Quiet Retirement

By Michelle Rafter

Oct. 1, 2004

In the months leading up to the election, President Bush and John Kerry sparred over lots of things: the war on terrorism, jobs, taxes, gay marriage, stem-cell research. But they ignored one issue that will be critical for whoever takes over the White House in January: how to ease America’s aging population into retirement without bankrupting the country in the process.

    With the oldest baby boomers nearing 65 and experts forecasting impending insolvency for government entitlement programs, reforming Social Security and regulations covering company pensions never seemed more urgent. Yet the candidates have remained all but mum on the subject, reluctant to tackle something so complex, long term and potentially explosive during the campaign. “It’s hard stuff. It doesn’t lend itself to easy sound bites,” says Judy Schub, managing director for the Committee on Investment of Employee Benefit Assets, which represents 15 million employees in 110 corporate pension funds.

    But tackle it they must. The first wave of 79 million baby boomers starts retiring four years from now. As more people stop working, the ratio of individuals paying into Social Security for each retiree collecting benefits will drop, from 3.3 to 1 today, to 2 to 1 by 2030, according to Social Security administrators. By 2018, Social Security won’t collect enough in payroll taxes in a year to cover annual benefits. By 2042, money pledged to the program’s trust funds will run out completely, according to a Social Security trustee report published in March.

    Pension funds face their own problems. A record 35 million Americans and their families are covered by defined-benefit pensions, according to Schub’s group. But despite stock prices that have rebounded from 2000 lows, many plans remain underfunded. The liabilities, along with United Airlines’ August announcement that it will likely terminate its pension plans as part of a bankruptcy restructuring, have put pressure on the Pension Benefit Guaranty Corp., the government agency that insures pensions for 44 million U.S. workers. That, along with uncertainty about proposed regulations and age-discrimination lawsuits over hybrid cash-balance accounts, is causing companies to turn away from defined-benefit plans. Instead, they’re offering more portable defined-contribution plans, putting more of the onus of investing retirement money on employees. Some are dropping pensions altogether.

    Corporate and employee-group lobbyists, academics and other observers say there’s no question that changes are needed. But the shape of the reforms, how quickly they’ll happen and the effect they’ll have on corporate America could be very different under a Bush or Kerry administration, industry watchers say.

    The candidates’ silence on retirement reform doesn’t mean they haven’t taken a position. Bush has pledged that, in a second administration, he would privatize Social Security, though he prefers to call it giving people “ownership.” He might raise the retirement age, according to experts and statements he has made during the campaign. Bush is also expected to continue working on pension-plan regulations introduced during his first term, including rules governing cash-balance plans and new measures for calculating pension-plan liabilities.

    By contrast, Kerry has vowed not to privatize Social Security, cut benefits, raise the retirement age or increase the current 12.4 percent Social Security payroll tax. Instead he’d shore up the program by cutting the federal budget deficit and growing the economy, though he hasn’t specified how that would happen. According to industry watchers, statements Kerry has made during the campaign, and materials on his official election Web site,, he also supports laws keeping defined-benefit and defined-contribution plans strong, and protecting older workers from unfair treatment under cash-balance plans, though again he’s been fuzzy on the details.

Revamping Social Security
    Bush has said he favors partially privatizing Social Security to give people more control over their retirement savings. As he explains it, benefits for current retirees and older workers would remain unchanged, while younger workers could voluntarily divert a portion of their Social Security payroll taxes into some type of personal retirement savings account. Bush made reforming Social Security a major plank in his 2000 campaign platform, and after the election, a Bush-appointed commission that studied privatization came up with several options for how personal retirement savings accounts could work. The push stopped, though, after the 9/11 attacks diverted the administration’s attention to the war on terrorism.

    However, lawmakers have followed through, in the past few years introducing a number of reform proposals, including private retirement accounts. The latest, from centrist Reps. Jim Kolbe (R-AZ) and Charlie Stenholm (D-TX), also includes a government match for low-income workers’ contributions, some small benefit cuts, a faster increase in the retirement age and a small hike in the current $87,000 payroll tax cap. “I wouldn’t be surprised to see something like this take off,” says Kent Smetters, an associate professor of insurance and risk management at The Wharton School at the University of Pennsylvania, and former Treasury deputy assistant secretary under Bush. If Bush is re-elected, “I could imagine [him] saying, ‘I don’t like everything about it, but the good outweighs the bad.’ “

“Both Bush’s people and Kerry’s people realize they have to be careful or they’ll cause more problems” than they solve.

    But running a partially privatized Social Security payroll-tax program could be an administrative nightmare for corporate human resources departments, some industry experts say. Systems would have to be established to collect “extremely small amounts of money and put them together in a way that administrative costs don’t exceed the amounts people are putting in,” says Janice Gregory, senior vice president of the ERISA Industry Committee, a Washington, D.C., lobby group that tracks pensions and other employee benefits for major employers.

