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(4/30/03) - Now that the war in Iraq has been declared officially over, can the media please put aside their preoccupation with Scott Peterson's new hairstyle and focus their attention on the sputtering U.S. economy? And in a week when even Fortune, the corporate playbook, has adorned its cover with a CEO with a pig's head and the title "Oink! CEO Pay Is Still Out Of Control," how about starting with the guys running corporate America? They have, after all, in the course of the last year gone from American Idols to America's Most Wanted, the most stunning transformation since Ozzy Osbourne morphed from a bat-chomping satanic rocker into America's cuddliest dad.

But no matter how battered their reputations may be, they still appear determined to rescue themselves instead of their sinking ships. For today's captains of industry, the maxim in a crisis seems to be: "To hell with the women and children -- save the lifeboats for us!"

Take American Airlines. While preparing to make a rough landing in bankruptcy court, executives at the dead broke carrier extracted from workers $1.62 billion in wage and benefit concessions the bosses claimed were needed to keep American aloft. At the same time, the execs secretly safeguarded themselves with a glittering array of golden parachutes, including massive cash bonuses and a $41-million trust fund to guarantee their pensions should the airline crash and burn.

Even after the secret escape plan was revealed and all hell broke loose, the company held fast to its priorities. It canceled the cash bonuses. It tossed CEO Don Carty onto the tarmac. But it refused to relinquish the fund protecting its execs' nest eggs.

In the end, the executives kept their cushy trust fund while the workers were forced to go along with a deal that will lead to thousands of lay-offs and pay cuts of between 15 and 21 percent. I guess in today's business world, that's what amounts to a compromise.

Besides making one reach for the nearest airsickness bag, the American Airlines debacle highlights the growing disparity between the ways corporate America is preparing for the golden years of its executives and its rank and file employees.

In the clubby confines of America's boardrooms, the sky is the limit. Compensation committees are working overtime coming up with ever more creative -- and devious -- ways to boost the earnings of top executives. And super-charged pension plans are the hot new trend.

Among the gimmicks being used to goose the value of these plans is an accounting scheme that can dramatically increase a CEO's retirement windfall by adding phantom years -- even phantom decades -- of service to the exec's pension. In theory, it works the same way as those jailhouse rules that reward a model prisoner with time off for good behavior -- only these guys get rewarded no matter how many employees or shareholders they've knifed in the back with a homemade shiv.

Thanks to this latest innovation in corporate accounting, Leo Mullin, Delta Airlines' CEO, has had an additional 22 years of service tacked on to the less than six years he's actually worked for the company, while US Air's former CEO Stephen Wolf was given credit for 24 years he didn't really put in. And this scam isn't reserved for the high-flyers of the airline industry. When John Snow left CSX Railroad to become Treasury Secretary, he was given credit for having put in 44 years at the firm, even though he'd actually punched a time clock there for 25 -- a little fun with numbers that helped him walk away with a cool $33 million in pension booty.

Corporate directors, who have come under increasing fire from shareholders for approving excessive pay packages for high-level executives, appreciate the fact that these pension plan adjustments allow them to fly under the radar while continuing to funnel millions to CEOs. Unlike salaries and bonuses, which are regularly reported in the business press, the details of executive pension plans are usually hidden away in the extra fine print of a company's SEC filings.

And CEOs love that pension plan payouts come with none of those annoying tied-to-performance strings attached. US Air's Wolf, for instance, made off with a $15 million pension cash-out just six months before the company filed for bankruptcy. Richard Brown, former CEO of Electronic Data Systems, was rewarded for overseeing a 62 percent drop in share price -- and steering the firm into an SEC investigation -- with a pension plan that will pay him $1.6 million a year for life. And Treasury Secretary Snow's $33 million pension prize came despite the fact that his company's stock underperformed its competitors' by two-thirds over the last 11 years of his reign.

The picture is far bleaker for those down on the factory floor or crammed inside an office cubicle, where ordinary workers are seeing their pension plans slashed or eliminated altogether.

Less than half of those currently employed in the private sector have any kind of pension coverage. And 40 percent of those companies that do offer pension plans are exploring the possibility of reducing benefits. Companies are also cutting back on matching contributions to their employees' 401(k) accounts. Some, like Ford, Goodyear Tire, and Charles Schwab, have decided to completely do away with matching contributions. They probably need the extra cash for their executives.

There is also a major push underway, spearheaded by the Bush administration, to allow companies to switch their existing traditional, defined benefits pension plans to so-called cash balance plans, which could lead to a serious loss in benefits for older workers.

And even those workers who are able to hang on to their defined benefits pensions can't rest easy: it turns out that the vast majority of corporate pension funds are critically underfunded. In fact, of the 343 S&P 500 companies that offer traditional pension plans, close to 90 percent of them are running a deficit. And we're not talking about being a few dollars short. General Motor's pension plan is $25.4 billion in the red while Ford's has a shortfall of $15.6 billion. All told, the S&P companies are $206 billion in the hole; that's a shift of $457 billion since 1999 when the same pension funds had a collective surplus of $251 billion.

In just a few short years, the nest eggs of the American worker have gone from sunny side up to seriously scrambled.

