Nowadays, pensions aren’t easy to define

Pensions are over.

The financial security that defined-benefit plans provided tens of millions of American workers in the post-WWII era are rapidly becoming history. IBM’s decision to freeze its pension plan just underscored a trend Eastern Washington University Professor Doug Orr says has been snowballing since U.S. steelmakers began failing in the 1970s.

“We’re past the tipping point,” he says. “It’s over.”

Defined-benefit plans assure retired workers of a fixed monthly income. Defined-contribution plans — 401(k)s, 503(b)s and the like — guarantee only that an employer and/or employee will contribute something each month into an individual retirement plan. What income the employee receives in retirement depends on what these investments earn.

Historically — and 401(k)s are just 30 years old — these individual savings programs have performed slightly less well than company-sponsored pension plans. And, unlike pensions, they are not insured by the federal government through the Pension Benefit Guaranty Corp.

To its credit, IBM will substantially increase company contributions to employee 401(k)s after the freeze takes effect in 2008. In fact, it will make a contribution whether or not the employee does. Sadly, too many employees ignore the opportunity to make pre-tax contributions to a retirement account even if their employer offers to match all or part of that investment.

Some will be utterly dependent, make that utterly indigent, on their monthly Social Security check.

Orr has been a student, and critic, of corporate America’s handling of its pension obligations for some time. He says there is a difference between steel industry bankruptcies, most of which were legitimate, and those filed by airline companies seeking bankruptcy protection only as lever in labor negotiations, or as an excuse to dump pension obligations on the PBGC. The government insurance program is already nearly $23 billion in the hole, a pittance compared with the $450 billion total deficit in all private pension plans. Orr predicts PBGC red ink will soon reach $100 billion. Unless there is a turnaround, taxpayers will end up picking up those obligations, just as they did in the wake of the savings and loan debacle of the later 1980s.

Although Congress has nearly completed work on a pension reform bill years in the making, Orr says the changes are probably too late to dissuade corporations from freezing their defined-benefit plans and shifting to 401(k)s.

“It’s just not profit-maximizing,” he says. IBM, for example, will save an estimated $3 billion over the next five years by restructuring its pension program. But almost one-fifth of the company’s workers will be hit with an average 12 percent decrease in retirement benefits. Those mostly senior workers have already successfully sued IBM for alleged age discrimination for another benefits change announced three years ago.

Big Blue pointed to similar moves by other high-tech companies to justify its pension changes. Many do not offer retirement benefits to work forces more likely to be peopled with the young, or they have already put a freeze on their plans. The company must match its costs to those of its competitors.

When rich companies like IBM join this race to the bottom, the demise of the traditional pension is only a matter of time.

Most recent strikes, the New York City Transit Workers walkout being just the latest example, have been prompted by concerns over benefit cutbacks, not pay, Orr says.

He says young workers watching their elders lose retirement benefits have become most skeptical of President Bush’s plans to privatize Social Security. Although early surveys indicated a slight majority favored the idea when the president made reform a centerpiece of his legislative program, Orr says support has eroded. When asked why they have become less open to Social Security reform, three-quarters of those surveyed said they fear they will have to support their parents on incomes that are not growing fast enough to keep pace with inflation.

How do you save for retirement when you cannot pay to fill your gas tank, or heat your home? At times last year, according to the U.S. Bureau of Economic Analysis, Americans had a negative savings rate; we spent more than we earned.

For decades, IBM was famous for its one-word slogan: Think. For thinking people today, “Save” is the new catchword.