The traditional pensioner is becoming a rare breed. In the past five years, no firm has launched an old-style pension plan. Many companies are closing them. Some steelworkers, engineers, and now airline pilots have seen their nest eggs cut when employers went bankrupt - or switched to other retirement plans.
But hybrid plans, which combine several pension features with new flexibility, could offer workers a stable retirement. They're called "cash balance plans." Many high-profile companies incorporated them in the 1990s. Now, though, they await action by the US Congress to pull them out of legal limbo and make them more attractive to workers.
Financing retirement has become a crucial issue in the United States. Some 77 million people born between 1946 and 1964 - the baby boomers - start retiring in masses in four years. They will get checks from Social Security. It has enough funding to provide full benefit payments until 2042 - and probably long after that, given the program's political support. But today, corporate pensions are in a shakier situation, as many retired airline employees discovered in recent weeks after their companies declared bankruptcy and shed some pension requirements.
Cash-balance plans offer one way for firms to continue offering a pension but often with less cost, at least in the short run. Here's how they work:
The company regularly puts money aside for workers. But unlike with popular 401(k) retirement plans, the company, not the worker, decides how that money is invested. At retirement, employees have accumulated a nest egg without the hassle of managing a portfolio of stocks and bonds.
Not everybody wins with such plans. Older workers whose companies used to have traditional pensions often see their future benefits reduced. Phil Nigh, an IBM engineer in Burlington, Vt., calculated that his pension wealth was halved when the company converted its system in 1999. He was just under 40 at that time, so he wasn't allowed to stick with IBM's old pension plan. He assumes he will lose pension benefits under his cash-balance plan - unless he works until he's 70.
"Nothing has come out since then to dispute that figure," Mr. Nigh says.
But for younger workers, cash- balance plans offer some advantages. Employees' pension wealth accrues evenly each year as long as they work for one firm. In traditional pensions, wealth accumulates slowly until employees reach their 50s, when it starts piling up rapidly. Firms built in this delay to encourage workers to stay on the job until retirement.
Under a cash- balance plan, the extra money at a young age means workers can be more mobile without suffering financially. If employees leave a firm, they take the accrued pension wealth (the cash balance) and roll it over into an Individual Retirement Account or into the new employer's pension plan, if allowed. Under traditional plans, departing vested younger employees may be entitled to a pension - probably small, and only on retirement.
More than 80 percent of participants do better under hybrid plans than under traditional pensions, says a study by consulting firm Watson Wyatt. "People that gain are not very vocal," says Julia Coronado, an expert at the Federal Reserve.
Opponents, however, have been vocal. They certainly were when IBM converted its traditional pension system to a cash-balance plan. Thousands of older employees - in the 40- to 60-year range - charged that the plan illegally cut their benefits.
The federal district judge dealing with the IBM lawsuit agreed. He ruled over a year ago that IBM's new plan discriminated against some 130,000 current and former older workers. The judge is expected to rule any day now on how much IBM owes them.
Last month, IBM agreed to settle part of the suit by paying $320 million to the aggrieved workers. One crucial question remains: whether cash-balance plans, by definition, discriminate against older workers.
Other courts have ruled that hybrid plans are not discriminatory. That has encouraged IBM to promise it will appeal the case. Other firms have grandfathered their older workers to avoid such suits.
About 57 percent of full-time workers are covered by some kind of company retirement plan, a figure that has changed little in recent years. But the type of plan that covers them has changed dramatically. In 1980, 60 percent of such plans were traditional pensions, called defined-benefit plans. By 2000, that share had fallen to 13 percent. But the number of 401(k) and other defined-contribution plans soared in that period.
Cash-balance plans are classified as defined-benefit plans because the employer both provides all the money and invests it. While traditional pensions have fallen out of favor, the number of companies offering cash-balance plans has risen dramatically. Already, a fifth of large companies have converted traditional pension plans to cash-balance plans. About 4.4 million workers were covered by cash- balance plans in 1999. By 2002, that number had grown to 7.3 million.
Since then, such conversions have stalled, partly because of the still unresolved IBM suit, partly because of regulatory and tax questions. For example, the Internal Revenue Service has not provided "determination letters" on the tax-exempt status of employer contributions to cash-balance conversions. It has granted that tax advantage to new cash-balance plans.
Another key question is what to do with older workers in such conversions. While current law prohibits employers from reducing pension benefits that have been earned by employees once they're vested, they can enhance or reduce future benefits that have not yet been earned. The problem is that long-time employees in traditional pension plans figure that they have an implicit bargain with their firms for a level of pensions higher than they've legally earned.
Now, Rep. John Boehner (R) of Ohio is trying to draft legislation that would remove the legal uncertainty for cash- balance plans. As chairman of the House Education and the Workforce Committee, he held hearings last July and has met with parties on various sides of the issues. But no consensus has emerged. And Mr. Boehner hasn't settled on key details.
His goal is to have a bill ready by year end for consideration by the new Congress in 2005. Fact sheets issued by Boehner's committee hint that his bill will certainly reflect business concerns. But he also notes that pension wealth often starts to decline for workers in traditional pension plans in their early 60s.