WASHINGTON — Nearly two-thirds of employers that offer traditional pensions
have closed their plans to new hires or frozen them for all employees, or plan
to do so in the next two years, according to a study released Tuesday.
The latest numbers show an acceleration in the decline of pensions —
retirement plans in which employers, instead of employees, are responsible for
investing retirement money and providing benefits. They also illustrate that
the trend is no longer confined to troubled industries such as steel, auto and
airlines, but now involves healthy companies such as IBM and Verizon.
Analysts have known for some time that the number of employers shutting or
freezing their pension plans was on the rise. But the sharpness of the increase
caught some by surprise.
"This is a watershed event," said Jack VanDerhei, a Temple University
pension specialist. "There has been a steady decline in traditional pensions
for two decades, but the trend is really accelerating, and it's going to accelerate
The survey by the industry-supported Employee Benefit Research Institute and
Mercer Human Resources Consulting shows that most companies that close off their
pensions seek to partially offset the loss to employees by increasing contributions
to firm-sponsored 401(k)s, where employees are responsible for managing their
own retirement money.
But critics say the increases do not make up for the demise of pensions.
The offsetting benefits of 401(k)s "are not measuring up," said David
M. Certner, legislative policy director for AARP, the giant services and lobbying
organization for senior citizens. "There are a lot more ways people can
get tripped up with 401(k)s than with traditional pensions."
The pickup in the pace of pension closures and freezes is particularly surprising
because employers seemed to have weathered the worst of their financial problems
several years ago.
During the booming 1990s, a rising stock market raised the value of plans'
investments so much that collectively the plans had to contribute only about
$30 billion a year to ensure they could meet their obligations to future retirees.
But in 2000, two things happened: The stock market crashed, slashing the value
of investments, and interest rates sank. Declining interest rates reduced the
return on their investments, forcing the plans to set aside more funds to meet
future benefit obligations.
The combination raised the amount that plans collectively had to set aside
to about $90 billion a year, and dramatically increased the number of plans
that were considered "underfunded" and unable to meet their future
But the number of underfunded plans has come down in the last four years and,
by some measures, the pension system as a whole is back in financial balance,
Paradoxically, one of the key items that has pushed employers into the new
rush to get out from under their pension burdens is a law approved by Congress
last year that was designed to stabilize the pension system.
Employers quizzed by EBRI and Mercer cited the law, the Pension Protection
Act, in explaining their actions.
Nearly 30% of those who said they planned to freeze or close their plans in
the next two years cited uncertainty about the law as contributing to their
decisions. More than half said their belief that the law would raise costs was
key to their decision.
"Companies hate uncertainty, and this law has created a lot of uncertainty,"
said Mauricio Soto, a research economist with Boston College's Center for Retirement
The new survey found that 25% of employers questioned had closed their pensions
to new hires within the last two years, whereas 12.9% had frozen their plans
for all employees. The survey found that more than 30% of employers expected
to make similar changes in the coming two years. The survey questioned 162 employers,
including some of the nation's largest companies, according to the study's statistics.
The acceleration of pension freezes and closures raises anew the question of
whether the 77-million-strong baby boom generation is financially ready to retire.
Some recent studies have suggested that baby boomers are not as ill-prepared
as previously suggested, and that a combination of pensions, 401(k)s and home
equity, together with Social Security, would see them through old age.
But EBRI analysts suggested those studies might need to take a fresh look in
light of the new survey's results.
"It appears that any careful analysis of retirement income adequacy …
must be modified substantially to factor in the extraordinary plan changes among
[pension] sponsors in the last few years," analysts said.
"What you're seeing is the slippage of the middle class," said Certner
of AARP. "Their retirement benefits are much smaller than those of the
previous generation that had traditional pensions."