This past December, Verizon Communications announced that it was converting from a defined-benefit pension plan to individual 401(k) retirement plans for all of its managers who have been with the company less than thirteen and a half years. Companies like computer giant IBM have followed suit, moving away from pensions for all of its employees. These companies, and others like them, are realizing the undeniable fact: pensions are just too expensive to fund properly; multiple factors account for this including lengthened life expectancies and an unsure stock market. The problem, especially in industries where unions are dominant, is that companies could possibly face massive revolts from workers and union leaders if they try to change retirement plans. Essentially, pension plans mandate that an employer pay a retiree some fixed amount of money every year for life. To cover these expenses, companies subtract wages from employees’ paychecks and invest these wages in stocks, bonds or other securities to form a giant pool of assets the company will tap in the future. On the other hand, 401(k) plans are personal accounts where an employee can place his or her own money. Additionally, employers typically match an employee’s contribution up to a certain percent of their income, usually around five. The biggest problems for companies with the traditional, defined-benefit pension plans will most likely plague industrial manufacturers, specifically automakers. Back in the 1970s when the American auto industry was a main engine of economic growth, the United Auto Workers demanded high pay and excellent benefits for its workers. At the time, the car companies thought they could afford giving better benefits to workers and granted most of the wishes of the unions. While the executives of the car companies thought their prosperity would be able to carry their massive obligations to their workers, they failed to see the future of the auto industry. Massive foreign competition began proliferating into the United States and the automakers began to feel the heat. Today, of course, that heat is at full burn, especially at GM, which not only has its own pension obligations, but is also legally responsible for the pension of its bankrupt spinoff Delphi. The question really is: what do we do next? First, it appears that many companies will stop offering a traditional pension plan, believing these plans to be much too expensive and having potentially enormous liabilities. That’s why IBM, whose plan is actually overfunded by $4 billion, is switching to 401(k). Second, unfortunately, there seems to be a great possibility that the US government will foot the bill. Under US law, defined-benefit plans, like the one at GM, are insured by the Pension Benefit Guaranty Corporation. This organizations, financed by the pension funds themselves, will accept the obligation of a private company’s pension plan if the company goes into bankruptcy. Given its worsening financial health and dismal operating results, it seems like GM is going to be a prime candidate to enter bankruptcy and shift its pension to the PBGC. While this would give GM breathing room to make the change to a 401(k) plan, it does present some major accounting challenges: the PBGC simply does not have enough money to pay for GM’s liabilities. Thus either benefits for retirees will be severely cut, or the PBGC will need to raise revenue from some external source. Whether or not GM does go into bankruptcy, the world will continue to witness a change from traditional pension plans to 401(k) and similar retirement accounts. This is a necessary shift, but it is sure to be painful for many retirees and corporations.
