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(12/11/02) - The Bush administration Tuesday proposed rules making it easier for companies to offer a controversial new pension plan that has been attacked by labor advocates and in class-action lawsuits as unfair to older employees.

Spokespeople for employers said that the new "cash balance” plans are better suited to a more mobile work force while preserving the old system in which employers instead of employees pay for retirement. The traditional plans have been disappearing because they are too costly, but cash balance plans can save a company hundreds of thousands of dollars a year.

"These are very good, legitimate plans,” said James A. Klein, president of the American Benefits Council, a lobbying group for Fortune 500 companies. He said that the alternative to cash balance plans is "getting rid of [traditional pension] plans altogether," and companies that have already adopted them "should be saluted, not criticized."

But labor advocates said the proposed rules would help corporations save money at the expense of workers in their 40s, 50s and 60s, who can lose up to 50 percent of their expected benefits when traditional plans are converted to cash balance pensions.

The proposed regulations issued for comment by the Treasury Department Tuesday "give a green light to a tremendously unfair practice that robs older employees of benefits they had counted on getting,” said Karen Ferguson of the Pension Rights Center, a worker advocacy group in Washington, D.C.

The new rules, which will be out for comment for 90 days before being put in final form, are expected to end a moratorium on Internal Revenue Service approval of cash balance plans that began three years ago. The proposed regulations say that as long as employers contribute the same percentage of pay to the new plans for older workers as they do for younger workers, they will not be considered discriminatory.

The new rules come after more than 800 discrimination complaints and several class action lawsuits by older workers against some of the nation's biggest companies, including AT&T.

Cash balance plans were first approved by the IRS in 1985, and hundreds of companies converted to them before the IRS moratorium was imposed as a result of complaints and protests by workers. They are cheaper to administer than traditional plans: recently, Delta Air Lines said it would save $500 million over five years by switching to cash-balance from a traditional pension plan.

In traditional pension plans, a very large share of a person's benefit is earned in the final years before retirement. Older workers complain they lose out on those lucrative years when a company converts to a cash balance plan, which doesn't make up for the difference.

By contrast, workers build equity in cash balance plans earlier than they would in traditional plans. The totals at the end of a career are far less than the old plan, but fewer people actually spend their entire career at one company. Thus the new plans are thought to be attractive to younger people.

But even some younger workers are finding the new deal unpalatable. Jeffrey Zitz is 38-year-old senior engineer, and a 15-year company veteran, at IBM's East Fishkill facility who specializes in computer modeling. So when IBM announced plans in 1999 to convert to a cash-balance plan -- and said the average employee would lose 20 percent of their pension benefit -- Zitz made his own computer model. "I was sure they were taking money off the table, but I didn't know how much,” he says.

To Zitz's horror, he learned his loss would be closer to 65 percent. Using IBM's own numbers, he figured his monthly pension at age 65 would drop from $14,465 to just $4,542, and more recent changes have driven the figure even lower.

IBM has since allowed workers as young as 40 to stick with the old plan, but that doesn't help Zitz. "Honestly, there's not much I can do about getting that money back,” says Zitz, who says he would have to sock away $20,000 a year in after-tax income to make up the shortfall.

Zitz says he's more skeptical about pension promises. "None of this is guaranteed,” he says. "It's something of a shell game.”

Lynda French, a former IBM employee who runs Cashpensions.com, an advocacy Web site for employees affected by the switch, said she retired at age 55 two years ago, before IBM relented and lowered the age limit, because she would have lost "about half” of her nest egg. Such conversions are "taking away money that people already earned,” French said. "You can't go back and replan your financial status.”

"It's unfair to say to people who have been at a firm a long time, and have made their retirement plans based on what they will accumulate under the existing plan, ‘We're taking away the old plan,'” said Alicia Munnell, director of the Center for Retirement Research at Boston College. "That doesn't mean that cash balance plans per se are bad -- they just have to be introduced in a way that will treat older workers fairly.”

(12/10/02) - Today the Bush administration proposed new rules that would allow employers to resume converting existing employee pension plans into controversial "cash-balance" pension plans.

In a cash-balance plan, workers build up retirement value evenly over the years (based on salary) rather than, in traditional plans, typically building greater pension value in later years of employment. While cash-balance plans help employees who work short amounts of time at many different employers, in the long run, these new plans can significantly decrease final retirement benefits.

From 1985 to 1999, an estimated 33% of Fortune 100 companies switched to cash-balance pension plans. In 1999, the right to convert to cash-balance plans was halted until the plans could be investigated. Now, within 90 days, conversion by employers could be allowed again.

Why did 33% of Fortune 100 companies switch to these new pension plans in relatively short order? Most say because it saves them money (large firms save as much as $100 million). If the cash-balance pension plan saves employers money, where do the savings come from? You got it. You. The employee.

