The company, which reported huge losses during the telecommunications industry slump, has notified employees it will no longer pay for health insurance for dependents of management workers who retired on or after March 1, 1990, at a salary of $65,000 or more.
A year ago, Lucent made the same cut for managers who had retired during the same period but had a base salary of at least $87,000.
The latest cut affects the dependents of 5,400 management retirees, a total of 7,400 dependents — spouses, disabled children and children age 23 or younger living at home. It takes effect Jan. 1, 2005.
The prior cutback affected about 9,000 dependents of 7,300 retirees.
"We're astounded that the Lucent executives would continue to take benefits away from dependents of retirees, since many retired based on Lucent's promise to provide health care benefits for them and their dependents," Ed Beltram, spokesman for the Lucent Retirees Organization, said Tuesday.
Those affected include thousands of people who retired in their 50s and early 60s, accepting buyout packages as struggling Lucent slashed its work force by about three-fourths.
"These are not decisions that we want to make, but we have no choice," Lucent spokesman Bill Price said.
He said the dependents could pay their own premiums and remain in the retirees' health plan. The premiums would range from $220 a month to $386.
###
Lucent Cutting Retiree Benefits Again
By The Associated Press
TRENTON, N.J. (AP) -- For the second time in a year,
telecommunications equipment maker Lucent
Technologies Inc. is reducing benefits promised to thousands of its
retirees.
The Murray Hill-based company, which reported billions of dollars in
losses during the telecommunications industry slump, notified employees by
letter it will no longer provide free health insurance for dependents of
management workers who retired on or after March 1, 1990, at a salary of
$65,000 or more. Instead, those dependents will have to pay their own
premiums.
Last September, Lucent announced identical cuts for managers who had
retired during the same period but had a base salary of at least $87,000.
That change took effect on Jan. 1.
The latest cut affects the dependents of 5,400 management retirees, a
total of 7,400 dependents -- spouses, disabled children and children age
23 or younger living at home. It takes effect Jan. 1, 2005.
The prior cutback affected about 9,000 dependents of 7,300 retirees.
``We're astounded that the Lucent executives would continue to take
benefits away from dependents of retirees, since many retired based on
Lucent's promise to provide health care benefits for them and their
dependents,'' Ed Beltram, spokesman for the Lucent Retirees Organization,
said Tuesday.
Lucent spokesman Bill Price said the company had no choice.
``We have to ask for some cost sharing, as we did last year, with our
retirees in order to remain competitive,'' he said, noting dependents
could stay in the retirees' health plan by paying their own premiums. The
premiums range from $220 per month to $386 per month, which Price said was
about half the cost of comparable coverage elsewhere.
Management retirees' costs for dental coverage also are being increased,
with premiums rising roughly one-third to $32 per month for single people
and $85 a month for family coverage.
The new changes should save Lucent about $16 million annually, Price said.
The prior cuts are saving about $75 million a year.
About 40 percent of Lucent's roughly 50,000 management retirees -- those
who retired before March 1, 1990 -- do not pay premiums toward their
health insurance. The rest pay on average $90 per month, if single, and
$226 per month if they have dependents, according to Price.
Two weeks ago, Lucent said it also would try to reduce future health care
costs for its retired union workers when it begins negotiating a new
contract with their unions. Bargaining is set to start in early October.
Ken Raschke, president of the Lucent Retirees Organization, said it was
hard to justify the cuts when Lucent's chief executive officer, Patricia
Russo, received a total of $44 million in compensation in 2002 and 2003.
Price said the compensation figure is deceptive because it is based on how
Russo's stock options are valued. He said Russo's compensation for her
first two years at the helm actually was $35.6 million and includes $18.2
million in hiring incentives to make up for money she lost by leaving Eastman
Kodak to join Lucent. Also, he said, her stock options are
worthless because the stock is trading for a lower price.
On the New York Stock Exchange, Lucent shares rose 7 cents to close
Tuesday at $3.36.
###
Lucent Cuts Retirees' Health Benefits
For the second time in a year, telecommunications equipment maker Lucent Technologies Inc. is reducing benefits promised to thousands of its retirees.
