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Why pensions are becoming even scarcer

More old-line industries may follow United Airline's move to default on pension obligations.

By Staff writer of The Christian Science Monitor / May 16, 2005


The nation's private pension system is fraying and at risk of unraveling altogether.

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The reason: More than three-quarters of the nation's traditional private pension plans are underfunded - which means they currently don't have enough assets to cover the benefits already promised to their workers and current retirees.

And the Pension Benefit Guaranty Corp. (PBGC), the government insurer that is supposed to guarantee workers some protections if companies go under, is facing a deficit of almost $30 billion.

Add to that the threat of more bankruptcies in old-line industries, from manufacturers to the so-called legacy carriers like United Airlines - which last week won approval to default on its pension obligations to 120,000 workers - and experts predict that millions more retirees may suddenly find themselves having to make due with less than they were promised.

"The broader issue of retirement security hasn't gotten enough attention heretofore," says Bradley Belt, executive director of the PBGC. "The retirement security fabric of this nation is increasingly tattered."

For millions of retirees, like former United pilot Bill Muller, the holes in the current system have already taken a toll. He retired in 2002, expecting to live comfortably on the six-figure pension he'd been accruing since he first went to work for United in 1969. Instead, he expects to lose 75 percent of that, even if the company successfully emerges from bankruptcy.

"It's such nasty news that it's hard to wrap your arms around this and understand the gravity of it," says Mr. Muller. "People have this idea that a pension is sacrosanct, that it can't be touched, but when you're in a situation like this you find that you have no control. And frankly, I think it's immoral to do to people in their 60s and 70s."

Currently, about half of Americans work for companies that offer some kind of retirement plan, whether it's a traditional defined-benefit pension; a 401(k)-type plan, known as a defined-contribution plan; or a mix of the two.

Only 20 percent have the traditional, defined-benefit plans - the kind that used to be given along with a gold watch when workers turned 65. That's down 50 percent from just 20 years ago.

And of those remaining plans, more than 75 percent are underfunded. Some experts say that time and a healthy economy will remedy most of that problem. They argue that only a few companies are facing serious pension deficits, while the rest are facing only small shortfalls. As the economy gains strength, these advocates contend, companies will be able to add more to their pension plans, which, as market also revs up, will be able to earn more income with their current assets.

But others are less sanguine. They argue that many more companies are facing dire shortfalls than it appears on paper. That's because accounting changes allowed by Congress last year have made it possible for companies to significantly overstate the health of their pension plans, they say. For instance, prior to its default in 2002, Bethlehem Steel stated that their pension plan was 84 percent funded. Once the PBGC took it over, it turned out to be only 45 percent funded, according to George Benston, a professor of finance at Emory University's Goizueta Business School in Atlanta.