Many argue cash-balance pension plans represent an "anti-worker movement." Do they? Well, they have been lobbied for by big-business interests since the 1999 freeze. And when money is saved, it has to come from somewhere. If your employer is suddenly saving more money, and it didn't cut nonemployee costs, then it's saving money on your back.

WASHINGTON (AP) - The Bush administration plans to propose new regulations Tuesday that would protect employers from age discrimination liability when a company converts its traditional retirement pension benefit to a different arrangement called a "cash balance plan."

Such conversions typically mean less money for workers closer to retirement age. Currently there is a moratorium on government approval of conversions. But that would be lifted if the regulations are approved after a public comment period and an April meeting of the Internal Revenue Service.

Cash balance plans usually consist of a percentage of pay by a worker plus interest that can be paid out as a lump sum if the worker leaves the company after working there for a certain period. Unlike a 401(k) plan, employees neither own the accounts or make investment decisions. Unlike a traditional pension plan, the worker isn't guaranteed annual benefits after retiring.

Critics say the proposed rules favor employers by allowing them to establish all the terms of the plan, including the return rates paid and the value of a worker's current benefit in the old plan.

"This is deregulation of pension plans and it is going to cost employees dearly, especially employees over 40 years of age," said Rep. George Miller of California, ranking Democrat on the House Education and Workforce Committee.

Companies increasingly converted their costlier traditional pension plans to cash balance plans starting early last decade. The plans are cheaper to administer and attract younger workers because of their portability. Pension laws prohibit companies from reducing benefits that already have been accrued. But they can cut or eliminate future benefits. Firms that eliminate their traditional pension plans are subject to an excise tax of up to half of any surplus assets in their pension trusts. But to avoid the tax and still do away with a costly pension plan, many companies are choosing to convert to cash balance plans.

About 19 percent of all Fortune 1000 companies offered them in 2000, according to a General Accounting Office study. The GAO is the investigative arm of Congress.

But more than 800 claims of age discrimination have been filed with the Equal Employment Opportunity Commission over conversions to cash balance plans.

That's because older workers don't get the future benefits promised under traditional plans — only what they have earned — when their plans are converted. Under cash balance plans, companies pay a fixed percentage of a worker's annual salary toward retirement. Older workers have less time to accrue those new benefits, and end up with less than the promised benefits under the traditional plan.

For example, James Bruggeman, a worker in Tulsa, Okla., told Congress two years ago that the benefits he expected under the old plan would have been 30 percent higher than under the new plan.

Often older workers go several years without earning any benefits after the transition. Called a "wearaway" period, that happens when the balance of an old pension account being converted is higher than what would be earned in the new plan.

The proposed regulations being issued by the Treasury Department (news - web sites) say that wearaway periods are not forms of age discrimination, a treasury official said Monday night. Also, no age discrimination exists if older workers are offered the same percentage of salary benefit or more in their cash balance plans. The interest earned on the account also must be at a "reasonable rate" determined by the employer.

(12/6/02) - NEW YORK -- The Financial Accounting Standards Board has received many complaints about pension accounting, and plans to consider at a meeting later this month how it should act on the matter.

In a memo circulated this month to its advisory committee, FASB wrote that " the Board has received many (other) communications from constituents expressing their dismay with pension accounting."

The advisory committee, known as the Financial Accounting Standards Advisory Council, told FASB its views on pension accounting at a meeting Thursday. FASAC members include accountants and others drawn from various business and other sectors.

Some told FASB the rules are ripe for an overhaul, but others said they're adequate, according to Jeffrey Johnson, a FASB project manager.

"We asked FASAC members what their appetite was for adding something on pension accounting to FASB's agenda," Mr. Johnson said. "Some thought pensions are ripe for another look, others thought the accounting is adequate the way it is."

Pension accounting rules are spelled out in a FASB statement known as FAS No. 87.

A Credit Suisse First Boston report on pensions published in September called the accounting used in FAS No. 87 "convoluted, complicated, misleading."

Particularly controversial, according to some analysts, are the use of various accounting techniques that fall under the rubric of "smoothing." They include letting companies take some assets and obligations off their balance sheets and amortize them over time as income or expenses; and letting companies report expected return on assets, rather than actual losses or gains.

FASB is addressing the issue of pension accounting as many U.S. companies and public pension funds are reporting that they are underfunded for the first time in many years, in some cases by billions of dollars.

General Motors Corp. , Delta Air Lines Inc., Ford Motor Co. , International Business Machines Corp. and others have all said in recent months that they are underfunded.

Workers at companies with underfunded plans aren't likely to be adversely affected, especially because corporate plans are insured by the a federal corporation known as the Pension Benefits Guaranty Corp. But companies must face the financial consequences of pension plans shortfalls, and are scrambling to do so.

The December FASB memo reprinted part of a letter the rulemaker received from U.S. Rep. Robert T. Matsui. In it, Mr. Matsui said he believes current accounting rules "create the potential for overstatement of corporate earnings and create incentives to corporations to overinvest pension plan assets in stock."