The Murray Hill-based company, which reported billions of dollars in losses during the telecommunications industry slump, notified employees by letter it will no longer provide free health insurance for dependents of management workers who retired on or after March 1, 1990, at a salary of $65,000 or more. Instead, those dependents will have to pay their own premiums.
Last September, Lucent announced identical cuts for managers who had retired during the same period but had a base salary of at least $87,000. That change took effect on Jan. 1.
The latest cut affects the dependents of 5,400 management retirees, a total of 7,400 dependents - spouses, disabled children and children age 23 or younger living at home. It takes effect Jan. 1, 2005.
The prior cutback affected about 9,000 dependents of 7,300 retirees.
"We're astounded that the Lucent executives would continue to take benefits away from dependents of retirees, since many retired based on Lucent's promise to provide health care benefits for them and their dependents," Ed Beltram, spokesman for the Lucent Retirees Organization, said Tuesday.
Lucent spokesman Bill Price said the company had no choice.
"We have to ask for some cost sharing, as we did last year, with our retirees in order to remain competitive," he said, noting dependents could stay in the retirees' health plan by paying their own premiums. The premiums range from $220 per month to $386 per month, which Price said was about half the cost of comparable coverage elsewhere.
Management retirees' costs for dental coverage also are being increased, with premiums rising roughly one-third to $32 per month for single people and $85 a month for family coverage.
The new changes should save Lucent about $16 million annually, Price said. The prior cuts are saving about $75 million a year.
About 40 percent of Lucent's roughly 50,000 management retirees - those who retired before March 1, 1990 - do not pay premiums toward their health insurance. The rest pay on average $90 per month, if single, and $226 per month if they have dependents, according to Price.
Two weeks ago, Lucent said it also would try to reduce future health care costs for its retired union workers when it begins negotiating a new contract with their unions. Bargaining is set to start in early October.
Ken Raschke, president of the Lucent Retirees Organization, said it was hard to justify the cuts when Lucent's chief executive officer, Patricia Russo, received a total of $44 million in compensation in 2002 and 2003.
Price said the compensation figure is deceptive because it is based on how Russo's stock options are valued. He said Russo's compensation for her first two years at the helm actually was $35.6 million and includes $18.2 million in hiring incentives to make up for money she lost by leaving Eastman Kodak to join Lucent. Also, he said, her stock options are worthless because the stock is trading for a lower price.
In afternoon trading on the New York Stock Exchange, Lucent shares were up 5 cents at $3.34.
By Jay Fitzgerald
Lucent Technologies and its remaining Bay State employees are headed for what a union leader called a ``take-no-prisoners'' showdown over the hot-button issues of outsourcing jobs and cutting health and retirement benefits.
The Communications Workers of America Local 1365 said it hopes a rally Tuesday at Lucent's North Andover facility will attract hundreds of area workers, retirees and union activists to protest Lucent's ongoing outsourcing of jobs overseas and reducing workers' hours and benefits to save money.``The crisis I speak of is the fact that Lucent continues to outsource work,'' Gary Nilsson, president of CWA Local 1365, said in a letter to members and retirees earlier this week.
Posted Thursday, September 16, 2004
Thousands of union workers and retirees of Lucent Technologies could be next on the benefits hit list.
Contracts for 4,000 members of Communications Workers of America and the International Brotherhood of Electrical Workers both expire Oct. 31 and new talks are set for Oct. 7.
Besides wages, discussions will focus on health care benefits and Lucent's ongoing mission to cut costs.
The negotiations also are expected to cover health care for about 71,000 Lucent union retirees nationally - including 5,700 in Illinois. If union retiree spouses and other covered dependents are included, the number jumps to roughly 120,000 nationwide.
Lucent officials have been chipping away at benefits because of huge losses after the collapse in the telecommunications equipment market. The company has almost four retirees for every active worker, making health care benefits for them a major burden.
Cuts last fall to management retirees were expected to save $75 million annually. Since then, Lucent, with operations in Naperville and Lisle, has returned to profitability.
