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Public Employee Press
Last part of a series on threats to a secure
retirement.
Pension crisis
As private companies dump their retirement plans, is the
public sector next?
By GREGORY N. HEIRES
Traditional pensions are an endangered species, dying off as Corporate
America breaks its promises to provide former workers with a guaranteed
retirement income.
Unless unions and working people fight back, baby-boomers and their children
will have to work much longer to have enough to live on in their golden
years.
But while private sector pension problems are often blamed on unions for
forcing “unreasonable” financial obligations on their employers,
the underlying causes of the crisis are stock market volatility, corporate
corruption, mismanagement of pensions, globalization and the anti-pension
policies of the federal government.
DC 37 Pension Committee Chair James Tucciarelli said what’s happening
in the private sector is a signal to public employees that they must be
ready to battle calls for benefit cuts amid a crescendo of warnings about
a similar crisis looming in the public sector.
Pension
problems at a glance
• Sixty percent of private pension plans are
underfunded, with a total shortfall of $450 billion, according
to Mother Jones magazine. But only 20 percent of the underfunding
is at companies considered “financially weak.”
• One third of U.S. workers don’t have savings set aside
specifically for retirement, according to Mother Jones.
• All told, 90 percent of public employees have a traditional
pension while only 20 percent of private sector workers have a
defined-benefit plan.
• In 2004, President George W. Bush signed legislation allowing
companies to underfund their pension promises. That contributed
to the private-sector pension crisis by adding $80 billion to
the gap between the assets and obligations of company defined-benefit
plans, which were already short by $350 billion.
• The average balance in a 401(k) account is about $100,000,
enough to provide for a $7,000 annual annuity, according the Labor
Research Association.
Coupled with the average Social Security payment of $12,000 a
year, a typical retiree without a traditional pension can count
on only $19,000 a year ($1,583 a month) in guaranteed benefits,
which LRA says “will translate into a decisive downward shift
in the standard of living for most retired workers.”
• Total pension losses related to the wave of accounting
scandals and bankruptcies in the early 2000s amounted to $175
billion with $1.69 billion caused by Enron alone, according to
a BBC report in 2002.
• In 2003, a NYS comptroller’s report concluded that
two years of corporate corruption scandals had cost the state’s
pension fund $7 billion.
• All told, Enron-like corporate corruption has caused public
pensions to lose $300 billion, according to The Nation.
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Nationwide, public employee pensions are under-funded by
$300 billion, according to one estimate. But the pensions of DC 37 members
are currently secure (see box). Undoubtedly, as the cost of public employee
pensions rise, funding will become a more contentious issue in New York
and elsewhere.
Tucciarelli cited the example of Alaska, which in July replaced its defined-benefit
pension with a 401(k)-type system. Gov. Frank Murkowski and Republican
legislators supported the change by arguing that traditional pension plans
are bankrupting corporations and bleeding public treasuries.
“This is a crisis of broken promises, not a crisis of affordability,”
said Notre Dame economist Teresa Ghilarducci. In the Clinton administration,
she served on the advisory board of the Pension Benefit Guarantee Corp.,
which insures defined-benefit pensions. “We have to strengthen defined-benefit
pensions and not allow these plans to be diminished,” she said.
Ghilarducci contends that the pension crisis is somewhat overblown because
it is largely restricted to the steel and airline industries, which have
been particularly battered by fierce global competition.
Nevertheless, the future of the traditional pension — and the retirement
years of workers — look bleak if current corporate practices continue
with the support of misguided government policies:
- The number of defined-benefit plans plummeted from 112,200
in 1985 to 29,700 today.
- Over the two decades, the number of workers covered by
those plans dropped from 22 million to 17 million.
- From 2001 to 2004, nearly 200 of Fortune Magazine’s
largest 1,000 companies shut down or froze their defined-benefit plans.
The wave of bankruptcies at major airlines — which are struggling
with high fuel prices and cutthroat competition from low-cost, non-union
upstarts like JetBlue Airways — has raised the PBGC’s deficit
to $23 billion.
Many plans took huge hits because of risky investments they
made during the boom-boom ’90s that blew up in their faces during
the subsequent stock market crash, the Enron scandal and other instances
of corporate malfeasance.
The PBGC now is handling 350 bankruptcy cases, with the bulk of its obligations
due to losses in the steel and airline sectors. Employers pay premiums
to PBGC, which now pays workers a maximum of $45,000 of their expected
pension if their plan fails.
The pension crisis somewhat mirrors the debate over the future of Social
Security, which has focused public attention on the Bush administration’s
attempt to replace the guaranteed payments of the nation’s most popular
government program with private accounts.
NYC
pensions: fully-funded
Despite a $5 billion loss after the stock market
blowup and the wave of corporate scandals a few years ago, the
New York City Employees Retirement System remains well funded,
with $35 billion in assets.
The funding is more than sufficient for NYCERS — which covers
most DC 37retirees — to meet its current obligations to retirees
and employees, said DC 37 Executive Director Lillian Roberts,
who is on the NYCERS board of trustees. The Board of Education
Employees Retirement System, with $2 billion, is similarly solvent.
The New York State Constitution protects public employee pensions.
If a stock market crash drove a deep hole in the NYCERS pension
fund, the city would still be legally required to make its pension
payments.
In New York City, advocates of smaller government, such as the
Manhattan Institute and the Citizens Budget Commission, are urging
the city to reduce its pension obligations by introducing a new
pension plan with smaller benefits or by switching to a defined-contribution
plan.
“That’s a draconian remedy that would put the burden
on new workers, not current employees and retirees, to manage
investments for their retirement and subject their savings to
the volatility of the stock market,” said Stuart Leibowitz,
president of the Retirees Association of DC 37.
“A new tier would give the ‘unborn’ less benefits
than we currently receive, and that is unfair and unnecessary,”
he said.
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Three new trends are increasing the pressure on business
to turn its back on traditional pensions and force employees to risk their
retirement security in the Wall Street casino.
- Businesses are using 401(k) plans — created a generation
ago to provide executives with deferred compensation — to rid themselves
of the costs of traditional pensions. With 401(k) plans, employees must
invest and manage their own funds, sometimes with an employer match,
but they lose the security of guaranteed retirement income that defined
benefit plans have.
- Corporations have learned to exploit pro-business bankruptcy
laws to rip up union contracts requiring pensions and lifelong health
coverage — a practice too familiar to workers in the airline and
auto industries today.
- Similar to its politically stalled prescription for Social
Security, the Bush administration is backing policies that encourage
corporations to dump their defined-benefit pensions and establish 401(k)
individual investment accounts.
Critics charge that the Bush proposals are driving business
to abandon traditional pensions by, for example, requiring excessive premiums
for PBGC insurance and setting rigid accounting rules that would deny
companies the ability to vary their pension investments according to swings
in the economy, said Ghilarducci.
The new Bush regulations would come on top of Congressional changes that
have hurt defined-benefit pensions.
Over the years, Congress has permitted business to underfund their pensions
and has restricted workers’ right to sue employers who break their
pension promises.
In interviews with Public Employee Press, both Dean Baker, co-director
of the Center on Economic and Policy Research, and James K. Galbraith
of the University of Texas at Austin both suggested that policymakers
consider addressing the private-sector pension crisis by establishing
a government-run pension system that employers pay into, rather than continuing
to allow traditional pensions to die off by design or neglect. A government
pension plan could allow workers to keep the same pension when they switch
jobs.
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