Some Workers See Pensions Dwindle
April 4, 2003 — -- Larry Redemann had worked in the mills at Bethlehem Steel since he was 19 years old, and has a bad knee and shoulder to show for it.
"My body is pretty much busted up after working for Bethlehem Steel for 36 years," he says.
Still, he always figured that a well-funded pension was waiting for him when he turned 55.
"That's one of your only reasons for staying there when you work in a place like that," says Redemann.
What he never imagined is that, after a century in business, Bethlehem Steel would close its doors forever. A federal agency now controls the $7.8 billion pension fund for the Pennsylvania company's 95,000 workers.
And under its rules, Redemann will get a monthly pension of $1,600 — about half of the $3,100 he expected.
Workers at Bethlehem Steel are not alone. The 6,000 pilots at US Airways also feel betrayed. They were expecting pensions of between $50,000 to $75,000 a year before the airline's bankruptcy forced them to accept much smaller benefits.
"There are some pilots who are exposed to up to a 75 percent reduction in their retirement income," says Roy Freundlich of the Air Line Pilots Association in Washington.
Some 44 million Americans are counting on defined-benefit pension plans when they retire, benefits that are insured by the Pension Benefit Guaranty Corp., or PBGC, a federal agency. But many of those workers may end up with less than they're counting on.
Huge declines in the stock market, where many of these pension plans are invested, have thrown the pension funds of even profitable companies into debt.
At the end of 2001, 261 companies had $111 billion less in their pension plans than they had promised in future benefits. And the PBGC, which is supposed to insure these plans, is itself $3.5 billion in debt.
So now many companies are cutting back on the benefits they're promising in the future.
"Even if you have a good pension plan now, you may find that your company is going to switch that plan or freeze that plan and in the future you may not get everything that you expected," says Karen Friedman, director of policy strategies for the Pension Rights Center, a Washington-based consumer-rights group promoting retirement security.
The most controversial switch under way is toward so-called cash-balance plans, which have been adopted by more than 500 companies, including IBM, Verizon and Duke Energy.
Unlike traditional defined benefit plans, in cash-balance plans, the employer's contribution does not increase with a worker's seniority and salary. So in a conversion situation, the older workers lose out. Younger workers, however, like them because their pensions build up faster, earlier. And unlike traditional plans, they're portable, so if workers change jobs, they can take the plan with them.
"The problem is you're switching from one kind of pension plan that has one kind of formula into another kind of pension plan that has a completely different kind of formula, and the end result of that switch is that it reduces the expected benefits of older workers," says Friedman.
The overall trend in financing retirement has been away from defined benefit plans of any kind into defined contribution plans like 401(k)s, where the employee contributes and manages most of the money — and can often end up with less if there's a prolonged market downturn.
Friedman notes that even with cash-balance plans, workers would end up better off than employees of companies like Enron and WorldCom, who lost money by investing heavily in company stock in their 401(k) plans.
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