Despite the improved outlook, the CWA said in a July statement that in preliminary bargaining, the company wanted sweeping changes: "Lucent has made demands that would jeopardize jobs and job security, shifting work to subcontractors, as well as substantial health care cost shifting and the elimination of other key benefits for retired workers while eliminating any obligation by Lucent for present and future retiree health costs."
Edward Beltram, spokesman for the Lucent Retirees Organization, is upset about the kinds of changes being sought.
"This is just another indication of utter disregard to commitments Lucent made to retirees," he said.
Lucent spokesman John Skalko wouldn't speculate on what the company will seek next month and any associated savings. He did say the company was disappointed the union leadership did not accept what it believed was a fair offer for wages. The company's offer also created a solution for retiree health care that provided funding for a sizable Lucent subsidy, but shifted some costs to retirees, he said.
Currently, active and retired union workers don't pay health care premiums. Until this year, Lucent has funded retiree health care benefits for management and union retirees through trust funds.
"The fund for management retirees is now depleted, and the one for our formerly represented retirees will be depleted by fiscal 2007 if no change is made," said Skalko.
The funding then has to come from operating cash, he said, and that figure represented nearly 10 percent of Lucent's annual revenue last year, "an expense most of our competitors do not have and one Lucent simply can't afford."
The Washington Post -
September 15, 2004
Pension Agency Seeks
More Power Federal
Insurer Wants to Put Liens on Companies in Bankruptcy
By Albert B. Crenshaw
Washington Post Staff Writer
Wednesday, September 15, 2004; Page E03
The government's pension insurer said yesterday that it wants the authority to place liens on the assets of companies in bankruptcy such as US Airways when those companies do not make required payments to their pension plans.
US Airways told a bankruptcy court in Alexandria on Monday that it doesn't plan to make a $110 million payment due today to pension plans covering its mechanics and flight attendants. The airline said its pension obligations total $531 million over the next five years.
In July, United Airlines refused to make a $72.4 million payment to four of its pension plans, and said it would not make $500 million in payments due this year.
The government agency, the Pension Benefit Guaranty Corp., argues that the failure to make required payments is illegal but that it lacks power to do anything about it under bankruptcy law. Yesterday it said it should have authority to place liens against the corporate assets of a bankrupt company so that the amount of the missed payment can be preserved for the pension plan participants. It already has such power over companies not in bankruptcy.
Such authority would require a change in the law.
"Failure to act will increase the risk that participants will lose promised benefits and that the pension insurance program will suffer larger losses. We need to make clear that pension contributions are required whether a company is in bankruptcy or not," Executive Director Bradley D. Belt said in a written statement yesterday.
The agency also wants companies to be required to notify pension plan participants within 30 days of a bankruptcy filing of the plan's funded status and of legal limits on the agency's guarantees, which in some cases are substantially less that the pension promised to an employee under the plan.
A federal judge in New York ruled in 1991 that the PBGC has no priority over other creditors in bankruptcy and that the PBGC cannot compel bankrupt companies to make payments required by pension law. PBGC officials said at the time that the ruling created a dangerous situation for the agency. Legislation was introduced to overturn that ruling but never passed.
United has said it expects to terminate its pension plans, but has not yet done so. US Airways has said it is negotiating with its unions to "modify and replace" its plans, but if it cannot reach agreement it will seek authority to abrogate its labor contracts to make the changes it wants.
The airline told the court it thinks it "would not be able to meet [its] obligations under the pension plans and survive."
The airline left open the possibility that it could "freeze" its pension, meaning benefits would cease to accumulate and no new employees would be covered. But the PBGC pointed to part of the airline's bankruptcy court filing that termed it "irrational" to make pension contributions because it "provides no benefit to the [bankruptcy] estate."
"That is a remarkable statement," Belt said. "The company is saying it's irrational to keep your pension promises and to comply with federal pension law. Bankruptcy should not be the path of least resistance to deal with your pension obligations."