Mr. Matsui also noted that "it appears" corporations have continued to use historically high rates of return in determining expected earnings from pension plan assets, even in light of recent dramatically lower returns on both bonds and equity investments.

"I can think of no other circumstance in which corporations report earnings to shareholders based on returns that they hope to realize in the future," Mr. Matsui wrote.

FASB also circulated an analysis of pension accounting by former FASAC member Jack T. Ciesielski, an accountant and principal of Baltimore-based R.G. Associates.

The analysis, contained in a May 28, 2002 issue of Mr. Ciesielski's publication, The Analyst's Accounting Observer, is titled "Pondering Pensions, 2001: The Face of the Shmoo."

In it, Mr. Ciesielski likens pension accounting to the Shmoo, a character from the comic strip "Li'l Abner." He describes the Shmoo as "a chubby, cheerful little blob of an animal whose chief happiness derived from serving mankind -- to the point of hopping into a frying pan to please any person who cast a hungry glance his way."

"There a similar animal in corporate finance: it's the defined benefit pension plan and the accounting for it," Mr. Ciesielski wrote. "These creatures serve the retirees who earned a pension, but they also serve CFOs a perennial accounting mechanism for smoothing earnings, to the point where such plans might actually produce income instead of expense in the income statement -- income not to be realized in future cash flows."

ATLANTA -- Delta Air Lines, in a move to slash costs by $500 million over five years, made sweeping changes to its pension plan that are likely to reduce retirement benefits for thousands of employees.

Delta said it will change to a cash-balance pension plan from a traditional pension plan for the airline's nonunion workers, who constitute the majority of its U.S. employees. The change will affect about 60,000 U.S. employees -- from rank and file to management. Another 9,000 pilots won't have their retirement benefits changed.

It is too early to say whether other airlines will try to follow Delta's move. Being the least unionized of the major carriers, Delta has more leeway than competitors to alter workers' retirement benefits. In addition to Delta's pilots -- represented by the Air Line Pilots Association -- a small group of unionized dispatchers are excluded. The pilots' contract gives them 60% of final average wages when they retire.

While a similar change in the contract of Delta's 10,000 pilots would likely bring huge savings, a Delta spokesman said the carrier hadn't asked the pilots to open negotiations on a change in benefits, and declined to say whether it intends to. "I can't predict what the future may include," spokesman Tom Donahue said.

The move follows Delta's announcement last week that it intends to cut an additional $2.5 billion in costs by 2005, on top of $1 billion in cost reductions already achieved, as the carrier toils to return to profitability amid the worst industry downturn in history.

Leo F. Mullin, Delta's chairman and chief executive, acknowledged in a memo to employees that workers who don't retire during a transition period during the next seven years "could see a reduction in their retirement benefits earned after June 30, 2010." Workers who retire within the next seven years will be allowed to choose either the old plan or the new one, whichever is greater. The plan will be adopted next June 30.

Labor unions that have been trying for years to organize Delta workers expressed outrage at Delta's move.

"It's a travesty," said Jeff Zack, a spokesman for the Association of Flight Attendants, which recently lost its bid to organize Delta flight attendants but is seeking a new election based on allegations of interference by the company. "If the employees had voted to become members of AFA, Delta couldn't have done this -- even if they didn't yet have a contract."

The Transport Workers Union, which had sought to organize several groups at Delta, including mechanics, ramp workers and ticket and reservation agents, said it had tried to warn Delta employees that the airline might try to implement such changes. "We have been predicting Delta would do something like this," said Lisa Frost, a TWU organizer.

Hundreds of companies have converted to cash-balance pension plans from traditional benefit plans since the 1980s. Traditional "defined benefit" pension plans promise a lifelong monthly payment in retirement. How much an employee gets is calculated based on multiplying years of service and final pay -- so typically the longer one stays at a company, the bigger the benefit.

Companies switching to a cash-balance plan determine the value of benefits built up by employees under the traditional plan and then place some or all of that sum into hypothetical individual employee accounts. The individual accounts then grow, with pay and interest credits made by the employer, over the years.

But cash-balance plans have drawn criticism from labor advocates who point out that when a company converts to a cash-balance plan, the longer-service workers typically see their benefits reduced, because they no longer benefit from a formula that rewards them for many years on the job.

The greater risk is for older, longer-service employees, said David Certner, director of federal affairs for AARP, the advocacy group for older Americans.

"You've put in all those long years in the traditional plan, expecting to receive a greater benefits level promised, only to find that the formula has been changed so that you no longer get those better benefits," he said.

While Delta has a stronger balance sheet than many of its rivals, it posted a net loss of $920 million through Sept. 30. Last month, Delta said it plans to cut up to 8,000 additional jobs, bringing to 18,000 the number it has pared since last year's terrorist attacks.

