Cracks grow in retirement nest eggs

Promised benefits like pensions, Social Security and Medicare are looking shaky.

Published May 12, 2005

A court decision Tuesday that frees United Airlines from its pension fund obligations leaves the carrier's employees face-to-face with a growing reality for U.S. workers: The retirement of the future will be a lot less secure.

Years ago, it was easy for the federal government and employers to promise retirement benefits; there were lots of young workers and health care costs were relatively modest. But it's not so easy to make good on those promises now that the baby boom is on the verge of retirement and the cost of meeting those obligations has swelled.

Anyone who has tuned in to the Social Security debate knows that Social Security and Medicare are headed for insolvency unless Congress cuts promised benefits or raises new revenues to pay for them.

Employer pension plans face many of the same issues. As their workforce ages and gets closer to collecting benefits, plan liabilities grow. A rising stock market took care of that problem during the 1990s; many companies didn't have to contribute a dime to their plans for years. Then the stock market reversed course and interest rates fell, which increased the amount of money companies needed on hand to ensure their ability to pay benefits later.

"I call this the perfect storm," said Tampa lawyer Al Ward, who specializes in employee benefits with the law firm Ward Rovell. "It's a combination of the stock market bubble bursting, which had your assets going down, and your liabilities going up because of low interest rates you had to use to value the liabilities."

Nationwide, company plans are underfunded by $279-billion, according to filings with the Pension Benefit Guaranty Corp.

United's pension plans are $9.8-billion in the hole. Under the deal approved by the bankruptcy court, the government-sponsored Pension Benefit Guaranty Corp. will take over United's plans at a cost of about $6.6-billion. The difference represents benefits United employees were promised but won't get, which is why the unions representing United employees are so upset. The maximum benefit PBGC will pay for any plans it takes over this year is $45,614 per person per year, even less if a worker retired before age 65.

Many people fear other troubled companies will follow United's example, deepening the $23-billion deficit the PBGC already faces. Ward said rising interest rates and an improvement in the stock market could close the shortfall for some companies, but won't be enough to bail out those in serious trouble. Other airlines, particularly American and Delta, are under financial pressure because of huge pension obligations, as are automakers.

"Taxpayers had better buckle up because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the PBGC," said Rep. Jan Schakowsky, D-Ill.

Although they are complaining mightily about the arrangement, United Airlines employees are luckier than most private-sector workers. Their benefits won't be as generous as they had expected, but at least United employees still are scheduled to get pensions. That's not the case for most U.S. workers.

Businesses are shifting the burden of retirement security from employers to employees. How well off most of today's workers will be in retirement will depend primarily on how much they save while they are working, and how well they invest.

While three-fourths of government employees are covered by a retirement plan at work, in the private sector only 45 percent of workers 21 to 64 have coverage, according to the Employee Benefit Research Institute.

Overwhelmingly, those private sector plans are savings plans such as 401(k)s rather than traditional pension plans that pay retirees a monthly check for life. Private-sector pension plans, known as "defined benefit" plans, in which a benefit amount was guaranteed, peaked in the mid 1980s at about 173,000. By 1998, there were only 56,405, and today the number is no doubt smaller.

Meanwhile, savings plans, known as "defined contribution" plans, have exploded in popularity, hitting 673,676 in 1998.

"The trend is clearly to either freeze or terminate" defined benefit plans, Tampa lawyer Ward said. "The only place you're not seeing that happen is in government and in collectively bargained plans because unions are adamant about continuing them."

Many companies choose to contribute to their employees' 401(k) savings plans, often matching employees' contributions up to 5 or 6 percent of income. However, they aren't obligated to make contributions and if times are lean, they often don't. If employees fail to save enough the company is not responsible.

"The previous generation could rely on a pension, so even without a whole lot of savings, between a defined benefit plan and Social Security, you were doing pretty good," said Rande Spiegelman, vice president of financial planning for the Schwab Center for Investment Research in San Francisco. "But we've got a demographic freight train that's changing the world as we know it."

Surveys repeatedly show that most workers aren't saving enough for a secure retirement, but are confident that things somehow will work out. About seven in 10 workers say they have saved something for retirement, but not a lot, according to the annual survey conducted by the Employee Benefit Research Institute. Most workers under 45 had less than $25,000 in savings and investments. Even among those 55 and older, half said they had saved less than $50,000.

"I don't think ignorance is bliss on this one," Spiegelman said. "The majority have never done any formal retirement planning. It starts with crunching the numbers, getting some kind of reality check and putting a plan in place. Even if the answer is bad, it's better to know than not to know."

He said, "It's never too late to save for retirement, but you just have to be socking away as much as you can." He said those who haven't saved much may have to work past normal retirement age and cut back their retirement budgets.

Information from Times wires was used in this report. Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.