the time we find out that they don't do the job, we'll be in another hole at least as deep as the present one.
The PBGC last week took over the Kaiser Aluminum Pension Plan, which covers more than 9,600 hourly employees of Houston-based Kaiser Aluminum Corp., the nation's third-largest aluminum producer. The plan is 48 percent funded, with about $301 million in assets to cover $629 million in liabilities. The PBGC has now taken on $555 million of Kaiser Aluminum's benefit promises. Kaiser Aluminum has transferred to the PBGC, in addition to the hourly pension plan, the liabilities of its pension plans for salaried and inactive workers. The company has paid a total of about $19 million in premiums for the three plans since 1994, the PBGC said.