The Association of U S West Retirees



America's pensions in peril - or gone

By Drew DeSilver

Seattle Times business reporter


After flying Army helicopters in Vietnam and then piloting United Airlines jets for more than two decades, John Balkenhol of Marysville was looking forward to retiring to his Montana vacation spread.


But when bankrupt United transferred its huge pension obligations to the federal government last summer, his maximum benefit was nearly halved. Now the 60-year-old Balkenhol is on the road looking for work.


"I was thinking of maybe flying fire bombers," the planes that drop water or retardant on forest fires, he said. "It's not easy to find a job flying, at this age."


It's hardly the retirement Balkenhol had hoped for. Like hundreds of thousands of workers and retirees across the country, he's getting a crash course on America's faltering pension system.


He's learned that a company like United can drop its pensions in the government's lap when they get too expensive. That pension benefits he'd been promised years ago can be cut. That the government's pension insurer is itself facing a huge deficit.


Throughout the Northwest and around the nation, workers have discovered their employer can unexpectedly shut down a healthy pension plan, or "freeze" it to exclude new hires and halt the growth of benefits for existing employees.


The list of companies that have dumped their pensions onto federal regulators over the past few years -- often slashing retirees' checks in the process -- reads like a Who's Who of industrial America: Bethlehem Steel, US Airways, Pan Am, Kaiser Aluminum. The federal Pension Benefit Guaranty Corp. (PBGC) has $56 billion in assets but $79 billion in current and estimated future liabilities.


For each failed plan taken over by the feds, hundreds of mostly smaller plans, affecting tens of thousands of workers, are quietly shut down each year, further hollowing out the traditional pension system.


So far, Washington state has avoided the worst of the pension system's slow collapse.


Largely because of the presence of Boeing, Paccar and other big manufacturers, the state ranks 12th nationally for the percentage of people covered by employer-sponsored pensions. As of 2003, almost 874,000 workers and retirees in Washington were counting on pensions for part of their retirement -- 19.1 percent of the adult population.


Since 2000, the PBGC has taken over plans from just three Washington-based employers: Lamonts Apparel, Consolidated Freightways and Longview Aluminum. This is called a "distress termination." Together, those plans covered 7,564 workers and retirees.


More than 120 plans sponsored by Washington-based companies and nonprofits have been shut down (or, in pension lingo, "a standard termination") in the same period; those plans covered 5,489 people.


For workers, pensions promised stability and security in retirement, in tacit exchange for devoting all or most of their careers to one company.


"Pensions aren't free," Balkenhol said. "They weren't a free grant from the company. You got them in return for giving up direct pay and working 15-, 16-hour days and flying on holidays."


But pressured by competition from domestic and foreign companies that don't offer pensions, by an economy that rewards workforce flexibility rather than stability, and by the sheer expense of keeping the plans running, more and more employers are getting out of the pension business.


"We're on a downward trajectory here," said Alicia Munnell, director of Boston College's Center for Retirement Research. "The traditional pension is not coming back."


Old Economy


Employer-sponsored pension plans became widespread after World War II, and remain concentrated in heavy manufacturing, banking and utilities -- the commanding heights of the Old Economy.


But newer businesses have mostly avoided taking on big pension obligations, favoring cheaper, easier-to-administer 401(k)s and other "defined-contribution" plans to which they don't have to contribute a dime unless they want to.


Of the nine Washington-based companies in the Fortune 500, Washington Mutual, Weyerhaeuser, Safeco and Paccar have traditional pensions in addition to 401(k)s or other defined-contribution plans. Microsoft, Starbucks, Nordstrom, and Costco Wholesale have defined-contribution plans only.


Almost no major employer has started a traditional pension plan for the past two decades, and more and more companies are looking to limit their pension costs -- "freezing" the plans when not shutting them down completely.


