Pension tension
Workers can no longer count on company-funded retirements
What's more, remaining pensions are in danger. Corporate and union pensions owe workers $600 billion more than they've set aside. To conserve cash, the PBGC has put ceilings on payouts and limited the kinds of pensions it will guarantee. These limits affect perhaps 100,000 of the 1 million retirees for whom the PBGC is now responsible, ranging from early retirees like Groff to some highly paid pensioners like pilots. Even so, an analysis by the independent Center on Federal Financial Institutions (COFFI) predicts that the PBGC will zero out its bank account in 2020.
Or even sooner. United and US Airways have gained such a price advantage by ditching their pensions that competitors like Delta, which owes workers and retirees about $5 billion, and Northwest, which owes over $3 billion, will probably have to follow suit, say industry experts. "They have no choice," says Vaughn Cordle, a 49-year-old United pilot and CEO of consulting firm AirlineForecasts. "They either terminate their pensions or liquidate." Now, young and midcareer pilots like him can no longer dream of retiring with a $140,000 annual pension. Cordle figures he'll only get the current PBGC maximum for 60-year-olds (the mandatory retirement age for pilots) of $29,648 a year. "Our generation will bear the brunt of overpromised pensions," he says.
It will indeed. If all the major airlines asked the bankruptcy court to free them of their pensions, the PBGC's deficit would probably soar to $100 billion, jeopardizing the pensions of perhaps 4 million Americans, COFFI estimates. Although the PBGC is not technically backed by the federal government, Democrats and Republicans alike say privately that the government would not let it fail. A taxpayer bailout of $100 billion would be America's second biggest, behind that of the savings and loan industry in the 1980s.
Like those of the savings and loans, the financial troubles of the pension system are rooted in laudable corporate intentions undermined by shortsightedness and greed. When the first pensions were launched in the late 19th and early 20th centuries, some firms tried to buy employee loyalty on the cheap, putting insufficient (or even no) money aside to fund them. After a series of spectacular failures, such as Studebaker's 1964 collapse that left more than 4,000 workers with pennies on their pension dollar, Congress passed laws successively tightening the funding rules. Since 1994, firms have been given just five years to make up any gap in their plans.
But Congress made pensions more costly to companies just as changes in the economy and management strategies appeared to reduce the corporate payoff. Executives concluded that pensions encouraged too many bad employees to stay and too many good ones to leave, says Sylvester Schieber, director of research for the benefits consultant Watson Wyatt Worldwide. They replaced traditional plans, which paid 25-year workers a "defined benefit" of, say, 50 percent of their final year's salary, with plans that gave immediate cash or credit for each year worked. Many of these alternatives, such as "cash balance" pensions and "defined contribution" plans such as 401(k)'s, also happened to save employers big money. The average traditional pension costs a company an added 6.6 percent of payroll. Companies typically cap their 401(k) contributions at just 3 percent of a worker's salary. And while older employees often objected to pension terminations, many younger workers preferred a bird in the 401(k) hand to two in the pension bush, especially given the recent wave of layoffs.
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