Pension peril has boomers in a pinch

As the baby boom generation retires and people live longer, both Social Security and privately funded pensions — the two basic legs of American retirement income — are under increasing financial pressure.

It’s an issue that could land in the lap of taxpayers. The collapse of the stock market bubble cut the value of many pension fund investments, and left company-funded programs scrambling to meet the demands of an aging work force. The Pension Benefit Guaranty Corp., the federally backed insurer of pension funds, is having to raise its premiums to cover the cost of defaulted programs, putting the plans that remain under even more financial stress.

At the same time, a number of big, old companies, particularly in the airline and steel industries, have gone broke, leaving behind underfunded plans that have been or will be turned over to the PBGC, which itself is underfunded. So far the PBGC has been able to pay insured benefits, but some worry that someday it may require a taxpayer bailout.

“There is a possibility of a looming train wreck that could cost the taxpayers of America untold billions of dollars,” Senate Commerce Committee Chairman John McCain, R-Ariz., warned recently.

Earlier this month, the PBGC took over the Kaiser Aluminum Pension Plan, which covers more than 9,600 hourly employees of Houston-based Kaiser Aluminum Corp., including about 4,000 Steelworkers in the Spokane region. Kaiser’s plan is 48 percent funded, with about $301 million in assets to cover $629 million in liabilities. The PBGC has now taken on $555 million of the company’s benefit promises – earlier, Kaiser transferred the liabilities of its pension plans for salaried and inactive workers to the agency. Kaiser has paid only about $19 million in premiums for the three plans since 1994, the PBGC said.

Pessimism about the future of pensions is widespread among labor unions and business executives alike.

The traditional pension systems that once guaranteed a retirement income until death are in sharp decline. The airlines are only the latest industry to begin dismantling such retirement programs. Between 2001 and 2003, 16 steel companies terminated their pension plans, leaving 256,800 workers, retirees and dependents at the gates of the PBGC.

The domino effect may be in full swing. As more company plans go under, the PBGC has had to steadily raise the premiums it charges to insure company pensions, from $1 an employee in 1975 to $8.50 10 years later, to a charge today of $19, plus a variable premium for troubled companies that can push per-employee costs to more than $60, said Sylvester Schieber, vice president of research and information for the consulting firm Watson Wyatt Worldwide.

It still has not been enough. PBGC Director Bradley D. Belt said recently that his agency’s deficit for the fiscal year that ended Sept. 30 would eclipse the previous year’s record $11.2 billion deficit. A slew of bankruptcies could leave taxpayers holding the bag.

“The longer-term solvency of the pension insurance program … is at risk,” Belt told the Senate Commerce Committee.

Deficient as they are, those rising premiums are one of the factors pushing traditional pensions toward extinction, Schieber said. In 1978, such pension plans covered nearly 41 percent of the private-sector workforce, according to the nonpartisan Employee Benefit Research Institute (EBRI). Now they cover just under 17 percent.

In their place have come 401(k)s and other defined-contribution plans, where risk is shifted from employer to employee, and contributions are fixed but benefits are left to the markets to determine. The number of such plans has swelled to 840,301 from 314,592 in 1978. About 42 million workers participate in such plans, far more than ever enjoyed a traditional pension.

But with that shift has come uncertainty.

Last month, EBRI found, average 401(k) balances had grown by 17 percent since 1999, despite the shocks to the stock market that knocked total stock prices down by $7 trillion — or 42 percent — between 1999 and 2002. But by the end of 2003, the account balances of experienced workers in their fifties — the ones closest to retirement — were 9.3 percent lower than they were four years before.

Meanwhile, savings rates have drifted downward, and the percentage of Americans who are saving has stagnated. An annual survey released by EBRI this spring found that 45 percent of all workers had total household assets, excluding the value of their homes, of less than $25,000.

Since the 1970s, the trend among American workers has been to retire earlier, but in recent years that has changed. In 2001, 31.9 percent of Americans older than 54 were working. Now, 34.6 percent are.