Under the law, an employer cannot unilaterally terminate an underfunded pension plan. To do so and shift the liabilities to the PBGC, a company such as US Airways must convince a bankruptcy court that it cannot survive or emerge from bankruptcy without shedding those liabilities. After emerging from bankruptcy the company can start a new plan, typically a 401(k) plan, which is less costly and more predictable for employers than a traditional pension.
Traditional pensions, known as defined-benefit plans, promise a pension amount based on a formula, typically involving pay and years of service with the company. Plans such as 401(k)s, known as defined-contribution plans, are investment accounts funded by contributions from the employee and/or the employer, and the benefit is whatever amount is in the account at retirement.
Defined-benefit plans are insured by the PBGC. Defined-contribution plans are not.
With Thousands
Of Pensions Closing,
How Safe Is Yours?
By JEFF D. OPDYKE
Staff Reporter
of THE WALL STREET JOURNAL
September 15, 2004; Page D1
US Airways Group Inc.'s bankruptcy court disclosure that it is considering terminating two pension plans underscores a big problem in the nation's retirement system.
In recent years, a surprisingly large number of companies have axed their pension plans. Already this year, more than 1,200 pension plans have been terminated, affecting tens of thousands of workers across the country, according to the Pension Benefit Guaranty Corp., the quasigovernment pension-protection agency.
Last year, 1,119 company pension plans were terminated. In all, since 2000, companies have shuttered about 7,500 plans.
By and large, most of the terminated plans aren't troubled. With ailing companies, however, ending a plan often is a last-ditch effort to boost their financial health. United Airlines' parent, UAL Corp., also recently threatened to kill off its pension plans as it struggles to survive.Despite the anxiety generated by terminating a plan, most workers won't lose benefits when their pension plan is eliminated. That is because most pension plans that terminate have enough assets to meet their obligations. Still, there are cases where beleaguered plans end up in the hands of the PBGC. When that happens, high-paid workers and even some retirees can see their promised benefits cut substantially.
Employees can have a difficult time ferreting out the financial status of their pension plans. While companies must report their underfunded status to the agency, pension law prohibits the agency from telling workers. Moreover, data that are available are dated. This works to the benefit of companies, since they not only can mask an ailing pension and take steps to cut benefits or eliminate the plan entirely, but they also can exaggerate the deterioration to justify trimming benefits.
Some lawmakers want to change the rules. This month, Rep. George Miller, a California Democrat, introduced legislation that would allow the PBGC to disclose company pension woes to workers. "There is no reason," Rep. Miller said, "that the government should know the status of a company pension plan, but the workers should not."
The good news for workers is that most pension plans are fine. While they are fading away, about 31,000 private-sector plans still exist. If your company is healthy, then there probably is little reason to worry about your pension going under.
When a pension is terminated, the employer no longer contributes to the plan. What that means for workers depends on whether the pension has enough money to cover its promises to workers, or whether the plan is terminated under so-called distress conditions. Distressed situations arise when a company falls into bankruptcy, or the plan is so underfunded it isn't likely to survive on its own.
![[pension]](http://online.wsj.com/public/resources/images/PJ-AC778-PENSION09142004210847.jpg) A UAL union member |
In either case, "the good news for workers is that the money in the plan is protected," says Karen Ferguson, director of the Pension Rights Center, a Washington consumer advocacy group. Money in a pension is in an irrevocable trust, and while it will fluctuate with stock- and bond-market conditions, it is safe from company creditors or from executives who might wish to raid it to help the company. "The bad news, though," Ms. Ferguson says, "is that in some instances, you may not get everything you were expecting."
If a healthy company terminates a well-funded pension, the company generally pays a lump sum or buys annuities that ultimately will pay current workers what they were promised.
Taking Over a Plan
In cases where a pension plan is distressed, the PBGC steps in to take over the assets and liabilities, managing the money for the benefit of the workers. At that point, no more benefits accrue. So wherever you are in your career, your benefits are calculated at that point in time. That means younger workers who have built up minimal years and earn relatively small salaries, will receive much smaller benefits when they finally reach 65. Older workers generally will receive most of what they expected, though not always everything they expected.