In an effort to level the lopsided pension playing field, Rep. Bernie Sanders (I-Vt) and Rep. George Miller (D-Calif), along with 124 co-sponsors, have introduced legislation that would make it harder for companies to force older workers to switch to cash-balance pension plans. To drive his point home, Sanders showed how such a conversion would affect the pensions of his fellow Congressmen. Denny Hastert, for instance, would see his $540,000 lump sum benefit shrink to $164,000. And Tom DeLay's retirement pay-out would be cut by 60 percent, shriveling from roughly $608,000 to $251,000.

"If members of Congress think that cash-balance payments are good for American workers," declared Sanders, "then they must believe that cash-balance pensions are good for themselves."

I couldn't agree more. And the same goes for those pension-protecting executives at American Airlines. If their future is worth safeguarding, then so is their workers' present. Just think how many jobs the $41 million they put into that trust fund could save.

Janice Revell pointed out, in a Fortune article, how even when CEO’s try to appear to be cutting back, they are really just cutting themselves a bigger slice of the pie. The CEO of Delta Airlines was all set to receive millions of dollars in bonuses and free stock, after losing over a billion dollars for the company.

Then the protests began. The CEO actually volunteered to give up 25% of his salary and his bonus for this year. He also gave up $2.4 million in “retention payments.”

But even after all that, the CEO is still making a killing!

He has worked for Delta for five years and eight months, but he will get another 22 years credited to his length of service! So, he could be looking at a $1 million, or so, per year as a pension. This money will be protected if the company goes bankrupt.

What will the workers get? They are losing their pensions and getting stuck with cash balance plans! This will only apply to the nonunion employees! Anyone who has not noticed that the benefits are always taken from the nonunion employees first, has not been paying attention.

Nonunion worker’s benefits are the low hanging fruit. Nonunion workers are always the sitting ducks, and end up as duck soup for executives.

The Tyco CEO has a pension with an estimated value of $50 million, in today’s dollars. When the public catches on to this CEO sham, another will take its place.

Proposed regulations to govern the way companies change to a controversial type of pension plan were assailed yesterday both by workers and corporate officials at a hearing by the Treasury Department.

Employees said the proposals would not prevent companies from reneging on pension promises and stripping workers of benefits they had been led to expect.

Company representatives found another fault, saying the rules failed to give employers enough flexibility to change their compensation practices as the economic climate changes. A number of companies, including R. J. Reynolds Tobacco Holding, also said that if the regulations were adopted as written, pension-plan changes that they completed years ago would be illegal.

The regulations under discussion try to address conversions of traditional pension plans to what are called cash-balance plans. Cash-balance pensions are hybrids that combine some features of pensions, which provide a defined benefit at retirement, with other features of 401(k) retirement plans. The rules were drafted after an outcry by older employees who said their benefits shrank drastically after their companies made such conversions.

In a traditional pension, workers build up the biggest part of their benefit shortly before they retire. Employees in cash-balance plans build their benefits at a steadier rate.

Kathy Cissna, director of pension benefits for R. J. Reynolds, testified that her company's pension plan would fall into a legal twilight zone under the new rules. The regulations would "push plan design into two limited categories," neither of which applies to the Reynolds design, she said. The company converted in 1993 to a type of hybrid that is not addressed by the proposed regulations.

Ms. Cissna said the rules would cause "extreme disruption" to many companies whose pension plans do not adhere to the standards, citing a study by the Watson Wyatt consulting firm that said about two-thirds of pension plans sponsored by the 100 largest American corporations would fail to comply. Watson Wyatt, which helps companies set up and change pension plans, also testified.

Representative George Miller, one of three legislators to speak on behalf of employees, called on the Treasury to scrap the regulations and replace them with rules that would permit employees going through conversions simply to calculate whether they would be best served by their companies' old plan or the new one, and choose one or the other. He cited a General Accounting Office finding that some workers could lose half their benefits in a cash-balance pension conversion.

The Treasury declined to comment on the testimony, which is to continue today. A spokeswoman said that the Treasury was "carefully considering" all public comments and would take them into account as it prepares the final rules. The department can either withdraw all or part of the rules, or revise and reissue them. If revisions are made, more public comment will then be solicited.

Even before the hearings began, the Bush administration took steps to defuse some of the tension over the rules. On Monday, it scrapped one part of the package, saying it would have undermined separate, existing pension rules that are designed to keep executives from turning pension plans into tax shelters.

The Treasury said it would rewrite that measure in a way that did not conflict with existing practices.

In addition, a separate regulation, requiring companies to notify employees clearly of pension-plan reductions, went into effect on Tuesday. In the past, some companies' communications were so impenetrable that the workers had no idea what was going on.

Cash-balance pensions captured the spotlight in 1999 after employees at I.B.M. discovered that a conversion by that company was reducing employees' benefits by tens of thousands of dollars in some cases. The harshest effects befell workers with the most seniority. An age-discrimination lawsuit followed, along with a political uproar.

