"Folk talk about Social Security, but pensions are in"
immediate trouble. Pensions nationwide are facing real issues. Employers are faced with either cutting back on labor, or making outrageous contributions in order to keep the generous pension plans many in America have become used to.
In order to view the link, you might need to register with the Atlanta Business Chronicle. When I read this a few days back, I was shocked. Finance heads, Economics heads please weigh in.
The 31,000 pension plans run by American businesses now have an estimated collective shortfall of $450 billion, a record figure, according to the Pension Benefit Guaranty Corp. (PBGC), a government entity that insures pension funds and must assume liability when they fail.
Much of the underfunding that has accumulated has been a direct result of the weak economy that has persisted for nearly five years, pension experts say.
Unlike 401(k) plans that allow employees and employers to make steady contributions to retirement programs, funding requirements for traditional "defined benefit" pension plans can change drastically from year to year. That's because contribution amounts are based on a complex formula of interest rates and the performance of existing portfolio investments.
Since most pension plans are heavily invested in the stock markets (which performed poorly for four of the last five years) and interest rates remain at near-record lows, scores of companies are having to cough up hundreds of millions of dollars to make up the difference and satisfy the minimum pension contribution amounts due each year.
Delta estimates its payment for 2005 will be $450 million, while Northwest says it must pay $420 million and American projects a payment of $310 million.
"There has been this perfect storm over the last five years that we've never seen before -- both the stock market and interest rates went down and then stayed down for a very long time," said Ron Gebhardtsbauer, senior pension fellow with the nonpartisan American Academy of Actuaries. "We've never seen that happen before to this extent. In the early '80s, interest rates went down but stocks were stable. In 1987, the stock market fell 33 percent, but interest rates were steady. This is new territory for pensions."