    Bush hasn’t fully explained how Social Security would make up for payroll taxes diverted to private accounts, says Nancy George, national grass-roots and elections coordinator for AARP, which represents 35 million Americans over the age of 50. By the administration’s own admission, if 2 or 3 percent of payroll taxes was set aside for private accounts, Social Security would have to come up with $1 trillion over the next 10 years to replace the diverted funds. “If you take money out to set up accounts, it won’t be there to provide benefits for people who are retiring,” George says.

    By contrast, Kerry’s Social Security reforms would include minor changes in calculating cost-of-living adjustments and the payroll tax cap, as well as shrinking the budget deficit so Social Security trust-fund dollars wouldn’t have to be used to pay general government expenses, as they have in the past. The Democratic hopeful has floated the idea of capping Social Security payments to wealthy retirees. Jason Furman, Kerry’s economic policy director, told Cox News Service in August that the cap would likely be for people with incomes over $200,000, but benefits wouldn’t be eliminated.

    Kerry’s critics claim that if he’s not going to substantially cut benefits, raise the retirement age or up payroll taxes, he’s left with only one option: raising general income taxes to make up for coming Social Security deficits. “He’s avoided saying anything that could lose the votes of the elderly,” says Wharton professor Smetters, who predicts that if elected, Kerry wouldn’t make reform a priority.

Revising Pension Regulations
    In the past four years, the Bush administration has been working on a complete overhaul of pension-plan regulations, parts of which have been introduced. Others are expected to appear if the president is re-elected.

    To aid underfunded pension plans, lawmakers in April approved a Bush-backed bill replacing the outdated 30-year Treasury bond previously used to set companies’ annual pension-plan liability. The new law replaces it, but only through 2005, with a composite corporate bond rate that lets companies contribute less to their plans. For a permanent benchmark, the Treasury Department has proposed using a corporate bond yield curve. But pension managers complain that a yield curve will make calculating how much they have to pay into their funds each year more volatile, and cause other pension-funding rules to be rewritten. “If they do something as simple as continue the [temporary] corporate bond rate into law, it’s a non-event for corporate America,” says Gregory of the ERISA Industry Committee. “But if they change the funding rules, it’s a big deal.”

    Industry watchers say Kerry wouldn’t back a yield-curve benchmark. “Normally, Republicans listen to employer groups and Democrats listen to employee groups, but this time Kerry is listening to both,” says Ron Gebhardtsbauer, a senior pension fellow with the American Academy of Actuaries in Washington, D.C.

    When a federal court ruled in July 2003 that IBM’s cash-balance-account pensions violated age-discrimination laws, it cast a pall on the hybrid defined-benefit plans, which hundreds of companies had adopted since the 1980s. The current administration has supported cash-balance plans, holding that they don’t show inherent bias against older workers. But in late 2003, federal lawmakers voted down an administration-sponsored bill that would have clarified cash-balance conversion rules. The Treasury Department issued a revised proposal last spring, but Bush has dropped the issue during the campaign, while the industry waits for a ruling on what back benefits IBM may be liable for in its suit.

    Kerry has promised to strengthen both defined-benefit and defined-contribution plans, and protect older workers from unfair treatment under cash-balance plans, but hasn’t said specifically how he’d do that. He has also vowed to “increase the portability of retirement savings,” according to the Kerry Web site, but again hasn’t offered many details.

    Some observers see Congress, not the White House, leading the charge to come up with rules covering conversions from defined-benefit plans to cash-balance plans that are palatable to employers and retirees. Senate and House committees with jurisdiction over pension affairs are already working on the issue, says Gregory. “In that sense, I don’t think the election changes much,” she says.

    Bailing out the Pension Benefit Guaranty Corp. could also be on the next president’s agenda. The PBGC already has a record deficit, $11.3 billion in 2003, and in the past three years has accumulated $15.9 billion in claims, twice the number amassed in the 18 years before that, according to a new report from the Cato Institute, a conservative Washington, D.C., think tank. Some argue that if other airlines follow United Airlines’ lead and dump their pension plans, the PBGC will go under, leading to higher insurance premiums for the agency’s 31,000 member companies and a taxpayer bailout.

    Others say the problem is exaggerated. The recent market downturn, slow economic recovery and period of low interest rates is unlikely to recur. “It’s a bizarre experience bound to be different in the future,” says John Hotz, deputy director of the Pension Rights Center, a Washington, D.C., employee lobby group.

    Regardless of who is president, he’ll have to walk a fine line, as the retirement issues facing the country are significant: reshaping Social Security for an aging workforce, and regulating pension plans to satisfy older workers and retirees without driving more companies to drop pensions. Says Gebhardtsbauer: “Both Bush’s people and Kerry’s people realize they have to be careful or they’ll cause more problems” than they solve.

Workforce Management, October 2004, p. 49-52Subscribe Now!

Michelle Rafter is a Workforce contributing editor.

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