Pinching pensions
BAD NEWS ABOUT PENSIONS, like Google’s latest acquisition or the gnomic pronouncements of Alan Greenspan, is a hardy staple of the financial pages. If it’s not IBM or Verizon or some other relatively healthy company announcing changes (read: cutbacks) to its plan, then it’s a company in a struggling “old economy” industry such as steel or airlines that is unable to pay all the retirement benefits it has promised.
So much for the bad news. The worse news is that pension reform bills passed recently by the House and Senate don’t do enough about the endangered pensions of the old economy -- and do too little to address the longer-term challenges facing all pension plans. Both reform bills, which lawmakers are expected to begin reconciling in the next few weeks, aim to force employers to better fund their pension plans. They also call for companies with underfunded plans to pay higher premiums to the Pension Benefit Guaranty Corp., the federal pension insurance system that is dangerously underfunded.
Good ideas all. But some of the bills’ less-noticed provisions may actually weaken some employee pension protections. Both bills, for example, allow companies whose plans become underfunded to freeze benefits. The House version lets companies even rescind benefits in some situations, an idea that could set a dangerous precedent. Another provision allows employers to reduce how much they pay retirees who choose to take their pensions in a lump-sum payment by playing with the interest rates used to calculate such payments.
President Bush has threatened to veto both bills, though not necessarily because of any of these concerns. Regardless, any bill that is as forgiving of employers as these does not deserve his signature.
No matter what happens in Washington, pension reform is happening anyway. For better or worse, as companies such as IBM and Verizon make clear, corporate America has decided that the traditional pension system is no longer attractive.
A growing number of employers are ceasing to provide traditional pensions, under which they guarantee employees a fixed income upon retirement. Instead, employers are increasingly offering 401(k)-style plans, to which they make fixed contributions during an employee’s career. This gives employees more control -- and more of the risk. Other than the danger that workers will bungle their investments (or cash them out and spend them ahead of time), the reality is that Americans are going to have to save more if they hope to retire at a decent standard of living. Or, for that matter, to retire at all.
If Congress truly wants to protect retirees, it needs to take on the broader issue of what to do about retirement savings in the new economy. One idea is to help small businesses, which employ nearly half the country but often don’t offer retirement plans, to do so. Another is to build on recent efforts around the country that are showing surprising success in helping low-income workers save more. And portable individual retirement savings accounts, which employers would contribute to but which would follow a worker from job to job, are also worth consideration.
Of course, Congress will have a hard enough time simply agreeing on how best to ensure that employers honor their current commitments without making changes that cause them to flee the pension system. But it’s not too soon to start thinking about the proper role for government in the kind of retirement system that replaces the one we have now.
