U.S. social-welfare system collapsing

Feb 10 2006 by Nic Paton Print This Article

The generous deal struck by U.S employers and their workers over pensions and medical care in retirement in the prosperous years following World War Two is rapidly falling apart, U.S workers have been warned.

The Wall Street Journal has warned moves by General Motors and others to dilute salaried workers' pensions and make them shoulder more medical bills in retirement is a milestone in the erosion of the post-war deal.

Employers promised to provide loyal employees with a comfortable retirement free of worry about running out of savings because of old age or ill health Ė but the changing demographics of the workforce are now putting that deal at risk.

"Our employer-based social-welfare system is collapsing," Alicia Munnell, director of Boston College's Center for Retirement Research told the newspaper.

"GM itself is not a big deal. It's GM on top of Verizon and IBM and then there's everything that's happening in weak companies like airlines," she added.

GM has said it cap health-care spending for all other salaried retirees and their families at 2006 levels, forcing them to shoulder all future increases in health costs, in a move that is set to save the company $900m (£515m) a year, before taxes.

Verizon, IBM and Japanese car giant Nissan, among others, have recently announced similar moves.

The North American arm of Nissan has said it that while it currently has only 500 retirees, this number will have grown to 3,500 within a decade, and so it had no option but to limit its share of retiree health costs to $2,500 (£1,430) a year, plus a 3 per cent annual allowance for inflation.

IBM last month told 117,000 workers in U.S. defined-benefit pension plans that they will stop earning additional benefits after 2007, saving it more than $2.5bn (£1.4bn) over five years.

And in December, Verizon said it was freezing the pensions of 50,500 managers, saving $3bn (£1.7bn) in the coming decade.

Workers at both companies still will get pensions at retirement but will not accrue benefits with additional years on the job.

A larger number of US companies Ė much as in the UK Ė are now also closing pension plans to new hires or to younger workers, said the paper.

These include Motorola, Lockheed Martin, Hewlett-Packard, Aon and NCR.

The changes, the paper warned, will be particularly difficult for workers in the middle of their careers, who may not have enough time left in their working lives to save for retirements that now look very different than the ones many had imagined.

Overall, the proportion of the U.S. work force without any job-based retirement plan is growing.

At last tally, 42.4 per cent of private-sector workers aged 21 or older lacked any retirement plan at work, up from 38.5 per cent in 1999, according to the Washington think-tank Employee Benefit Research Institute.