Other major carriers have also announced drastic cost-cutting plans. Delta rivals US Airways Group Inc. and UAL Corp. have sought steep concessions from their employees, both union and nonunion. Changing retirement plans for its workers is one way Delta can achieve savings without cutting pay, although it hasn't ruled out that step.

Ellen Schultz contributed to this article.

BOSTON, Nov 8 (Reuters) - Sen. Judd Gregg said on Friday that under the Republican-controlled U.S. Senate he may try to promote defined benefit pension plans which have lost ground with corporations in recent years.

Gregg, a New Hampshire Republican who is in line to be chairman of the Senate Health, Education, Labor and Pensions Committee, said he is looking at initiatives that would "push" defined benefit plans for employees.

Over the past 20 years, many employers have replaced defined benefit plans, which are funded by companies and assure life-long pensions, with defined contributions plans, like 401(k) accounts, that are mostly paid for and managed by employees themselves instead of professionals.

"Defined benefit pension plans, which used to be very popular, essentially say you receive a certain benefit when you retire no matter what the assets are in the fund," Gregg said in an interview on Boston's WBZ radio.

"Unfortunately those have gone into disfavor, those types of approaches. I do think there are ways to promote defined benefit plans and I hope we can put some ideas on the table in that area," he said. He did not offer further details.

Of the 70 million American workers with $3.6 trillion in assets in retirement plans, 42 million with $1.8 trillion were in 401(k) accounts at the end of 2000, according to industry figures.

Gregg also said that as a way of restoring investor confidence in the wake of corporate scandals involving Enron and WorldCom, he would seek to shorten the vesting period for people who wish to sell company shares in their pension plan.

The collapse of Enron demonstrated that a main pitfall in pension law is the holding and vesting period employers are allowed to impose that prevents employees from selling the stock their employers have contributed to their plans.

Some employers do not allow workers to sell the stock they have contributed to employee 401(k) accounts for many years, or until they turn 55.

Lack of enforcement costing workers hundreds of millions of dollars in lost pensions

BURLINGTON, VT - Congressman Bernard Sanders (I-VT) announced today that he has sent a letter to the Internal Revenue Service (IRS) urging them to enforce existing pension laws and regulations when companies shift to controversial cash balance schemes. The letter, co-signed by 116 tri-partisan Members of Congress, asserts that the lack of enforcement by the IRS is allowing corporations to illegally slash the pensions of their employees by hundreds of millions of dollars.

The letter comes on the heels of a recent federal court ruling that Xerox Corporation had illegally slashed the pensions of 13,000 of their employees by more than $280 million by converting to a cash balance plan. This is the third favorable court ruling for employees who have seen their pensions slashed by as much as 50% as a result of cash balance conversions. Earlier courts ruled that Georgia Pacific illegally slashed the pensions of their workers by shifting to cash balance plans by over $50 million, and that the Bank of Boston illegally slashed the pensions of 8,000 of their employees by at least $7 million. All of these decisions were based on the regulations that Sanders is pushing the IRS to enforce.

Sanders said, "The IRS can no longer sit on the sidelines while the pensions of American workers are being illegally slashed. Workers and retirees shouldn't't have to go to court to enforce their rights under the law. This is the IRS' job and they need to get it done. If the IRS would do its job, workers and retirees would be receiving hundreds of millions of dollars in increased pension benefits instead of spending years in litigation. These cash balance pension raids must be brought to an end."

Last July, Sanders successfully offered an amendment on the House floor to prohibit the IRS from gutting or eliminating pension protection laws and regulations pertaining to cash balance conversions. The amendment, which was approved by a 308-121 vote, was in response to a Department of Labor Office of Inspector General report that found that the lack of enforcement by the federal government was allowing over 20% of companies that had shifted to cash balance plans to illegally slash pension benefits between $85 million and $199 million each year.

Three years ago the IRS put a moratorium on approving cash balance pension conversions while they continue to investigate whether cash balance conversions violate pension age discrimination laws. The moratorium, which is still in effect, has prevented some 300 corporations that have converted to cash balance plans from having their tax-exempt status approved by the IRS. The IRS is expected to issue cash balance pension regulations soon.

Sanders concluded, "We have heard a lot about accounting gimmicks, but corporate pension raids are another aspect of the corporate thievery that is plaguing our nation. The bottom line is that if a worker is promised a certain pension benefit, a corporation must not renege on that agreement."

Sanders' IRS Pension Letter

(10/17/02) - The Treasury Department is proposing new regulations that would give workers more information about their pension choices, a change that could benefit millions of employees by spelling out which option would pay them the most money after they leave a company.

The proposal, issued last week and scheduled to take effect in little over a year, would require employers to provide details about pension payouts, in particular the effects on employees of taking a lump sum, a monthly payment in retirement or a combination when they retire or quit a job.

Typically, pensions are structured so lump sums are worth far less to most workers than when the pension is taken as a monthly payment -- as much as 50% less. However, 90% or more of departing employees choose the lump sum, rarely realizing it has a far lower value because they lack adequate information to compare the choices, according to lawmakers who have studied the issue.

