Bush OKs Pensions That Worry Workers

IRS Logo over tax forms, receipts, and paperwork.
The Bush administration plans to propose new regulations Tuesday that would protect employers from age discrimination liability when a company converts its traditional retirement pension benefit to a different arrangement called a "cash balance plan."

Such conversions typically mean less money for workers closer to retirement age. Currently there is a moratorium on government approval of conversions. But that would be lifted if the regulations are approved after a public comment period and an April meeting of the Internal Revenue Service.

Cash balance plans usually consist of a percentage of pay earned by a worker plus interest that can be paid out as a lump sum if the worker leaves the company after working there for a certain period. Unlike a 401(k) plan, employees neither own the accounts or make investment decisions. Unlike a traditional pension plan, the worker isn't guaranteed annual benefits after retiring.

As CBS News Correspondent John Roberts reports, corporations love cash balance plans -- by restructuring pension contributions, they save tens of millions of dollars every year. Younger workers can build up savings over a lifetime, but older workers - nearing retirement often lose substantial income when their employer switches from a traditional, or 'defined benefit', pension plan.

"It's a massive takeaway of their retirement benefits of the money they thought they'd have as income coming to them from their retirement," says Rep. George Miller (D-Ca).

The IRS stopped approving cash balance pensions in 1999 - after a barrage of complaints that older workers were losing up to 30 percent of their projected pension benefits. The new rules require companies to treat older workers 'fairly and reasonably' - but leave it up to the employer to determine what 'fair' and 'reasonable' mean.

According to Roberts, about a fifth of the Fortune 1000 companies - CBS among them - have cash balance pensions - covering about 8 million workers. If the IRS lifts its moratorium on approvals, dozens more are expected to jump in.

Critics also say the proposed rules favor employers by allowing them to establish all the terms of the plan, including the return rates paid and the value of what a worker would have received under the old plan.

"This is deregulation of pension plans and it is going to cost employees dearly, especially employees over 40 years of age," said Miller, ranking Democrat on the House Education and Workforce Committee.

Companies increasingly converted their costlier traditional pension plans to cash balance plans starting early last decade. The plans are cheaper to administer and attract younger workers because of their portability.

Pension laws prohibit companies from reducing benefits that already have been accrued. But they can cut or eliminate future benefits — like the benefits expected by employees whose original pension plan was based on final average salary.

Firms that eliminate their traditional pension plans are subject to an excise tax of up to half of any surplus assets in their pension trusts. But to avoid the tax and still do away with a costly pension plan, many companies are choosing to convert to cash balance plans.

More than 800 claims of age discrimination have been filed with the Equal Employment Opportunity Commission over conversions to cash balance plans.

That's because older workers don't get the future benefits promised under traditional plans — only what they have earned — when their plans are converted.

Traditional pension plans tend to base their annuities on final average pay, usually the average salary of an employee's last three years on the job.

Therefore older workers — who've been with a company longer — could expect to have their pensions based on salaries much higher when they left the firm than younger workers, who would leave earning less because they were at an earlier stage of their careers.

However, under cash balance plans, companies pay a fixed percentage of a worker's annual salary toward retirement.

Rather than basing a pension on the years when an employee earns the most, it spreads it out over a greater number of years and bases it on a lower average salary, because people tend to earn less when they are younger.

A 2000 General Accounting Office report found that for some young people, a cash balance plan could increase retirement benefits compared to an old plan.

But older workers have less time to accrue the new benefits — because the benefits are a percentage of what's earned each year and older workers have fewer years left to work. So they can sometimes end up with less than the promised benefits under the traditional plan.

For example, James Bruggeman, a worker in Tulsa, Okla., told Congress two years ago that the benefits he expected under the old plan would have been 30 percent higher than under the new plan.

Often older workers go several years without earning any benefits after the transition. Called a "wearaway" period, that happens when the balance of an old pension account being converted is higher than what would be earned in the new plan.

Because federal law prohibits pension changes from lowering a workers' pension payments, employers can only switch workers to a cash benefit plan if that plan would put more in a worker's retirement account than the old pension plan was expected to award.

During the first few years under a cash balance plan, older workers will not be included, because the old plan was worth more. But that means the company is not saving anything for these older workers.

The proposed regulations being issued by the Treasury Department say that wearaway periods are not forms of age discrimination, a treasury official said Monday night.

Also, no age discrimination exists if older workers are offered the same percentage of salary benefit or more in their cash balance plans.

The interest earned on the account also must be at a "reasonable rate" determined by the employer.