Corporate fraud has dominated the headlines for months, and while Congress and the White House have sparred for the moral high ground, an even more disturbing economic development is taking shape that will affect millions of Americans nearing retirement.
The corporate pension is disappearing.
As corporations have switched from defined benefit plans to defined
contribution plans, or 401K's, an entire generation will soon reach
retirement age with a large number of people unable to retire and
maintain their standard of living. According to a study published
by the Employee Benefits Research Institute, 58 percent of U.S.
households with pension plans in 1998 had to rely solely on a 401K
in addition to their social security benefits. This compares to
only 38 percent of households in 1992.This puts tomorrow's retirees
in a much more risky position than those retiring as recently as 10
years ago. Never has this been more evident than in the last two
years, when employees with 401K's have seen dramatic drops in their
retirement portfolios. These retirement plans were never meant to
replace pension plans, only to augment them.
Employers have been dropping pension plans for one simple reason:
They are more expensive than 401K's. Retirees receive a specific
payment from the company each month, limited only by how long they
live, a payment that's not influenced by economic downturns. The
company takes on the risk of a market downturn.
In contrast, 401K retirees are limited to the balance in their
account, which fluctuates with the market. Retirees, rather than
employers, take on the risk.
Employees also are required to contribute to their 401K's, with
companies matching 25-100 percent of the employee's contribution
with shares of company stock. This means that 401K's as they
currently exist are risky and not diversified. They're also not
federally insured. If the company stock plummets, employees could
lose most, if not all, of their life savings.
Congress refuses to act
Despite the seriousness of the pension issue, Congress has refused
to address it with any urgency. 'Congress is ducking the issues in
not addressing a wide range of pension concerns,' says Karen
Ferguson, director of the Pension Rights Center. 'They're doing as
little as possible and spinning rhetoric that misleads the public
into believing they've done something real.'
The House has approved one bill addressing this and two others have
come out of committee in the Senate, but all three remain far
apart. A bill sponsored by Sen. Ted Kennedy sets limits on how much
of its own stock a company can offer to its employees. The other
bill approved by the Senate Finance Committee has no such
restrictions. Ferguson says Finance Committee members see 'little
political gain in change. They're telling employees, all that's
needed is notification that it's good to diversify.'
The House version allows mutual fund and insurance companies to
serve both as financial advisor and investment manager to an
employee whose 401K they manage.Ferguson sees this as an 'acute
conflict of interest,' that would make it difficult for an employee
to obtain unbiased recommendations. An employee might not receive
advice to diversify when the advice is coming from an organization
with a stake in seeing the company's stock perform well.
Corporations argue that they give employees company stock as an
incentive to work. But Daniel Halperin, pension law expert at the
Harvard Law School and a Treasury Department official during the
Carter Administration, disagrees. A company's primary motive is to
'have a stable place where the employer's stock will be purchased
on a regular basis, will not be sold at any particular whim, and
will not be available to anyone planning an unfriendly takeover.'
Employees' motive, on the other hand, should be to 'not have a
significant portion of their own employer's stock,' according to
How does one accomplish this when there are no laws today
regulating how an employee's money is matched? Clearly, an employee
should have some voice in this matter. And some believe there's
nothing wrong with giving employees the right to make their own
investing mistakes. But Halperin disagrees. 'We are talking about a
federal subsidized retirement program.' Since money deposited into
pensions decrease taxes, we have a legitimate interest in trying to
make sure that retirement benefits are as insured as possible.'
This is a difficult goal to achieve in a volatile market, however.
Even if the Senate and House agree to a bill taking some of the
volatility out of pensions, we would still not be dealing with the
fact that without a bull market on the horizon, its doubtful
whether 401K's, with their limited payout, will be enough to
maintain employees' standards of living after retirement.
'People overestimate what $100,000 or $200,000 will buy in
retirement income,' says Halperin. He notes that some observers are
saying when baby-boomers reach retirement and begin to see how
inadequate their 401K's actually are, 'the interest in revised
forms of defined benefit pension plans will be renewed.'
Peg O'Hara, managing director of the Council of Institutional
Investors agrees. 'You are going to have people retiring without
the big piles of money they thought they would. They may not have
any. Then, we'll see what political power the baby boomers have to
And what about the Americans who have no pensions? Today, about
half of those working don't have any pension plan. The problem is
particularly acute among minority populations and the poor.
The question we're left with is, how do we give voice to those who
can make real and systematic changes? Do we need the type of uproar
created by this summer's market crash? And wouldn't it be easier to
deal with the problem now before retiring baby boomers discover
their 401K's will be unable to provide an adequate stream of
income, and before taxes have to be dramatically increased to deal
with the increased social problems created by an experiment gone