Employees as a result often receive 20% to 50% less from their pensions than they otherwise would. Those most likely to be affected are long-term employees in their 40s to mid-50s.

The Treasury proposal would require employers to provide the relative values of the payouts; in other words, employers can't simply say the lump sum is $200,000 and the monthly payment is $1,000. They would have to say what the lump sum would be if it were paid out monthly in retirement, and vice versa.

"This may prove to be one of the more important retirement security measures this year," says David Certner, director of federal affairs at AARP, formerly known as the American Association of Retired Persons.

Employer groups have in the past opposed the proposed changes, which they say would burden employers with more paperwork. The American Benefits Counsel, an organization that represents employers, declined to comment, though a spokeswoman says the group is studying the matter.

Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries, says his group is neutral. "It's important to disclose this information, but I'm not sure it will be helpful to everybody," he says. In general, he adds, people are better off taking monthly pensions rather than lump sum payments, though that isn't always the case. People may be better off taking a lump sum if they have a short life expectancy, which means they might not collect monthly pension payments long enough to equal the amount of the lump sum they could collect, he notes. In addition, some people will be attracted to the lump sums if they think they can invest it for a higher return, he adds.

Employees have complained for years that they can't get their employers to provide apples-to-apples comparisons of the pension payout choices. Employers save money when employees choose the less-valuable lump sums, which critics say is one of the reasons employers began offering lump sums in the 1990s.

The law requires companies to tell employees about the relative values of the payout options. But, because this requirement is vaguely worded, employers still could avoid providing details showing a direct comparison of the value of the pension options. The Treasury's proposal has been in development for more than two years, and was prompted by a January 2000 letter from Sen. Tom Harkin, a Democrat from Iowa, that complained that companies were intentionally failing to provide adequate information to employees about which payout options were more valuable.

The letter cited an industry publication that encouraged employers to "Ask a few employees, 'At age 65, would you rather have $100,000 or $1,200 a month for life?' You'll likely find far more takers for the lump sum" even though the lump sum is 50% less valuable than the monthly payment. The industry publication also noted that "most American workers are clueless about the financial aspects of retirement," and that "given this massive naivete, it's little surprise that [most] employees who had a choice took lump sum payouts."

While current law forbids employers from cutting a pension that has already been earned, if an employee chooses a less valuable payout -- in effect choosing to cut his or her own pension -- then the so-called anti-cutback rule hasn't been violated.

In April, Sen. Harkin added an amendment calling for greater disclosure of payouts onto a broader Senate pension bill, and Sen. Max Baucus, a Montana Democrat, chairman of the Senate Finance Committee, added a similar provision to a bill introduced by the Senate Finance Committee.

"Making the pension decision between one immediate payment or annual payments is one of the largest financial decisions someone makes in his or her life -- folks should be able to do so with good-faith information from their employer," says Mr. Harkin.

These legislative initiatives will become moot if the Treasury proposal, which doesn't require congressional approval, is adopted. A hearing on the Treasury proposal is scheduled in January, and employers and interested parties have until Jan. 1, 2003, to file comments. "Senate interest in this issue clearly helped move the Treasury along," says Mr. Certner of AARP.

Mark Iwry, former benefits tax counsel at the Treasury, under whose tenure this project was launched, says, "The proposed regulation strikes a reasonable balance. It gives employees information they need to make informed decisions while giving employers flexibility."

Employees most likely to have a large gap between the value of the lump sum and monthly payments are those who leave their jobs in their early 50s, because they have built up a pension and can lose the value of any "early retirement" subsidy their pension may provide. People in their 40s who have worked many years at a company can also see a steep pension cut if they choose a lump sum when they leave and forgo an option to wait for a monthly payment to commence at age 55, when a subsidy would be locked in.

The Treasury proposal wouldn't erode the funding level of pensions, because companies have already funded the promised benefits. It could, however, make companies less likely to benefit when employees inadvertently give up some of their pensions.

Democratic Senators Vow to Override Veto of Bill Strengthening Veterans Benefits

WASHINGTON (AP) - A Senate Democratic leader dared President Bush on Monday to veto a bill that would allow disabled veterans to collect their full military pensions.

"We'll override the veto," said Assistant Majority Leader Harry Reid, D-Nev., on the Senate floor. "Let everyone here in the Senate decide who they want to support: the president's people or the veterans of their states."

Veterans now have their retirement benefits reduced by the amount they are receiving in disability pay. Under bills authorizing 2003 Defense programs, both the House and Senate have voted to allow veterans to receive their full retirement benefits regardless of disability pay.

Under the House bill, retirees with at least a 60 percent disability would have their full retirement benefits phased in, at a cost to taxpayers of at least $18.5 billion over 10 years, according to the White House. The Senate version would apply to all veterans and would cost at least $58 billion.

