The Pension Research Council

Newsday: "The vanishing pension: If your company still offers a guaranteed retirement plan you're fortunate these days. But how safe is it?"


The vanishing pension: If your company still offers a guaranteed retirement
plan you're fortunate these days. But how safe is it?

BY PETER KING Newsday, August 6, 2005

The three-legged stool is getting wobbly. For most of the last century, the stool symbolized a
secure retirement for those in the Greatest Generation. The legs - personal savings, Social
Security and a company pension with a specified monthly payment - together ensured a
financially predictable future after the paychecks stopped. But with the savings rate at historic
lows and the future of Social Security the subject of heated debate, two of the legs aren't as
sturdy as they once were. And for many baby boomers nearing retirement, the third leg has been
all but sawed off. Fewer companies today offer guaranteed pensions - known as defined-benefit
plans - preferring instead 401(k) plans where the contributions are specified but the amount at
retirement is not.

Eleanore Countis, 79, like many in her generation, worked for a company with a defined-benefit
plan. For her, the three-legged stool remains a solid piece of furniture. Countis, who lives in
King's Park, retired in 1991 after a long career at New York Telephone Co. Despite the morphing
and merging of New York Tel into NYNEX and Bell Atlantic and finally Verizon, Countis never had
any concerns that her pension payments would stop or be reduced. "I never did worry, not once,"
she said. "It's a shame that most companies don't have them anymore. The pension is a
guarantee." But how safe is this guarantee? Retirees can't help but feel a twinge of fear at the
plight of former United Airlines workers. The carrier's parent, UAL Corp., is in bankruptcy. Its
pension plans will be taken over by the federal Pension Benefit Guaranty Corp., which insures
corporate pensions and steps in when they fail. United's default on $9.8 billion in pension
obligations is the largest in U.S. corporate history. The federal pension agency will cover $6.6

For some, a 70% cut
The agency's maximum monthly benefit for plans it takes over this year is $3,801.14, or $45,614
a year, for those who retire at age 65. Retirees whose benefits are higher will be cut back to
$3,801. The maximum amount is lower for those who began to collect benefits before 65. Some
retired United pilots, whose mandatory retirement age was 60, will see their pension benefits
slashed by more than 70 percent.

"Some of the airline pilots who thought they'd be getting six-figure benefits are now getting
$25,000 because they retired at 50 or 55," said Olivia Mitchell, a professor at the University of
Pennsylvania's Wharton School of Business and executive director of Wharton's Pension
Research Council. "That's a pretty big shock." A bigger shock could be what happens if the
federal pension agency runs out of money. The agency is funded primarily by insurance
premiums it collects from companies with defined-benefit pension plans. "The PBGC itself faces
shortfalls right now in the order of about $23 billion," said Mitchell, who also served on President
George W. Bush's Social Security commission. The problem has caught the eye of lawmakers. A
bipartisan bill introduced in the Senate last month would require companies to increase funding of
their pension plans and pay more in insurance premiums to keep the PBGC afloat. Congress is
expected to vote on pension reform legislation this fall.

Still, most retirees need not worry. Unless your plan was one of the roughly 3,500 taken over by
the federal agency, your benefits cannot be reduced. In plans taken over by the government,
more than 90 percent of the retirees continue to receive their full benefits. "If your benefits are not
over the maximum and you retired at 65, your benefits are pretty much secure," Mitchell said.

Boomer alert
While retirees can feel secure, boomers on the cusp of retirement face a far more uncertain
future. No new defined-benefit plans are being started. Taking their place in many companies are 401(k) plans, where the risk is shifted from the company to the individual. In a defined-benefit
plan, the company must, by law, ensure that the plan has enough money to pay promised
benefits. This means that if the plan makes bad investments and loses money, the company is
responsible for making up the difference, even if it means diverting revenue. In a 401(k), it's up to
the individual to make investment decisions. Make a bad choice? That money is gone. Just ask
those who bet their 401(k) money heavily on Enron or tech stocks earlier this decade.

Also affecting workers is the decision by more and more companies to "freeze" their pension
plans. "Freezing means whatever benefit you've accrued as of that date is what you get," said
Craig Copeland, senior research associate at the Employee Benefit Research Institute. This is
troubling for workers over age 50, many of whom are entering their peak earning years, because
future salary increases will not translate into higher pensions. "Whatever your salary is now, that
is going to be the basis of your benefit," Copeland said. Once a plan is frozen, companies
maintain their pension obligations to current workers and retirees but close the plans to new

Lifetime, or lump?
Perhaps the biggest change in the defined-benefit landscape is the availability of lump-sum
payments in lieu of lifetime monthly benefits. About 60 percent of companies allow participants to
take lump sums when they leave the company, up from 10 percent 15years ago, according to
Copeland. The potential problem? A lump sum could produce an unwarranted feeling of
prosperity. In the grip of this "sudden wealth effect," some may see the money as a windfall to be
spent instead of a fallback to be saved. "It changes the total structure of defined-benefit plans,"
Copeland said. "The annuity payment, which gives you that payment for the rest of your life,
insures against your not outliving your resources."

