Disturbing Happenings in Pensions : Threats to Retirement Security for Many Draw Little Alarm

It’s a truism of American politics that problems tend to go unsolved until they reach crisis proportions--by which time they can be corrected, if at all, only with great difficulty and at great expense.

One of the best examples at present is the perilous company pension situation. Although the retirement incomes of millions of Americans are potentially at stake, the problem was not even mentioned by President Reagan in his State of the Union address or by Democratic congressional leaders in their response.

Close to 40 million workers in private industry are covered by company retirement plans. Collectively, these pension funds have assets totaling more than $1 trillion.

Critics point out that, in fact, millions of workers supposedly covered by pension plans end up collecting little or nothing because of frequent job changes; they don’t stay with any one company long enough to qualify for full vesting.

The certainty of collecting promised pension benefits is receding, however, even for those who stick with the same employer and have been led to believe that a given level of retirement income is assured.

Experts emphasize that most pension funds are economically sound and responsibly managed. But some very disturbing things are happening--things that, if allowed to continue, will undermine the viability of the whole system.

Congress thought that it had nailed down the security of company pensions with the creation in 1974 of the Pension Benefit Guaranty Corp., which supposedly insured employees against a loss of pension benefits if their companies went broke or were otherwise unable to deliver.

Well over 1,000 companies have dumped their unfunded pension liabilities onto the agency since it was founded, but things began to get out of hand only when large, troubled steel companies joined the parade. The biggest rescue operation came in mid-January, when the PBGC took over the pension programs of bankrupt LTV Corp., the nation’s second-largest steel producer.

To quote Secretary of Labor William E. Brock III: “What’s happening is that firms are declaring bankruptcy, unloading their pension liabilities on the government, then operating under Chapter 11 reorganization.”

As a result, with the PBGC making pension payments to more than 150,000 retired workers, the pension-guarantee agency has been plunged deeply into the red.

Kathleen Utgoff, executive director of PBGC, says that the agency’s mushrooming deficit poses no immediate danger to pensioners. But she warns that corrective steps must be taken to “prevent the collapse of the pension insurance system.”

Higher pension premiums are part of the answer. Legislation giving retirees (or the PBGC) senior claim against companies filing for bankruptcy would make sense, too. But if many more big companies dump their underfunded pension obligations onto the federal government, an infusion of tax money may be the only way to keep the system afloat.

What could prove to be a much greater, more widespread threat to pension-plan beneficiaries is posed by the raids being made on healthy retirement funds, which are in the great majority these days.

Many companies have accumulated a lot more money in the pension till than projections say they will need to meet obligations to present and future retirees. This “surplus” is less the result of shrewd investment choices by fund managers than of the general rise in stock and bond prices--that, and the tempering of pension obligations as corporate work forces have been slimmed down.

The fat coffers are an irresistible temptation to many corporations--and to corporate raiders, who see fat pension funds as a special inducement for takeovers.

As Business Week reported a few days ago, “Since 1980 more than 1,000 companies have pulled some $12 billion out of their pension funds, usually by terminating the plan, purchasing insurance annuities to cover the obligations to existing beneficiaries, and the pocketing of what’s left over.”

Nothing in the law prevents a company from collapsing a pension plan; it is not even necessary to substitute a new retirement program as long as the firm pays or guarantees benefits earned up to that point. The result in such cases is to shrink the benefits to future retirees--by up to 50% in some cases.

Even if a new plan pledging substantially identical benefits is inaugurated, employees have cause for concern.

Skimming off the surplus reduces the likelihood of cost-of-living adjustments for retirees. And it could endanger the availability of benefits already promised.

After all, markets can go down as well as up. Just as the so-called “surplus” resulted mostly from gains in the prices of stocks and bonds held by the funds, a sharp drop-off in values could trigger quick deficits. Are companies really prepared in that event to put enough money into their pension funds to keep them solvent?

Most corporate managers think of any “surplus” in their pension funds as belonging to the company rather than to employees. This overlooks the fact that pensions are part of a total compensation package. Pension improvements often have been extended in lieu of pay increases. Workers have a right to expect fair play from their employers.

Last year an alarmed Congress imposed a 10% excise tax on recapture of pension surpluses. But this doesn’t appear to be a big enough inhibition. Some members of Congress will try again this year for restrictions on pension-plan terminations--a move that will be stoutly resisted by business lobbyists.

The Administration itself is philosophically attracted to the idea of people financing more of their retirement needs through private savings. With sufficient encouragement, that might make sense. But last year’s so-called tax-reform bill actually discouraged such savings by emasculating Individual Retirement Accounts without providing a substitute.

Adequate safeguards for pension benefits are unlikely to be forthcoming unless people depending heavily on company pensions for their retirement years light a fire under their congressmen. So far that sense of urgency is not evident.