AUSWR
The Association of U S West Retirees
 

 

 

Fake Retirement Security
Washington Post Editorial
Thursday, January 19, 2006


Among Congress's many bits of unfinished business is corporate pension reform.  Both the House and the Senate have passed bad bills that the White House has threatened to veto;  the chance to do better will come next month, when the bills go to conference.  Unfortunately, the omens are not promising.  Lobbies are pressing Congress to stick with its bad legislation, and the news from corporate America is likely to be twisted to suit the lobbyists' ends.

The corporate news is depressing.  A procession of blue-chip companies is walking away from traditional defined-benefit promises, the sort that guarantee a fixed proportion of salary upon retirement.  Companies such as IBM Corp. and Verizon Communications Inc. have stopped allowing new pension claims to accrue under these plans, while others, such as Alcoa Inc., are barring new hires from participating in them.  From the companies' viewpoint, switching to defined-contribution 401(k) plans cuts risk:  Companies just have to pay in a fixed and knowable sum each year;  they don't have to worry about how long retirees will collect pensions or whether their investments will grow fast enough to pay for their promises.  But reduced risk for the company means increased risk for the employee.  Companies are better placed to shoulder risk than individuals, so the switch away from traditional defined-benefit plans is a loss to society.

But this is not a reason for Congress to shrink from sound pension legislation, despite arguments to the contrary.  Congress needs to require companies that operate traditional defined-benefit plans to put aside enough money to fund their promises;  lawmakers should not allow them to fudge assumptions about investment returns, cutting the immediate costs of maintaining pension plans but producing unfunded promises in the long term.  Funding shortfalls create a risk that the federal pension insurer, and perhaps ultimately the taxpayer, will have to bail out pension plans.  When this happens, some retirees get smaller pensions than they counted on:  For a worker planning to retire at age 60, the federal insurer covers annual benefits only up to $31,000.  Anyone who had been promised more than that is confronted with the nasty truth:  The supposed advantage of traditional pensions -- that they shield individuals from risk -- can sometimes be illusory.

So although it's true that companies are dropping defined-benefit plans, and that even more may do so if they are told they can no longer fudge the numbers, this is not a reason to allow the fudging to continue.  It makes no sense to extol the reliability of traditional pensions at one moment, then to propose legislation that makes them unreliable in the next.  Yet that is what a recent letter circulated by a group of lobbyists styling themselves the Pension Coalition does:  It complains that the administration's sensible push for pension rules that reduce the funding shortfall would "leave fewer Americans with the retirement security of a defined benefit plan."  But how much retirement security is there in an underfunded plan?  If workers are going to face risk, they might as well have 401(k) accounts.  At least these make no pretense of guaranteeing income in retirement.

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