The Internal Revenue Service, one of three agencies that regulate pension plans, has stopped approving cash-balance conversions while experts sort out the legal issues. The new regulations, issued in December, are the Bush administration's proposal to resolve the age-discrimination issue.

WASHINGTON -- The Bush administration said Monday that it would scrap -- for now -- a proposed rule that sought to ensure that highly paid workers aren't unduly favored when companies switch to a new type of retirement plan.

The provision was contained in a broader proposal that companies would follow when they convert traditional pension plans to "cash balance" plans.

Critics say cash balance plans hurt older workers. When IBM Corp. switched its pension plan in July 1999, it ignited a backlash against the company among employees, with workers at the plant in Essex Junction, Vt., taking the lead.

A small group of people from Vermont plan to continue to fight the change in resolution proposals at IBM's annual meeting each year.

The Treasury Department and the Internal Revenue Service said the broader proposal, which among other things advises companies how to avoid age-discrimination lawsuits when switching to cash balance plans, would not be affected by Monday's action.

Plan conversions typically mean less money for workers close to retirement and have been the subject of a rash of lawsuits.

The provision jettisoned Monday said companies, in setting up cash-balance plans, "may not provide disproportionate benefits to highly compensated employees."

Treasury said that the proposal would have made it hard for companies -- wanting to make the switch-over -- to provide certain workers with pension options, such as how they would want to accrue future benefits or whether they would want to be grandfathered under the traditional pension plan.

"The proposed nondiscrimination regulations would have had the unintended effect of making it more difficult for employers to provide workers with transition relief in cash balance conversions," said Pam Olson, Treasury's assistant secretary for tax policy.

The government said it intends to rework the provision.

Rep. Bernie Sanders, I-Vt., said the partial withdrawal was a step in the right direction. He will introduce legislation Tuesday requiring companies that convert to cash balance plans to allow most workers to stay in their traditional pension plans.

"Now we have got to get the IRS to withdraw all of its proposed cash balance regulations, and we need to work to ensure that the next round of regulations don't allow companies to cut their employees' pension in violation of federal age discrimination laws," he said.

Currently, there is a moratorium on government approval of conversions to cash balance pension plans given all the concerns about them. But the ban will be lifted if Treasury's regulations ultimately are adopted. Treasury's plan has drawn concern from some lawmakers on Capitol Hill, which had thrown a temporary snag in the Senate confirmation process for Treasury Secretary John Snow.

Free Press staff writer Sue Robinson contributed to this article

JERUSALEM (AFP) - At least 155 employees of the Israeli spy service Mossad have said they will resign if their pension plans are slashed as the finance ministry launches an austerity plan, the daily Yediot Aharonot said.

They include several high-ranking Mossad figures, who had put their case to the head of the legendary spy service Meir Dagan after the finance ministry presented a plan to reduce their pensions plans, the paper said.

The proposed cuts were part of Finance Minister Benjamin Netanyahu's austerity plan to tackle the country's worst-ever economic crisis.

Along with military personnel, Mossad employees would be expected to retire at 55 instead of 45.

Yediot said the wave of resignations risked the smooth functioning of the spy service, seen as key to the country's security.

The government's austerity plan which still has to win the backing of parliament, has met with fierce opposition from the trade unions, whose Histadrut confederation has threatened an open-ended general strike in protest.

As members of Congress prepare to reform the pension system, they might want to think hard about the proposals on the table. A new study has examined what would happen to their own retirement benefits if the changes that some favor for other workers were applied to them. The answer might give them pause.

Virtually every senator and representative would lose out, the study found — in some cases by hundreds of thousands of dollars — if their current Congressional pensions were switched to a controversial variant called a cash-balance pension.

One big loser, for example, would be Representative Rob Portman, a major sponsor of the House Republicans' pension legislation. He had built up a pension benefit worth $337,857 by the end of 2002, if taken as a single payment, the study found. But if Mr. Portman had instead earned his benefits under a cash-balance plan, he would get $239,185, based on an age of 48 and 10 years of service.

Mr. Portman will turn 48 this year. (The study used approximate ages in calculating the hypothetical totals.)

The study, done by the Congressional Research Service, shows that other members of Congress would suffer losses of varying amounts, depending on their ages and years of service.

Congress will be deliberating on significant pension legislation in the coming months, including proposals that would affect benefit levels and the strength of the pension system itself. An especially contentious debate is looming over regulations proposed by the Bush administration on how companies could convert their traditional pension plans to the cash-balance variety.

The existing Congressional pension plan is generous, and no one is really planning to trade it in for a new, stripped-down version. For years, however, private-sector employers nationwide have been replacing traditional pension plans with newer ones that are generally meant to be less costly for the companies to offer, but that in many cases yield smaller benefits, or transfer all the risk to workers.

Seen in that context, the Congressional Research Service study shows how well members of Congress are insulated from some trends in the private sector.

Since the 1980's, hundreds of large companies have switched from traditional to cash-balance plans. These plans combine features of the traditional pension with yet another type of retirement plan, the 401(k), in which employees manage their own retirement money and sometimes receive matching contributions from employers. They are called cash-balance plans because employees periodically receive notice of a hypothetical cash balance that they can track as it grows.

