income is supposed to come from three sources -- often referred
to as the three-legged footstool: pension benefits, Social Security
and personal savings. Forget for the moment that Social Security
is in jeopardy, and that personal savings among Americans are at
historically low levels. Let's just look at pension benefits.
Are you getting any? I'm talking about the old-fashioned
kind, known as defined-benefit plans.
My dad, who worked in the engineering department of
a farm-equipment manufacturer for nearly 35 years, has collected
a monthly pension check for the past 20 years or so. Imagine that
-- paternalistic companies routinely offered pension benefits to
employees who clocked in for 40-hour weeks that stretched into 20
or 30-year careers. These companies valued their employees' loyalty
enough to reward them with an income long after they ceased to be
productive, for the sunset phases of their lives.
Lately these traditional pension plans have been fading
into the horizon. Sure, some companies still offer them, but the
numbers are dwindling.
Their allure to workers: Defined benefit plans offer
a specific benefit according to a particular formula, commonly based
on years of service or a percentage of earnings. Employees are promised
regular payments for their entire lives. Surviving spouses also
get a benefit. Companies bear all investment risk and must ensure
that their plans are adequately funded.
However, lately the promises to fund these pensions
have rung hollow. In recent months, financially troubled airlines
announced plans to terminate their pension plans. United Airlines
stopped funding its four plans, and US Airways just recently turned
over its three employee pension plans to the Pension Benefit Guaranty
Corp., a quasi-government organization created in 1974 to make sure
corporations comply with pension law. Altogether, these moves affect
the pension benefits of some 176,000 active and retired workers
in the industry. And it may affect more, as other airlines use the
same strategies to stay aloft. Many employees will end up with reduced
benefits as a result.
Let's face it: These days, you can't leave something
as important as retirement security in the hands of your employer.
Companies just don't care anymore about rewarding loyalty. They're
much more concerned about shareholders, evidenced by their knee-jerk
tendency to lay off employees in droves if the quarter's earnings
fall short of expectations. In many cases, the stability of a company's
stock price has become more important than the stability and quality
of their employees' lives.
Generally, most workers today get no assurance of
a predictable monthly pension benefit. The trends tell the story:
- The number of defined benefit plans grew through the 1960s and
'70s, peaking in the mid-1980s, with 112,000 plans then in effect.
About 40 percent of American workers were covered.
- Over the past two decades, the number of these pension plans
has fallen to about 31,000, and currently cover only about 20
percent of the private-sector work force.
- Employers have been "freezing" their private pension
plans with increasing frequency over the past few years, resulting
in limited benefits to both current and future employees.
- Freezes usually foreshadow plan terminations, where employers
no longer contribute to their plans. In cases where plans are
terminated because the employers are "distressed," the
plans are taken over by the PBGC, which then dispenses benefits
according to prescribed limits, possibly resulting in lesser benefits
than had been originally promised to workers.
- The PBGC itself is not in a position of financial strength.
Thanks to the financial turbulence in the airline industry, its
deficit doubled from a record $11.2 billion reported in fiscal
year 2003, to a new record of $23 billion in 2004.
- The defined benefit system the PBGC oversees has a $450 billion
gap between assets and liabilities. That means many defined benefit
plans are underfunded. Currently, companies don't have to report
the deficiencies of their pension system to their employees, so
only the PBGC has an accurate accounting of the system, though
this may change soon. There's a Bush administration proposal
to reform the PBGC's operations to improve disclosures and the
The truth is, companies that do offer traditional
pension plans don't actually have to worry about funding them, because
if they run into trouble, they know the PBGC will bail them out.
And if the PBGC has insufficient assets to do so, American taxpayers
have to step in to make things right. Or as Bradley Belt, executive
director of the PBGC said last summer at the annual Retirement Research
Consortium: "The 80 percent of the work force that doesn't
have access to defined benefit plans would pay for the benefits
of the 20 percent that does."
So what should the 80 percent of us who aren't covered
by a traditional pension plan do? We really have no choice but to
take steps to ensure our own retirement security. Make use of every
available vehicle to accumulate assets -- especially those with
a tax benefit. "Defined contribution" plans, more commonly
known as 401(k) and 403(b) plans, are an obvious choice. Max them
out to the fullest extent your budget and federal law allow.
These plans have been taking over the retirement system
in this country anyhow. Since 1974, the number of participants in
defined contribution plans mushroomed from 12 million to nearly
64 million, according to the Employee Benefit Research Institute.
These plans are a lot different than traditional pension
plans: You have no specific promise of a monthly benefit. You are
primarily responsible for funding them, and you bear all investment
Do you see the pattern here? The responsibility of
retirement security has shifted from the broad shoulders of corporate
America to the burdened shoulders of individual American workers.
American values, too, have shifted, and I would argue that the average
worker is worse off for it.
But let's clear up one misconception, lest we romanticize
about the way things were. The fact is, most of the old-time private-sector
pension plans don't have a cost-of-living component, so while they're
a nice benefit, they lose value over time.
For example, when my dad retired 20-odd years ago,
his pension check was big enough to rent a sizeable home. (He and
my mom own their home, but that's beside the point.) Over the past
two decades, thanks to the erosive effects of inflation, his check
today is barely big enough to rent a one-bedroom apartment.
Longtime financial journalist Barbara
Mlotek Whelehan earned a certificate of specialization in financial