THE TALK OF Social Security reform has stalled in Congress, but over in the private sector big changes stalk the world of pensions. Traditional corporate pension plans, which rewarded long service and penalized job hoppers, have been displaced, first by 401K plans and now by a beast called the cash-balance plan. For the most part, this is good: Work-force mobility is a great economic asset. But sometimes the transition is managed in a way that is unfair to workers and harmful to prosperity. This appears to be the case with IBM's proposed pension changes.
IBM has closed down its traditional pension plan. Instead, IBM will pay 5 percent of each worker's salary to a cash-balance account, which the worker will get, with interest, on retirement. Young workers probably will do better out of this plan than the previous one. Workers older than 50, or those who have been at IBM for more than 25 years, are allowed to stay in the old plan and so are unaffected. However, the workers in the middle of the pack will lose out. By some estimates, the new plan will give them pension rights worth one-fifth to one-third less than the old one.
IBM offers a variety of defenses. First, companies are not obliged to offer any pension. Second, the pension promise to workers is never immutable: When companies go bust, or lay people off, workers lose their pensions. Third, much of the reduction in benefits for mid-career employees is not the fault of the cash-balance plan but the result of IBM's withdrawing early-retirement incentives it had offered temporarily when it was restructuring.
IBM has long been a good employer, and its protests have some merit. But its 40-somethings are getting a less-generous retirement deal, and this when profits are good and the old pension plan had an $8 billion surplus. The company's workers are attending protest meetings, and they have won the sympathy of Sen. James Jeffords and Rep. Bernie Sanders, who represent Vermont, where IBM has 7,000 workers. Web sites have sprung up to offer disgruntled employees advice on suing their firms and lobbying Congress against pension switches.
Across the country, more than 300 employers have switched to cash-balance plans, and many more will follow. If this process harms mid-career employees, an injustice will have been done. People's faith in corporate pension plans will take a hit, and America's already abysmal savings rate may decline further.
Still, efforts to protect workers with new regulation are fraught with danger. IBM claims that three-quarters of its competitors operate no pension plan. If new regulation pushes more companies down that path, the retirement security of American workers and the national savings rate will be the losers.