House and Senate conferees are trying to resolve the differences as they negotiate a final authorization bill. The White House has threatened a veto, saying the expanded benefits would deepen the federal deficit.

Reid said that with the Senate considering a resolution backing the use of military force against Iraq, "we must send a signal to these brave men and women that the American people and government take care of those who make sacrifices for the nation."

Reid also rejected suggestions that the simultaneous benefits be awarded just to veterans injured in combat. "Many of our veterans have not been injured in combat, but they are no less injured or less deserving of their compensation," he said.

Sen. Byron Dorgan, D-N.D., said the United States is obliged to keep its promises to soldiers.

"One of those promises is to say that if you earn a retirement we will pay you that retirement," Dorgan said. "If you are disabled because of your service to our country, you are entitled to that disability payment. It's just that simple."

The leader of the American Legion urged lawmakers to allow veterans to receive both sets of benefits.

"It would send the wrong message to today's troops, whom the president will order to fight for freedom in Iraq, to continue to rob disabled military retirees of their full and justly earned benefits," said Ronald F. Conley, national commander of the group, which has 2.8 million members.

The bills are H.R. 4546 and S. 2514

Vets Win Agent Orange Round

The congressional spotlight has recently been focused on corporate governance, and retirement plans, including 401(k), cash balance and other qualified plans, have become part of that focus. The House of Representatives approved legislation that could hinder the IRS from issuing guidance on cash balance plans — at least in fiscal year 2003. In addition, Senator Ted Kennedy (D-Massachusetts) and Representative George Miller (D-California) wrote a letter asking President Bush to step up enforcement of cash balance plan rules and take action on other retirement-related issues.

House Approves Cash Balance Provision

On July 24, the House added a cash balance-related amendment to the bill providing appropriations to the Treasury Department and Postal Service (Treasury/Postal) for fiscal year 2003. Specifically, the amendment prohibits the IRS from using appropriated funds to undermine the age discrimination and anti-cutback provisions of the Internal Revenue Code, ERISA, the Age Discrimination in Employment Act and IRS Notice 96-8, which addresses lump sum distributions from cash balance plans.

Representative Bernie Sanders (I-Vermont) sponsored the amendment, which was approved by a vote of 308-121. Representative Sanders sponsored a similar amendment in 2000, which was approved by the House as part of the Treasury/Postal appropriations bill for fiscal year 2001 but was later removed during conference committee.

The Senate Appropriations Committee has approved a Treasury/Postal appropriations bill that does not include the cash balance provision, but the language could be added as an amendment when the bill moves to the Senate floor. Senator Tom Harkin (D-Iowa) also introduced the language as a stand-alone bill and could offer it as an amendment on the Senate floor.

The outcome of this debate and the effect of the amendment if enacted are uncertain. The IRS and other federal agencies are already required to uphold federal law — and therefore are prohibited from violating the Code, ERISA and ADEA, even without the amendment. However, the language regarding Notice 96-8 and fear of congressional interference on pension-related issues may discourage the IRS from issuing additional cash balance guidance.

Kennedy, Miller Ask for More Cash Balance Enforcement

Senator Kennedy, who chairs the Health, Education, Labor and Pensions Committee, and Representative Miller, the ranking Democrat on the Committee on Education and the Workforce, have asked President Bush to take action on several retirement-related issues. In their letter to the President they asked him to direct "the Departments of Treasury and Labor to immediately ensure that there are no more regulatory failures regarding cash balance plans." The letter also suggested requiring independent plan fiduciaries, establishing an Office of Participant Protection within the Department of Labor and other changes.

Outlook

With the November elections approaching and the appropriations process behind schedule, lawmakers face a busy agenda when they return for the fall session. However, the focus on corporate reform is likely to keep retirement-related issues prominent in campaign speeches and on the political agenda.

Issue Date: 9/23/02

The Enron implosion briefly focused public attention on the vulnerability of ordinary Americans' pension coverage. But the remedial legislation passed by the Republican House actually makes workers even more vulnerable. The bigger scandal is not the occasional loss of entire retirement savings in cases such as Enron's but the inadequate coverage and systematic erosion of worker retirement benefits generally. Real reform would not just safeguard retirement savings from Enron-style thefts but would broaden retirement savings, especially for those less affluent workers who typically have little or no coverage at all. While the Democratic leadership is pushing for better legislation to protect against Enron-style abuses, neither party is currently promoting broader reform.

A basic flaw in the current system is that retirement is tied to one's job, and that a given employer is free to have -- or not have -- some kind of pension plan. A second flaw is the shift to so-called defined-contribution plans, such as 401(k)s, which shift the risks to workers and have no guarantee of a set pension benefit, either from the employer or from the government.

In the era after World War II, large national employers typically offered companywide pension systems run by management, so-called defined-benefit plans. Workers were guaranteed a set pension for life, the amount of which was based on their pre-retirement earnings and their years of service. The company managed the pension investments and bore the related risk. By the mid-1970s, almost one worker in two had such pension plans. Since 1974, federal law has guaranteed the safety of these benefits via the Pension Benefit Guarantee Corporation.

