How we can protect workers' pensions
WILLIAM CANTER worked 38 years as a printer for Simplicity Pattern Company, always feeling secure with its pension plan. But in 1984 that changed. The company decided to terminate the plan and skim off $10 million for its own purposes. Mr. Canter's benefits were frozen at the amount he had earned at age 57 when the plan terminated, even though he expected to work until age 65. If the plan had continued and he worked until age 65, he would have received a pension of $800 a month. Instead, his benefits were ``cashed out'' at $35,000, which an actuary estimated would provide an annuity of only about $300 a month at age 65. This represents a loss of $500 a month, or $6,000 a year. Even if a new plan had been initiated, he would have been considered a new employee, and unable to accrue pension benefits as fast as he could under the old plan.
Canter is typical of workers who have endured difficult job situations, despite increased corporate profits, but have remained with a company with the hopes of building pension credits, only to have them drastically cut. His plan was overfunded, which meant that excess assets remained after liabilities (benefits to workers) had been satisfied and the plan was terminated. The excess assets were not really excess at all.
More and more, employers are terminating overfunded plans. Since 1980, 1,400 companies - including United Airlines, Union Carbide, and Firestone - have siphoned off $16 billion from pension plans.
How did this trend get started? The high interest rates in the 1980s and the continuing stock market boom boosted plan assets beyond those needed to pay benefits, creating tempting sums of money that employers were unable to resist using for themselves.
Then there is underfunding. As in overfunded plans, the hardship suffered by retirees who lose part of their pensions in underfunded plans is immeasurable. Tony Pierorazio retired from financially troubled Eastern Stainless Steel in Baltimore after 30 years and invested his savings and a small retirement check in a fried-potato business. Less than six months later, his company terminated its underfunded plan. As a result, pensions were cut, and Mr. Pierorazio's monthly check was slashed in half, from $1,239 to $632.
The reasons for underfunding are many. But most significantly, the law that governs plan funding also permits employers easily to delay their contributions.
This law, the 13-year-old Employee Retirement Income Security Act (ERISA), has not kept pace with changes that have led to either overfunding or underfunding. Some underfunded plans unable to meet their obligations dump their liabilities on the Pension Benefit Guaranty Corporation, which insures basic coverage, but not all benefits in a plan. That program is floundering, with a gap of nearly $4 billion between the agency's assets and liabilities. And the agency's solvency is further threatened by the present total liability of underfunded plans, which exceeds $47 billion.
More than 40 million people in the nation's 200,000 defined-benefit plans covered by ERISA may also be threatened by outmoded standards. ERISA's rules are so flexible that Allis-Chalmers (a Fortune 500 company now close to bankruptcy) ran out of cash to manage its plan, while Exxon dissolved its plan and was able to come out with nearly $1 billion in excess assets. Yet both plans operated totally within current law.
What is to be done? Overfunded plans, with employers' recapture of assets, affected many more people than underfunded plans, and have attracted more debate. But I do not believe that anyone should suffer a reduction of a pension for any reason, including inflation. Elderly people should be able to retire in dignity, free from financial anxiety. In many cases they cannot afford to save and must rely on a pension as their only supplement to social security. They cannot protect themselves when a company dissolves a plan. Their only hope is that Congress will act now to reduce the effects of overfunded and underfunded plans.
We must change the rules of funding pensions and adopt measures to shore up the Pension Benefit Guaranty Corporation. Accordingly, the House Subcommittee on Labor-Management Relations has included the Pension Assets Protection Act of 1987 in the budget reconciliation bill, HR 3545, expected to be enacted this fall.
My proposal would strengthen the minimum funding rules for pension plans by requiring greater employer contributions. As a result, assets would remain in the plan to pay benefits. Excess assets would be shared among participants and retirees. The employer would be unable to strip a plan down to bare termination liability. In addition, my proposal stipulates that the annual per capita single-employer premium paid to the guaranty corporation be increased from $8.50 to $19; in other words, the companies would continue to share equally in paying for that organization's deficit. As a result of these and other changes, hardworking, self-sufficient Americans like William Canter and Tony Pierorazio will be able to collect their promised benefits. We must act quickly to protect their pensions.
Rep. William L. Clay (D) of Missouri is chairman of the House Subcommittee on Labor-Management Relations.