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Workers wake up to cold fact: Pension security blanket gone

By Jonathan Weisman
The Washington Post

WANDA BENVENUTTI / SPECIAL TO THE SEATTLE TIMES Retirement plans of United Airlines pilot Steve Derebey and his wife, Jeane of Gig Harbor are up in the air because the bankrupt airline has warned it will likely terminate its union pension plan, cutting Derebey's benefit by two-thirds.

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A commercial-airline pilot, the 52-year-old would not be worrying "about guys behind (him) with box cutters," he said. Just as important, his $66,000-a-year pension would leave him and his wife, Jeane, free to travel from their home in Gig Harbor to visit their grandchild in Crystal Lake, Ill., who is due in January.

But last month, in a Chicago bankruptcy court, United Airlines almost certainly changed the rest of the Derebeys' life, warning it will likely dump its pension plan onto the federal government.

Under the rules of the federal Pension Benefit Guaranty Corp. (PBGC), Derebey would be left with $22,000 a year, a third of his expected benefit. Now, he and his wife are hastily planning a second career, a long one, they say, maybe running their own public-relations shop in Seattle.

"Instead of being able to retire, see our kids, we're probably going to have to work until we die," Jeane Derebey said.

The couple's misfortunes are part of a phenomenon reshaping the financial landscape for America's retirees. As the baby-boom generation retires and people live longer, both Social Security and privately funded pensions — the two basic legs of retirement income — are under increasing financial pressure.

Yet beyond a vague debate over the future of Social Security, neither President Bush nor Sen. John Kerry, D-Mass., has made much mention of looming pension and savings problems, despite pleas for federal intervention from unions, employers and even the PBGC itself.

"Go onto the Bush and Kerry Web sites, looking for the word 'pension,' " said James Klein, president of the employer-backed American Benefits Council. "You don't see a heck of a lot."

It is an issue, however, that could land in the lap of taxpayers and the next president. The collapse of the stock-market bubble cut the value of many pension-fund investments and left company-funded programs scrambling to meet the demands of an aging work force.

The PBGC, the federally backed insurer of pension funds, is having to raise its premiums to cover the cost of defaulted programs, putting the plans that still exist under even more financial stress.

"There is a possibility of a looming train wreck that could cost the taxpayers of America untold billions of dollars," Senate Commerce Committee Chairman John McCain, R-Ariz., warned last week.
 
The pessimism is widespread among labor unions and business executives alike.

Traditional pension systems that once guaranteed a retirement income until death are in sharp decline. The airlines are only the latest industry to begin dismantling their plans.

Between 2001 and 2003, 16 steel companies terminated their plans, leaving 256,800 workers, retirees and dependents at the gates of the PBGC. Just last week, the PBGC announced it would take over the pension plan of Kaiser Aluminum.

The domino effect may be in full swing. As more company plans go under, the PBGC has had to steadily raise premiums it charges to insure company pensions, from $1 an employee in 1975 to $8.50 in 1985 to a charge today of $19, plus a variable premium for troubled companies that can push per-employee costs to more than $60, said Sylvester Schieber, vice president of research and information for the consulting firm Watson Wyatt Worldwide.

The increase still has not been enough. PBGC Director Bradley Belt said last week his agency's deficit for the fiscal year that ended Sept. 30 would eclipse the previous year's record $11.2 billion deficit. A slew of bankruptcies could leave taxpayers holding the bag.

"The longer-term solvency of the pension-insurance program ... is at risk," Belt told the Senate Commerce Committee.

Deficient as they are, those rising premiums are one of the factors pushing traditional pensions toward extinction, Schieber said. In 1978, there were 128,401 such pension plans covering nearly 41 percent of the private-sector work force, according to the nonpartisan Employee Benefit Research Institute (EBRI). Now there are 26,000, covering just under 17 percent.

In their place have come 401(k)s and other defined-contribution plans, where risk is shifted from employer to employee, and contributions are fixed but benefits are left to the markets to determine.

The number of such plans has swelled to 840,301 from 314,592 in 1978. About 42 million workers participate in such plans, far more than ever enjoyed a traditional pension.

But with that shift has come uncertainty.

Last month, EBRI found, average 401(k) balances had grown by 17 percent since 1999, despite the shocks to the stock market that knocked total stock prices down by $7 trillion — or 42 percent — between 1999 and 2002.

But by the end of 2003, the 401(k) account balances of experienced workers in their 50s — the ones closest to retirement — were 9.3 percent lower than they were four years before.