Danger: Pension Perils Ahead

Changing demographics, and high inflation, spell trouble for the funds A pension bomb threatens the U.S. economy. Its fuse may now seem comfortably long, but it is indisputably burning. The toughest issue in the negotiations for a new contract between General Motors and the auto workers was not demands for more pay for the U.A.W.'s 460,000 workers on GM's pay roll, but for increased benefits for its fast-growing legion of retired employees. A big reason why policymakers in Washington are agonizing heavily over Chrysler's petition for federal help is the stark fact that if the company were to close down, the nearly $1 billion in unfunded pension obligations that it would leave be hind could exhaust the private-pension rescue fund that the Government maintains. Before long, the combined pressures of inflation and the changing U.S. demographics will force the problem of supporting the retired into the forefront of the nation's social concerns.

The country is approaching the otherside of the baby boom. Those first postwar children are now 33-- or closer to the still common retirement age of 65 than to birth-- and the balance of the economy is shifting rapidly. In the future, far fewer workers will be supporting far more retired people. In 1950 the worker-to-retiree ratio was 7.5 to 1; to day it is 5.4 to 1. By 2030, when the baby boomers will be rocking away on the veranda, the ratio will be 3.1 to 1. Under Social Security, payments from current workers back the checks that are sent to former employees. There are now three workers paying into the system for every retired person who is drawing out from it; in about 50 years there will be only two workers for every retiree.

This bleak demographic problem has been compounded by rising prices and the trend toward earlier retirement. Inflation erodes the real worth of the $280 billion that companies and unions have built up in private pension funds and increases the payout needed to keep the elderly out of poverty. A person who began contributing to a pension fund when he was earning a respectable $2,000 per year in 1939 may now be receiving $6,000 a year from that fund and finding it mighty hard to make do. Earlier retirement, mean while, is shortening the period during which people contribute to pension funds and stretching out the years during which they receive benefits. A decade ago, California teachers averaged 28 years in the classroom, but now they are leaving after 21 years. The average Army enlisted man retires at about 40--and then collects a pension for more than 30 years.

Before long, many industries will have to face up to the changing pension demographics that automakers have already encountered. While in 1970 there were seven current auto workers for every retired one, the ratio now is 3 to 1 and will be 2 to 1 by 1990. Masterful union negotiators, going back to legendary President Walter Reuther, have won their employees some of the best pensions in private industry. This year the union fought for another breakthrough that would tie pension benefits to the cost of living, a plum common to public employees but still almost unknown in the private sector. But the pension burden for even the giant automakers is heavy and growing. Total pension expenses for GM were $1.3 billion last year, up from $329 million in 1970.

Already, just about every employ with a pension plan is having to pay soaring retirement costs. At Atlantic Richfield, the eighth largest U.S. oil company, the pension payout jumped from $60 million in 1976 to $80 million last year. The pension burden has become heaviest in the older capital-intensive industries such as steel, rubber and farm equipment, often because tough unions have increasingly asked for fringe benefits instead of simple wage hikes. Among other firms carrying particularly weighty pension loads are Uniroyal, Wheeling-Pittsburgh Steel and the Budd Co. A great many other firms have not taken care to set sufficient money aside to pay fully for promised benefits. A recent amendment to the Financial Accounting Standards Board rule instructed accountants to include all such costs in company annual reports.

Pension fund managers, struggling to keep their pots of money intact, have begun to look beyond the blue chip stocks and bonds in which they have traditionally invested. In June the Government eased the rule limiting pension fund investments to only those that a "prudent man" would make. Now pension funds can invest in real estate or gold or even Picassos and Chinese porcelain. Eastern Air Lines pilots have almost 10% of their $250 million pension fund in Atlanta warehouses, Kansas City shopping centers and Southeastern forests. Such investments seem attractive at a time of rising prices for tangibles of all kinds, but they could also fall quickly in some future speculative collapse.

While the pension problems of private workers are serious, those of public employees can be drastic. Some local governments soon will reap the whirlwind from years of promising elaborate benefits while making insufficient contributions to pension kitties. The General Accounting Office watchdogs reviewed at random 72 state and local government pension plans and found that 53 of them failed to make contributions on the level required by the Federal Government of private corporations. Says Michael Thome, head of the California state teachers retirement system: "Pension costs have been pushed into the future for somebody else to pay. Now, that day has arrived."

Typical of the many cities or states that face the pension squeeze is Hamtramck, Mich. (pop. 26,000), a working-class town of neat clapboard houses skirting Detroit. Payments for retired Hamtramck public employees could be halted next year. Pension promises in the past were so generous while funding was so skimpy that 99% of the town's property tax income now must be funneled directly into the police and fire pension funds to keep them afloat. One former city employee who contributed only $35 to his retirement plan when he was on the payroll has collected $280,000 in benefits since he finished working. Says Chester Pierce, Hamtramck's acting director of urban renewal: "Within the next 20 years, pensions will rival energy as the major problem facing the United States."

Nervous that years of underfunding by corporate managers and abuse of pension funds by some union bosses may have left millions of workers helpless, Congress in 1974 passed the Employee Retirement Income Security Act, which set up the Pension Benefit Guaranty Corporation to assure the payment of vested pensions. The aim was to prevent situations like the one that arose in 1964 when Studebaker stopped production and workers were left with little or no benefits. Now the pension protector is itself troubled. Twice the Pension Corporation has asked Congress to postpone putting into effect new provisions on multiemployer pension funds for fear that companies or unions would dump their programs and leave the Government to pick up the pieces. The largest net claim for a bankrupt firm to date was $35 million. In the unlikely event that Chrysler went into total bankruptcy and reneged on its pensions, the federal agency would have to put up perhaps $780 million. The Pension Corporation, whose assets total around $250 million, would be forced to ask Congress for additional funds to cover Chrysler's 124,000 workers.

The longer term solution to the pension woes can only be painful to workers and the retired: they will have to pay more, and receive less. As the ratio of retired people to those holding jobs narrows in coming decades, active workers will have to increase their pension contributions. A congressional Joint Committee on Tax study has estimated that individual contributions will nearly double, from this year's $11.3 billion to $21.9 billion in 1984. Cutting back the growth of pension fund benefits in an era of double-digit inflation will be difficult but inevitable. Without some moderate increase in the burden on current workers combined with some decrease in benefits for current and future retirees, the fate of many pension programs is grimly clear. Says Richard Roeder, a pension analyst in Detroit: "For the Hamtramcks of this country, no one has an ark. The flood will come."

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