General Motors, with a $90.9 billion pension fund – the largest among U.S. companies – announced on March 7 that it will freeze pension benefits for nonunion workers. The move will cut the company’s costs by $1.6 billion in 2006 and reduce benefits for 42,000 salaried GM employees.
In January, IBM, with a $44.8 billion pension plan – the nation's third biggest behind GM and General Electric – announced it would freeze pension benefits for its 117,000 employees starting in 2008. Verizon said in December 2005 that it was freezing benefits for 50,000 nonunionized managers starting in June 2006.
The sudden escalation in the number of U.S. companies that are terminating or freezing their pension plans spells disaster for U.S. workers because there is no adequate public pension system to replace private plans when they disappear.
Among 26 major world economies, manufacturing workers rely on private company retirement plans for most of their retirement income only in the United States, the United Kingdom and South Africa, according to a new Towers Perrin study.
In all other countries, Social Security and other compulsory programs cover all or most of a manufacturing worker’s retirement income. In most of those cases, the guaranteed pension is at least half and often more than two-thirds of the average total cash compensation that the worker received before retirement.
In the United States, Social Security and other public retirement programs provide just under 40 percent of total retirement income for a manufacturing worker, about the same level as in India. In India, however, the employer contributes 13.59 percent of payroll for social security and the worker contributes only 1.75 percent. In the U.S., the employer contributes only 6.20 percent, and the worker must match that with a 6.20 percent paycheck reduction.
The United States now spends only 4.6 percent of GDP on Social Security, its public retirement income program, the lowest portion of GDP of all of the advanced nations, according to HSBC, the global finance corporation. France spends 12.1 percent of GDP for its public retirement income programs, Germany spends 11.8 percent and the United Kingdom spends 5.5 percent. Canada spends 5.1 percent and Japan spends 7.9 percent.
The extremely low benefits Social Security pays out mean that U.S. workers who do not receive private pension plan benefits are thrown into poverty or near poverty when they retire.
According to January 2006 data from the U.S. Social Security Administration, 30.6 million retired workers now receive retirement benefits under Social Security. The average monthly benefit is $1,004 or $12,048 per year, just $2,478 a year more than the official federal poverty guideline for an individual.
The Social Security Administration produced data on the share of income from Social Security benefits in 2003. It reported that 65 percent of all retired workers who live alone rely on Social Security for more than half of their retirement income. For retirees who are heads of households, 39 percent rely on Social Security for more than half of their income.
African American retirees are even more dependent on Social Security. For black retirees living alone, 68 percent rely on Social Security for more than half of their retirement income; 52 percent rely on it for more than three-fourths of their income. Among black retirees who are heads of households, 73 percent rely on Social Security for more than half of their income; 48 percent rely on it for more than three-fourths.
More U.S. companies will move to terminate or freeze their plans as the Pension Benefit Guaranty Corporation (PBGC) premiums for both single employer and multiemployer defined benefit plans rise by almost 58 percent starting with the 2006 plan year.
The push to end pensions will also accelerate as the Financial Accounting Standards Board (FASB) proposed changes in accounting rules force companies to recognize larger pension liabilities in their financial statements beginning in 2006.
The FASB changes will dramatically increase reported liabilities and slash shareholder equity.
Boards of directors and some shareholder groups can be expected to play a more active role in demanding that companies freeze or terminate their plans.
GM announced that it would replace its pension plan with a 401(k) plan that provides a 50 percent company match for employee contributions up to 4 percent of pay. This will not provide a secure retirement for any GM worker, and Social Security benefits are far too low to make up for the loss of the defined benefit pension.
The United States needs to join other advanced nations in funding a public retirement program that provides retirees with a secure income that replaces a substantial portion of wages earned.
