Statement Of Senator Patrick Leahy On Cash Balance Pension Plans Before The Senate Committee On Health, Education, Labor And Pensions

September 21, 1999

Chairman Jeffords and Senator Kennedy, I commend you and the Committee for convening this hearing on retirement security into the 21st Century.

It is time for Congress to undertake a careful and comprehensive review of a recent phenomenon in corporate America: switching from traditional pension plans to cash-balance plans. In recent years, at least 325 companies, with more than $330 billion in pension-defined benefit assets, have adopted cash-balance plans. This changeover is the biggest development in the pension world in years.

I have brought a chart showing nine of the world's largest corporations that have switched to cash-balance plans. These nine companies hold pension assets valued at more than $136 billion and employ more than one million workers. At the top of my chart is IBM, the largest private employer in Vermont.

We all know that last Friday IBM announced it was adjusting upward the number of its workers who will be able to choose between pension options -- a reversal that I think we should all applaud IBM management for proposing. If I might be parochial for just a moment, I believe that it was the folks at IBM in Essex Junction, Vermont, who are responsible for firing the shot for pension fairness that was heard in every corporate boardroom across the land. Some of these Vermont IBMers are here today. Chalk up another time when Vermonters have led the nation.

What this example has vividly shown all of us is the dark side of this corporate trend: the fact that many experienced workers face deep cuts in their promised pensions when their company switches from a traditional pension plan to a cash-balance plan.

I say experienced workers – not older workers – for a reason. We are not talking here about Willy Loman in "Death of a Salesman." These are not tired, aging workers who time and technology have passed by. Instead, we are talking about workers in the prime of their productive lives: workers who have played by the rules, saved for their kids' college educations, put away money for their retirement, who wake up one day and read that the rules by which they have lived their lives have been changed -- changed because some economic model on some consultant's computer somewhere spits out that this is the way for a large corporation to maximize profits.

Let me explain. Traditionally, companies have adopted defined-benefit pension plans to meet the needs of their employees in retirement. Under these plans, the defined monthly payment an employee receives upon retirement is based on a formula that takes into account the number of years he or she worked for that company and his or her salary in the final years of employment. These types of plans are designed to encourage employees to dedicate their careers to one company.

But since 1985, hundreds of companies have converted to a new type of pension plan called a "cash-balance plan." In a cash-balance plan, the amounts earned are based on a worker's average salary over his or her total years of service. With a cash-balance plan, workers who leave the company early may take the entire value of their pensions with them. This type of plan is clearly more attractive to a younger, more mobile work force. But there is a catch: When a company converts a traditional pension to a cash-balance plan, older workers who have relied on the earlier pension promises of their employers often lose out.

In a traditional pension plan, most of the benefits accrue between the ages of 55 and 65. Therefore, when a company converts to a cash-balance plan, workers in their 40s and 50s lose the opportunity to earn their pension based on their highest salary as they were promised. And in many cases, older workers are hit with a double whammy because pension plans are converted in such a way that middle-aged workers do not accrue any benefits, often for a period of 5 years or more. This occurs when employers establish the initial value of a cash-balance plan at an amount that is less than the employee's accrued benefit under the old plan. In this scenario, an employee ceases to earn new pension benefits until subsequent pay and interest credits cause the new plan to catch up with the old plan. This period of time has been aptly named a "wear-away" period by pension experts. And under federal law, it is legal.

During an online chat I had with some Vermont IBMers, one 25-year employee affected by IBM's decision to switch to a cash-balance plan pointed out that she would have to work an additional 6 years just to receive the same benefits under the new cash balance plan that she would have received under the old one. This is simply unfair.

I have joined with Senators Harkin, Kennedy and Wellstone on the Committee to propose the Older Workers Pension Protection Act to amend the Employee Retirement Income Security Act to prevent this so-called "wearing away" of long-term workers' pension benefits when their employers switch to these new, less generous cash-balance plans. I urge the Members of the Committee to support our legislation to prevent this type of injustice.

I have also joined with Senator Moynihan to introduce the Pension Right to Know Act, S. 659. The Pension Right to Know Act requires that employers with more than 1000 employees must provide a comparison of estimated future earnings under both the new cash-balance plan and the old pension plan. This Act would be a step in the right direction to ensure that companies fully disclose to their employees the effects that a transition will have on their benefits. I urge the Members of the Committee to seriously consider amending our pension laws to require greater disclosure to employees of the consequences of switching to cash- balance plans.

We in Congress have a responsibility to carefully review the corporate phenomenon of cash-balance pension plans and enact appropriate safeguards necessary to protect the rights of all workers.

I welcome the contributions that all of the witnesses at today's hearing will make through their testimony, and I particularly look forward to the testimony of Vermont's Congressman, Bernie Sanders, who has been a leader and a catalyst in resolving this problem, and of Bill Syverson, who is here on behalf of Vermonters from the IBM plant in Essex Junction.

Thank you for focusing the Committee's attention on this issue, and for this opportunity to share my concern and observations.