But in the past two decades, employers have shifted the responsibility and risk for retirement plans to employees. Under the new wave of defined-contribution plans, employees may put money into the plan; the employer must then match part or all of the worker's contribution. But worker payment is optional, there is no guarantee of benefits and payout is entirely a function of how much money accumulates over time in the individual's account -- and how well the investments do.

With the growing reliance on defined-contribution plans, individuals assume a variety of risks. One is the chance of misjudging the market and investing in losing assets. A second is unlucky timing. Markets sometimes stay depressed for decades, generating low rates of return for even the savviest investor. Further, there is the risk that the employer will induce or require a worker to concentrate savings in company stock, which violates the first rule -- diversification -- of prudent investing. Bad experiences in the market may also lead people to put aside too little, leaving inadequate assets for retirement.

A Collapsing System

As the system has shifted more toward defined contributions, retirement coverage has become more tenuous. In general, retirement savings are considered adequate if they allow the household to replace at least 75 percent of its pre-retirement income. However, most people retire on significantly less income than that. Whereas 44 percent of households could replace three-fourths of their pre-retirement income in 1989, only 39 percent could by 1998. And in 1998, almost 40 percent of households faced retirements with less than half their pre-retirement income.

The proliferation of new retirement-savings instruments such as 401(k) plans did not lead to an increase in pension coverage, even though the plans shifted the risk to workers. For a quarter-century, the share of private-sector workers covered by a pension plan remained constant at about 46 percent but dropped steadily in traditional guaranteed-defined-benefit plans. In 1998, more than one-fourth of households with workers between the ages of 47 and 64 had no pension assets whatsoever.

Why the inadequate coverage? First, many employers have no pension plan at all. Even if an employer offers a 401(k) plan, many employees, especially lower-income workers, do not contribute because they lack the income or the financial education. Lower-income workers also don't have large tax incentives to contribute. Further, many pension plans require a minimum job tenure before a worker qualifies, and in high-turnover companies, few workers stay long enough to receive benefits even where an employer offers a plan.

Retirement wealth is very distributed. Single households are less likely to be covered than married couples, minorities have less adequate retirement assets than whites and households with higher incomes tend to have disproportionately more pension wealth than others. Even at companies that don't offer traditional pension benefits to ordinary workers, senior executives often have special pension plans that guarantee them a set benefit.

Many of the recent proposals to address the pension crisis are woefully inadequate; some would even worsen the current system. For example, the Republicans' proposed Pension Security Act of 2002, their response to the Enron scandal, would actually weaken existing nondiscrimination rules. Under current law, "non-highly compensated" employees -- those earning less than $90,000 -- must receive at least 70 percent of the average benefits of higher-paid employees. The proposed Pension Security Act would eliminate this provision and leave it to the discretion of the U.S. Treasury to decide whether a plan is fair. The Republican bill has no provision to hold corporate executives accountable for misleading income statements. Enron workers were undone by lock-in requirements: They couldn't sell their plummeting Enron stock. But the House bill would allow firms to bar workers from trading company stock matches for up to three years. The bill even invites new conflicts of interest by allowing investment companies that manage a retirement plan for the company to market investment advice to workers.

A much better approach would be to require that private-pension plans, including 401(k)s, have diversified assets, with no more than 10 percent of holdings in any one asset. This provision is included in legislation proposed by Sens. Barbara Boxer (D-Calif.) and Jon Corzine (D-N.J.). But the Senate leadership has already backed weaker legislation with no quantitative limits. The Senate bill will have to be reconciled with the even more pro-industry bill already passed by the House.

Rebuilding Secure Retirement

A successful pension reform needs to accomplish three things: It should significantly increase pension coverage, raise retirement assets for moderate-income households and guarantee the security of pensions. The existing proposals before Congress all fall short on one or more of these fronts.

As a national policy goal, retired workers should receive at least 80 percent of their pre-retirement income via a combination of Social Security benefits and private pensions. Social Security already offers almost universal coverage, disproportionately higher benefits for low-income workers and safe retirement. Its coverage is close to 100 percent of all households. Thanks to its benefit formula, workers with low lifetime earnings will receive higher relative benefits than average or high lifetime earners, and Social Security's benefits are inflation-proof and guaranteed. However, since its inception, Social Security was always meant to be only a basic benefit. A worker with average lifetime earnings can expect benefits equal to about 42 percent of his or her earnings.

Social Security is the basic tier in a three-tiered retirement pyramid that also includes private pensions and personal savings. For a retired worker to afford a decent standard of living, additional sources of income are necessary. This does not mean that private pensions could serve as a substitute for Social Security, only that work-related pension coverage must be broadened.

