Corporate America's treatment of its retired employees is, generally, abysmal.
A Hewitt Associates survey shows only 33% of employers increased pensions for retirees between 1988 and 1992. For manufacturers, the figure was a dismal 29%. Of the companies that increased benefits, 17% did so because an automatic increase was built into the plan - probably a result of a union contract.
The low rate of benefit increases for retirees shows one of the great weaknesses of the U.S. corporate (and often public employee) defined benefit pension system - the lack of inflation protection for retirees.
At even low rates of inflation, the purchasing power of benefits can be eroded quickly. At a 3% annual inflation, a pension loses 20% of its value after six years. After 10 years without adjustment, it loses more than one-third of its purchasing power. Yet there are employers who have made no adjustment to the pension of their retirees in a decade.
The employers who did increase the pensions of their retirees generally recognized the corrosive effect of inflation on their employees. Of those in the Hewitt survey that increased benefits for retirees, 57% did so because of the "cumulative effect of inflation over several years."
To be sure, most retirees from corporate plans also receive Social Security benefits, and these are indexed. But if Social Security makes up half of an employee's retirement income, the loss of purchasing power can still be substantial if the corporate pension goes unadjusted.
Corporate executives might argue that because they don't cause inflation - the government does - they should not be required to pay for it. But many corporate executives are only too happy to benefit from the easier business environment that a little bit of inflation can provide. Some are arguing even now that the Federal Reserve should not push inflation any lower than it already has for fear of slowing the economy too far.
While life is made easier for business executives by a little inflation, it is made harder for their former employees whose pensions are not adjusted for inflation.
U.S. executives claim U.S. pension funds can't afford to adjust benefits for inflation for retirees. The costs would be too great, they argue, and would be a further nail in the coffin of the defined benefit plan. Yet corporate plans in the United Kingdom inflation-protect pensions not only of retirees, but also of vested employees who have left the company but are still employed elsewhere. And defined benefit pension plans are no more under threat in the United Kingdom than in the United States.
Are British companies so much more efficient and productive than U.S. companies that they can afford indexed benefits? Not obviously. Are British pension executives so much smarter in their investments than U.S. executive that they earn higher returns and thus enable their funds to pay indexed benefits? One might suspect so, given their ability to not only cover indexed benefits but also to accumulate pension surpluses.
Perhaps, though, it's not a matter of skill or ability, but of corporate philosophy. U.S. companies, in too many instances, seem to want to cut all ties with employees once they retire. Too bad if those former employees slowly slide into poverty.
No one suggests mandating U.S. companies inflation-adjust pensions, but companies ought to commit themselves to reviewing pension adequacy on a regular schedule, and making adjustments where necessary.