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the vanishing american pension plans


      • From: "stacy keebler" <ampinay@xxxxxxx>
      • Date: 24 Jul 2005 17:52:46 −0700
Traditional pensions vanishing

Russ Wiles
The Arizona Republic
Mar. 27, 2005 12:00 AM

The bad news is, traditional pension plans cover fewer American workers
these days.

No matter how you view things, the pension trends aren't encouraging.
For many years, these were the Cadillac of workplace retirement plans,
a lavish benefit in which employers promised to pay a guaranteed income
to workers, no matter what happened in the stock or bond markets.

Traditional pensions covered 40 percent of workers in the mid−1980s,
but that's down to 20 percent today. Pensions account for an even lower
percentage of retirement assets, around 16 percent.

The glory days of pensions have passed. Intimidated by the plans' high
costs and open−ended liabilities, few companies start new pensions
anymore, and many long−established plans have frozen coverage. Other
funds are failing, dumping their IOUs into the lap of the Pension
Benefit Guaranty Corp., a federal agency facing a $23 billion

The upshot is most workers, especially those under 40, must rely mainly
on their own retirement−planning efforts, supplemented by Social

"The traditional (pension) plan is a real challenge for . . . companies
to fund and manage," said Grace Lau, a Phoenix money manager and former
investment−committee vice chairwoman at the Arizona State Retirement
System, a pension program for state and municipal workers. Underfunded

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                                    the vanishing american pension plans

liabilities, she said, exert a "real drag" on corporate balance sheets
and cash−flow demands.

Traditional pensions gained special prominence at large companies with
unionized or white−collar workforces. Small firms are less likely to
offer them, which explains why coverage is lower in Arizona and other
Western states.

Nationally, the trend in recent years has been to shift retirement
responsibility to workers using 401(k) plans. Most employers still ante
up 401(k) cash on behalf of workers and pay administrative costs. But
they don't make investment decisions and aren't on the hook if the
stock and bond markets go south.

Of those firms with pensions in place, a growing number are unable or
unwilling to honor existing commitments. Several big players in steel,
airlines and other industries have handed their liabilities to the PBGC
or are threatening it.

"I try not to panic too much about it," said Beverly Aldous, a retired
Delta Air Lines flight attendant now living in Higley, citing the
airline's shaky finances. "I don't want to give up something for which
I worked 36 years."

Delta this month asked Congress to ease pension−funding rules, allowing
it to make catch−up payments over a longer span to free up cash to help
with operations.

"Oil prices are up and Delta's highly leveraged," Aldous said. "They're
sitting on the brink."

The PBGC already has taken over $2.1 billion in pension liabilities for
United Airlines machinists and $3 billion at US Airways, the
second−biggest rescue ever. The largest plan to terminate was Bethlehem
Steel's $3.9 billion in pension obligations, although United's
liability for its entire workforce could total $6.4 billion.

PBGC funding comes from employer−paid insurance premiums, the agency's
investments and whatever assets it takes over. But the $23 billion gap
has raised the specter of a taxpayer−funded bailout.

"The 80 percent of the workforce that doesn't have access to (pension)
plans would pay for the benefits of the 20 percent that does," said
Bradley Belt, the PBGC's executive director, in a speech.

When plans terminate, the PBGC takes over available plan assets and
makes payments to retirees but doesn't guarantee full benefits. That
means workers can suffer a payment cut.

Most companies facing serious pension woes operate in depressed
industries, especially those facing fierce competition from foreign

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                                   the vanishing american pension plans

firms or new domestic rivals unfettered by hefty pension liabilities.

"General Motors' pension and retiree health expenses added $1,360 to
the cost of each U.S.−produced vehicle (in 2003), while the same cost
was only $107 for Honda," Belt said.

Loose accounting rules have contributed to the problem by allowing
firms to reduce or skip payments, especially during years of good
investment returns when pension assets are rising noticeably.

Subpar stock returns in recent years have exacerbated the problem, and
so have record−low interest rates. Skimpy rates depress earnings on
pension funds' bond holdings. And since interest rates are used as a
type of divisor to estimate the present value of future liabilities,
low rates magnify those obligations.

"In recent years, the one−two punch of asset losses resulting from
falling stock prices and increased liabilities due to declining
interest rates has affected pension funding significantly," Belt said.


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