A reformed pension system would depart from the current pension system in one important aspect: by making pension coverage mandatory. In its weakest form, this mandate would merely require that every employer has to offer access to a pension plan but not to put money into it. Rep. Richard Gephardt (D-Mo.) has proposed such legislation. His Universal and Portable Pension Act of 2002 would create a new type of account, Universal Retirement Savings Accounts, which would be managed by private financial institutions.

However, administration of these new accounts in the private market would likely be very expensive; many of them will hold only small balances, as they are targeted toward currently uncovered workers, who are predominantly low income. To reduce the costs of these accounts, they could piggyback on the existing Federal Thrift Savings Plan, the pension plan for U.S. government employees. Professional fund managers run this plan, and federal employees have a choice of (currently five) investments. Thus, private employees could take advantage of a well-diversified investment option without costly fees.

But many low-income workers don't earn enough to put aside adequate retirement contributions. A stronger reform would have government use direct and matching contributions to shore up the retirement savings of low- and moderate-income households. President Clinton proposed a version of this in his Universal Savings Accounts. The idea was that government would contribute retirement savings for people with incomes below $20,000. (Households with incomes exceeding $80,000 were ineligible.)

Even $300 per year in direct contributions would help low-wage workers build up substantial savings by the time they retire. If government contributed that sum for 40 years for a low-wage worker, it would replace 7 percent of his or her pre-retirement income. A two-for-one match of worker contributions would double the sum to 14 percent. Together with Social Security, this would give low-income workers an inflation-adjusted 70 percent of their pre-retirement income.

The Clinton proposal would have cost about $38 billion in its first year. This cost has to be seen in context, though. The government currently subsidizes private pensions with substantially larger amounts by making contributions to the pensions tax-exempt. Defined-benefit plans are estimated to cost $48 billion in foregone tax revenues, and 401(k) plans to cost $53 billion. In other words, the government is currently spending $101 billion -- or more than twice as much as required for the USA Accounts -- with little effect for the retirement security of low- and moderate-income families.

The additional revenues to pay for government contributions could come from two sources. First, already scheduled tax cuts could be eliminated. According to Citizens for Tax Justice, 80 percent of benefits to the richest 1 percent of households from President Bush's tax cut will come into effect due to changes in the tax code after 2005. If future tax cuts for the richest 1 percent are repealed, the federal government would have an additional $380 billion in revenue at its disposal between 2005 and 2011, or enough to pay for any proposed government contribution.

The direct-contribution levels of the proposed USA Account plan, however, are not enough to provide a low-income worker with adequate retirement savings over the course of a full working life. To do that, the contribution amounts would have to be doubled. An alternative is to require employers to contribute a minimum percentage of their payroll to their employees' pension, in addition to government contributions. President Jimmy Carter proposed a Mandatory Universal Pension System with a minimum employer contribution of 3 percent of payroll for most workers. This would give a typical low-wage worker about 14 percent of pre-retirement earnings. Together with Social Security, this would produce a retirement income of 70 percent of earnings. With direct or matching contributions by government, it could be raised to 80 percent.

Will mandatory minimums cause employers with more generous plans to reduce them to the lowest possible level? Probably not. Employers with generous plans use them as a recruitment or retention tool. Critics of universal pensions also contend that mandatory pension contributions would reduce wages, because the employer presumably has only so much money to spend on payroll. However, the same argument was made about minimum-wage laws. The evidence suggests that more generous compensation for low-wage workers often pays off in the form of higher productivity and reduced turnover.

A third issue is that a mandatory contribution might affect the competitiveness of U.S. businesses. Because all employers in the United States would be affected by this change, such a mandate would have little to do with the competitiveness of domestic employers. Domestic producers already compete with producers from such low-wage locales as China, Vietnam and Mexico, who enjoy a huge wage advantage. But marginal changes in the compensation of U.S. workers will not offer a meaningful incentive for production to move overseas.

Is Reform Possible?

In sum, we need a universally mandatory private system. Government should also contribute money on behalf of low-wage workers and toughen its regulation of plans, so that the Enron case can never be repeated. Without a serious reorientation of our retirement policy, we are likely to continue spending more than $100 billion in foregone tax revenue to subsidize a system that fails the majority of households.

Life expectancy is likely to continue rising. However, many older people are in fragile health, so continuing to work beyond the ages of 65 or 70 is not an option for all. Unless we are willing to accept a growing old-age poverty for the foreseeable future, we need to address the inadequate retirement savings of a growing share of households sooner rather than later.

The retirement situation today is comparable to health care, where the problem is extreme and the legislative responses feeble. Many Americans are at risk of retirement coverage that is inadequate, insecure or both. With a universal pension, low-income workers could for the first time build up wealth in pension accounts. Middle-class workers would also gain new security, and all Americans would enjoy a decent standard of living in retirement. A new approach to pensions, which combines mandates on employers with direct government expenditures, is likely off the political radar screen in the current political environment. With political leadership, however, broad support would be forthcoming.