A Surprising Thing About Pensions
Sep 13th 2011 2:07PM
Updated Sep 13th 2011 2:08PM
It can be easy for high-level thinkers to assume that it's a good thing when companies phase out their pension plans and replace them with 401(k)s. After all, the company is relieved of a lot of responsibility, and most of the investment performance risk is shifted to the worker. That seems like a good move for corporations, though it's understandably not pleasing to workers. It turns out, though, that pensions can be good not only for employees, but also for the corporate world.
Diane Oakley, director of the National Institute on Retirement Security (NIRS), recently testified before a Senate committee, saying, "Pensions are a 'high five' for the U.S economy: investing $5.35 trillion in assets for the future, keeping some 5 million retired Americans out of poverty, supporting 5.3 million American jobs, and delivering retirement income at nearly 50% lower cost than individual defined contribution retirement accounts."
This additional detail might surprise you: "When retirees have a stable and secure pension check, they don't stick it under the mattress. They spend that income [on] goods and services in their local communities, leaving a substantial economic footprint from coast to coast." It makes sense, since pensions offer incomes that retirees can count on. Those of us relying on 401(k) plans, IRAs, and similar beasts are busy socking away what we can, but we have no idea how big our nest eggs will ultimately grow, and how much income they'll generate. Thus, many of us engage in some hoarding; we put off or reject various purchases.
While this is great news about pensions, the sad truth is that they're on a path to extinction. Last year, Towers Watson reported that only 17% of Fortune 100 companies still offered pensions to some of their workers. Many of those are Dow Jones Industrial Average (INDEX: ^DJI) components, such as General Electric (NYS: GE) , which reported being fully funded, a rarity among pension providers. It's logical for big blue chips to be the holdouts. For old stalwarts such as GE, pensions are longtime fixtures and the companies tend to be big enough, with predictable enough income, to be able to plan for pension funds (and dividends, for that matter).
Still, pension freezes and eliminations continue, with companies such as Caterpillar (NYS: CAT) and Walt Disney (NYS: DIS) switching to 401(k)s for many or all workers in 2011. Verizon (NYS: VZ) workers recently went on strike, protesting a proposed pension freeze, among other things. Even General Electric, which has a pension fund so healthy that the company has hardly contributed to it since 1987, is freezing its pension, making it unavailable to new hires.
Ramifications and bad impressions
Pensions can weigh on financial statements. Milliman Inc., which tracks the 100 largest corporate pension providers, noted recently that at least three companies -- Honeywell (NYS: HON) , Verizon, and AT&T (NYS: T) -- changed their GAAP accounting in 2010 to recognize accumulated losses in their plans, taking sizable charges. Many companies would likely prefer to not have to deal with pensions at all.
But while companies are phasing out pensions, our economy is sputtering. As more and more people rely on 401(k)s rather than pensions, many people are not spending as freely as they otherwise might, thus creating a drag on our recovery. Despite that, many are not hoarding enough, and are on track to have gruesome retirements.
According to NIRS, people without pensions are six times more likely to be living in poverty than those with pensions. Those folks cost society, via public assistance, and they're much less able to spend money and support the economy. Government pensions are valuable, too. The NIRS estimates that "each taxpayer dollar invested in state and local pensions supported $11.45 in total economic activity, while each dollar paid out in benefits supported $2.36 in economic activity." And best of all, there's a strong case to be made that pensions are more cost-effective than alternatives in providing retirement income.
America should rethink pensions and how we might bring them back.
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At the time this article was published Longtime Fool contributor Selena Maranjian owns shares of Verizon Communications, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Walt Disney and AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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