Over 40? Over 50? Welcome to the Screwed Generation.
The New York Times
March 9, 2003
What if a Pension Shift Hit Lawmakers, Too?
By MARY WILLIAMS WALSH
As members of Congress prepare to reform the pension system, they might want to think hard about the proposals on the table. A new study has examined what would happen to their own retirement benefits if the changes that some favor for other workers were applied to them. The answer might give them pause.
Virtually every senator and representative would lose out, the study found in some cases by hundreds of thousands of dollars if their current Congressional pensions were switched to a controversial variant called a cash-balance pension.
One big loser, for example, would be Representative Rob Portman, a major sponsor of the House Republicans' pension legislation. He had built up a pension benefit worth $337,857 by the end of 2002, if taken as a single payment, the study found. But if Mr. Portman had instead earned his benefits under a cash-balance plan, he would get $239,185, based on an age of 48 and 10 years of service.
Mr. Portman will turn 48 this year. (The study used approximate ages in calculating the hypothetical totals.)
The study, done by the Congressional Research Service, shows that other members of Congress would suffer losses of varying amounts, depending on their ages and years of service.
Congress will be deliberating on significant pension legislation in the coming months, including proposals that would affect benefit levels and the strength of the pension system itself. An especially contentious debate is looming over regulations proposed by the Bush administration on how companies could convert their traditional pension plans to the cash-balance variety.
The existing Congressional pension plan is generous, and no one is really planning to trade it in for a new, stripped-down version. For years, however, private-sector employers nationwide have been replacing traditional pension plans with newer ones that are generally meant to be less costly for the companies to offer, but that in many cases yield smaller benefits, or transfer all the risk to workers.
Seen in that context, the Congressional Research Service study shows how well members of Congress are insulated from some trends in the private sector.
Since the 1980's, hundreds of large companies have switched from traditional to cash-balance plans. These plans combine features of the traditional pension with yet another type of retirement plan, the 401(k), in which employees manage their own retirement money and sometimes receive matching contributions from employers. They are called cash-balance plans because employees periodically receive notice of a hypothetical cash balance that they can track as it grows.
In theory, the cash-balance pension has virtues that make it superior to the 401(k): it is paid for and managed by the employer, and it is guaranteed by the federal government; a 401(k) has no such guarantee. But in the real world, companies that have converted traditional pension plans to the cash-balance variety have reduced some employees' retirement benefits sharply. The worst losses have generally befallen older workers.
Statistics on the trend are sketchy. But a 2002 audit of 60 corporate pension conversions by the Labor Department's Office of Inspector General found that in 13 cases about 20 percent workers were deprived of retirement benefits. They were losing about $17 million a year because companies used improper calculations in making the conversions.
Extrapolating these lost benefits to the hundreds of pension conversions across the country, the office said, the affected workers
"may be underpaid between $85 million and $199 million annually." The office called for heightened regulatory vigilance.
Even assuming proper calculations, cash-balance pensions can mean lower payments than in the traditional approach. Cash-balance plans differ from traditional plans, which are set up to let workers build the biggest part of their benefit in the years just before they retire. The idea was to promote worker loyalty by giving workers an incentive to stay with one company.
Many graying baby boomers in traditional plans may not know it, but now that they are passing 50 and amassing the bulk of their pensions they are becoming very expensive to their employers. Companies that have converted to cash-balance pensions have been able to reduce labor costs by ending their traditional plans before many workers enter this high-accrual stage.
Cash-balance pensions build benefits more evenly over the course of a worker's career. For some people, they can yield larger benefits than traditional plans, particularly for younger workers who often jump from job to job.
In switching to cash-balance pensions, some companies have notified employees in technical jargon or euphemisms that have left workers clueless about what is really happening. But as older employees started to realize that the conversions could mean individual losses in the tens of thousands of dollars, they began to pepper the Equal Opportunity Employment Commission with age-discrimination complaints. Some have filed class-action lawsuits against their companies. The most prominent case, still pending, affects more than 140,000 employees at I.B.M.
In 1999, the Internal Revenue Service, which regulates pensions, placed a moratorium on conversions, to give specialists a chance to sort out their legality.
Now the Bush administration has proposed regulations that would settle the issue, laying out basic rules for making cash-balance conversions legal. Public comment will be accepted until Thursday, and hearings are scheduled for April 9. If the proposed regulations take effect, the moratorium will be lifted.
Critics of cash-balance plans fear that an end to the moratorium would prompt a flood of pension conversions. They and their advocates in Congress doubt that the regulations would adequately protect older workers.
"There are millions and millions of workers today who are scared to death that the pensions they have been promised, that they have worked their whole life for, will not come through," said Representative Bernard Sanders, a Vermont independent who has long opposed cash-balance pension conversions.
