Take aging baby boomers, now hitting their late 40s, with mansion-size mortgages and shantytown savings accounts. Add corporate downsizing, career uncertainties, and the resulting turmoil in pension coverage. For good measure, throw in Social Security, whose day of insolvency gets closer every time two gray heads pulling a U-Haul cross the Florida state line.
If that brew makes you feel more than a bit queasy, you're far from alone. Economists looking ahead at the baby boomers' prospects for retirement are finding them to be grim. And there is precious little cause for optimism in recent pension news. On Nov. 22, the Pension Benefit Guaranty Corp. (PBGC) disclosed that the gap between promised benefits and assets in the 50 most underfunded traditional pension plans grew by 30% last year, to $38 billion, in part because lower interest rates are shrinking the earnings of pension portfolios. In light of those low rates, the Securities & Exchange Commission may soon force even healthy retirement plans to adjust their balance sheets. That could accelerate companies' moves away from paternalistic guaranteed pension benefits and toward plans that turn over retirement investment decisions to workers themselves.
HOT BUTTON. Baby boomers, who will start turning 65 in just 18 years, aren't making up for shakier pensions by socking away more savings. Instead, they face a huge gap between their bank balances and what they need for a comfortable old age (chart). "People are just awakening to the news that they've got to take responsibility for their own retirement," says Dallas L. Salisbury, president of the Employee Benefit Research Institute.
Washington knows that retirement fears fuel the public's growing discontent with the economy and government. But some of the capital's sharpest politicians see an opportunity as well as a threat. They predict that "retirement security" will be the next hot button on the domestic agenda. "If health reform is the issue of today, pension reform is the issue of tomorrow," says House Ways & Means Committee Chairman Dan Rostenkowski (D-Ill.). In the Senate, New Jersey Democrat Bill Bradley is planning hearings next year on retirement issues: "We need to strengthen the pension system today rather than wait for it to falter tomorrow," Bradley warns.
Rostenkowski and Bradley are just beginning to frame the issue. But they are still far ahead of the Clinton Administration. The gang that campaigned to the strains of Don't Stop Thinking About Tomorrow hasn't even started thinking about pension policy. Labor Secretary Robert B. Reich has offered a PBGC reform plan to force companies to bring their underfunded pension plans into balance. But underfunding is an old problem, and Labor officials refuse even to talk about the greater challenges of the baby boomers' retirement. That's "a second-term issue," they confide.
Delay could be dangerous, though. Washington last thought seriously about retirement policy 20 years ago. Ever since, it's been tinkering without a blueprint, and those haphazard changes are the cause of many of the pension system's current problems. In the 1970s, companies boosted their contributions to old-fashioned, defined-benefit pension plans in response to pension-friendly corporate tax breaks. But in the 1980s, Congress and the White House started whittling away those incentives, and pension coverage fell.
Having trampled on the carrots, some politicians think the answer now is the stick: Senator Howard M. Metzenbaum (D-Ohio) will soon offer a bill that would tilt pension benefits toward lower-income workers. And other liberal Democrats want to resurrect the Carter-era notion of mandating a new payroll tax to fund pensions for all workers. Such an approach would tempt companies to dump their pensioners onto the government, turning the corporate retirement safety net into a new national liability.
Instead, lawmakers pursuing pension reform should focus on three themes that would direct the debate toward sensible solutions.
-- First, retirement policy must be considered on its own merits--not as a poor cousin to budget politics. For the past decade, Washington has treated pensions as a cash cow for deficit reduction and undermined pension funding. In 1987, for example, Congress lowered the lid on businesses' tax-deductible pension contributions to pick up $3.1 billion over three years in new revenue. As a result, employers were barred from putting new money into an estimated 40% of big pension plans. But while contributions were frozen, pension obligations continued to grow, so many employers now face a stiff bill to bring their plans into balance. They have a choice: "Rather than pay more, some of those sponsors are just going to terminate" the plans, says Research Director Sylvester J. Schieber of Wyatt Co., a benefits consultant. The result: Workers' benefits would no longer grow, and Congress' short-term deficit cut could cost the economy billions in lost savings.
-- The second theme is a touchy one: To ensure a good retirement for workers, Washington has to permit better pensions for bosses. Pension law tries to balance tax incentives with fairness: Executives can participate in workers' pension plans but are subject to tough rules ensuring that benefits are spread fairly to all covered employees. But recent tax bills--including President Clinton's tax hike--have tilted that balance, putting the squeeze on contributions for highly compensated employees. Those limits "are divorcing top executives from their companies' mainstream pension plans," argues James A. Klein, executive director of the Association of Private Pension & Welfare Plans, which lobbies on benefits issues. When managers don't share in workers' benefits, those benefits don't get the same attention--or funding. Congress must reduce its obsession with equity if it wants to harness bosses' self-interests on workers' behalf.
-- The third theme is flexibility. While company-run, defined-benefit plans stagnate, the growth in pensions is in self-directed investment programs, such as 401(k)s. These plans offer greater portability to meet the changing needs of a more mobile work force, but they're also more likely to be left languishing in low-yielding investments--or spent when workers switch jobs. Pension paternalism can't be resurrected, but new policies should help ensure that workers hang on to their savings. Congress could boost the tax penalties for spending retirement funds. And businesses should offer more savings options, backed by investment education that helps workers learn how to handle their nest eggs.
Rewriting pension rules won't guarantee a sound retirement for the massive baby-boom generation. Security requires savings--current sacrifice for future comfort--and Americans haven't done very well on that front over the past 20 years. As Rostenkowski says: "We've yet to discover an issue involving actuaries that stirs the imagination." But pension reform can make the requisite sacrifice less painful, and the payoff could be huge. Boosting retirement savings, as Bradley notes, will set in motion "a virtuous circle of economic growth and job creation, which are the only long-term answers to our problems." Baby boomers--just beginning to realize that they, too, can age--can't afford to sit this debate out.