In theory, the cash-balance pension has virtues that make it superior to the 401(k): it is paid for and managed by the employer, and it is guaranteed by the federal government; a 401(k) has no such guarantee. But in the real world, companies that have converted traditional pension plans to the cash-balance variety have reduced some employees' retirement benefits sharply. The worst losses have generally befallen older workers.

Statistics on the trend are sketchy. But a 2002 audit of 60 corporate pension conversions by the Labor Department's Office of Inspector General found that in 13 cases — about 20 percent — workers were deprived of retirement benefits. They were losing about $17 million a year because companies used improper calculations in making the conversions.

Extrapolating these lost benefits to the hundreds of pension conversions across the country, the office said, the affected workers "may be underpaid between $85 million and $199 million annually." The office called for heightened regulatory vigilance.

Even assuming proper calculations, cash-balance pensions can mean lower payments than in the traditional approach. Cash-balance plans differ from traditional plans, which are set up to let workers build the biggest part of their benefit in the years just before they retire. The idea was to promote worker loyalty by giving workers an incentive to stay with one company.

Many graying baby boomers in traditional plans may not know it, but now that they are passing 50 and amassing the bulk of their pensions — they are becoming very expensive to their employers. Companies that have converted to cash-balance pensions have been able to reduce labor costs by ending their traditional plans before many workers enter this high-accrual stage.

Cash-balance pensions build benefits more evenly over the course of a worker's career. For some people, they can yield larger benefits than traditional plans, particularly for younger workers who often jump from job to job.

In switching to cash-balance pensions, some companies have notified employees in technical jargon or euphemisms that have left workers clueless about what is really happening. But as older employees started to realize that the conversions could mean individual losses in the tens of thousands of dollars, they began to pepper the Equal Opportunity Employment Commission with age-discrimination complaints. Some have filed class-action lawsuits against their companies. The most prominent case, still pending, affects more than 140,000 employees at I.B.M.

In 1999, the Internal Revenue Service, which regulates pensions, placed a moratorium on conversions, to give specialists a chance to sort out their legality.

Now the Bush administration has proposed regulations that would settle the issue, laying out basic rules for making cash-balance conversions legal. Public comment will be accepted until Thursday, and hearings are scheduled for April 9. If the proposed regulations take effect, the moratorium will be lifted.

Critics of cash-balance plans fear that an end to the moratorium would prompt a flood of pension conversions. They and their advocates in Congress doubt that the regulations would adequately protect older workers.

"There are millions and millions of workers today who are scared to death that the pensions they have been promised, that they have worked their whole life for, will not come through," said Representative Bernard Sanders, a Vermont independent who has long opposed cash-balance pension conversions.

Proponents of cash-balance pensions have argued that conversions are usually harmless. They note that some companies have voluntarily sweetened their cash-balance plans after older workers complained.

In general, members of Congress who have served the longest would face the greatest losses if they were given a cash-balance payout.

Patrick J. Purcell, the Congressional Research Service economist who conducted the study, said he worked with each lawmaker's age and years of service without knowing whom the numbers applied to, "so there would be less reason for people to question the results."

He then used standard actuarial methods to compress each pension — normally taken as a lifelong stream of monthly checks — into a lump-sum payment.

Calculating the lump-sum value made comparison possible with cash-balance benefits, which are normally given in a single payment.

Mr. Purcell then calculated what the lawmakers' hypothetical cash-balance benefit would be if they had had such a pension from the day they entered Congress. That approach made for a more straightforward comparison and possibly gave an advantage to the cash-balance plan. In practice, some of the most harmful effects of pension conversions occur because employees undergo the change at midcareer.

Mr. Portman, the Ohio Republican, was unavailable for comment on the study. But a spokesman, Jim Morrell, noted that in 2001, Mr. Portman sponsored legislation requiring companies to notify employees of the way their benefits would be affected in cash-balance conversions. That bill is now law.

Senator Charles E. Grassley, Republican of Iowa and chairman of the Finance Committee, earned a pension worth $508,266 under the existing plan, based on an age of 70 and 18 years of service. Under a cash-balance plan, he would have received only $161,623, according to the study.

Mr. Grassley is also the former chairman of the Senate Special Committee on Aging and is active on pension issues. A spokeswoman, Jill Gerber, said Mr. Grassley could not comment on the new findings without seeing the study.

The study also found that Representative Tom DeLay, the House majority leader, had earned a benefit worth $608,143 at the end of 2002 under the current plan. In a cash-balance plan, Mr. DeLay, a Texas Republican, would receive $251,086, or 59 percent less, based on an age of 56 and 18 years of service.

Mr. DeLay did not respond to a request for comment.

Representative J. Dennis Hastert, the House speaker, qualified for a Congressional pension worth $540,572 at the end of 2002. He would qualify for $164,455 in a typical cash-balance plan, the study found, based on an age of 61 and 16 years of service .

Mr. Hastert's press secretary, John Feehery, questioned whether it was fair to single out members of Congress for scrutiny when the entire federal compensation system is skewed toward smaller paychecks and larger pensions compared with the private sector.

