IBM. Verizon. Sears. Hewlett-Packard. Motorola. The list of corporations that have put a halt to guaranteed pension plans comes as a jolt to Baby Boom employees entering what they thought would be their peak pension-building years.
At the same time, new accounting rules and Congressional legislation are being drafted to close the U.S. pension-funding gap, now estimated at $450 billion. While some proposals under discussion could make it easier for companies to discontinue defined-benefit plans, others would create incentives to support investment in defined-contribution programs, such as 401(k) plans, according to Wharton faculty and pension experts.
Olivia Mitchell, director of Wharton's Pension Research Council, says the recent rush to freeze guaranteed pension benefits is a continuation of a long-term trend in abandoning defined-benefit plans in which workers receive a guaranteed retirement payout. The announcements are eye-popping now, she says, because they come from large, well-established companies that seem to be in good health, compared to steel and airline companies that cut pension commitments under severe financial strain. "These are companies that seem viable. They are not going bankrupt and dumping their plans on the government."
While the idea of a guaranteed pension in old age may be comforting, Mitchell says the changing nature of pension plans reflects today's economy, in which little is assured. "There's a common perception that defined-benefit plans are safe and guaranteed and defined-contribution plans are risky, but I think the last 10 years should have removed that misimpression from people's minds. Defined-benefit plans are risky, too."
Changing the game plan for existing employees will generate fallout, predicts Wharton management professor Peter Cappelli, who is also director of Wharton's Center for Human Resources.
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