Univar USA, a large chemical distributor based in Bellevue, closed its traditional pension plan to new workers in July 2004, chief administrative officer John Sammons said. The plan now covers about half of Univar's 3,400 U.S. employees, he said, while more than three-quarters are enrolled in its 401(k) plan. (Univar, unlike most employers, automatically enrolls its workers in the plan.)


"This is the kind of plan that our competitors have," Sammons said, referring to 401(k)s generally. "In order to be competitive in the marketplace, we needed to have this kind of portable benefit."


With few younger workers expecting to spend most of their working lives with one company, pensions aren't the powerful recruitment and retention tools they once were.


"When you talk to someone who's 25 or 30 about a job, and you talk about the wonderful pension plan they'll have when they're 65, they kind of look at you with a blank stare," Sammons said. "Especially when the guy down the street is offering to put $5 more in their pocket."


Thinking about retiring


That was pretty much how Jeff Sutton felt when he was hired into the Seattle office of Avemco, an aviation-insurance company.


Avemco, founded in 1961, had both a pension and a profit-sharing plan, a type of defined-contribution plan that was particularly popular before 401(k)s. Sutton was 23 and just out of college, and retirement seemed a long way away.


"But over time, as you start having a family and kids, you start thinking, 'Yeah, I'd like to retire,' " said Sutton, now 41 and living in Tacoma. "I think a lot of us felt very comfortable having that pension there. You knew that even if the stock market had a burp or something, you'd still have a retirement.


"And then they go and get rid of it."


In 1997, Avemco was sold to Houston-based HCC Insurance Holdings. Within a year, HCC had shuttered the pension plan and folded the profit-sharing plan into its 401(k). It was one of 2,475 pensions that were voluntarily terminated that year. (HCC did not respond to a request for comment.)


When a healthy plan, like Avemco's, is shut down, the company must either buy annuities that will guarantee workers will receive the annual benefits they've earned, or give them lump-sum payments reflecting their future benefits. Avemco's employees got the lump-sum payments; Sutton says his was "minuscule."


Sutton, who had been with Avemco for just a decade, ran up against one of the key facts about defined-benefit pensions: The longer you work for your employer, the more the pension is worth to you.


Most pensions calculate retirees' checks based on how long they worked for the company and their top salary -- often expressed as, say, the average of the five years before retirement. Because most people earn more in their 50s and 60s than in their 20s and 30s, most of the pension's value is earned in the last years before retirement.


Sutton admitted that he and his Avemco colleagues had more pressing concerns after the merger than monitoring their pension plan -- such as "whether we would have long-term jobs or not." Still, the meager lump-sum check dismayed him.


"The thing that really ticked me off is that I didn't hold out for more salary, because we had the pension," he says now. "If I'd known they were going to take that away, I'd have asked for more money so I could have put more aside."


Sutton left not long after the HCC deal. He now works for London Aviation Underwriters, which offers only a 401(k). And retirement once again seems a long way off.


"I'm not going to retire," he said. "I'm going to work till I die."


Unlike Sutton, John Balkenhol had some advance warning that his pension might be in trouble. United filed for bankruptcy in late 2002, and warned it could no longer afford its massive pension plans.


Balkenhol joined United in 1979 and (after a five-year furlough in the early '80s) retired in January 2005 -- days after the airline defaulted on its pilots' plan. Fearing that a federal takeover would end up eviscerating his pension, he took some of it as a lump sum last year and used it to pay down as much debt as he could, even though he knew that could cut his monthly check.


Still, Balkenhol was stunned when he got his first benefit estimate from the PBGC. Instead of the $4,700 or so a month he had earned under United's plan, Balkenhol would receive only $1,074. That likely was because of three factors: his lump-sum payout, a cap on the federal insurance, and the fact that he retired before age 65 -- even though commercial airline pilots are forbidden to fly after age 60.


Now, instead of traveling with his wife or relaxing in Montana, Balkenhol expects he'll keep working -- "as long as health holds out, I guess."


Drew DeSilver: 206-464-3145 or