While the PBGC notes that it "pays most people all of their pension benefits," that isn't always the case. Congress imposes limits on what the PBGC can pay, currently set at $44,386 a year per individual. As such, high-paid workers in particular may not always get what they were promised. Additionally, if they planned to retire early or are required to retire before age 65 -- such as pilots who must retire at 60 -- they may see their benefits cut, possibly drastically.
For high-paid workers who retire early, the maximum pension payments are cut 7% a year between ages 60 and 65. They lose an additional 4% a year if they retire between 55 and 59. For instance, a 65-year-old worker who retires this year would receive nearly $3,699 a month in maximum benefits, even if their promised benefits are substantially more. Meanwhile, a worker retiring at age 60 would receive $2,404 a month, or 35% less, and a worker retiring at 55 would receive just $1,664, or a 55% reduction.
Getting Pinched
Retirees already receiving a monthly check from their company could be pinched, too, as well as workers promised full benefits at early retirement. If a troubled pension ends up with the PBGC, retirees earning more than the federal maximum, "generally see their pension cut back to no more than the max," says Randy Clerihue, PBGC's spokesman. Meanwhile, the PBGC doesn't honor a company's promise to offer full benefits to early retirees. Thus, a worker promised, say, $50,000 in benefits at age 50 would be eligible for no more than $15,535 based upon the laddered cutbacks imposed on early retirees.
In certain instances some retirees will receive more than the maximum benefit, but the PBGC says that generally is rare. That situation is more likely to arise when plans aren't significantly underfunded.
For workers approaching retirement and who are concerned about the health of their company's pension, one protective strategy is to take a lump-sum payout when you retire, if your employer allows it, and invest the cash in an immediate annuity with a reputable insurer. That will generate guaranteed monthly income, just as the pension would.
For decades, pensions were the retirement plan that most workers had. During the course of employment, companies routinely contribute a certain amount of dollars to a pool of money that is professionally managed on behalf of workers in the plan. Unlike 401(k) plans, in which workers are charged with shepherding their own investments, pension-plan participants don't have individual accounts that hold contributions in their names. Instead, they are guaranteed a stream of monthly payments until they die. The size of the monthly check typically is based on years of service and pay level.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com
Reuters -
September 14, 2004
Lawmaker Warns Companies Not to Dump Pensions
By
Susan Cornwell
WASHINGTON (Reuters) - Struggling U.S. companies must not use the federal
pension agency as a "dumping ground" for their pension plans in order to
survive, a key lawmaker working on pension reform legislation warned on
Tuesday.
With some U.S. airlines skipping pension payments and considering
defaulting on their retirement obligations, Ohio Republican Rep. John
Boehner said such moves could lead to a taxpayer bailout of the pension
agency, or higher insurance premiums from healthy companies to keep the
agency going.
He asked the business community to pressure companies not to deepen the
crisis by shedding their retirement plans on the insurer, the Pension
Benefit Guaranty Corp. (PBGC).
"I'm concerned about the possibility of a company using the PBGC as a
pension dumping ground to boost their economic prospects and get a leg up
on the competition," Boehner, chairman of the House Education and
Workforce Committee, said in a speech at the U.S. Chamber of Commerce.
Making the PBGC take over the pensions "isn't fair to the workers or
taxpayers," Boehner said. He is working on a bill to reform the system of
traditional "defined benefit" pensions insured by the agency, but said he
did not expect it to start moving through Congress until next year.
Boehner said he opposed raising insurance premiums on all companies that
offer old-style pensions to prop up the PBGC. "I think that would be
devastating," Boehner said, adding that it would push healthy companies to
stop offering plans that guarantee a fixed payout at retirement.
Instead, Congress should require companies to fully fund their plans and
let them make additional contributions to their pensions during strong
economic times, Boehner said.
US Airways Group Inc. . told a bankruptcy court on Monday that it would
skip a $110 million pension payment, and UAL Corp.'s United Airlines has
said it is mulling its plans' termination. There are fears that other
struggling airlines might follow suit, dumping billions in liabilities
into the PBGC's lap. US Airways filed for bankruptcy over the weekend.
