No more guarantees
Pensions are in crisis, and older Americans face a retirement that is much less secure than they counted on. Meanwhile, young workers bear more responsibility to plan and save on their own.
By H.J. Cummins, Staff Writer
Mpls Star Tribune
Sunday, September 25, 2005
Retired mechanic Randy Daly had two thoughts when Northwest Airlines declared bankruptcy: "I'm going to lose medical benefits for me and my wife," he said. And, "If my pension gets turned over to the government, I'm going to lose some more money."
Both are strong possibilities for the Apple Valley resident, who's 61, and together they would cost him about $1,300 of the $2,860 monthly benefit he just started collecting in April.
"I'm retired. You'd think you'd be safe, wouldn't you?" Daly said. "But no, that's not the way it works. You put 40 years into a place, and you get promises and then, whoops, they change their mind."
As Northwest's 71,000 employees and retirees await news on the fate of their pensions -- and their retirement years -- they have a lot of company.
Across thousands of workplaces -- from steel mills to airline hubs to small businesses -- the status of many employee pensions now sits somewhere between threatened, and dead and gone.
A country where private industry counted 114,000 pension plans a generation ago now has only 31,000 -- and the decline is accelerating.
Among the country's Fortune 1000 companies, the number of plans frozen or terminated jumped from 45 in 2003 to 71 last year, according to Watson Wyatt Worldwide, an employee benefits consultant. Another 25 companies closed their pensions to new hires.
The result is that older Americans are staring at the least-secure retirement in at least three generations. Many can expect to outlive their money.
The biggest byproduct of the new order is fear.
Even older Americans already retired worry about their children, said Dennis Gerhardstein, programs director of the Minnesota Senior Federation. "They tell me, 'We have our pensions. But the boomer generation thought they had a solid agreement, and now someone's changing the rules on them midstream.' "
Boomers see the new employer message as "Good luck to you. Hope you don't get sick. Hope you don't get fired. Hope you save some money," Gerhardstein said. "That's the anxiety I see in people's eyes at retirement seminars these days."
The end of the pension is coming quickly -- and in all kinds of ways. IBM converted its plan to something else. Motorola closed its plan to new employees. Northwest Airlines will either dump its pensions in bankruptcy or freeze them and replace them with 401(k) savings accounts.
The impact on workers ranges from nuisance to financial catastrophe. For young people, it means they're on their own to plan and save -- two things Americans don't do well. For many counting on their pension to finance their golden years, it means extra years of working.
Some refuse to give up on pension promises.
Teamster Dave Reed and 20 other yardmen, mill workers and truck drivers at Rum River Lumber Co. in Coon Rapids walked off their jobs last spring rather than switch to a 401(k) plan.
Reed, 57, of Big Lake, would be celebrating 18 years at Rum River this month, where he filled orders for home builders. Instead, he's on a picket line at its front door. And the company replaced all the striking workers, so Reed is out of a job.
He figures that swapping plans, as his employer wanted, would cut his monthly pension checks from $3,000 to about $600.
"What surprised me, after all those years in a union, is I didn't think it would be this easy to do what they're doing to us," Reed said.
Businesses say there's nothing nefarious going on, just that the cost of pensions is outstripping the cost of doing business.
"It's very much a business decision," said Philip Berglin, chief financial officer at family-owned Rum River. The pension, which has covered 21 of 65 employees, is underfunded by more than $500,000.
If the fund's problems continue, the company's liability could bankrupt it, Berglin said, "and that would mean the loss of everyone's job."
The other economic reality businesses cite: If their competitor doesn't offer a pension, how can they afford to?
That is Northwest Airlines' argument, as it faces off with low-cost carriers -- such as Southwest Airlines and JetBlue Airways -- that don't have employee pension plans. United Airlines and US Airways already have defaulted on their pensions.
Pensions rise and fall
In some ways, U.S. workers have brought this on themselves. Through the 1990s, many employees asked for 401(k)s in order to jump into the lucrative stock market, and their companies obliged.
In 1981, 60 percent of private-industry workers who had retirement plans through their employers had only traditional pensions. By 2001, 60 percent of private-industry workers with retirement plans at work had only 401(k) types.
Discrimination, bad management and corporate scandals also have played a role in killing pensions. Last year, for example, IBM agreed to pay $300 million to settle a lawsuit brought on behalf of hundreds of thousands of current and former employees. Depending on appeals, that figure could climb as high as $1.7 billion. A federal court in 2003 ruled that IBM's new defined-benefit pension plan discriminated against older employees.