While you may think the lump sum will last a lifetime, don't forget that a lifetime these days is
lasting longer. "People don't understand mortality risk," Mitchell said. "They tend to think they're
rich when they have the lump sum and don't understand the risk of outliving their money." And
even if you roll all the money into an IRA, there's always the possibility it will be invested poorly.
There are instances, however, where it may be smart to take the money and run. "It could be a
very sensible financial strategy if you believe your company is going down the tubes and their
pension with it," Mitchell said. "If you take the lump sum, you'll get the full present value. If you
wait for the company to go bankrupt and have the PBGC pick up the insured portion, you could
get a lot less." Had the United Airlines pilots opted for lump sums instead of monthly payments,
they would have been a lot better off. While the federal pension agency will slash monthly
payments that are higher than $3,801, it can't touch a lump sum once you get it.

Another argument in favor of taking the lump sum is that it gives you more control over where the
money goes, especially after your death. While the monthly payments are guaranteed for your
lifetime, they will, in many cases, stop after you die. Mark Snyder, a Medford-based financial
adviser, counsels clients on whether to take lump sums or guaranteed monthly payments. "By
taking the lump sum, the person has the ability to name a beneficiary," Snyder said. If the lump
sum is big enough, or the retiree has amassed a substantial nest egg, he or she could spend
some of it now, roll over some into an IRA for future needs, and earmark a portion to be passed
on to heirs. "It gives you more flexibility," he said. So how will the three-legged stool hold up for
retiring boomers? Pension experts and financial advisers agree that personal savings will be the
leg boomers must stand on to ensure a retirement like the one enjoyed by Countis and the
workers of her generation.

"The three-legged stool always had three legs, and the third leg was private savings," Mitchell
said. "With savings down in the basement for the past 20 years, I would say we haven't done our
part." Boomers without a defined pension or a substantial 401(k) will have to make sure they save
enough to augment their Social Security benefits. This could mean that retiring at 65, let alone 55,
is no longer an option. "The whole baby boomer generation should set its sights on retiring at 70
or beyond, because that's really the only way you can protect yourself against what's a much more uncertain world at retirement," Mitchell said. "You might not like it, but you're also not going to like eating cat food when you're 80."

Here are some key statistics on defined-benefit pension plans.
1 Number of new defined-benefit pension plans with more than 1,000 participants created in the
past decade (the United Methodist Church's pension plan for its pastors and lay workers).
11 Percentage of companies that have terminated or frozen their pension plans, up from 5
percent in 2001.
20 Percentage of U.S. workers covered by a defined-benefit plan, down from 40 percent in 1980.
52Percentage of plans covering 1,000 or more participants that are underfunded, compared to 15
percent in 1992.
3,500 Number of defunct pension plans now administered by the Pension Benefit Guaranty Corp.
$3,801 Maximum monthly benefit paid by the PBGC once it takes over a defunct pension plan
31,000 Estimated number of companies offering a defined-benefit pension plan, down from
150,000 in 1980.
518,000 Number of people being paid benefits by the PBGC, totaling $3 billion, after their pension
plans were terminated because of distress or bankruptcy.
44 million Number of Americans whose pensions are insured by the PBGC.
$400 billionEstimated amount by which defined-benefit pension plans are underfunded.
SOURCE: Pension Benefit Guaranty Corp., U.S. Department of Labor, Pension Rights Center,
Employee Benefit Research Institute, Watson Wyatt

With retirement options becoming more complex in recent years, here's a quick refresher on
various plans.

Defined-benefit plan: Traditional company pension plan. Pays a guaranteed, fixed monthly
amount after retirement. Participants become fully vested after a defined period with the
company, usually five to 10 years. Value of the pension rises faster as the employee nears
retirement age. Funded solely by the employer, who is responsible for investing the money in the
plan. Benefits usually begin at age 65, but in some plans a reduced benefit is available if the
participant retires earlier. Many plans allow participants to receive a lump sum instead of a
guaranteed monthly benefit.

Defined-contribution plan: In this group are 401(k)s. Participants contribute a percentage of salary
into individual accounts. Employers often match a portion of the contribution. Amount of money
available at retirement is determined by how much was contributed and investment performance.
Investment decisions are made by the participant. Money can't be withdrawn without penalty
before age 59 1/2.

Cash-balance plan: The go-go '90s alternative to the traditional pension plan. Employers make
contributions, based on salary, once a year into a participant's individual account. Money is
invested in interest-bearing instruments such as Treasury bonds. Participants have no control
over how the money is invested. Recent court verdicts that said these plans discriminate against
older workers have put their status in limbo.

IRA: Personal retirement account not connected with a job. Participants fund accounts
themselves and are responsible for how money is invested. Lump-sum disbursements from
company retirement plans can be rolled into an IRA. Penalty on withdrawals before age 59 1/2.

Social Security: Government-backed program that pays workers a defined benefit based on past
wages and number of years worked. Usual age for full benefits is 65 to 67 (depending on date of
birth), but participants can collect reduced benefits as early as age 62. No lump sum is available.
Average monthly benefit paid was $922 in 2004.

The incredible shrinking pension plan
The number of active workers in traditional pension plans has been dropping.
Year Active workers in defined-benefit plans
1988 27.3 million
1996 22.6 million
2004 18.8 million*
The percentage of active workers in traditional pension plans has been dropping.
Active workers Retirees
1988 69% 31%
1996 55% 45%
2004 45% 55%
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