But even without the airline liabilities, the PBGC is in deficit and in
crisis. A new study by the Center on Federal Financial Institutions says
that it will run out of money in 2020 if current financial conditions
persist, imperiling pension payments to millions of retirees.
The PBGC guarantees payment of pension benefits earned by 44 million
American workers in some 31,000 private sector plans. Its operations are
financed largely by insurance premiums paid by companies that sponsor the
plans.
PBGC Executive Director Bradley Belt on Tuesday put forward some reform
ideas, including forcing companies in bankruptcy to pay their pension
contributions.
"We need to make clear that pension contributions are required whether a
company is in bankruptcy or not," Belt said in a statement.
Boehner, speaking to reporters after his speech, said there were some
discussions on Capitol Hill about bankruptcy reforms to help the pension
system but noted such changes would have to go through the judiciary
committees of Congress.
Sept. 13 issue - Oops, we've done it again—drilled a blast hole into the bedrock of workers' financial security. In the mid-1980s, a laissez-faire Congress let the savings-and-loan industry blow itself up, endangering the very existence of federal deposit insurance. The rescue cost taxpayers $200 billion. Now we're replaying that dangerous game with traditional lifetime pension plans—still enjoyed (and trusted) by some 45 million workers and retirees.
 
 |
The federal Pension Benefit Guarantee Corp. picks up the pieces—only for pensions, not 401(k)s. Currently it insures part or all of the pensions owed to nearly 1 million workers and retirees in 3,200 failed plans. Single workers retiring this year at 65 can collect as much as $44,386 in benefits, with lesser amounts for early retirees. At 55, the maximum payout drops to $19,973, even if your company promised more. Any pension income exceeding the caps is usually lost.
The PBGC relies, for support, on insurance premiums paid by the companies that sponsor pension plans. It also takes over the assets of plans that fail. Several super-large plans collapsed in recent years, leaving fewer than usual assets to help pay the claims. Now United Airlines hopes to dump a record $6.4 billion in pension obligations on the PBGC, paving the way for Delta and US Airways to follow.
Bailing out the airlines would not be the end of the world, says the PBGC's former chief actuary Ron Gebhardtsbauer. In the worst case, the agency's $10 billion deficit might rise to $40 billion—small scale compared with the S&L debacle, he says. But behind the airlines lurk autos and other weak industries. If the PBGC can't collect enough to pay benefits, who's on the hook? Friends and taxpayers, look in the mirror. We are.
Most workers have no clue that their "guaranteed" pension system rests on sand. President George W. Bush has proposed some smart fixes, but his business buddies don't want to play. Here are some of the danger points, and what could be done:
Solution: Stop troubled companies with weak plans from promising workers more.
—Your pension-fund managers have strong incentives to hold the bulk of their assets in riskier investments (stocks) rather than in conservative ones (bonds). If stocks pay off big, your company won't have to keep making annual contributions toward its workers' retirement security. Future pensions can be magically funded with capital gains.
But over several 15- and 20-year periods in the past century (not to mention many shorter periods, such as now), stocks underperformed. When that happens, prudent companies should step up their contributions, to keep plans whole. But—here's the crazy part—they don't always have to. By law, pension plans are allowed to "assume" that stock prices are rising even when they fall! (Don't ask me; I just write about this stuff.) So even when stocks dive, companies don't have to beef their plans up. As a result, some of them never recover.
Solution: Fund pension plans primarily with bonds, says finance professor Zvi Bodie of the Boston University School of Management. Bonds' fixed incomes and maturity dates can be matched with the years that retirees will be owed the money—creating a genuine guarantee. For its own trust fund, the PBGC is already headed that way. After making (and losing) a big bet on equities, it now plans a maximum stock exposure of 25 percent. Corporations, however, shudder at this idea. If they held more bonds in their pension plans, they couldn't project high, mythical future returns. They'd have to back their workers' pensions with more cash. (They say, "Ugh." I say, "Yes, exactly.")
