The Really Troubled Program

By Daniel Kadlec

Social Security isn't the only retirement program in line for a makeover. Labor Secretary Elaine Chao, saying "our country must act now," outlined bold plans to shore up the nation's ailing private pension system last week. She's walking a fine line between restoring its health and scaring companies out of the programs altogether. Among the tough measures she has proposed: a 58% hike in insurance premiums that private pension sponsors must pay. The Bush Administration also suggested a seven-year deadline for all pensions to be fully funded and called for even stiffer premiums for companies whose plans are in the worst shape. "A lot of companies are looking to get out of these plans anyway," says Dan McGinn, a pension consultant in Anaheim, Calif. "This might be just the prod they need."

While debate brews over whether or not Social Security faces a crisis, few disagree that the pension system is a problem that needs to be addressed. The proposed makeover has nothing to do with 401(k) plans and others like them, in which employees provide most of the funding and make all the key decisions--and must live with the results. The crisis is in traditional "defined benefit" plans, in which companies set aside money now to provide workers with guaranteed income after they retire. Those plans, which cover 34 million Americans, are deeply underfunded.

Here's the scary part: you might think your pension is safe, but companies that offer pensions have collectively set aside $450 billion less than what they need to secure the retirement promises they have made. On top of that, the government fund that guarantees the benefits is swamped by recent failed plans; last year the Pension Benefit Guaranty Corp. ran a $23 billion deficit.

Traditional pensions may require a taxpayer bailout. If it comes to that, pensioners may get stuck with less than they expect. Already, there are limits to what the government will step in to pay. The maximum benefit for a retired 65-year-old in a failed pension is $45,614 a year. At that cutoff, 90% of those in plans taken over by the PBGC get full benefits. But in high-paying industries like airlines and steel--in which the biggest pension failures are now occurring--only 60% of pensioners get full benefits.

The pension system has been dwindling for years. Today there are just 29,600 traditional pension plans, down from 57,000 a decade ago. According to James Klein, president of the American Benefits Council, "the big question is being missed: What can be done to bolster the defined-benefit system" and preserve those plans that are left? Probably not much. Just this year, IBM stopped offering new hires a company-funded pension, joining firms that have shifted their focus to the 401(k). "It now has a politically acceptable feel, which argues for a continued decline in defined-benefit plans," says Dallas Salisbury, CEO of the Employee Benefit Research Institute.

The bottom line: individuals are being asked to shoulder more financial responsibility, from private accounts for Social Security to new health-savings accounts that put the onus on you to keep spending in check. We are moving away from the Depression-era welfare state toward one that requires self-sufficiency. Shrinking pensions and the rise of 401(k)s fit that trend. President Bush calls it an ownership society. What that means is that more and more Americans are on their own. --By Daniel Kadlec