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Whither the American pension?

Whither the American pension?

Fewer and fewer workers covered by pension benefits as 401(k) and similar plans proliferate
Whither the American pension?
Photographer: John Cropley

The sudden erosion of pension benefits for 1,100 former employees of the old St. Clare’s Hospital in Schenectady is a scenario that isn’t supposed to happen.

In 1974, Congress enacted the Employee Retirement Income Security Act, which regulated workplace pensions and created the Pension Benefit Guaranty Corp. Since then, employers with pension plans are required to follow PBGC regulations and pay premiums to the PBGC. In return, the PBGC takes over pension payments to retirees if a guaranteed pension fund fails.

However, the Employee Retirement Income Security Act contained a religious exemption that was later expanded to hospitals operated by religious groups, and St. Clare’s took advantage of that. Now, many of its former employees are on their own.

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Karen Ferguson, director of the nonprofit consumer organization Pension Rights Center, in Washington, D.C., has been in contact with some of the St. Clare’s retirees. She said a recent Supreme Court ruling that unanimously upheld the religious exemption to ERISA was not as absolute as it seemed. But what can be done to help the St. Clare’s retirees get more money remains to be seen.

“This is a broken promise to these folks who were promised these benefits, earned these benefits,” Ferguson said.

She noted two recent cases in nearby states that are similar to the St. Clare’s pension case:

The St. Joseph Health Service pension fund was reportedly the largest to fail in Rhode Island history, affecting more than 2,700 people to the tune of at least $125 million. It prompted a lawsuit against a dozen entities, including the Diocese of Rhode Island. Media outlets there reported a tentative settlement in late October.

The former St. James Hospital in Newark, New Jersey, seems more similar to the St. Clare’s situation, Ferguson said. After mergers and acquisitions, the Archdiocese of Newark and all other entities disavowed responsibility for the deflated St. James pension plan — successfully, thus far.

FEWER PENSION PLANS

But what about the rest of America?

Two generations of American workers increasingly don't have to worry about pension plan failures because fewer and fewer workplaces offer pensions.

In the 40 years since ERISA was enacted, a sea change has moved Americans from defined benefit pension plans to defined contribution investment plans, such as 401(k)s.

The number of defined contribution plans more than tripled, and the number of defined benefit plans fell by more than half, from 1975 to 2015. In 1975, about three times as many workers were covered by pensions as had investment accounts. In 2015, nearly three times as many had investment accounts as had active pensions. 

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Defined benefit pensions guarantee a specific payment to retirees. If the pension fund doesn't contain enough to pay retirees, the employer must come up with the money to make up the difference. Ideally, the retired employee never notices this.

Defined contribution plans are funded by specific contributions by employees and/or employers that the employees, in many cases, decide how to invest. If the employee invests wisely and the economy is strong, the plan can appreciate sharply, building a big nest egg to spend in retirement. The opposite is also true: If the investment or the economy sours, the employee retires with less money or must delay retirement. 

The PBGC doesn’t cover defined-contribution plans.

Ferguson said the shift in the American workplace from pensions to 401(k)-type plans is not a fair trade, exposing workers to risk and uncertainty.

“This really was a way of saving money at the expense of employees and retirees,” she said. “Financial institutions bear great wealth and wield great influence now.”

WIDESPREAD ISSUE

Not all pension funds are equal.

Public employee pensions in New York state, for example, are about as certain as anything can be in this world -- guaranteed by policy, politics and the state constitution. And the money is there for them: For the fiscal year that ended March 31, police and firefighter pensions were 96.9 percent funded, and other state employees’ pensions were 98.2 percent funded -- one of the best funding ratios in the nation.

The pension fund of neighboring New Jersey, by contrast, was only 36 percent funded at the end of the 2017 fiscal year -- one of the most severe examples in a nationwide patchwork of underfunded municipal pension plans. The Pew Charitable Trust estimated the collective shortfall among the 50 states' plans was $1.4 trillion in 2016.

Meanwhile, many of the largest American firms have also shorted their pension funds to free up money for other purposes. By far the biggest of these (by dollar amount though not by percentage) is none other than General Electric, which went from a $14.6 billion pension fund surplus in 2001 to a $31 billion deficit at the start of 2018.

The financially struggling company has announced plans to borrow $6 billion to shore up the pension fund this year.

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