—Workers can't tell how safe or risky their pensions are. Just before it failed, US Airways pilots' plan was said to be 94 percent funded. At termination, it turned out to be just 35 percent funded. So the pilots lost $1.9 billion they thought was guaranteed. Solution: Disclose how well each pension plan is currently funded, and also the loss if it should end. "This should be motherhood and apple pie," says Bradley Belt, head of the PBGC. "Workers should know what they're at risk of losing."
—The politics stink. Pension regulations say, loud and clear, that companies with underfunded plans have to make catch-up payments. But does that really happen? No. They go whining to Congress for relief—backed by threats to close their plants, fire local workers or shut down airline service to a senator's hometown. Last year, with airline and steel pensions teetering, Congress tweaked the law to let them skip some of the payments owed. If those plans now fail, workers will lose even more.
Solution: None. Congress will always cave. That's what makes the risk so great.
Reported by Temma Ehrenfeld and Barney Gimbel
Airlines' Pension Maneuvers Raise Questions About the Law
By
ELLEN E. SCHULTZ
Staff Reporter
of THE WALL STREET JOURNAL
September 14, 2004; Page A17
As US Airways Group Inc. considers terminating two of its pension plans, the continued bad news about airline pensions is fueling concern that other companies will rush to dump their pensions, triggering a savings-and-loan-style taxpayer bailout.
In fact, most companies probably won't -- and can't -- shed their pensions, in part because most pension plans are relatively healthy. But the airlines' pension maneuvers underscore how the pension law enables some employers to withhold pension contributions in good times, to hide the actual health of their pensions, and then use the bankruptcy courts to shed their pensions altogether.
Here are common questions and concerns:
Will the airline-pension terminations encourage other companies to do the same?
First, a reality check: Not all airlines are ditching their pensions -- only some operating under bankruptcy protection. Last year US Airways terminated its pilots' pension plan. Last month UAL Corp. said in court filings that it believes it would have to terminate its pensions in order to emerge successfully from bankruptcy. Meanwhile, Delta Air Lines and ATA Airlines have threatened to file for bankruptcy, which could indicate they, too, might seek to dump their pensions.
But -- with rare exception -- only companies operating under bankruptcy protection can terminate their pensions without considerable expense. (Airlines that aren't in bankruptcy include AMR Corp.'s American Airlines, Northwest Airlines and Continental Airlines.) In most cases, companies that are going concerns don't kill their pensions, because they would be required to pay out all the benefits immediately. If the pensions are underfunded, the sudden IOU could put a crimp on cash flow. If they are overfunded, the company must pay an excise tax on the surplus, which takes away the financial incentive to dump the pension to nab the surplus cash.
Furthermore, even if a company is struggling, it can't just dump its pension onto the Pension Benefit Guaranty Corp., the quasi-public insurer that takes over troubled pension plans. To prevent companies from ditching their pensions willy-nilly, the PBGC has strict criteria for taking over an underfunded pension plan. There is no set percentage amount by which a plan must be underfunded, but the PBGC has found that companies seldom terminate their pensions if they're more than 80% funded.
What has changed is that in recent years, some high-profile employers in Chapter 11 have convinced a bankruptcy court that their companies couldn't survive unless they terminated the pensions. In these cases, the bankruptcy courts have essentially forced the PBGC to take over the plans.
But if enough large companies use the bankruptcy courts to abandon their pensions, won't this set off a savings-and-loan-style taxpayer bailout of pension plans?
No. Taxpayers aren't involved. Pensions are guaranteed by the PBGC Corp., which is financed by premiums paid by employers that sponsor pension plans. While the PBGC's own deficit has grown to about $10 billion, it is far from insolvent and its peril has been exaggerated. For one thing, when the PBGC takes over a pension, it doesn't assume 100% of the liabilities, only the maximum guaranteed benefit, which currently is a pension of $44,386 a year at age 65. Thanks to this, the liability it inherits typically is smaller than the one the company was on the hook for. Meanwhile, the PBGC has also assumed custody of the pension assets, and has many years to earn investment returns on the money to pay out in benefits that come due over decades. For example, the PBGC estimates that the UAL's total underfunding on a termination basis, the most conservative measure -- would be $8.3 billion. However, the PBGC estimates it would be liable for only $6.4 billion. "The $1.9 billion difference is what the participants would lose if the plans terminated," says Randy Clerihue, a spokesman
Still, isn't the U.S. pension system underfunded because of a "perfect storm" of stock market losses and low interest rates?
