It's a slow road to pension reform

Only one-quarter of American workers receive a traditional corporate pension when they retire. That proportion is likely to shrink drastically in the next decade. Many corporations have decided that paying for that type of pension, with a monthly payment for the lifetime of a retiree, is too costly.

In effect, the pension system in the United States is falling into a crisis. Yet it could well be years before the issue is fully tackled by Washington.

The problem has been noticed.

Last month, Time magazine's top story was headlined, "The Broken Promise." It pointed out that more and more companies are walking away from their promise to provide their workers with retirement benefits.

"We regret to inform you that you no longer have a pension," was the title of the cover article in The New York Times Magazine last week. "America's next financial debacle," was the subtitle.

Day after day the news includes stories about various corporations shedding or limiting pension and health benefits for their workers or retired workers.

The 34 million workers covered by traditional plans is steadily dwindling.

Will more Americans be left destitute in their retirement years? Will more have to work into their 70s and 80s to maintain a decent living standard? Perhaps.

One good thing is that President Bush's goal to partially privatize Social Security has been stymied, says Alicia Munnell, director of the Center for Retirement Research at Boston College. As a result, nearly all American workers still have a pension that is guaranteed by the government and - at least so far - indexed against inflation. Nor is it dependent on the vagaries of financial markets.

Social Security payments, however, are modest. The average check next year will be a poverty-level $1,002 a month. The maximum amount will be $2,053. For one-third of retirees, Social Security is their only income.

Given these facts, most Americans want some other income in retirement than Social Security. To deal with that desire and avoid the financial burdens presented by old- fashioned pensions, more and more corporations have been offering 401(k)s. These plans let workers deposit a portion of their pay into tax-deferred accounts. The firm often makes a matching contribution of some sort. That's usually cheaper than funding a traditional pension. Further, the employee assumes the risk - managing the plan's investments in the hope that the assets will grow over the years - not the firm.

The problem is that, at least so far, most 401(k)s don't hold enough money to provide a comfortable retirement. Workers approaching retirement in 2001, ages 55 to 64, had an average of $42,000 in their 401(k)s. They need to have $300,000 to generate a reasonable income for a decade or two or more, says Mrs. Munnell. With the stock market recovery since 2001, many 401(k)s are doing a bit better. But not well enough, she says. Moreover, many employees don't participate in these plans.

One proposed reform would let companies automatically enroll new employees in a 401(k) plan. Should workers decide they can't manage the deductions from their pay, they could opt out. But more employees, out of inertia or whatever, are likely to stay in the plans.

When a company uses bankruptcy or other means to shed a traditional pension plan, the plan is taken over by the federal government's Pension Benefit Guaranty Corporation. The PBGC, as an insurer of participating pension plans, takes whatever remaining corporate assets the bankruptcy judge gives it and assumes future payments.

The maximum pension paid by the PBGC is $45,000 a year. So the great bulk of corporate pensioners are protected in full. But those with more handsome pensions, such as some airline pilots, find they receive less each month.

For years, Congress has been considering legislation to reform the private pension system. The House has the Pension Protection Act, the Senate another bill. The hope of their legislative sponsors has been for a floor vote this year. But there may be no action before 2006.

"There is not a constituency [for reform] on the outside," says a congressional staffer speaking on background. Business isn't keen on seeing their PBGC premiums jump sharply, a provision of both bills. As it is, the PBGC has a $23 billion gap between its expected income and its pension obligations. That gap could grow quickly to $100 billion. That might have to be made up by Congress with a future appropriation.

The bills also aim to close by regulation the gap between what firms promise employees in pensions and what companies actually provide in funding to meet those obligations. But lawmakers don't want to be so tough as to speed the exit of companies from defined benefit plans.

Details of a transition to PBGC solvency are controversial. Basically, the bills are a patch job for a fading system. The bills, for instance, aim to clear away legal obstacles to what are known as "cash balance" pension plans, a hybrid between traditional pensions and 401(k)s. Daniel Halperin, a pension expert at the Harvard Law School, says cash balance plans make "perfect sense" if older employees are protected from losing out in a transition.

The debate on how to set up a healthy future pension system has barely begun. Congress may decide that the US should build a generous Social Security system, such as that of France, Italy, or Germany. Or perhaps require workers to save for their own pensions, as do many Asian and South American nations.