Defending pension plans
Are defined-benefits pension plans sustainable? Readers debate the issue.


(NEW YORK) FORTUNE - Are defined-benefits pension plans sustainable?

We got many responses to Justin Fox's Thursday column. Here is some of what our readers said, and Fox's response.

Good riddance to pensions
Corporate pensions are an unstable, unfair and economically perverse means of paying for retirement. (Read column)

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Justin Fox's article on the plight of defined benefit plans was misinformed and obviously biased against DB plans. I am an enrolled actuary with 28 years of experience working with DB plans, and I can tell you that the main culprit for the current condition of DB plans rests with Congress. Congress throughout the years has continually passed legislation hampering the adequate funding of DB plans in order to help balance budgets. In addition the PBGC is faced with a shortfall because the premiums have never been priced adequately to compensate the agency for the risk they are assuming (Congress sets the premiums by law and again is to blame). Current law also allows companies in bankruptcy to foist liabilities for underfunded plans onto the PBGC as an unsecured creditor.

I also find it amusing that Justin feels IRAs are much more effective in providing retirement income to employees. It is well known that employees not only do not contribute enough to DC plans, but do not have any idea how much they should contribute to these plans to provide an adequate income. Furthermore, employees entirely bear the investment risk in DC plans, and we have seen how our DC accounts have suffered brutally over the past 5 years if they have been invested in equities. I would appreciate more balanced and informed reporting when the issue of DB plans is addressed in the future. I could go on but I am too busy to devote any more time to this. Thank you for the opportunity to respond to this article. -- K.C.

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From my perspective, even with the 401K, IRA's, the prospect of losing my pension is scary....Remember our economy thrived partially on the basis that retirees were an economic power also. I suppose your next target is to eliminate Social Security too! -- C.M.

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My guess is that Mr. Fox is a member of Generation X. When will he and his MTV-bred, job-flittering, Wall Street- worshipping peers awaken to the fact that pensions -- when efficiently and honestly administered -- can actually be good for employers, employees and the economy in general? They fail to appreciate how much comfort can be taken in knowing that no matter how much money we may save individually, and regardless of how the vagaries of the economy might affect us, we can still look forward to at least some degree of guaranteed income resulting from our years of loyalty to and hard work for a particular company. (Indeed, one of the main incentives for such loyalty and hard work was our employer's promise -- and legal obligation -- to help take care of us in retirement.)

Like outsourcing, scrapping pension plans is a quick, dirty fix: Its only purpose is to strengthen the bottom line, regardless of how much it hurts employees. Obviously, those of us with a sense of loyalty to our employers feel singularly betrayed by this trend to eliminate (rather than improve, which would make vastly more sense) what has been a cornerstone of the American workforce. It would seem that members of Mr. Fox's generation -- cynical, full of self-reliant, media-muddled financial bravado -- don't care. They should. -- P.

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Re: Good riddance to pensions, January 12, 2006, you state "If GM had simply set aside all the money it put into its pension plan .....it wouldn't have this problem." You also state under An Alternative..."every worker's income is automatically funneled into retirement accounts...". Well, isn't this what the pension accounts did, funneled the workers' money into retirement accounts? Same as Social Security, all the years of putting money into an invidividual's social security account, isn't that what we were doing all those years, saving for retirement?

If the moneys are being taken from these accounts (SS) and used by the government for other expenses, how is that the individual's fault? Where is the money that I've been forced to save for my retirement since my first job at 16 years old? Now I'm being told that as a baby boomer, it's my fault that the system will fail. Let's put the blame where it belongs. So ... how do I know that by the time I retire my retirement money will be in any accounts that I have? There's no guarantee, is there? So, is the solution to put it in a sock under the mattress? Maybe our grandparents knew what they were doing. -- L.J.T.

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Justin Fox responds: After writing an intentionally provocative essay, I'm certainly not going to criticize anybody for being provoked. But I do want to make it clear whose side I'm on: I don't think it's a good thing that bankrupt companies are defaulting on pensions, and I'm not thrilled with the way IBM, Verizon and the like are freezing theirs (they should give employees more time to adjust their plans and expectations).

What I am saying is that the corporate pension setup we had was doomed to fail, simply because corporations can't be relied upon to look after their current employees 50 years down the road. The world changes, companies shrink, they go out of business, CEOs shortchange pension funds to goose earnings, etc.

If money is set aside instead in accounts owned by individual workers, those risks recede. Other risks appear in their place: The biggest one is that individuals will fail to save enough, the second is that they will make poor investment choices. But that's where the "buyer's co-ops" I discuss in my original essay come in: They're supposed to nudge (or force) people into setting aside enough money and putting it in a diversified, low-cost portfolio of stocks and bonds.

Something I didn't point out in my original essay is the need to nudge (or force) retirees to buy an annuity with at least part of their stash so they don't run out of cash if they live longer than expected. To those who object that even with all those protections, individual accounts are too risky, all I can say is, there's risk in every method we've come up with of funding retirement. It's just that with corporate pensions that risk is usually ignored until it's too late.

A couple of letter writers not cited above wondered about my claim that if GM had put money into individual accounts over the years instead of a pension fund, "some GM retirees would be worse off than they are under the existing pension plan, but prospects for current employees (and potential future employees) would be far better."

I fess up: There are no actuarial calculations to back that up -- and I don't think I could come up with any. It's an opinion, based on the premise that GM wouldn't be in such dire trouble today if it didn't have to devote so much of its cash (and its executives' time and mental energy) to keeping its pension fund and retiree health plan afloat.

Finally, since several people brought it up: I was born in 1964, the final year of the baby boom. I'm vested in my employer's pension plan, but I'm certainly not counting on it.

Justin Fox can be reached at jfox@fortunemail.comTop of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.