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The Ins and Doubts of Pension Plans


As we just heard, about 44 million people participate in traditional pension plans, also called defined benefit plans. We asked Olivia Mitchell to explain how they work. She's the executive director of the Pension Research Council at the University of Pennsylvania's Wharton School.

Ms. OLIVIA MITCHELL (Pension Research Council): A defined benefit plan is one where the formula for the benefit is pre-specified, so it might be a percent of your final salary, which you would get then from the point you retire until the point you die, usually in the form of a life annuity. And then it's up to the employer that makes this pension promise to set aside enough money to be able to pay it when the time comes. So a defined benefit plan has funding concerns. That is, if you have set aside enough money to really pay off those benefits, you're considered fully funded.

BLOCK: And which industries and sectors of the economy are these concentrated in?

Ms. MITCHELL: Well, the traditional defined benefit plans are found in the traditional U.S. heavy manufacturing sector, so that would include autos, steel, airlines, railroads, the things that America relied on for its growth phase over the last 40 years.

BLOCK: And we've seen some problems with those plans in the steel industry, the airlines. What obligations do companies have to actually pay out on these pensions they've promised?

Ms. MITCHELL: As long as the company remains in business, it is required to make good on those pension promises that workers have already accrued. The problem arises when the company doesn't set aside enough money to actually pay off those promises and then the corporation goes bankrupt. At that point, the promises have been made, insufficient assets have been set aside to pay them, and so that's where we get into the area of government reinsurance of those defined benefit plans.

BLOCK: And does that make up for what's missing?

Ms. MITCHELL: No, it does not. When the government reinsurance group was put together 32 years ago, they agreed to charge premiums to try to provide some insurance, but there's only partial insurance. The maximum that an employee would get would be whatever he's entitled to or $47,700 a year, whichever is less. And if the employee retires early - let's say he leaves at 55 - he'll only get half of that maximum guarantee.

So many workers may anticipate getting $80,000, $90,000, $100,000 a year and find when their company goes broke that they won't get what they had anticipated.

BLOCK: What about state and local governments that have their own huge pension programs? Do their finances look different?

Ms. MITCHELL: Well, the interesting thing about state and local pension plans is they are not federally regulated. So as a result, there's very little information about exactly what the status of their funding is. But the sense is that there are some states in great shape and then a few states in terrible shape on the funding frontier.

BLOCK: When you step back and look at this world of pensions and how they're funded and under funded, how concerned are you about where we are?

Ms. MITCHELL: I think things are a bit problematic. As we look ahead to the retirement of the baby boomers, they will be facing a longer period in retirement because we're all living longer, they will be facing a tenuous Social Security system because it has run out of money, and the pension system just isn't doing what it did for our parents. So I am concerned.

I think the good news, though, is that this bill will help on the funding front. It also will provide investment advice and education for participants in this burgeoning 401K sector. And so we have a few years to try to build some savings that we will need.

BLOCK: Olivia Mitchell is executive director of the Pension Research Council at the Wharton School, part of the University of Pennsylvania. Thanks for being with us.

Ms. MITCHELL: Thank you very much. Transcript provided by NPR, Copyright NPR.

As special correspondent and guest host of NPR's news programs, Melissa Block brings her signature combination of warmth and incisive reporting. Her work over the decades has earned her journalism's highest honors, and has made her one of NPR's most familiar and beloved voices.