Reform erodes the future of US pensions

The primary goal of America's new Pension Protection Act was to secure the health of traditional worker pension programs, but the "fix" appears likely to hasten their slow decline.

It's not that the traditional pension is dead. Millions of workers will still receive monthly benefit checks from their former employers for decades to come. Indeed, the new law – signed by President Bush Thursday – promises to help ensure that fewer of those plans end up going bust and slashing benefits.

But at a time when barely half of American workers are covered by any form of workplace retirement plan, the law does little to entice more employers to offer traditional pensions. If anything, it adds new reasons for employers to do what they are already doing: Opting for 401(k)-style benefits that shift the retirement burden onto workers.

That's a troubling trend, some retirement analysts say.

"We are going to need another layer of retirement protection," says Alicia Munnell, who heads the Center for Retirement Research at Boston College. "If business just uses this [law] as an excuse to freeze pension plans ... then we are going to see a faster decline of defined-benefit pensions than we would have seen otherwise."

Rumors of the traditional pension's death, however, are greatly exaggerated. As of last year, more than 40 million US workers and retirees in the private sector were covered by pension plans that promise a defined retirement benefit – such as a monthly payout based on one's final salary and years of service. That's actually more participants than such plans had in 1985.

But over that same two decades, the number of such pension programs has plunged. Employers now operate fewer than 40,000 plans, down from more than 100,000 in 1985, according the Pension Benefit Guaranty Corp. (PBGC), the federal agency created to insure such plans against failure.

"Defined-benefit plans have been heading out for the last 20 years really," says Olivia Mitchell, a pension expert at the University of Pennsylvania's Wharton School.

The trend reflects changes in the health of particular industries as well as changes in the way companies use benefits to compete for workers.

First it was steel, then airlines, where global competition or deregulation shook the financial health of giant companies. Many of their pension plans were terminated in bankruptcy proceedings, with the PBGC now paying reduced benefits as the plans' caretaker.

So the PBGC has charged ever-higher premiums of companies with healthy defined-benefit plans.

The law seeks to limit the risk to the PBGC – and to the healthy companies that fund it – by requiring all employers to do a better job of funding their plans.

One key goal is to avoid the need for a bailout by federal taxpayers.

Many state and local governments face their own looming pension shortfalls, and their plans do not fall under the protective umbrella of the PBGC. So those governments could be faced with difficult choices between higher taxes or scaling down their promises to future retirees.

The new federal offers mixed benefits. In shoring up pension security, pension coverage could suffer. Some of its elements, experts say, may discourage companies from providing traditional pensions:

Stricter funding rules. Employers will have to make sure the current funding of their pension plans is sufficient to cover 100 percent of their future liabilities, up from 90 percent.

Faster corrections. Companies that get off track will have just seven years to get their plans on track, down from 30.

"All those things will make it somewhat more expensive to offer defined-benefit plans," says Ms. Mitchell.

The pension law has a host of other features – many of them lauded by retirement experts. Among them:

•It prods companies with 401(k)s to automatically enroll all workers. (Employees could still opt out, but they are more likely to participate when the default option is to be enrolled.)

•It also encourages 401(k) sponsors to provide better "default" investments, so that workers who don't choose their own investments will be put in a balanced portfolio including stocks. A common problem has been workers ending up with savings in low-yielding money-market funds.

•It paves the way for more companies to create hybrid plans that blend elements of a 401(k) and a traditional pension. These include DB/K plans, designed for small employers, and the cash-balance plans that some companies are using as a substitute for traditional pensions.

•It makes permanent higher contribution limits to IRA accounts, and catch-up contributions by older workers, which would have ended in 2010.

Those changes should place millions of new workers into 401(k)s. But since the level of contributions to those plans is voluntary, many workers aren't saving enough in them to match the benefits they would have gotten with a traditional pension.

The average 401(k) participant nearing retirement has barely $60,000, says Bill Samuel, of the labor group AFL-CIO. "Encouraging more enrollment is not going to put more money in people's pockets."