Why pensions are becoming even scarcer

The nation's private pension system is fraying and at risk of unraveling altogether.

The reason: More than three-quarters of the nation's traditional private pension plans are underfunded - which means they currently don't have enough assets to cover the benefits already promised to their workers and current retirees.

And the Pension Benefit Guaranty Corp. (PBGC), the government insurer that is supposed to guarantee workers some protections if companies go under, is facing a deficit of almost $30 billion.

Add to that the threat of more bankruptcies in old-line industries, from manufacturers to the so-called legacy carriers like United Airlines - which last week won approval to default on its pension obligations to 120,000 workers - and experts predict that millions more retirees may suddenly find themselves having to make due with less than they were promised.

"The broader issue of retirement security hasn't gotten enough attention heretofore," says Bradley Belt, executive director of the PBGC. "The retirement security fabric of this nation is increasingly tattered."

For millions of retirees, like former United pilot Bill Muller, the holes in the current system have already taken a toll. He retired in 2002, expecting to live comfortably on the six-figure pension he'd been accruing since he first went to work for United in 1969. Instead, he expects to lose 75 percent of that, even if the company successfully emerges from bankruptcy.

"It's such nasty news that it's hard to wrap your arms around this and understand the gravity of it," says Mr. Muller. "People have this idea that a pension is sacrosanct, that it can't be touched, but when you're in a situation like this you find that you have no control. And frankly, I think it's immoral to do to people in their 60s and 70s."

Currently, about half of Americans work for companies that offer some kind of retirement plan, whether it's a traditional defined-benefit pension; a 401(k)-type plan, known as a defined-contribution plan; or a mix of the two.

Only 20 percent have the traditional, defined-benefit plans - the kind that used to be given along with a gold watch when workers turned 65. That's down 50 percent from just 20 years ago.

And of those remaining plans, more than 75 percent are underfunded. Some experts say that time and a healthy economy will remedy most of that problem. They argue that only a few companies are facing serious pension deficits, while the rest are facing only small shortfalls. As the economy gains strength, these advocates contend, companies will be able to add more to their pension plans, which, as market also revs up, will be able to earn more income with their current assets.

But others are less sanguine. They argue that many more companies are facing dire shortfalls than it appears on paper. That's because accounting changes allowed by Congress last year have made it possible for companies to significantly overstate the health of their pension plans, they say. For instance, prior to its default in 2002, Bethlehem Steel stated that their pension plan was 84 percent funded. Once the PBGC took it over, it turned out to be only 45 percent funded, according to George Benston, a professor of finance at Emory University's Goizueta Business School in Atlanta.

"It's not mystery when you read the rules and the law. There are all kinds of loopholes that make it possible for companies to be underfunded and not penalized for it," he says. "If you're in a company with a defined-benefit plan, you better hope your company is around when you retire."

Some advocates for the elderly contend that Congress has bowed to corporate pressure, making it possible for companies to renege on the obligations they've made. They point to the United default as the latest in a trend that started in the mid-1990s as companies looked for ways to increase bottom lines.

"This is an assault on the retirees all over America, and we've got to bring it to a stop somehow, someway," says Jim Norby, president of the National Legislative Retiree Network in Washington, which represents more than 2 million retirees nationwide.

The Bush administration has proposed changes that would tighten accounting rules and require some companies to contribute more to their current pension plans to prevent underfunding. Among other things, the administration also proposes to increase the premiums that businesses pay to bolster the financial health of the PBGC. Currently, companies pay $19 per employee per year, a rate set in 1994. The administration hopes to raise that to $30 a month to reflect wage growth in the past decade.

The proposal has won praise from some of the Bush administration's usual critics for being financially sound and a necessary fix to prevent another debacle like the savings and loan crisis in the 1980s, in which taxpayers ended up bailing out thousands of failed banks. But it's also been criticized by some in the business community, who are usually supportive of the administration.

"There are some things that we can do to make the system stronger," says Judy Schub, director of government relations and pension policy at the Association for Financial Professionals in Bethesda, Md. "With the administration's proposal, we're concerned the medicine may kill the patient." That's because companies would have to put resources that could be used for growth and expansion into insuring their employees' retirement.

Mr. Belt of the PBGC counters that there is no evidence that the administration's proposals would have this effect, despite having asked for such evidence from people who've made the assertions. Instead, he calls the proposals common-sense remedies to ensure the nation's retirement safety net remains intact.

"When these losses are incurred, ultimately somebody is going to have to pay for them," says Belt. "The question is who is that going to be? Will our current premium payers get left holding the bag? Do we cut back benefits to participants? Or ultimately will the taxpayer get left holding the bag?"