Pension Fairness Older Workers Deserve Protection When A Firm Changes Retirement Plans

Author: Editorial

Published: August 15, 2003

A U.S. federal court struck a blow for fairness the other day when it ruled that IBM illegally penalized older workers when it converted its pension plan from a defined-benefits format to a "cash-balance" plan -- a hybrid between the traditional defined benefit and a 401(k)-type program. Judge G. Patrick Murphy of U.S. District Court in East St. Louis, Ill., who handed down the ruling, was right on. The cash-balance plan takes away a benefit many older workers have come to expect. In a standard defined-benefits plan, an employee's pension increases as he accumulates more years, especially in the last part of his employment. The cash-balance plan puts money into a hypothetical, individual account. Workers are allowed to take the money with them when they leave the company.

The changeover is fine for younger workers, who may be more mobile and who have a majority of their working lives to build a retirement fund. But it does not leave enough time for older workers to do the same thing. Hundreds of other companies have switched from a defined-benefits plan to a cash-balance format, and this decision is bound to bring on more lawsuits. IBM has already said it will appeal. Initially, IBM grandfathered employees 50 and older, but relented under pressure from its workers and moved the threshold to 40. IBM could have saved itself a lot of trouble -- and bad publicity -- if it had looked for fairer alternatives at the outset rather than a total and sudden switch. Various employers who have switched to a cash-balance plan have grandfathered older workers, noted Dean Baker, co-director of the Center for Economic and Policy Research. Another alternative has been suggested by J. Mark Iwry, senior fellow at the Brookings Institution. In testimony to Congress, Iwry tried to map out a middle ground, recommending legislation giving employers reasonable flexibility to choose how -- but not whether -- to protect older workers in a conversion. Plan sponsors, Iwry said, could choose among an array of protective options based on the "best practices" many companies have adopted to protect employees. In addition to grandfathering some employees, the options could include giving older employees the better of the old and new plan formulas at retirement or giving them special increased cash balance benefits. Those are reasonable options. Companies have the right to adapt to changing times. But the rules for workers shouldn't change in the middle -- or the end -- of the game.