By P.A. MacLean,
RedwoodAge.com


Millions of American workers in their ‘50s face a pension squeeze when they hit retirement age that is not shared by their younger co-workers.

Over the past decade hundreds of companies have altered the way they calculate pension benefits in order to trim company pension costs and shift more of the investment risk from employer to employee.

These pensions, known as cash balance plans, have angered growing numbers of near-retirement workers who are challenging the legality of the plans in court, calling them discriminatory against older workers.

Under these relatively recent conversions to cash balance pensions, benefits accrue at a slower rate for older workers and in some plans a little-noticed feature leaves employees without the ability to determine their monthly retirement benefit, according to AARP.

Nearly 1,500 companies, covering 8.5 million workers, have converted from the traditional promise of a specific monthly pension payment, known as defined benefit plan, to cash balance plans that accrue more the longer an employee works.

To understand the significant financial difference between the plans, the traditional defined benefit pension is based on a formula that takes years of service and final salary or wages into account.  That is critical because the biggest earning years usually occur at the end of an employee’s career. 

By contrast, a cash balance pension is a “hypothetical account” for each individual that is credited annually with a percentage of pay, such as 5 percent a year, and usually a hypothetical rate of return.

Younger Workers Favored
A 2005 report by the Government Accountability Office calculated that older workers experience greater losses of expected benefits than younger workers when companies convert from traditional defined benefit pensions to cash balance.  The median benefit reduction for a 30-year-old worker at conversion is $59 a month, versus $238 per month for workers at age 50.

One federal judge in Indiana wrote of the cash balance plan, older workers “have been getting the worst of both worlds as a result of these [cash balance] conversions” because they are “too young to derive much benefit from the traditional final average pay design, but… too old to have gotten an early start in their careers on the benefits of a cash balance plan.”

Workers around the country have gone to court challenging the plans based on a federal law protecting retirement investments made by companies on behalf of workers.  The law forbids reducing the rate of benefit accrual in defined benefit plans based on age.

“The essence of cash balance shifts the market risk onto the employees shoulders to ride out uncertain markets,” said Jay Sushelsky, attorney for the AARP Litigation Foundation in Washington, D.C.

So far the suits have not gone well for workers. Federal appellate courts based in Chicago and Philadelphia have rejected the age discrimination claims suggesting that workers are focused incorrectly on what will be paid out eventually, instead of what the employer credits to the accounts each year.  So long as everyone gets the same credits input, there is no age-related bias.

But that is not the last word.  An appeals court in New York will hear a similar appeal in April, and courts based in San Francisco and St. Louis will hear still more later this year.  If any of them come down on the other side the question may eventually end up in the U.S. Supreme Court.