Tension Over Pension Reform
Retirement is a long way off for 28-year-old Wallace Miles. So, the lack of a pension plan at the small Los Angeles market where he works does not bother him--yet.
“I don’t think too much about (a pension) at the moment,” said Miles, who manages Papa’s Grocery in the Crenshaw District. “Maybe down the road, I will have to have it . . . because it’s going to help in the long run.”
Miles is one of the nation’s estimated 42 million American workers without a company pension. Small firms, such as Papa’s Grocery, are prime targets of recent government proposals to increase pension coverage. However, the plans have met with a lukewarm response from business groups and criticism by others who claim that the plans do little for low-income workers who face retirement without a major source of income.
The Labor Department initiatives--which would, among other things, create a simplified, low-cost retirement plan for small firms--are the latest developments in a long and messy struggle over pension reform. Business favors tax-sheltered plans with a minimum of regulation and employee contributions; worker and retiree groups prefer pensions funded only by employers, and the government looks askance at any proposal that would cut tax revenue.
Meanwhile, recent business trends have magnified fears that more workers “will be hitting 60 and 65 and not have enough to live on,” said Judy Husbeck, a senior analyst at the American Assn. of Retired Persons. “My sense is that a lot of these folks are in for a rude shock.”
The government’s most recent proposals focused primarily on small businesses, which create most of the nation’s jobs but are the least likely to offer pensions. An estimated 26 million workers at small businesses lack pensions.
Pensions have been a standard benefit at large corporations and at unionized firms since World War II. About 51 million workers are covered by company-sponsored plans, according to the Assn. of Private Pension and Welfare Plans, an industry trade group.
But less than 20% of firms with fewer than 25 workers offered pensions, according to a 1988 survey conducted by the Employee Benefit Research Institute. By comparison, 83% of companies with 250 or more employees offer the benefit, the EBRI study showed.
“A lot of people don’t realize that only half the work force at any given time is accruing pension benefits,” said Joe Piacentini, an analyst at EBRI.
Besides contributing to the pension account, a business owner with 25 employees faces a $5,000 bill just to set up the plan and at least $4,000 a year in administrative costs, said Louis Kravitz, a pension plan administrator in Encino.
Costs such as those put pension plans out of reach for most small businesses.
“It’s almost impossible,” said Patsy Brown, owner of Papa’s Grocery. “It took me one year to get their hospital plan in place. That seems to be more important to them than a pension plan because everybody is so young.
“People in small business,” Brown said, “do not even expect” a pension.
Complex rules and constant changes in pension regulations add to the frustration.
“It’s a constant aggravation,” said William Pechstedt, president of Huntington Park-based Sanford Lussier, which employs 27 workers in the manufacture of hardwood moldings.
“We just put this plan in a couple of years ago,” Pechstedt said of a profit-sharing pension plan for seven salaried workers. “We got through paying for that. Now, my pension administrator says we have to write a new plan (because of revised regulations). Now, we have do this all over again.”
Many of the costly and complicated administrative requirements would be eliminated under one of the Labor Department’s pension proposals aimed at firms with 100 or fewer workers. In return for less red tape, an employer would have to contribute to the plan at least 2% of a worker’s pay, up to a maximum of $2,000 a year. The employee would be able to contribute up to $4,200 on a pretax basis. The employer would have the option to match up to 50% of the employee’s contribution.
Cutting the paperwork costs will persuade many small businesses to begin pensions, said D. J. Gribben, legislative representative for the National Federation of Independent Business, a group of small-business owners.
However, the mandatory 2% contribution “will require a lot of money,” Gribben said. “That will probably price the plan out of the price range of most small employers.”
James Klein, deputy executive director of the Assn. of Private Pension and Welfare Plans, said the proposals “are not going to do tremendous things to extend coverage.”
Critics said the proposals favor affluent workers who have surplus earnings to invest in the tax-sheltered plans. Lower-income workers, on the other hand, have little or nothing to contribute, said Anne Moss, deputy director of the Pension Rights Center in Washington.
“They don’t have the ability to save,” Moss said. “If they don’t have a pension, Social Security is not enough to get them by. The average Social Security benefit is slightly over the poverty level.”
In the past, workers at small firms often moved up to larger corporations that offered pensions.
However, that path to a pension is no longer as viable, say retiree and worker groups. Manufacturing firms, where pensions have been the most common, have shrunk in the face of growing competition. Furthermore, traditional pensions that were funded only by the company are fast losing ground to programs that rely more on employee contributions, say industry officials.
Unlike traditional pensions, the new programs--which are commonly known as employee savings or 401k plans--are more variable and do not promise workers a certain amount of annual income once they retire.
Sanford Lussier, the Huntington Park firm, contributes to a profit sharing plan that serves as a pension for its salaried workers. (Union workers have a separate plan.) This year, a construction industry slump has cut into revenue, and the company will probably have to cut back its contribution, Pechstedt said.
“It’s tough for a little business,” said Pechstedt, who has owned the firm since 1976. But, “we’ve got good, loyal employees. The pension is something that’s appropriate.”
Pension Proposal Benefits Those employed by firms with up to 100 workers would be able to save up to $8,300 a year tax free through employer and employee contributions.
Government agencies and nonprofit firms would be able to set up tax-free retirement savings or 401k plans for their employees. Private-industry employees already have access to such plans.
Workers who change jobs would find it easier to switch their pension savings directly into new retirement accounts without facing penalties.
Workers in pension plans that include several employers would gain access to their funds in five years instead of 10.
Pension Coverage These figures show that pensions are less common at smaller firms and organizations.
Private employers Gov. employers No. of workers with pensions with pensions 25 or fewer 18% 67% 25-99 47% 83% 100-249 62% 93% 250 or more 83% 96%
Source: Employee Benefit Research Institute