"The Treasury Department and Congress are looking at ways to make sure that any conversion is fair," he added. "But on the other hand, many companies, given the economic downturn, are faced with the possibility of not being able to offer any plan at all. And that also would be bad for employees."

Ms. Gerber noted that pension conversions in Iowa, Senator Grassley's state, generally make it clear that companies are backing away from traditional pensions. In the mid-1970's, there were about 1,100 pension plans in Iowa, she said, but now there are fewer than 400. With some companies deciding not to offer any pensions at all, she said, Mr. Grassley sees a need to find some balance between protecting workers' benefits and offering employers incentives to stay in the pension system.

"The anti-cash-balance people are just anti-cash-balance," she said. "But if you just make cash-balance plans illegal, what are the plan sponsors going to do?"

The Congressional Research Service, a nonpartisan branch of the Library of Congress, did the study at the request of Mr. Sanders, who has introduced legislation opposing cash-balance conversions in the past — none of it successful. He said he hoped the new findings would "show the hypocrisy" of colleagues who would let other people undergo pension conversions but would not have to suffer ill effects themselves.

"If they think a cash-balance plan is good enough for American workers, why don't they convert their own pensions?" he asked in an interview.

He said he intended to introduce legislation this week that would force Congress to put its money where its mouth is: it would require the conversion of all Congressional pensions to the cash-balance type if the legislators allow the administration's proposed regulations to go forward.

Mr. Sanders himself would lose 72 percent of his pension if that happened. Based on an age of 61, with 12 years of service, he qualified for a $416,159 lump-sum payment at the end of 2002. In a cash-balance model, he would have received $115,850.

He would not comment on the prospects for his cash-balance legislation. Perhaps more pragmatically, he said he would also introduce legislation to require companies converting their pensions to let each worker choose whether to keep the old plan or go with the cash-balance plan.

Some companies have done this voluntarily, he noted.

"Kodak has done that," he said. " Motorola has done that. CSX, which is the new secretary of the Treasury's company," had done that, he said, referring to John W. Snow, who was chief executive of CSX, the railway company, before Mr. Bush appointed him in December to replace Paul H. O'Neill. As Treasury secretary, Mr. Snow has authority over the proposed regulations.

All of those companies converted, Mr. Sanders said, "but they gave workers the choice."

(3/3/03) - On a cold Philadelphia day this past February, 50-year-old Janice Winston received something that warmed her considerably: a $400,000 payment from her former employer, Verizon Communications. The money represented the pension benefits Winston had earned during her 29 years on the job. It was also about $215,000 more than the company had hoped to pay her.

A full seven years earlier, Winston's employer, Bell Atlantic (which later merged with GTE to form Verizon), had made an elegantly simple, barely noticeable change in its pension plan that would have slashed the anticipated retirement benefits not only for Winston but also for thousands of her fellow employees.

What Bell Atlantic (and, for that matter, IBM and some 300 other big companies) had done was to switch its dowdy defined-benefit pension plan to an exciting new type of plan being touted by benefits consultants. Even its name had a dollar-happy ring to it: "cash balance." In the simplest terms, both cash-balance and traditional plans set aside a percentage of an employee's pay every year for a pension. And in both plans the benefit remains "defined"--that is, unlike a 401(k), it can't be slammed by the stock market and is funded wholly by the employer. The difference lies in how that benefit is calculated.

For Winston, a soft-spoken engineer, that new math was going to cause her to lose half her expected nest egg. Hardly the hell-raising type, she didn't organize noisy demonstrations or shout obscenities at management from the building rooftop. Instead, she began a grassroots campaign to force Bell Atlantic to return to the old plan. She sent dozens of e-mails to then-CEO Ivan Seidenberg, hopped into the elevator with him when he happened to visit the Philadelphia office, even flew out to the annual shareholders' meeting in Denver at her own expense to press the issue.

Remarkably, the strategy worked. In early 2000, Bell Atlantic reversed course, allowing thousands of employees to remain in the company's traditional pension plan. And when the company merged with GTE, it even sweetened the plan--hence Janice Winston's big fat payment last month.

It makes a really sweet story. Unfortunately, it's unlikely to repeat itself for millions of other employees. We'll go a step further: Brace yourself for a very un-fairy-tale ending to this story. Millions of American workers are sure to see a large slice of their retirement income go up in smoke. It may not happen right away, but the groundwork is being laid right now. Of course, people have been saying for years (including people at this magazine) that economic necessity--the chasm between the cost of promises made and companies' ability to keep them--leaves management no choice but to reformulate, rethink, and in some cases renege on post-employment benefits for their workers. What's new in the past few months is that they're quietly taking action. The profoundest benefit cuts will happen perhaps a decade or more from now--but you may as well add them to your retirement worry list, alongside those limp 401(k)s, rocketing health-care costs, and underwater stock options (see Is Your Retirement at Risk?).

To some, especially those brought up in the new economy, pensions may seem like a holdover from the days when people envisioned retirement security as a three-legged stool, in which the first two legs are Social Security and household savings. And to be sure, the share of American workers with company pension plans has progressively slipped in each decade--from almost 40% at the beginning of 1980 to about 20% now.

