Pension crisis may be worst in history

Think again.

As the stock market decline forces companies to spend millions shoring up their pension funds, some workers are bracing for possibly the biggest wave of cuts to retirement benefits in 20 years.

Bethlehem Steel, which operated a Seattle plant until the 1980s, is seeking to terminate medical and life insurance for retirees. Bethlehem, which is in bankruptcy in part because of pension-fund losses, wants to cut overhead to spruce up for a takeover.

Kaiser Aluminum, also in bankruptcy, might propose similar cuts for workers at mills near Tacoma and Spokane.

Bethlehem's proposal, made last week, adds to a growing fear that healthy companies might try to reduce their pension liabilities by cutting retiree benefits and swapping pension programs for 401(k) savings plans.

The pension crisis is shaping up to be the worst in history. Nationwide, corporate pension funds last year were an estimated $240 billion to $300 billion short of what they're committed to pay retirees, and that gap is growing. Shortages for state- and city-government pension programs could be another $350 billion, said Stephen Nesbitt of Wilshire Associates, an investment adviser in Los Angeles.

Pensions are insured by the federal Pension Benefit Guaranty Corp. (PBGC). When a company fails and can't pay benefits, the PBGC pays — though frequently at a reduced level.

There is no such guarantee for retiree health benefits.

"It's something you worked for 30 years to accomplish, and now they're talking about taking it away," said John Childs, 53, a retired crane operator at Kaiser's plant in Tacoma, who now receives medical insurance from Kaiser.

If he lost benefits, he figures he would sell his house and move to a cheaper rental, since his monthly pension check probably wouldn't cover the cost of his medicine. Childs, who lives alone and has little savings, wants to go back to work but hasn't been able to find crane or trucking jobs.

'Like an iceberg'

At the heart of many companies' financial troubles is the traditional defined-benefit pension, in which a pool of money is invested to pay an amount promised to retirees based on years of service. Because the payout is guaranteed, the plan assumes all the market risk. The market decline of the past three years means many companies and governments must make up the difference.

Many of the nation's largest companies have experienced huge declines in pension portfolios that, if they were marked on their balance sheets, would have turned their reported profits into losses. Boeing's pension fund lost $7.2 billion in value in 2001, which would have been more than enough to wipe out its $2.8 billion profit that year.

Accounting rules allow companies to make up pension-fund shortfalls over 15 or 20 years. But the payments take a real bite out of earnings and can even tip companies into default on loans.

Boeing's pension fund needed a $340 million cash infusion last year, up nearly twentyfold from 2001. That figure probably will rise this year.

Other Northwest companies such as Airborne Express, Paccar, Louisiana-Pacific, Avista and Alaska Airlines had losses that may require additional contributions. "You can hide (the losses), but it's like an iceberg," said Rob Ryan, president of Ryan Labs, a money manager in New York. "The part that's sticking up is still pretty big. And few people realize there's 14 more years to go. Only one-fifteenth of the iceberg is visible."

So far, only bankrupt companies like Bethlehem are announcing possible pension and benefit changes. But profitable ones, facing similar astronomical charges, are talking about it.

"It is still early days, but the conversation is being had," said Valerie Paganelli, a senior retirement adviser at Watson Wyatt consultancy in Seattle. "It runs the gamut from, 'Let's get the hell out of this business of sponsoring a defined-benefit plan,' to, 'No, dog-gonit, we're not going to pull out just because times get tough.' "

Rise of the 401(k)

To be sure, a reversal of the stock market and economy could make these problems go away. But if the downturn continues, workers and retirees across the country could be facing higher insurance premiums, reduced retirement contributions or full-scale cancellation of pension plans.

State pension funds are under similar stress. More than half of state pension funds are underfunded, and four states — Nevada, West Virginia, Oklahoma and Oregon — have gaps greater than their state budgets. Washington state's pension-fund payments are going to double to $1.2 billion a year because it is now underfunded by 7.2 billion, Nesbitt said.

Companies and states have engaged in benefit-cutting before. Accounting changes in 1985 and 1992 prompted many firms to scale down health and pension benefits to retirees and employees.

Some switched defined-benefit pensions to defined-contribution plans, such as the 401(k), which have no set payout and require employees to shoulder the market risk.

On top of this, pensions and benefits are facing many of the same forces that are putting Social Security on shaky footing. Baby boomers are reaching retirement, driving up medical costs and pension payments. Yet after years of corporate downsizing, many companies have fewer workers to support those costs.

The worst scenario would be if many companies simply eliminated pension plans, paid their obligations and stopped paying into the PBGC, the federal agency that insures the funds and pays out benefits when companies go bankrupt.

That in turn could spell disaster for other companies' pensioners. "What's troubling is if these underfunding situations lead healthy companies to terminate their pension plans," said John Ehrhardt, a partner at Milliman U.S.A., an actuarial firm based in Seattle.

That could start "a negative spiral" in which there are "more and more benefits to give and fewer and fewer employers to cover them," Ehrhardt said.

Of course, companies have constraints on what they can do. Many have union contracts that require changes to be negotiated. They also are barred from cutting pensions that employees already have earned.

Social Security safety valve

The PBGC already is hurting. The agency ended fiscal 2002 owing $3.64 billion more in pension payments than it has in assets. Its $25 billion in funds is more than enough to pay out the $1.5 billion in benefits due last year. But its shortfall is expected to grow substantially this year as it absorbs up to 100,000 more pensioners from the bankruptcies of National Steel and Bethlehem Steel.

If the gap persists over the long term, it would pose a serious financial problem, PBGC spokesman Jeffrey Speicher said.

"We have the cash flow to pay benefits for a number of years, but it's not inexhaustible," Speicher said. "We are not backed by full faith and credit of the U.S. government and we do have liabilities that exceed our assets."

The shifts pose a further problem for the government and baby-boomer retirees. If employers opt for cheaper plans that pay out less, employees would rely more on already-strapped Medicare and Social Security.

Today, about 80 percent of U.S. companies have pension plans, Ehrhardt said. If more pension plans disappear, it isn't clear that individual workers will close the gap by investing for their own retirements.

"Defined-benefit plans are the best safety valve against Social Security and everything else," Ehrhardt said. "Look at what happened to defined contribution (savings) plans. As the stock market has plunged, contribution rates have gone down. It may not be the wise thing, but people say, 'Why put money in here when I'm only going to lose it?' "

Alwyn Scott: 206-464-3329 or ascott@seattletimes.com