Stop Pension Changes that Will Cost Workers Millions

President Bush is proposing regulations that could cost workers millions in lost pension benefits. The proposed regulations will make it easier for companies to change from traditional defined benefit retirement plans to cash balance plans, without any restrictions to preserve the pension benefits and retirement security of senior employees. Changing the rules on these workers after years of dedicated service is wrong and could reduce their promised pension benefits by up to 50 percent.

Sample Letter for Campaign

Subject: Stop Pension Changes that Will Cost Workers Millions.

Dear [ Decision Maker ] ,

Please don't allow President Bush to enact retirement plan changes that will permit companies to hurt millions of workers by reducing their pensions and retirement security.

The President's proposed Treasury Department and IRS regulations will hurt workers by making it easier for companies to change from traditional defined benefit retirement plans to cash balance plans, without any restrictions to preserve the pension benefits and retirement security of senior employees. Changing the rules on these workers after years of dedicated service is wrong and could reduce their promised pension benefits by up to 50 percent.

Forcing these regulations on workers with more seniority can make it impossible to accrue any additional benefits through a cash balance plan, meaning that some workers could toil for more than 15 years without their pension increasing at all.

The proposed regulations will change the accrual formula and will result in lower retirement earnings than expected for senior workers, leaving them without sufficient time to work their way back to their promised level of retirement income. This system is discriminatory and penalizes workers who have dedicated themselves to the same company for several years.

Make sure companies keep their promise of retirement security for workers who have put in years of hard work. Any proposed regulations for companies changing from traditional defined benefit to cash balance plans must include transition rules that will eliminate the "wear-away" period during which pension benefits no longer accrue. All workers who will be adversely affected by their company converting to a cash balance plan must have the option to remain in their current defined benefit plan and preserve their benefits.

The IRS must extend its current moratorium on approving new cash balance plans until the proposed regulations can be revised to prevent workers from being stripped of their hard earned promised pensions and retirement security.

Sincerely,

Campaign Launched:
March 05, 2003

Background Information

Over the last ten years, about 700 companies have converted their traditional pension plans to cash balance plans. This is a controversial move because once converted, future benefits are reduced for many workers under cash balance plans.

Experts report that most of these conversions have drastically reduced future benefits, especially for older workers. Representative George Miller (D-Calif.), a critic of conversions to cash balance plans that reduce the retirement benefits of older workers, estimates that about 8 million current and retired workers have lost about $334 billion in promised benefits. This is because cash balance plans are based on average career earnings, not the average of an employee’s highest salary over three or five years that is typical of the benefit formula for a defined benefit plan.

Currently, there are proposed Treasury regulations that would allow companies to convert traditional defined benefit plans to cash balance plans provided that current workers start out with at least the present value of their benefits under the former plan. Future earnings are based on the new formula.

“Anybody with around 12 or more years of service with the company [is] going to get the short end,” says John Holz, deputy director of the Pension Rights Center (“PRC”), a Washington-based advocacy group for workers and retirees. “They could lose as much as half the benefits they were originally promised.”

This hits older workers the hardest because they can no longer count on receiving their promised benefits and are too old to save enough on their own to make up the difference, said Karen Ferguson, Director of the PRC.

Federal pension law prohibits companies from taking away retirement benefits that have already been earned. The problem is that cash balance plans often stop older workers from accruing any additional benefits after the conversion.

For example, assume that the conversion from a defined benefit plan to a cash balance plan occurred when a worker was 50 years old. At the time of the conversion, the worker would be allocated a benefit equal to the present value of his future pension at age 50. It is quite possible though, that the same worker could work for 15 more years without getting any additional retirement benefit. This period of time during which older workers accrue no additional retirement benefit is called the “wear-away” period.

During the Clinton administration, the IRS imposed a moratorium on approving new cash balance plans. On December 10, 2002, the Treasury Department and the IRS issued proposed regulations on cash balance plans addressing the application of pension age discrimination rules to cash balance plans and conversions.

Essentially, the proposed regulations would allow conversions to cash balance plans and provide that, if the regulations are followed, any “wear-away” period during which older workers do not accrue any additional retirement benefit is not a violation of age discrimination laws.

These proposed regulations do not minimize the effects of “wear-away,” period, which could result in millions of pensions being drastically lower than what the workers were expecting.

For more detailed pension information, go to www.afanet.org/retirement.