Fed Pension Safety Net Strained by Bankruptcies

Madeleine Brand examines whether the Pension Benefit Guaranty Corporation, the federal agency that takes charge of pension plans when corporations default, can handle its growing financial burden. Observers are concerned about the agency's future effectiveness in the wake of United Airlines pension plan default last week.

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From NPR West and Slate magazine online, this is DAY TO DAY. I'm Alex Chadwick.

Coming up, a first year fully legal marriage for a lesbian couple in Massachusetts. First, the lead. Married or not, many workers are now worrying about their retirement. Last week, United Airlines defaulted on pensions for 120,000 workers and there are other companies with pension plans in trouble. Many workers are worrying and wondering if they could be next. DAY TO DAY's Madeleine Brand reports.

MADELEINE BRAND reporting:

United isn't the first company to default on its pensions. Over the last five years, nearly 800 pension plans have gone bust. When the LTV Steel Mining Company in Minnesota went bankrupt several years, its workers received a nasty surprise. Jerry Falis(ph) worked at LTV for 35 years.

Mr. JERRY FALIS: Well, you know, it was a shock basically because it came without any warning at all. You know, we were always led to believe that once we retired, we'd have good pensions and good health care for the rest of our lives, and that's one of the things that we negotiated. I was part of the negotiating team. So we actually, you know, waived a lot of raises just to keep good health care and good pensions.

BRAND: Falis was 55 years old. He thought he'd be able to retire on $2,600 a month. When the company defaulted, the federal government stepped in with about half that.

Mr. FALIS: A lot of people have told me, `You know, well, that happened three years ago. You know, forget about it.' Well, in three years, I've lost over $36,000 just in pension money. Now if I live another 20 years, it's going to be a quarter of a million dollars that I should have gotten and I didn't.

BRAND: He also has advice to workers worried that they'll face the same problems.

Mr. FALIS: People nowadays are going to have to, you know, have another game plan so--you know, have money set aside just in the case of something like this happening.

BRAND: And here's another piece of advice from Boston University finance Professor Zvi Bodie. If possible, try to get your pension out now.

Professor ZVI BODIE (Boston University): So the first thing I would advise people do is find out if they do have the option of taking a lump sum settlement. And if they do, you know, then invest that lump sum on your own if you're concerned that your company is going to go broke.

BRAND: So you should take the money and run basically.

Prof. BODIE: Basically.

BRAND: But the catch is you'd have to take a steep loss. The other problem, he says, is that few people have the skill and knowledge required to create a secure retirement income.

Prof. BODIE: Where they have to decide how much to save on their own, how to invest it, and the current state of affairs is that you are pretty much on your own.

BRAND: The reason companies are getting rid of these old-fashioned pension plans, Bodie says, is that they are too expensive in today's dog-eat-dog business world. Low interest rates mean the employer has to sock away more now to provide future benefits.

Prof. BODIE: And on top of that, many pension plans were heavily invested in the stock market but alas stocks are risky.

BRAND: And so employers are trying to minimize their risk by offering 401(k) plans instead, says Sanford Jacoby, professor of management at UCLA.

Professor SANFORD JACOBY (UCLA): Now what employers are trying to do is shift this risk increasingly on to the shoulders of employees. The same thing is happening with health insurance and other employee benefit programs that are provided by employers who in today's competitive environment companies are much more reluctant to shoulder risk for employees than they were, say, 30 years ago.

BRAND: That hot potato is also being tossed to the federal government which underwrites traditional pensions. The money comes from premiums companies pay into the federal fund. So when a company goes bankrupt and defaults on its pensions, this fund provides a maximum of around $45,000 a year to a retiree, but with all the defaults, the government program is itself in trouble and may not be able to pay out to all the workers in need, says Boston University finance Professor Zvi Bodie.

Prof. BODIE: My guess is the handwriting is on the wall, and in another couple of years, there'll be very few defined benefit plans still active.

BRAND: And if you think all this is pretty bad news, consider another looming problem. Not only are companies canceling their pension plans, they are also curtailing their health insurance plans. Remember steelworker Jerry Falis who had to retire on half of what he expected? Well, the kicker, says Falis, is that his company also dropped its health-care plan.

Mr. FALIS: We were to get retirement health care until--for the rest of our lives. You know, we would pay a small monthly supplement, but once we lost our health care, those premiums are about $900 a month for a family plan.

BRAND: And so at age 58, Falis now has another full-time job.

Madeleine Brand, NPR News.

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