Still, for those in many giant companies--more than 70% of the FORTUNE 500 --pensions remain a very big deal. From the oil-futures trader at Exxon Mobil to the drug researcher at Eli Lilly, the plans cover 23 million active workers and pay more than $111 billion each year to another 21 million who are already retired. One way or another, those benefits are going to be sharply curtailed--whether through a cash-balance conversion or other changes we'll discuss in a bit. Warns Dave Hilko, a principal and benefits consultant at Deloitte & Touche: "There's no guarantee on these pension plans any more."

That is not to say that company managements are wholly to blame for the sudden turnaround. As FORTUNE reported in December, the lethal combination of a cratering stock market and plunging interest rates has played havoc with the finances of corporate pension plans. For the first time in years, the plans don't have enough money set aside to pay for the $1.2 trillion or so in benefits that they owe current and future retirees. The size of the shortfall? Some $240 billion, or more than half of what they earned in 2002. That shortfall is forcing companies to pour billions of additional dollars into the plans and is whacking billions more off earnings.

Shareholders, to put it mildly, are not content with the status quo. After all, the money going into pension plans is ultimately coming out of their pockets. The stocks of companies with some of the worst pension problems, like General Motors, Ford, Delta, and American Airlines' parent, AMR, have been absolutely pummeled. In executive suites throughout the country, CEOs and CFOs are taking note. "It's not okay to say to shareholders, 'We can fix this over the next ten years,'" says Mike Johnston, who heads the North American retirement practice at benefits consulting firm Hewitt Associates. "Companies have to fix it now."

Of course, the best way out of this mess for everyone involved--shareholders, companies, and employees alike--would be a nice, sharp rebound in the stock market during the next year or two that just blows away that $240 billion pension deficit. Whoops--we're back in fairyland again. Credit Suisse First Boston estimates that if big corporate pension plans generate an average return of 10% on their stock market holdings in 2003, they'll still have to pump some $29 billion into their plans. In 2004, they'll have to shovel in another $44 billion. (For the record, the S&P 500 is down about 5% this year.)

No, the real salvage work is happening on the liability side of the equation. Translation: Benefits are going to be cut. A lot of companies may even be tempted to just dump their costly defined-benefit plans and replace them with cheaper 401(k)-type alternatives. There's reason to believe it would have happened a long time ago if there hadn't been such compelling tax and accounting reasons for sticking with traditional plans. (More on that later too.)

But first, let's get to the "right now." Many companies are right now lobbying furiously to make a subtle--yet for many employees, potentially damaging--change in their pension plans. It involves tinkering with the interest rates they use to calculate how much they owe workers. To figure out how much money needs to be in its pension plan, a company's financial officers must calculate the present value of its obligations, or what it would cost in today's dollars to make good on the benefits promised to workers when they retire. To determine this minimum funding level, companies factor backward using a so-called discount rate, which by law is tied to the 30-year Treasury bond. Simply put, when the discount rate goes up, the present value of a company's pension obligations shrinks. And that lowers the dollars a company has to put into its pension plan today.

But just as a stock market rebound is no sure thing, companies can hardly count on a sharp increase in interest rates anytime soon. So in an effort to remove this annoying uncertainty, companies are pushing federal lawmakers to let them use higher-than-mandated interest rates--about 1% to 1.5% higher, to be specific--when calculating pension liabilities. If they're successful, it will make a huge difference in the health of their pension plans, at least on paper. According to Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries, each percentage-point increase in interest rates would decrease the pension liabilities of companies by about 10% to 12%. That's no small chunk of change, considering that a slew of large companies are shouldering pension liabilities in excess of $1 billion.

Permitting companies to increase the discount rate used in determining pension obligations would have a side effect, naturally: It would decrease the amount paid out to workers who take their pension income as lump-sum payments when they retire--by as much as 20% or more, according to Gebhardtsbauer--since those payments are also based on the discount rate. Congress, which sets the discount rates that pension plans must use, is expected to make a decision on the issue this year. The word on the Hill is that corporate America will get at least some relief on this front.

But even if employers get their way with discount rates, most observers say that change alone won't be enough to dig many out of the pension hole. To get out completely, a number of companies are simply going to slash retirement benefits. And it looks as if they're sharpening the axe: According to a survey released in January by Deloitte & Touche, 40% of major pension-plan sponsors are seriously considering cutting the benefits they offer under their traditional plans. What's more, regulations proposed by the Treasury Department in December would make it much easier for them to do so.

The proposed regulations give companies, for the first time in three years, the okay to convert defined-benefit plans to the cash balance version. That's despite the fact that an army of critics has labeled such conversions discriminatory against older workers and in violation of federal pension law. In fact, by late 1999 the plans had generated so much controversy that the Internal Revenue Service, which as part of the Treasury Department determines whether pensions qualify for tax-favored treatment, stopped sanctioning them.

In essence, the new regulations would end the IRS moratorium and make it easier for companies that convert to ward off age-discrimination suits like those launched by the employees of IBM and AT&T. It's no surprise that the proposed regulations have worker groups and others screaming foul. "What we're seeing is a massive assault on the pensions of millions and millions of workers," says Vermont Congressman Bernie Sanders, who along with 216 other Congressmen and Senators sent a letter to President Bush asking him to quash the proposed rule change.

