The mainstream press is finally covering the pension crisis with full force, spurred by Delphi’s bankruptcy filing and news that the Securities and Exchange Commission (SEC) has formalized its investigation of General Motors’ underfunded pension obligations.
In fact, the SEC has been investigating the retiree obligations of six large companies — GM, Ford, Delphi, Northwest, Navistar and Boeing — for a year. The formal subpoenas now issued for GM simply signal that the SEC has reason to believe that the company may have distorted its financial results.
At this point, the Pension Benefit Guaranty Corporation (PBGC) has established that unfunded private sector pension obligations total $450 billion and that the PBGC, which insures pensions, is already running a deficit of $23 billion. All of the possible reforms now pending in Congress will do nothing more than patch up the system until more employers can terminate their pension plans and the decades-long shift away from employer-provided pensions is complete.
The pension crisis has worked its way through the steel and airlines industries and is now moving on to autos and telecom. Beyond that point lies the public sector, where retiree obligations are underfunded by an estimated $490 billion.
Now Congress, the PBGC, the SEC and the Financial Accounting Standards Board are all promising to generate new rules that will correct a small part of the accounting issues that have facilitated underfunding, but they will not solve the more fundamental economic issues.
What no one is willing to discuss is the hard-dollar consequences of this change for all future generations. The simple fact is that a retirement based only on Social Security benefits and 401(k) payouts will leave most Americans in poverty. Pensions have made the difference between a modest but adequate retirement and financial disaster for millions of elderly Americans.
Assuming that Bush does not succeed in his efforts to privatize Social Security, the average payment will remain at about $12,000 a year. The average balance in a 401(k) account for workers nearing retirement is less than $100,000, which will purchase an annuity of about $7,000 a year. The grand total for the average retiree of less than $19,000 a year in guaranteed benefits will translate into a decisive downward shift in the standard of living for most retired workers.
The U.S. retirement system has long rested on the assumption that workers would draw from three sources of retirement income: Social Security, pension plans and personal savings, which now commonly take the form of employee contributions to 401(k)s. Without pensions, the system is not valid.
Social Security benefits have been set with the idea that they would supplement the guaranteed lifetime benefits provided by defined benefit pension plans. No one in government is prepared to broach the question of the role that Social Security will have to play when pensions disappear.
This development is not a distant problem, but an issue that will have to be addressed in the foreseeable future. As Delphi and a number of other companies demonstrate, filing for corporate bankruptcy under Chapter 11 is a strategic move to unload certain financial obligations while still continuing to do business with the same executives and business plan in place. More companies with underfunded plans can be expected to adopt this strategy.
Bankruptcy law in the United States has become a method for bailing out mismanaged companies. Companies that have been run into the ground are simply resurrected and allowed to off load their obligations on to their workers and the public.
The latest data from the Bureau of Labor Statistics show that the employer cost for a defined benefit pension plan for union workers is $1.84 per hour worked. The average employer contribution for a defined contribution plan for nonunion workers, primarily 401(k)s, is only 43¢ per hour worked, and that contribution is wholly discretionary.
Employers created 401(k)s primarily to head off pressure to provide pension plans and to make some gesture toward retirement income for employees. With no serious effort to revive pension plans, employers will feel even less inclined to contribute to 401(k)s, and all forms of retirement savings will become completely self-funded and self-managed.
Some employers and politicians are now talking about requiring workers to put a certain portion of their pay into 401(k) accounts to ensure that they have savings for retirement. No one has explained how workers can save more when real wages are declining.
Self-funding is not an option, and calls for greater personal savings so that workers can buy annuities are totally unrealistic. Social Security will have to be overhauled, but in a completely opposite direction from the one Bush envisions.
