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Social Security Reform Thursday: Week Fifty-Nine -- Defined Benefit versus Defined Contribution Lessons from Private Industry


Thursdays are good days for reform, because they fall between Wednesdays and Fridays. And reform is a long-haul process, not a fleeting event. So we're going to keep plugging along with the case for reform, even as the issue goes off the political radar screen.

That's why WILLisms.com offers a chart or graph, every Thursday, pertinent to Social Security reform.

(Check that, Will offered a Chart or Graph, I just offer words. But, hey, Will isn't paying me so live with it people.--Justin)

This week's topic:

Private Industry's Transition from Defined Benefit Plans to Defined Contribution Plans.

Imagine if Congressmen and Congresswomen had to actually deliver on their promises to the voters that elected them. They were judged on results, much like the CEO of a company. Sure CEO's have expectations in the here and now like delivering earnings that meet the market's demands, but they also have to be keenly aware of the future. And for most CEO's of Fortune 500 Companies, Pensions are a thing of the past.

The transition from traditional pensions to 401(k) plans has been occuring for the last two decades. Pensions have bankrupted the Airline and Automotive industries, pushing companies like GM and, well, all the airlines to the brink of folding. Pensions are a fixed or defined benefit program where the company makes promises, often decades in advance, then has to pay out an annuity to the worker when he/she retires. 401(k) plans are fixed contribution plans where the company matches a certain percentage of the employee's contribution, but the money belongs to the employee and is portable.

Which one sounds like Social Security? You guessed it. Social Security is making promises for the future that politicians today are not accountable for. The CEO's at the Airlines that negotiated the Union deals that put the Airlines in the pension pickle are long since gone, but we keep sending folks like Ted Kennedy and Robert Byrd back to the Senate.

IBM is doing their part to reform their pension program because despite having a surplus of $48B dollars, yes that is forty eight billion dollars just to clarify, the company sees the future and is preparing. The move effectively ends one of the most lucrative pensions in all of the business world.

BOSTON -- IBM's freeze of its otherwise healthy U.S. pension plan will reverberate through industry not only because it illustrates the erosion of traditional benefit packages, but also because it sharpens the focus on 401(k) plans as a source of retirement security.

With the 401(k) increasingly becoming a de facto pension for many American workers, several experts suggest reforms are in order.

International Business Machines Corp.'s announcement this week drew attention because the security of the technology giant's $48 billion U.S. pension fund stands in contrast to endangered plans run by airlines and other large companies.

However, retirement analysts found IBM's enhancements to its 401(k) more notable, saying the company is transplanting some virtues of traditional pensions that generally have been absent from newer kinds of plans.

When the pension freeze takes effect for IBM's 125,000 U.S. employees in 2008, IBM will match their 401(k) contributions dollar-for-dollar on up to 6 percent of salary; previously the match had been 50 cents on the dollar, a common figure.

Perhaps more important, the company will automatically contribute an extra amount equal to 1 percent to 4 percent of employees' pay into their 401(k) plans in an attempt to make sure every employee participates.

Those notions of universal participation and automatic security were hallmarks of traditional pension packages known as "defined-benefit" plans.

Newer plans such as 401(k) packages are known as "defined-contribution" plans because that's all the company is promising -- to contribute a set amount, if it offers a match. The size of the retirement benefits depend on the vagaries of investment portfolios, shifting the risk from the company to the employee.

In 1985, 89 percent of Fortune 100 companies offered traditional pension plans, but that had fallen to 51 percent by 2004, according to Watson Wyatt Worldwide, a human-resources consulting firm. Some 11 percent of the plans were frozen or terminated for new employees, up from 5 percent in 2001.

Note that Stockholders did not refer to the change as a "risky scheme putting poor workers at risk". The CEO did not ignore the fact that today's surplus is already committed to future benefits. As you would expect, workers are not pleased. "We worked our whole lives for this and the rug is being pulled out from under us." Yep.

Hard decisions must be made at GM, Delta, United, IBM, and other companies. Benefits that were once thought to be guaranteed will bankrupt these giants of industry. But CEO's know it is their job to make tough decisions sooner rather than later or risk leaving all of their employees at the Unemployment line. And the companies that waited too long are already on the brink of extermination. New companies don't carry the pension burdens and have the capital tied in these plans available to expand and take market share.