To understand why, a quick review of how pension plans work is in order. Traditional plans are back-loaded--that is, a worker's retirement benefits accrue slowly during his first few years on the job and then increase sharply toward the end of his career. In a typical plan, benefits are based on a formula that incorporates years of service and salary--for instance, an employee may accrue a pension benefit equal to 1.5% multiplied by his years of service, and multiplied again by his average salary during the last five years on the job. So after one year of service, a worker's annual retirement benefit may equal just 1.5% of his salary; after 30 years, that amount may have ratcheted up to 45%.

In cash-balance plans, by contrast, benefits accrue evenly throughout a worker's career. Every year the company contributes a fixed percentage of the employee's salary, say 5%, to a hypothetical retirement account, which in turn earns a hypothetical rate of interest, often tied to the 30-year Treasury rate. Cash balance plans tend to be a big hit with younger employees, because they can rack up retirement benefits much faster than they would under a traditional plan. They're also more favorable to job hoppers, since employees who leave a company can take whatever they've accumulated in their retirement accounts with them, provided they've been with the company for a specified minimum length of time, usually five years. Less than a third of traditional plans offer this feature.

But while cash-balance plans may be highly appealing to younger workers, critics say that when employers convert traditional plans to the cash-balance variety, older workers are hit hard. Here's why: Under a cash balance plan, a 25-year-old and a 60-year-old earning $60,000 each might get the same $3,000 pension credit. But that $3,000 is obviously worth more to the 25-year-old, who will receive 40 years of compounding returns on the money before reaching normal retirement age, than it is to the 60-year-old, who has only five years left to retirement. And that, say some, flies in the face of the federal law governing defined-benefit plans, which states that the rate of benefit accrual cannot decrease on account of age. "Most cash-balance plans are in violation of the statute," says Norman Stein, a law professor at the University of Alabama who also sits on the Department of Labor's advisory council for employee retirement plans.

There's yet another doozy of a math trick that plays out during a conversion to a cash-balance plan--often it can whack as much as 50% from a worker's expected retirement benefits. When a company makes the switch, it calculates two amounts. The first is the value of the retirement benefit to which the employee would be entitled if he left the company at the time of conversion. That's done by figuring out the present-day, lump-sum value of the pension benefit the worker has already earned, using a discount rate. The lump-sum value for a worker with 20 years' service, for instance, might equal $100,000.

The second number the company calculates is the employee's "opening account balance" under the new cash-balance plan. That amount is also based on the present value of what an employee has earned to date. But here's the rub: Instead of using a discount rate that's tied to the 30-year Treasury bond, the company can use a rate that's higher--say, by 2%. And as we've noted earlier, the higher the discount rate, the lower the present value of the lump sum. What's more, when companies convert to a cash-balance plan, they also eliminate the early-retirement subsidies offered in most traditional plans, typically to employees aged 50 and older. Those subsidies can add tens of thousands of dollars to the value of a worker's pension. But since they're eliminated under the cash-balance plan, the opening account balance doesn't have to reflect their value.

The net result is that the opening account balance for our hypothetical employee could be far lower than the value of the benefits he's actually earned to date. It might be, say, $60,000 instead of the $100,000 he'd get if he walked out the door right then and there. The problem is, if our employee were to stay put, he wouldn't earn any new pension benefits until his opening account balance "caught up" to the $100,000 he had earned under the old plan. In essence, his pension would be frozen for years to come.

That's exactly what Larry Cutrone, a former tech worker at AT&T, claims happened to him when the company converted its traditional plan to a cash-balance plan in 1998. Cutrone, 55, was downsized from his job in September 2001, and says the conversion has slashed his pension from the $47,000 a year he had expected to just $23,000. A Vietnam vet, Cutrone says he feels like "collateral damage." A company spokesperson defends AT&T's cash balance plan as fair.

Not all companies that switch to cash-balance plans do so in a way that harms older workers. In the best-case scenario, firms will offer all employees the choice of staying in the old plan. FedEx told FORTUNE that it intends to convert its traditional plan to the cash-balance version later this year, but the company will offer all employees the option of remaining in the old plan. The company will still save money over the longer haul, but not as much as it would if it weren't offering the choice. "We wanted to do the right thing by our employees," says spokeswoman Sandra Munoz.

That kind of protection is rare: According to a 2000 study by the government's General Accounting Office, only 9% of companies converting their plans to cash balance offer all employees the choice of remaining in the old plan. About two-thirds offer partial transition benefits that lessen, but do not eliminate, the blow. The GAO study estimates older workers typically experience pension-benefit reductions ranging from 20% to 50% when cash-balance conversions take place.

Under the proposal now before Treasury Secretary John Snow, cash-balance plans would not be deemed age-discriminatory if older workers receive at least the same percentage of pay in their cash-balance accounts each year as younger workers do. In other words, when the conversion takes place, older workers could still find themselves with pensions that are essentially frozen for years to come. And the proposal calls for no requirements to provide employees with transition benefits. Public hearings on the regulations are scheduled for April 9, after which Snow will make a final determination.