Assets in many pension plans took a big hit during the downturn in the stock market, especially from 2000 to 2002. Meanwhile, continued low interest rates have caused liabilities to inflate. The combination led many plans to go from overfunded to underfunded. (To determine whether a pension is well funded, companies calculate their liabilities -- the IOU for the pensions to be paid decades into the future -- and offset this by the plan's assets. If the result is negative, the pension is "underfunded.")
However, improvements in the stock market have replenished asset levels at many companies. Companies in the Standard & Poor's 500, which account for the majority of pension assets, bounced back last year, as assets rose to $1.14 trillion, up from $955 billion in 2002, according to estimates by Credit Suisse First Boston. Interest rates remain low, but as they rise, they will erase hundreds of billions in liabilities.
The general public also has a more pessimistic view of pension funding than is really the case, because the figures companies report to the Securities & Exchange Commission -- which are used by analysts to crank out pension surveys -- include liabilities for executive pensions, which have been growing significantly. Because pension assets aren't used to pay for executive pensions (which are paid from cash flow or from special protected trusts), the result is that pension plans appear more underfunded than they really are.
Write to Ellen E. Schultz at ellen.schultz@wsj.com
USA Today - September 14, 2004
Medical costs eat at Social
Security
By William M. Welch, USA TODAYWASHINGTON — With a new Medicare drug benefit set to begin in 2006, Americans 65 and older can expect to spend a large and growing share of their Social Security checks on Medicare premiums and expenses, previously undisclosed federal data show.
Information the Bush administration excluded from its 2004 report on the Medicare program shows that a typical 65-year-old can expect to spend 37% of his or her Social Security income on Medicare premiums, co-payments and out-of-pocket expenses in 2006. That share is projected to grow to almost 40% in 2011 and nearly 50% by 2021.
Unless Congress does something to hold down costs confronting seniors, the official projections suggest that health spending will consume virtually the entire amount of Social Security benefits when children born today reach retirement age.
The table was provided by the Department of Health and Human Services at the request of Rep. Pete Stark, D-Calif. Stark, who opposed the drug benefit enacted last year at President Bush's urging, sought the data after noticing that a chart included in previous annual reports was not in the 2004 version.
Stark charged that the administration threw out the chart because it shows future Medicare costs under the new law will erode Social Security checks.
"It doesn't look good to lie to grandma, so the Bush administration has withheld information and come up with other creative ways to mask the damage they have done to Medicare," Stark said.
Richard Foster, Medicare's chief actuary, said the program's trustees — administration officials and appointees — replaced the chart with a graph that lacks specific numbers in an effort to show that the increased costs come with a new benefit.
"The table makes it look like beneficiaries are worse off than ever, and that's not the case," Foster said.
Bill Pierce, a spokesman for Health and Human Services Secretary Tommy Thompson, said the administration wasn't trying to hide anything. "We have a new program, and it's got to be reflected with new information," he said.
The drug benefit is voluntary. It requires a premium, estimated at $420 a year initially, and substantial co-payments. The administration estimates participants will save about 50% on their drug bills.
Critics of the law say the new figures show it does little to restrain drug costs. The law prohibits the government from negotiating lower drug prices.
The data "ironically are the clearest proof of the new Medicare law's failures and the resulting squeeze on seniors' pocketbooks," said Ron Pollack, head of Families USA, a health advocacy group.
The disclosure comes just days after the administration announced Medicare premiums will rise by 17% next year due to rising health costs.
Foster is at the center of another dispute over missing data. He says he withheld from Congress higher cost estimates for the Medicare law last year, at the direction of a Bush appointee who headed the Centers for Medicare and Medicaid Services. Congress approved the law based on a 10-year, $400 billion estimated price tag. Foster's estimate was $540 billion.
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