This is a metaphor for our country. We must make hard decisions. If Harry Reid were the CEO of IBM and denied that a pension time bomb loomed, he would find himself looking for a new job when the analysts and institutional investors reviewed the books. But most Americans are not investors. And our CEO's like Reid, Pelosi, Kennedy, Boxer, etc., are denying there is a problem.

We are all shareholders in this corporation and it is time we vote our shares.

It's time for reform.

The clock is ticking.


Previous Reform Thursday graphics can be seen here:

-Week One (Costs Exceed Revenues).
-Week Two (Social Security Can't Pay Promised Benefits).
-Week Three (Americans Getting Older).
-Week Three, bonus (The Templeton Curve).
-Week Four (Fewer Workers, More Retirees).
-Week Five (History of Payroll Tax Base Increases).
-Week Six (Seniors Living Longer).
-Week Six, bonus (Less Workers, More Beneficiaries).
-Week Seven (History of Payroll Tax Increases).
-Week Seven, bonus (Personal Accounts Do Achieve Solvency).
-Week Eight (Forty Year Trend Of Increasing Mandatory Spending).
-Week Nine (Diminishing Benefits Sans Reform).
-Week Ten (Elderly Dependence On Social Security).
-Week Eleven (Entitlement Spending Eating The Budget).
-Week Twelve (Benefit Comparison, Bush's Plan versus No Plan).
-Week Thirteen (Younger Americans and Lifecycle Funds).
-Week Fourteen (The Thrift Savings Plan).
-Week Fifteen (Understanding Progressive Indexing).
-Week Sixteen (The Graying of America).
-Week Seventeen (Debunking Myths).
-Week Eighteen (Debunking Myths).
-Week Nineteen (Reform Needed Sooner Rather Than Later).
-Week Twenty (Global Success With Personal Accounts).
-Week Twenty-One (GROW Accounts: Stopping The Raid).
-Week Twenty-Two (Millions of Lockboxes).
-Week Twenty-Three (Support for Ryan-DeMint).
-Week Twenty-Four (KidSave Accounts).
-Week Twenty-Five (Latinos and Social Security).
-Week Twenty-Six (AmeriSave).
-Week Twenty-Seven (Cost Of Doing Nothing).
-Week Twenty-Eight (Chile).
-Week Twenty-Nine (Entitlement Spending Out Of Control).
-Week Thirty (Reform Better Deal Than Status Quo).
-Week Thirty-One (Social Security As A Labor Cost).
-Week Thirty-Two (Social Security And Dependence On Government).
-Week Thirty-Three (Social Security, Currently A Bad Deal For African-Americans).
-Week Thirty-Four (Longer Life Expectancies Straining Social Security).
-Week Thirty-Five (Howard Dean & Salami).
-Week Thirty-Six (Growing Numbers of Beneficiaries Draining Social Security).
-Week Thirty-Seven (The Crisis Is Now).
-Week Thirty-Eight (Disability Benefits).
-Week Thirty-Nine (Broken Benefit Calculation Formula).
-Week Forty (German Social Security Disaster).
-Week Forty-One (Crumbling Pyramid Scheme).
-Week Forty-Two (Overpromising, Globally).
-Week Forty-Three (Demographic Wave).
-Week Forty-Four (The Jerk Store).
-Week Forty-Five (Defined Benefit Plans).
-Week Forty-Six (Even The Empty Promises Are A Bad Deal).
-Week Forty-Seven (Our Aging Population).
-Week Forty-Eight (The Tax Increases Required To Cover Social Security's Costs).
-Week Forty-Nine (Much Longer To Get Your Money Back From Social Security).
-Week Fifty (A Vote, At Last).
-Week Fifty-One (We Can Do Better).
-Week Fifty-Two (Socialist Security).
-Week Fifty-Three (China Has The Same Problem, Only Worse).
-Week Fifty-Four (Potential Crisis Size).
-Week Fifty-Five (The Crisis Moves Closer).
-Week Fifty-Six (Big Brother Social Security).
-Week Fifty-Seven (Personal Accounts Are Awesome).
-Week Fifty-Eight (Private Accounts and Presidential Proposals).

Tune into WILLisms.com each Thursday for more important graphical data supporting Social Security reform.

Posted by Justin B. · 26 July 2006 11:42 PM