IBM, a titan of computer technology, has lost market share in recent years to newer companies with younger workers and little or no long-term pension commitments.
WorldCom's downfall in 2002 took much of Bill Haider's retirement security with it.
Haider, of Mendota Heights, came to the telecommunications giant via MCI, in a 1998 merger. Suddenly, 40 percent of his $1 million 401(k) was WorldCom stock.
He knew he didn't want $400,000 in company stock, but the plan wouldn't let him sell any until he was 55 or left.
He did leave in October 2001, to become an independent financial adviser for Focus Financial Network in Apple Valley.
When he took his WorldCom stock out, it was worth $908.50.
Haider is married, with two children. They are the reason, he said, that he wrote every government agency he could think of to push for more protections -- including the problem of pension plans overweighted with company stock.
Some older workers contend that employers are taking away pensions and not being completely honest about how or why. In late 1999, for example, Allstate announced it was eliminating its employee sales force to streamline its operations.
It invited all 6,200 agents to keep selling its insurance as independent contractors. But they could sell only Allstate. In their new status, the agents lost health coverage, and their pensions were frozen at the 2000 level.
Ron Harper, an Allstate agent who made the switch to independent contractor, felt the changes weren't fair. He did some math that convinced him the company motive was not streamlining: The median age of the sales force was 50, and 94 percent of them were older than 40, meeting the federal government's standard for protection against age discrimination.
Harper now is a plaintiff in an age-discrimination lawsuit against Allstate, filed in 2001 by the Sprenger & Lang law firm of Minneapolis and Washington, D.C.
"The benefits were getting more and more expensive because all that was left was us old folks," said Harper, who lives in Thomson, Ga.
His lawsuit is awaiting a ruling in federal district court in Philadelphia on whether it will be granted class-action status.
Allstate denies any ulterior motive: "This was a reorganization that was not done because of age or our agents' tenure," spokesman Mike Siemienas said. "It was done for legitimate business purposes."
Pensions remain the bedrock of benefits paid to public employees. They too, soon may be in trouble.
During the past four years, their average funding level has gone from 100.9 percent to just 88 percent -- meaning they are now short $287 billion.
One of the most underfunded public pensions in Minnesota is the Minneapolis Teachers Retirement Fund. A state analyst described it as in "a death spiral," saying it could run out of money in as few as eight years.
With $878 million in assets and paying out $118 million a year, it is now rated as 50 percent short of its liabilities. Some blame a legacy of rich benefits, others a legacy of government's inadequate contributions that goes back nearly 100 years.
The shortage is a double worry for Lee and Mary Ann Fabel of Minnetonka, who retired last year after a combined 64 years teaching at elementary schools in Minneapolis.
Both 59, they continue to substitute-teach between trips to Turkey, Ecuador and the Galapagos Islands -- travel dreams they stored all those working years.
The Minnesota Legislature this year once again left unresolved whether the state would help with some kind of bailout.
The Fabels say they're concerned but hopeful.
"We've been able to save a bit, but mostly we've been counting on the pensions," Lee Fabel said.
"And every year that goes by that nothing gets done, it's more concerning," Mary Ann Fabel said.
Pension safety net
Until just a few years ago, government policymakers and workers had the security of knowing that if a company such as Northwest went bankrupt, their pensions were insured by the federal Pension Benefit Guaranty Corp. (PBGC).
Employers pay the PBGC $19 per person annually; in turn, the agency takes over the pension obligations of companies that go bankrupt.
The arrangement worked for years until 2002, when a series of bankrupt steel companies and then airlines with huge workforces started to hit the agency hard. The PBGC is now on the hook for $62.3 billion in pension checks with only $39 billion to its name. That's before Northwest and Delta airlines declared bankruptcy, which could add 177,000 people to the agency's obligations.
Those recent steel and airline defaults account for 75 percent of all the pension checks the PBGC now must pay, including 177,000 people covered by United and US Airways. Northwest said it will try to avoid a PBGC takeover of its pensions, but it's $3.8 billion in arrears and many observers doubt that will be possible.
What's more, employees whose pensions go to the PBGC don't get as good a deal as they would from their own companies. As retired Northwest mechanic Daly knows, the agency doesn't cover retiree health benefits. It would cost him about $600 if he has to buy coverage for his wife and himself, he said.
The insurer also won't pay full retirement benefits before age 65, and it won't necessarily cover pension raises made shortly before bankruptcy. That's why Daly figures he'd lose another $700 a month.