Most Capitol Hill observers don't expect the proposed regulations to pass in their current form. That's not just because the Treasury Department fears recriminations from employee groups or Democratic legislators. Companies that want to implement cash-balance plans aren't happy with the regulations either: They feel the proposals are too vague regarding what's considered age-discriminatory. The likely outcome is that Treasury will refine the regulations after the hearings and submit new proposals later this year.

But here's a news flash: It doesn't really matter what Snow decides. Many companies are going ahead with pension plan conversions anyway--and betting the IRS won't disallow them later. The stakes are simply too high to do nothing. Take Delta Air Lines, which in November announced that it is switching its 56,000 non-union workers to a cash-balance system. Workers who retire within the next seven years will be allowed to choose either the old plan or the new one, whichever works out best. According to the company, the switch will result in a savings of about $500 million during the next five years. "Unless these steps are taken, Delta's retirement expenses would increase at an unsustainable rate," says executive vice president Bob Colman in a press release. Vanessa Joe, a Delta flight attendant for the past 15 years, says she understands why the airline is doing what it's doing but thinks all long-time employees should have the option to stay in the old plan.

Consumer groups, as you'd expect, are crying foul about any substantial changes to employee pensions. "If you've made promises to older workers in their 40s or 50s and they've relied on those promises, it's not fair to change the rules of the game," insists Karen Friedman, a director at the Pension Rights Center, a consumer watchdog group.

Fair or not, though, companies can change the rules of the game virtually anytime they want. That's a central tenet of America's corporate pension system: It's entirely voluntary. By law, a company is obliged only to pay what its employees have already earned under an existing plan. Cutting future pension benefits is perfectly legal, as long as the cuts apply equally to all plan participants and don't discriminate against older workers.

What's more, if the government forces companies to offer older workers the option of remaining in their traditional pension plans, many businesses will likely pursue alternatives that could leave workers far worse off. For instance, an employer might simply choose to freeze its defined-benefit plan altogether (that is, pay only what workers have earned to date) and replace it with a 401(k), in which employees themselves put up the bulk of the cash. "No company is going to continue with a plan that locks it into heavy liabilities and extreme rules," says Mark Ugoretz, president of the ERISA Industry Committee, a lobbying group that represents big corporate pension payers. "Rather than be saddled with a permanent and costly commitment to maintain the status quo, employers will abandon the system altogether."

Why haven't more companies dumped their old plans already? For starters, during the stock market boom of the late 1990s, big pension plans were overflowing with billions of dollars in surplus assets. Thanks to the arcane rules surrounding pension accounting, companies booked the gains on pension assets into reported earnings--some, like IBM and General Electric, were able to goose annual profits by 9% or more. More important, perhaps, were the tax consequences: If a company had terminated its plan, it would have had to pay a whopping 50% tax on the pension fund's surplus assets.

Today, that pension income has been replaced by pension expense--CSFB estimates that pension losses will subtract $25 billion in net earnings from the S&P 500 in 2003 alone. So if you can't at least trim your losses, why not drop this unsustainable burden and run?

It's worth noting that it's not unionized employees who are likely to see their pensions slashed. Defined-benefit pension plans are a crucial component of the collective bargaining agreements negotiated between companies and unions--and the latter aren't predisposed to accept cash-balance conversions. "I don't know of any negotiations out there where it's on the table," says Gordon Pavy, a collective bargaining specialist with the AFL-CIO. Indeed, conspicuously absent from Delta's changeover are the airline's 8,000 unionized pilots.

And that has fed into an already increasing tension between union and non-union workers over employee benefits. Janice Winston says that was certainly the case at Bell Atlantic, where unionized employees were excluded from the company's original conversion to the cash-balance plan. "Our argument was that if it's not good enough for the union employees, why is it good enough for us?" she says. In fact, the pension crisis appears to be creating a whole new class of worker advocate. "That's the irony of these abuses," says Friedman. "We've seen a new kind of activist born in this country. They're white-collar, they're highly sophisticated, and once they become activists they don't stop."

No, they may not stop--but that doesn't mean they'll win. In fact, one retirement benefit that's long been considered a given for the baby-boom generation--subsidized early retirement--is almost sure to die off in the next few years. "Most traditional pension plans have created a labor-market effect that many employers have decided, rightly or wrongly, they no longer want to have," says Dallas Salisbury, president of the Employee Benefits Research Institute in Washington, D.C. "It's the retired-in-place syndrome. You have employees who are 48 years old, they hate their job, they hate the company, but they know they'll cross a magic threshold at 50 or 55." And that threshold is just becoming too expensive to keep in place, say benefit consultants. "We can't afford as a society to continue to pay people to leave a company at age 55," contends Larry Sher, a principal at benefits consulting firm Buck Consultants in New York City. "It can't be sustained."

Deloitte's Hilko offers, however, what may be the single most important message for the millions of baby-boomers lucky enough to still be counting on a lush pension in retirement: "Don't take for granted what you have today."

Additional reporting: Melanie Shanley, Doris Burke