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So much pension tension

By Barbara Whelehan · Bankrate.com
Friday, July 29, 2011
Posted: 4 pm ET

Pensions have been in the news a lot lately, from reports about lackadaisical planning to the continued erosion of defined benefit plans to the prospect of federal pensions being entangled in the debt ceiling/budget-cutting drama in Washington.

On the lighter side, Fidelity Investments released a survey this week highlighting the problem of ignorance among pension plan participants. Four out of 10 people don't know what their payment options will be, 31 percent don't know their plan's vesting schedule and 27 percent don't know when they can begin receiving payments. Apparently, they don't feel the need to know this information until they're forced to think about it.

But most pension news is even gloomier. For one thing, defined benefit plans are becoming more elusive to workers. Global consulting firm Towers Watson released a study yesterday revealing that just 30 Fortune 100 companies offer a defined benefit plan of some sort to newly hired employees, down from 90 companies in 1998. Only 13 offer the traditional pension plan to new hires.

Public plans no longer sacrosanct

Government pensions represent the last bastion of traditional pensions. The other day my supervisor and I were talking about our respective retirement planning efforts, and he remarked that he made a tragic mistake 30 years ago when he began his career. He failed to get a job with the government. Hence he can never retire.

He was kidding, but I had to agree that I'd made the same grave error. Yet now government plans stand on a cracked foundation, thanks to funding issues stemming from the financial crisis and occasionally malfeasance. Over the past year, governors around the country have enacted reforms that raise the retirement age, end early retirement, require workers to contribute more to their pensions and crack down on practices like "pension spiking." That practice allowed workers to rack up overtime hours during their last year on the job so they could get fatter checks throughout their retirement.

Some of these government plans experience funding shortfalls. For instance, New Jersey's pension deficit of nearly $54 billion was due to mismanagement, according to ai-CIO.com. The state had skipped payments to the fund. To make up for the shortfall, it's requiring participants to pay more into the system and forgo cost-of-living increases among other measures. Plus, it's moving into riskier alternative strategies to boost returns.

Arizona, Rhode Island and New Hampshire are facing lawsuits over changes in their state retirement systems, according to Plansponsor.com. The Arizona governor received a recommendation from a commission she appointed to move the state exclusively to 401(k)-type plans, an idea she's rejecting for now. Other governors have considered this move.

Even federal workers feel the winds of change. Last week, Plansponsor.com reported that federal workers in New York, Washington and Detroit have protested expected increases in their contributions to pensions. As part of the debt ceiling deal, the annuity formula may change for federal workers, according to Plansponsor.com.

Capitalism a culprit

The demise of the old timey pension plan is partly attributable to the widespread adoption of ruthless capitalistic values. Publicly traded companies don't want pension liabilities on their financial statements. They tarnish quarterly earnings numbers. And governments experiencing revenue issues don't want to allocate a disproportionate amount to pension funds at the expense of taxpayers.

Also, pension funds themselves are indirectly hurting American jobs. I asked a member of the faculty at the University of Cambridge what he thought about the idea that state and local governments are considering offering only defined contribution plans to future government workers. Ha-Joon Chang, author of "23 Things They Don't Tell You About Capitalism," said he wasn't familiar with the U.S. pension system, but he offered this nugget: "Ironically, in search of higher returns, pension funds have joined other equity investors in putting pressures on companies to raise (short-term) profits, which have encouraged companies to sack workers and reduce investments, which in the long run reduce(s) employment."

We can mourn the gradual passing of these plans that take care of the retirement needs of workers. But some hold out hope for a pension plan renaissance. Earlier this month the U.S. Senate Committee on Health, Education, Labor and Pensions held a hearing that examined their usefulness. The case was made that these plans are a "powerful economic tool for employers" and a way to "grow our economy."

Yeah, right.

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1 Comment
William
September 03, 2011 at 12:53 pm

Based on a study completed by a commission of experts, the Department of Defense is considering changes to the US Military retirement benefits. This would be the first major change in over twenty years.

The current plan allows a member to retire after twenty years of service with payments equal to 50% of his (her) base pay. Many of the naysayers of the current plan indicate that this is the "best" retirement plan available any where in the world.

Wouldn't a counter argument be that the best military in the world deserves the "best" retirement plan.

I for one don't mind seeing my taxes provide benefits to service members who have spent twenty years deploying, fighting, and sacrificing. In an average 20 year deployment, five years are spent away from home/family. How much is five years away from your wife and kids worth?