Government Study: Cash Balance Pension Plan Conversions Cut Benefits for All Workers

GOVERNMENT STUDY: CASH BALANCE PENSION PLAN CONVERSIONS CUT BENEFITS FOR ALL WORKERS

Report Underscores Need for Congress to Act to Protect Older Workers' Retirement Benefits

Workers of all ages experience significant cuts to their retirement benefits when their employers switch from traditional pension plans to so-called cash balance plans without first protecting employees' benefits, according to the results of a major government study released by lawmakers today.

The study, by the Government Accountability Office, found that over 85 percent of 30-year-olds, 90 percent of 40-year-olds, and half of 50-year-olds experience deep cuts in their retirement benefits if they are shifted from a traditional pension plan into a cash balance plan without protections from retirement benefit losses that result from the transition.

For the 30-year-old worker, such a change brings an average benefit cut of $59 per month; 40-year-old workers lose $188 per month; and 50-year-old workers lose $238 per month. Over one-third of pension plan participants never vested in the cash balance plan because they did not meet the plan's five-year vesting requirement.

The GAO study, which examined 31 large pension plans and 102 smaller ones matched against over 100,000 participants, did not find a single case in which a cash balance plan provided the same level of retirement benefits that a typical defined benefit plan provided.

Sen. Tom Harkin (D-IA), Reps. George Miller (D-CA) and Bernie Sanders (I-VT) and requested the GAO study last year and released the final report today. The lawmakers said that the study reinforces their view that pension legislation now pending in Congress should include a provision to protect the retirement benefits of workers who are at least 40 years old or who have at least 10 years of experience under cash balance conversions.

"I welcome this report. I've always said that workers need transition protections when their employer changes the rules in the middle of the game," said Harkin. "This independent analysis from the GAO confirms that, without some protections, everyone loses."

"House Republicans are pushing pension legislation that is rife with problems, like saying to employers that it's acceptable for them to cut the retirement benefits of older workers," said Miller, the senior Democrat on the House Education and the Workforce Committee. "Workers have made career and financial decisions based upon these benefit promises, and they should not have their retirement plans dashed at the whims of the companies they've loyally served."

"The GAO report is further proof of the need to stop companies from slashing the pension benefits of older workers through cash balance schemes," said Sanders, who has offered several successful amendments on the House floor against unfair cash balance pension conversions. "What was especially surprising about this report is that these cash balance conversions hurt a greater percentage of younger workers than older workers. This flies in the face of the claims of companies that these conversions are better for younger workers. Clearly that is not true and companies that continue to push that line are just not being honest. Cash balance pension plans hurt everyone."

A number of major U.S. companies, including IBM and AT&T, have converted their traditional pension plans into cash balance plans in the last 20 years. The GAO found that, in 70 percent of the cash balance conversions they studied, companies provided at least some measure of protection for workers who had been enrolled in the old system. Roughly half of companies allowed either all of their workers or their older workers to stay in the old plan.

The Senate is working to pass legislation that would allow cash balance plans to exist going forward, as long as they have a strong basic structure that protects worker's wages. It would also prohibit companies from "wearing-away" or eroding the value of the benefits of their older workers, including early retirement benefits, and requires some transition benefits for workers caught in the middle of a conversion.

Traditional pension plans, formally knows as defined benefit plans, guarantee retirees a fixed monthly payment in retirement based on variables like age and years of service to the company. In a cash balance plan, workers generally receive one lump-sum payment at retirement or separation from service.

The GAO study found that the key reason why workers experience benefit cuts after switching to cash balance plans is that the method for calculating cash balance plan benefits is less generous than the method for calculating benefits in a traditional pension.

Harkin, Miller, and Sanders and have introduced legislation that would allow workers who are at least 40 years old or who have been on the job for at least 10 years the option to choose which pension plan works best for them at retirement.

The AARP, the AFL-CIO, and the Pension Rights Center have all endorsed the legislation. In the House, the legislation is H.R. 4052. In the Senate, it is S. 1304.

http://harkin.senate.gov/news.cfm?id=248308