Tension over pensions: Can they be saved?

The traditional employer-sponsored corporate pension system in the United States is fading away fast.

The latest in a long parade of firms freezing their traditional pension system is the world's largest aluminum producer, Alcoa Inc. A week ago, Alcoa said it would eliminate its "defined benefit" pension plan for most new US salaried employees as of March 1.

Like IBM, which earlier this month announced it was freezing its pension plan, Alcoa said it would replace its old system for new hires with a relatively generous 401(k) plan. Alcoa promised to match up to 6 percent of salary that an employee contributes to the new "defined contribution" retirement savings plan. In addition, it will contribute 3 percent of salary and bonuses to a 401(k) - even if an employee doesn't contribute a penny to the plan.

But are today's 401(k) plans adequate to provide a decent supplemental retirement income for their beneficiaries?

The question is important. Already nearly 65 percent of employers with retirement plans have a 401(k) system as their primary vehicle. But almost no plans are generous enough.

"Most people are going to arrive at retirement and not have adequate money," says Alicia Munnell, director, Center for Retirement Research at Boston College. "This is serious. None of us are good at doing our own retirement savings."

With the real value of Social Security pensions shrinking as Medicare premiums rise and the normal retirement age climbs to 67, the bottom one-third of new pensioners will be poor, Ms. Munnell says - far greater than today's 9.8 percent poverty rate for retirees.

The middle third of retirees will scrape by - if no big extra expenses occur. "Everything has to break right," she says.

The top third will be "OK." Munnell adds. Yet many will be disappointed with their living standard.

In addition to Social Security, workers should contribute 12 percent of their pay over their entire career to build an adequate 401(k) pension - one that replaces 75 percent of preretirement income, says Edward Wolff, an economist at New York University.

Even the generous IBM plan falls well short of that percentage contribution.

Mr. Wolff figures the "best thing" for the nation and its retirees is to go back to traditional corporate pensions, where the company invests pension money and takes the investment risk, rather than employees.

"That is unlikely," Wolff says. "So we are stuck with 401(k)s."

These plans are subject to the vicissitudes of the financial markets. Indeed, the stock market's plunge between 2001 and 2003 influenced some plan owners to postpone retirement.

Congress is now trying to save defined-benefit plans from a rapid demise. Differences between a 700-page Senate pension bill and a similarly large House bill may be reconciled next month. Though quarreling over the differences, experts consider this effort to be a useful exercise. The bill could strengthen the Pension Benefit Guaranty Corporation (PBGC), which insures traditional pension plans, and require companies to better fund the reserves for their traditional plans.

One fear is that corporate bankruptcies and their failed pension plans will saddle the PBGC with so much debt that federal revenues, and thereby taxpayers, will be required for a costly rescue.

Further, the bill probably will raise pension burdens for corporations. That could mean more and more companies dumping their old pension systems, especially since 401(k) plans cost about half as much as traditional plans do.

"I'm dubious about trying to do anything at this stage to stop them from shutting them down," says Munnell.

What's to be done?

One possibility, suggests Munnell, is to follow Australia's example. In 1992, it set up a mandatory private saving program run by employers and funded by a contribution equal to 9 percent of workers' pay.

Any US plan should be universal, substantial, and mandatory, she argues.

A new plan, Wolff says, should also be "portable," with an employee able to take savings from job to job. Top management should get no special deals. Administrators of pension funds should be corporate outsiders. A tight limit should be set on how much money can be invested in the stock of the company involved, to avoid the disaster many Enron employees suffered.

But it may take a pension crisis down the road for Congress to seriously consider alternatives to today's private pensions.

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