Pensions of us

    • pensions

In the United States, employers play a key role in helping workers save for retirement. About half of all privately employed people and most government employees are covered by some type of pension plan. Employers are not required to sponsor pension plans, but the government encourages them to do so by offering generous tax breaks if they establish and contribute to employee pensions.
The federal government's tax collection agency, the Internal Revenue Service, sets most rules governing pension plans, and a Labor Department agency regulates plans to prevent abuses. Another federal agency, the Pension Benefit Guaranty Corporation, insures retiree benefits under traditional private pensions; a series of laws enacted in the 1980s and 1990s boosted premium payments for this insurance and stiffened requirements holding employers responsible for keeping their plans financially healthy.

The nature of employer-sponsored pensions changed substantially during the final three decades of the 20th century. Many employers -- especially small employers -- stopped offering traditional "defined benefit" plans, which provide guaranteed monthly payments to retirees based on years of service and salary. Instead, employers increasingly offer "defined contribution" plans. In a defined contribution plan, the employer is not responsible for how pension money is invested and does not guarantee a certain benefit. Instead, employees control their own pension savings (many employers also contribute, although they are not required to do so), and workers can hold onto the savings even if they change jobs every few years. The amount of money available to employees upon retirement, then, depends on how much has been contributed and how successfully the employees invest their own the funds.

The number of private defined benefit plans declined from 170,000 in 1965 to 53,000 in 1997, while the number of defined contribution plans rose from 461,000 to 647,000 -- a shift that many people believe reflects a workplace in which employers and employees are less likely to form long-term bonds.

The federal government administers several types of pension plans for its employees, including members of the military and civil service as well as disabled war veterans. But the most important pension system run by the government is the Social Security program, which provides full benefits to working people who retire and apply for benefits at age 65 or older, or reduced benefits to those retiring and applying for benefits between the ages of 62 and 65. Although the program is run by a federal agency, the Social Security Administration, its funds come from employers and employees through payroll taxes. While Social Security is regarded as a valuable "safety net" for retirees, most find that it provides only a portion of their income needs when they stop working. Moreover, with the post-war baby-boom generation due to retire early in the 21st century, politicians grew concerned in the 1990s that the government would not be able to pay all of its Social Security obligations without either reducing benefits or raising payroll taxes. Many Americans considered ensuring the financial health of Social Security to be one of the most important domestic policy issues at the turn of the century.

Many people -- generally those who are self-employed, those whose employers do not provide a pension, and those who believe their pension plans inadequate -- also can save part of their income in special tax-favored accounts known as Individual Retirement Accounts (IRAs) and Keogh plans.

   • The End Of Pensions

NEW YORK - In the future, will any company offer a pension? The answer is probably not, and the future is getting closer all the time.

Yesterday a U.S. federal bankruptcy judge approved a plan by UAL (otc: UALAQ - news - people ), the parent company of United Airlines, to transfer its pension plans, which are underfunded by $9.8 billion, to the Pension Benefit Guaranty Corp., which is itself underfunded.

UAL's move is expected to spur similar actions by other so-called legacy carriers among the airlines, which are squeezed by high costs, competition from airlines without substantial pension obligations and, lately, by rising fuel costs.

More broadly, UAL's action takes place against a looming retirement crisis in which the relatively benign problems of the Social Security system are just a part (see "Retirement Doomsday").

The decline of pensions is likely well past the tipping point already. No so long ago, the defined benefit pension--guaranteed retirement income--was a prevalent aspect of the U.S. financial scene. But no more. In 1980, 38% of Americans had a defined benefit pension as their primary retirement plan. By 1997, just 21% of Americans had such plans, according to the Pension Benefits Council. That percentage is certainly lower now, and more and more plans have been passed off to the PBGC, a federal agency that insures pensions, but which does not necessarily pay the benefits retirees expected.

The ratio of active to inactive workers in existing defined benefit pension plans has fallen to roughly 1-to-1, down from more than 3.5-to-1 in 1980, according to the PBGC. This retirement math is starker than that faced by the Social Security system. The PBGC now pays the pensions of more than 1 million retirees.

While many more workers now have retirement savings plans such as 401(k)s, relatively few have sufficient assets to fund their retirements in a way that will maintain all or most of their pre-retirement incomes.

United's unions are preparing to fight the decision made by the company and permitted by the bankruptcy court, and they have threatened to strike. But with the defined pensions now a decidedly minority benefit, their partial loss is not likely to resonate politically or among United's customers.

More likely, the court's decision will encourage other airlines to follow suit. US Airways Group (otc: UAIRQ - news - people ), which, like UAL, is in bankruptcy, terminated the last of its pension plans earlier this year. Yesterday, Delta Air Lines (nyse: DAL - news - people ) said it might have to seek bankruptcy protection, too, adding that it expected a significant loss for 2005. The airline industry already has the second-most beneficiaries of any industry covered by the PBGC guaranties. Steel is by far the first. Unlike steel, however, the airline industry is not in a long-term slide in terms of total employment, despite its financial troubles over the past several years.

The PBGC guarantees corporate pension plans and pays benefits to retirees when company plans fail. When it takes over a plan, it receives its assets as well as its liabilities, and also collects insurance premiums from the plans it guarantees. So far, the agency has been able to meet its obligations, but currently it faces a $23.3 billion deficit between its assets and long-term liabilities. The takeover of the UAL pension plan is already factored in that number. Overall, it backstops the pensions of 44.3 million beneficiaries.

The bankruptcy court frees UAL from $3 billion in pension contributions over the next five years. But the shortfall between its pension plan assets and its liabilities is much greater, nearly $10 billion, according to PBGC estimates.

It is not immediately clear which beneficiaries will be paid less and by how much. The PBGC's maximum guaranteed benefit is adjusted yearly. This year, the maximum paid to most retirees is $45,614 for a 65-year-old, so those who are now due more or who retire earlier would be paid less.

UAL says unloading its pensions is critical to obtaining the $2 billion or more in debt financing it needs to get out of bankruptcy. However necessary, in a world where employer-paid pensions are increasingly rare, unloading pension obligations is likely to become increasingly common.

Here are links to pages:

http://economics.about.com/od/laborinamerica/a/pensions.htm

http://www.forbes.com/2005/05/11/cx_da_0511topnews.html

http://www.vba.va.gov/bln/21/

http://www.dol.gov/ebsa/