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Thursday, 19 December, 2002, 08:13 GMT
Companies flee US pensions
Retired man in Schwab office
US senior citizens can no longer rely on their pensions

As fears mount about Britain's underfunded pension system, there is intense debate about alternatives to current policy. But as BBC News Online explains, America's different approach to pensions has its own troubles.
The US pension system is a study in contrasts.

US companies have been the most ruthless in eliminating traditional pension schemes, but the state pension system (known as Social Security) is still one of the most generous in the world.

However, the long-term funding of Social Security is under severe pressure, especially if the Bush administration succeeds in making permanent its $1.3 trillion (814bn) tax cut.

And companies are now moving to eliminate traditional pension plans not just for newly hired workers, but are also seeking to retrospectively change the pension arrangements of existing staff.

The US population is not ageing as fast as those in Europe and Japan, because the workforce is being refreshed by high immigration, but the generation of "baby-boomers" who were born in the 1950s and will be retiring in the next 20 years will put an enormous strain on the system.

Changing company schemes

American companies have pioneered the shift from final salary pension schemes - where the company takes the risk of investing its money to provide a pension - to money purchase schemes, where the employee is expected to contribute to a fund which he invests in stocks or bonds.

The change, ironically, was facilitated by legislation in the 1970s which was designed to protect pension funds from the effects of corporate collapse.

One part of the new law allowed companies to introduce so-called "401-K" plans, in which individuals could contribute to their own personal pension plan, often with the company topping up the payments.

One problem has been the tendency of employees to fill their pension plans with the company's own stock - something which proved disastrous in the case of Enron when the firm effectively went bankrupt.

Rush to the exit

And recently, some companies decided to change the pension scheme not just for new employees, but to retrospectively change the schemes so that existing workers lost their rights to a final salary pension - even big companies like IBM, for example.

This led to fierce protests from the workforce, even where they were not unionised.

Now, the Bush administration has signalled its willingness to allow such controversial plans to go ahead.

The US Treasury is expected to announce a blanket approval for such plans, which can save companies millions of dollars each year.

Future of Social Security

Meanwhile, the Bush administration appears to have shelved plans to partly privatise social security.

Under the US scheme, workers get up to $25,000 per year on retirement, depending on their lifetime earnings, and generous benefits for spouses and dependents.

Social security, established by Democratic President Franklin D Roosevelt in the 1930s, has been extremely popular, and contributed to alleviating poverty among older people.

But is now facing a funding crisis.

Despite accumulating a balance of some $2 trillion, the social security system - which is funded by a pay-as-you-go payroll tax - is predicted to run out of money in the next 20 to 30 years.

Several distinguished commissions have examined the question of how to pay the future costs of social security, and in the 1980s measures were taken to gradually raise the retirement age (to 67, with an option of retiring earlier on reduced benefits) and to increase the payroll taxes paid by employers and workers.

Privatising options

In recent years, there have been suggestions that the system could be privatised, with some or all of the taxes paid by the workers put into a stock market fund rather than the social security trust fund.

The Democrats, during the boom years, generally favoured a collective stock fund, which would increase the overall size of the trust fund put aside to pay future benefits.

This was vigorously opposed by the industry, and by Fed chairman Alan Greenspan, on the grounds that it would give the government too much power over the stock market.

Instead, many Republicans want to create individual retirement accounts for each person eligible for social security, giving them the option of investing the money in stocks or bonds to earn higher returns and increasing their retirement income.

President Bush favours this option, and a commission he appointed on taking office, headed by former Senator Daniel Patrick Moynihan, recommended a limited move in this direction.

Problem postponed

But the fall in the stock market, and the corporate scandals that have devastated some pension funds, have put this plan on the back burner.

Experts are also worried that, by taking some money out of the pay-as-you-go system and giving it to individuals, the plan would make the short-term crisis of the system even worse.

Now the Republicans are planning to extend their tax cuts (which are officially due to expire in 2011) into the future, which could mean that the accumulated social security trust funds will be needed to help cover any future budget deficits.

The painful choices about social security reform have not gone; they have just been postponed - and are likely to re-emerge as a big electoral issue in the future.

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