Cappucino Economics - Economics for the rest of us On Labor Day, 1974, President Ford signed the Retirement Income Security Act, calling it the most important labor legislation since the 1935 Wagner Act. Since then, Congress, firms and federal agencies have abandoned meaningful pension protection. Though some firms still shave wages and hours, workers" pension fund money is routinely siphoned away by corporations and their professionals. In a dismal reversal of fortune, workers in the nation"s most celebrated companies find their pension cupboards bare. It is not just rank and file workers from criminally-suspect firms like Enron, Global Crossings and Adelphi, but also workers at firms that only have 401(k) plans - like the world"s largest employer, WalMart. Indictments will not remedy the bulk of pension shortfalls because most of the abuses are legal. In traditionally-defined benefit plans, firms contribute to trust funds to finance future pension payouts. In the case of underfunded plans in bankruptcy, the Pension Benefit Guaranty Corporation (PBGC) pays only the core pension, not early retirement supplements and cost of living improvements, as LTV and Polaroid workers recently discovered. In July, the PBGC reported that pension underfunding quadrupled to $111 billion - which doesn"t even reflect the stock market shortfalls in 2002. If plans don"t turn around sharply, the PBGC might have to raise premiums on healthier, more conservative firms or, though unlikely, get money from the U.S. Treasury. The rub is that firms have been reporting to shareholders that these funds were doing well. Actuaries and auditors in the steel, airlines, pharmaceutical, energy, chemical and other companies have made very aggressive (and unreasonable) estimates for growth, which means, when refigured, that what once looked like healthy companies could be saddled with debt. Drastic legal changes must prevent gross conflict of interests in 410(k) plans. Though, on average, employees hold 20 percent of their 401(k) assets in employer stock, averages hide the fact that some workers, like at Procter and Gamble, have over 90 percent of their pension assets in their 401(k)s. Employees aren"t the ones foolishly putting all their eggs in one basket; employers have powerful ways to load their employee"s accounts with large amounts of company stock. They can prohibit rank and file workers from selling stock and tie job loyalty to buying stock. Also, many employers force employees to pay high fees for bells and whistles on 401(k) services, causing the account value to erode by as much as 20-40 percent. Reasonable curbs on all these practices face severe, but quiet, employer resistance that Congress has so far not overcome. Workers pay directly for pensions with contributions and indirectly through lower wages. Taxpay-ers pay for pensions because pension contributions and earnings are exempt from taxes until benefits are paid. This favoritism reduces federal tax revenue by $80 billion per year. This is the largest source of tax loss, larger than tax breaks for mortgage interest deductions. Pension funds pay the actuaries, attorneys, accountants and auditors yet are hired by the firm executives. It"s understandable, though illegal, that these professionals, like Arthur Andersen, become captive to the firms" concerns. Is there any other structure where the person paying the bills has no say in crucial decisions? If we are to prevent plan abuse it must become impossible for employer sponsors to use plans to enrich the company. Plan sponsors should no longer control major plan decisions. Instead, employee representatives should be pension trustees. Workers should not only have a say in how their money is used because it is the right thing to do, but because worker trustees serve practical ends. Experience shows that worker trustees encourage employees to save in their pension funds - an important outcome in our debtor nation. In the period 1984-1996, employer contributions to the largest 401(k) type plans fell 20 percent. In circumstances where there was employee board representation, employer contributions rose by 6 percent and employee contributions rose by over 500 percent - and that is no typo. While many regard 401K plans as a fabulous innovation, over 30 percent of those eligible don"t participate. Many non-participants say that they cannot afford to make contributions, others don"t seem to know if they are eligible. The presence of worker trustees seems to make workers aware of their plans and encourage trust and engagement. Taxpayers and employees deserve employer pension plans that actually produce secure retirement income, which can happen if workers can share control over their pension money.
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