As pension problems spread, Congress will look for ways to undergird the whole system, possibly as soon as it finishes with hurricane relief.
The Senate and the House have comprehensive bills that include stricter funding requirements and higher insurance premiums to the PBGC. The Senate version is known by its acronym NESTEG, for National Employee Savings and Trust Equity Guarantee Act of 2005. The House version is the Pension Protection Act.
Three other bills also propose changes.
One would put a six-month moratorium on terminating plans and handing over the obligations to the PBGC.
Another would forbid companies from continuing to fund their special executive retirement plans if their rank-and-file pensions are seriously underfunded.
Yet another would make it easier for employees to know whether their pensions are in trouble by making public the reports of risk that companies now file confidentially with the PBGC.
Any remedies will have wide impact because 44 million U.S. workers and retirees from the private sector still have some kind of pension.
One of those 44 million is Daly.
"It's a good thing we still have Social Security, because that's going to save me," he said. "Everybody I know is in about the same boat as me."
H.J. Cummins is at email@example.com.
A brief history of pensions:
Roman legionnaires had pensions. English sailors had them for centuries. From the late 1880s to the early 1900s, pension caught on across the United states in churches, banks and railroads. In 1875, American Express Co. established the first employer-paid pension in private business. An exemption from World War II wage controls and then the growth of unions in the 1940s led to expansion of the benefit. Roberta Hovde
How poorly Americans save for retirement:
- Six in 10 U.S. workers say they are saving in some way for retirement. But half say their family assets, not counting their homes, add up to less than $25,000.
- Among workers with 401(k)s at their current employers, half have balances under $18,000.
- One-quarter of U.S. employees with a 401(k) plan at work don't put any money in. Of the three-quarters who do participate, less than 10 percent save the maximum.
- Fewer than 3 percent of taxpayers contributed to an IRA in any recent year.
- Personal savings, as a percentage of the national GDP, has dropped from 7 percent in 1980 to 0.9 percent in 2004.
Sources: Center for Retirement Research, Survey of Consumer Finances, U.S. Department of Commerce, Employee Benefit Research Institute
The law says no one can take your pension away ....
But don't buy that condo in Sun City just yet. Here are just a couple of the ways that promise can take a disappointing turn.
Say, for example, you've worked someplace for 20 years under a pension plan that says you now qualify for $2,000 a month when you retire. Then your employer revises the plan to say that someone at your pay scale doesn't qualify for that $2,000 until 40 years of work. For the next 20 years, none of your work will add to your pension. Technically, the company has not reduced your promised benefit; it is just holding you in place until time "wears away" the difference between the old terms and the new terms.
Pension Benefit Guaranty Corp.
If your company goes bankrupt, your pension is transferred to this government insurance agency, which could reduce the benefit in several ways. Also, any retiree health coverage goes away. H.J. Cummins
Giving up on pensions
The Pension Benefit Guaranty Corp. paid about $42 million in fiscal 2004 to Minnesotans whose pension plans had failed. That covers 7,673 people, and the PBGC has assumed pension obligations for another 7,268 when they reach retirement.
Minnesota companies that have turned over their pension plans to the PBGC:
Thunderbird Mining Co - August 2004
Minnesota Malting Co. - March 2004
Sheldahl Inc. - December 2002
Shasta Paper Co. - September 2002
Hartz Foods Inc. - April 2001
Capitol Gears Inc. - December 1999
Jewelmont Corp. - September 1999
Hennepin Paper Co. - July 1999
Baldinger Baking Co. - July 1999
James M. Zoller - March 1999
Pako Corp - March 1998
Richard W. Anderson Inc. - October 1996
Deep Draw Corp. - July 1996
Midwest Wholesale Tire Inc. - June 1996
Golden Valley Health Center - April 1996
Murphy Motor Freight Lines - August 1994
Peerless Welders Inc. - July 1994
Reserve Mining - July 1993
Munsingwear Inc. - June 1992
Sea Board Corp. * - October 1991
Owatonna Manufacturing Co. - June 1990
Blue and White Taxi Co. - June 1988
L.L.Dewey Co. - July 1982
Standard Conveyor Co. - February 1981
St. Paul Yellow Cab Co. Inc. - November 1980
Goodwill Industries of Minneapolis - March 1980
Grain Belt Breweries Inc. - July 1979
R.N. Cardozo and Brother Inc. - April 1977
* Albert Lea hourly employees; Source: Pension Benefit Guaranty Corp