Underfunded pension plans represent one of the biggest potential financial problems facing the nation. Despite rising challenges over the past several years in meeting pension obligations, most pension plans have remained committed to making good on the promises they had already made to retired pensioners, following the federal law that protect retirees against benefit reductions.
Now, though, retiree pension benefits could be at risk for the first time in decades. As a recent Wall Street Journal report explained, unions and employers have gotten together to recommend changes to the nearly 40-year-old laws governing pension plans that cover workers from multiple employers. Those changes would make it possible for plans to reduce existing benefits paid to current retirees.
Us vs. them
The dilemma that pension plans face right now is a difficult one. Although many pension plans have been diligent in maintaining adequate funding levels to finance the promises they’ve made, an increasing number of plans are falling behind. With scores of pension plans on a path toward failing entirely, cutting pension benefits now could allow the plans to survive longer, benefiting current workers and relatively new retirees at the expense of older retirees.
Yet the policy behind protecting retirees is still as strong as ever. After you retire, you have almost no ability to replace lost income from declining pension payments from other sources. Conversely, current workers can still take steps to boost their personal savings to plan for an anticipated reduction in future pension benefits.
Indeed, most private companies have followed the strategy of protecting current pensioners while removing benefits from future workers. Over the past several years, International Business Machines Corp. (NYSE:IBM), Verizon Communications Inc. (NYSE:VZ) , and countless other major employers have frozen existing pension plans, keeping them in place for employees that already earned benefits from them. New hires, however, were shunted into 401(k) plans and similar defined-contribution plans, which carry far less risk for the employer.
In addition, failing private companies have often relied on the federal Pension Benefits Guaranty Corporation to step in and protect their workers. In the past, US Airways Group Inc (NYSE:LCC) and United Airlines, now merged into United Continental Holdings Inc (NYSE:UAL) , have seen the PBGC take over certain pension-plan obligations to provide benefits to their workers as part of the airlines’ respective bankruptcy proceedings. Under the PBGC, certain former workers whose benefits fall above a maximum benefit level have seen their payments cut, but many have gotten full restoration of their pensions.
The PBGC steps in to make payments to pensioners when pension plans fail. Source: PBGC.
Unfortunately, the PBGC has had financial problems of its own for years. The premiums the PBGC collects from employers haven’t been sufficient to avoid a funding deficit of about $34 billion, and it anticipates rising rates of pension insolvencies to push that deficit much higher in the coming decade. As a result, lawmakers will be more receptive to union and employer proposals that could reduce any potential taxpayer bailout of the PBGC in the future.
Weighing the alternatives
Pension obligations have also become a big financial issue for public employees. The recent bankruptcy of the city of Stockton, Calif., has become a test case for whether federal bankruptcy law overrides California law’s requirement for the funding of the California Public Employees Retirement System. Other municipal creditors wanted Stockton to reduce the amount that would go to CalPERS in its reorganization plan, and although a court-approved Stockton’s plan in ruling that those creditors acted in bad faith by refusing to negotiate, the judge suggested that the amount of money going to CalPERS could be subject to negotiation as part of bankruptcy proceedings.
In the end, with public and private employers all struggling to make ends meet, the shrinking pool of funding for pension benefits means that some workers won’t get the full amount they were expecting. The big question, though, is which workers will bear the brunt of the shortfall, and the joint union-employer proposal would put the benefits of all workers, both current and former, on the table.
The article Why Unions Want to Cut Retiree Pension Benefits originally appeared on Fool.com is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool owns shares of IBM.
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