Proponents of cash-balance pensions have argued that conversions are usually harmless. They note that some companies have voluntarily sweetened their cash-balance plans after older workers complained.
In general, members of Congress who have served the longest would face the greatest losses if they were given a cash-balance payout.
Patrick J. Purcell, the Congressional Research Service economist who conducted the study, said he worked with each lawmaker's age and years of service without knowing whom the numbers applied to, "so there would be less reason for people to question the results."
He then used standard actuarial methods to compress each pension normally taken as a lifelong stream of monthly checks into a lump-sum payment.
Calculating the lump-sum value made comparison possible with cash-balance benefits, which are normally given in a single payment.
Mr. Purcell then calculated what the lawmakers' hypothetical cash-balance benefit would be if they had had such a pension from the day they entered Congress. That approach made for a more straightforward comparison and possibly gave an advantage to the cash-balance plan. In practice, some of the most harmful effects of pension conversions occur because employees undergo the change at midcareer.
Mr. Portman, the Ohio Republican, was unavailable for comment on the study. But a spokesman, Jim Morrell, noted that in 2001, Mr. Portman sponsored legislation requiring companies to notify employees of the way their benefits would be affected in cash-balance conversions. That bill is now law.
Senator Charles E. Grassley, Republican of Iowa and chairman of the Finance Committee, earned a pension worth $508,266 under the existing plan, based on an age of 70 and 18 years of service. Under a cash-balance plan, he would have received only $161,623, according to the study.
Mr. Grassley is also the former chairman of the Senate Special Committee on Aging and is active on pension issues. A spokeswoman, Jill Gerber, said Mr. Grassley could not comment on the new findings without seeing the study.
The study also found that Representative Tom DeLay, the House majority leader, had earned a benefit worth $608,143 at the end of 2002 under the current plan. In a cash-balance plan, Mr. DeLay, a Texas Republican, would receive $251,086, or 59 percent less, based on an age of 56 and 18 years of service.
Mr. DeLay did not respond to a request for comment.
Representative J. Dennis Hastert, the House speaker, qualified for a Congressional pension worth $540,572 at the end of 2002. He would qualify for $164,455 in a typical cash-balance plan, the study found, based on an age of 61 and 16 years of service .
Mr. Hastert's press secretary, John Feehery, questioned whether it was fair to single out members of Congress for scrutiny when the entire federal compensation system is skewed toward smaller paychecks and larger pensions compared with the private sector.
"The Treasury Department and Congress are looking at ways to make sure that any conversion is fair," he added. "But on the other hand, many companies, given the economic downturn, are faced with the possibility of not being able to offer any plan at all. And that also would be bad for employees."
Ms. Gerber noted that pension conversions in Iowa, Senator Grassley's state, generally make it clear that companies are backing away from traditional pensions. In the mid-1970's, there were about 1,100 pension plans in Iowa, she said, but now there are fewer than 400. With some companies deciding not to offer any pensions at all, she said, Mr. Grassley sees a need to find some balance between protecting workers' benefits and offering employers incentives to stay in the pension system.
"The anti-cash-balance people are just anti-cash-balance," she said. "But if you just make cash-balance plans illegal, what are the plan sponsors going to do?"
The Congressional Research Service, a nonpartisan branch of the Library of Congress, did the study at the request of Mr. Sanders, who has introduced legislation opposing cash-balance conversions in the past none of it successful. He said he hoped the new findings would "show the hypocrisy" of colleagues who would let other people undergo pension conversions but would not have to suffer ill effects themselves.
"If they think a cash-balance plan is good enough for American workers, why don't they convert their own pensions?" he asked in an interview.
He said he intended to introduce legislation this week that would force Congress to put its money where its mouth is: it would require the conversion of all Congressional pensions to the cash-balance type if the legislators allow the administration's proposed regulations to go forward.
Mr. Sanders himself would lose 72 percent of his pension if that happened. Based on an age of 61, with 12 years of service, he qualified for a $416,159 lump-sum payment at the end of 2002. In a cash-balance model, he would have received $115,850.
He would not comment on the prospects for his cash-balance legislation. Perhaps more pragmatically, he said he would also introduce legislation to require companies converting their pensions to let each worker choose whether to keep the old plan or go with the cash-balance plan.
Some companies have done this voluntarily, he noted.
"Kodak has done that," he said. " Motorola has done that. CSX, which is the new secretary of the Treasury's company," had done that, he said, referring to John W. Snow, who was chief executive of CSX, the railway company, before Mr. Bush appointed him in December to replace Paul H. O'Neill. As Treasury secretary, Mr. Snow has authority over the proposed regulations.
All of those companies converted, Mr. Sanders said, "but they gave workers the choice."
Copyright 2003 The New York Times Company