The Enron Corp. scandal and losses in 401(k) accounts have raised questions about the wisdom of shifting the responsibility for retirement saving to workers.
At the same time, the recession has increased pressure on companies to cut costs.
Pension experts believe this double squeeze will persuade more companies to shut down their pensions and discourage others from starting new plans.
"We'll see more plan freezes and plan closures," said pension expert Steve Vernon of consultant Watson Wyatt. "Some of the companies that are already cash-strapped won't be able to tolerate these [contribution] increases."
No one is predicting the extinction of traditional pensions, which cover some 36 million workers nationwide. The big, unionized industrial companies are unlikely to abandon their plans, pension experts said. But smaller plans are on the endangered list. And workers without pensions aren't likely to get them in the future.
The decline of the corporate pension could mean more workers reaching retirement age without enough money to retire, consumer advocates warn.
They point to disasters such as that at Enron--where workers lost $1 billion in 401(k) accounts heavily invested in the company's stock--as evidence that workers may not be the best stewards of retirement money.
"Ideally, the 401(k) should be a supplement to a traditional pension plan, not a substitute," said Karen Friedman, director of policy strategy for the Pension Rights Center.
Traditional pensions enjoyed a heyday after World War II and the Korean War, when wage controls forced employers to add benefits to compete for scarce workers.
But pensions lost ground with the decline of the manufacturing sector, where defined benefit plans typically are part of union-negotiated compensation packages, said Alicia Munnell, director of the Center for Retirement Research at Boston College. Traditional pensions also were pushed out, Munnell said, by employers' rush to 401(k) plans.
In 1975, 43% of corporate employees were covered by a traditional pension, according to the Employee Benefit Research Institute. By 2000, that proportion had dropped to 20%.
In contrast to 401(k)s, in which workers invest their own money (often with some match from the company) and bear all the investment risk, traditional pensions are entirely funded by the employer, who is required to make up for any shortfalls if the plan doesn't have enough money to pay promised retirement benefits.
Those promises also are backed by the Pension Benefit Guaranty Corp., a quasi-government agency that steps in if employers go bankrupt, default or fail to adequately fund their plans. The agency collects premiums from companies to cover this risk and sets guidelines for how much money employers must contribute to their plans.
The contribution amount varies from year to year, depending partly on how well the plans' investments perform. In good years, such as the late 1990s, companies might not make any contributions.
Earnings at companies in the Standard & Poor's 500 were boosted by an average of 5% to 7% during the stock market boom of the late '90s, said Ronald Ryan of pension tracker Ryan Lab Inc. At IBM Corp., for example, pension fund profit since 1986 exceeded expectations by more than $5 billion.
But two years of poor stock returns have "ravaged" pension plan finances, which will force companies to pony up more money to keep their pensions fully funded, Ryan said. Ryan, like many other analysts, thinks hefty pension contributions will lead to reduced corporate earnings, lower credit ratings for companies and increased Pension Benefit Guaranty Corp. insurance premiums in coming years.
Some companies already have reported that their pension earnings have dropped sharply, including General Electric Co., General Motors Corp., IBM and tractor maker Deere & Co., which said its pension plan lost $1 billion last year. While these companies don't expect to have to contribute to their pension plans in the near future, J.C. Penney Co. said last month that pension expenses would cost the company 25 cents a share in 2003. That compares with earnings of 85 cents to 95 cents that the retailer expects this year.