Pensions

How much is the pension a UAW member receives when he or she retires from an auto industry employer?

UAW pension benefits at the Big Three, Delphi and Visteon are linked to Social Security. The goal is to provide all workers, no matter how old they are when they retire, with an income based on an employer pension plus Social Security.

Workers who retire before reaching eligibility to receive 80 percent of their Social Security benefits receive both a regular pension and a supplement intended to take the place of the income they will later receive from Social Security. When retirees reach the age to receive 80 percent of their Social Security benefits, or if they retire after reaching that age, they receive only their regular pension payment.

The basic benefit levels for a typical UAW-represented auto industry production worker with 30 years of service are as follows:

UAW pension benefits: Big Three, Delphi and Visteon

Age of retiree	Monthly Current Benefit	Annual Current Benefit
Prior to Social Security 80% eligibility	$2,730.00	$32,760
At and after Social Security 80% eligibility	$1,408.50	$16,902
Source: United Auto Workers. Notes: Figures are for retirements effective on or after Oct. 1, 1999, for a UAW member with 30 years credited service at the Big Three, Delphi or Visteon.

The supplemental benefit paid by employers is calculated to match a worker’s Social Security entitlement. Thus, when a retiree reaches age 62, he or she will still have the same retirement income including Social Security, but the share paid by his or her employer is reduced by nearly 50 percent.

Is it true that a large proportion of the UAW auto industry workforce is eligible to retire in the next few years?

Yes. Nearly half of the 302,500 UAW members at the Big Three, Delphi and Visteon will have the necessary combination of age and years of service to retire within the next five years.

The proportion of those eligible to retire varies at each company, as follows:

Company	Percent of UAW members eligible to retire within 5 years
GM/Delphi	60%
Ford/Visteon	39%
DaimlerChrysler	33%
Source: United Auto Workers, based on company data.

How can auto industry employers handle that many retirees? Doesn’t the shrinking ratio of active to retired workers place an unacceptable burden on corporate finances?

No. The auto companies are well aware of the age of their workforces and of their pension obligations. The Big Three, Delphi and Visteon accounted for this cost and set aside tens of billions of dollars to pay for it. Auto industry pension plans are actuarially sound.

At the end of 2002, General Motors, the company with the largest workforce and therefore the greatest pension obligation, had $39 billion in pension assets. Due in part to market declines over the past three years, the plans were not fully funded at the end of 2002, but have been at or near full funding in prior years.

It is crucial to note that a pension plan can be actuarially sound in the long term, even if it is not fully funded in any given year. Pensions represent long-term obligations during which assets and liabilities can fluctuate significantly based on short-term investment returns and interest-rate levels.

Currently GM has about 2.5 retirees per active worker, significantly higher than the 1:1 ratios at Ford and DaimlerChrysler. Over the past 15 years, GM has spun off several divisions (Delphi most recently) while retaining the retirees attributable to those units. This has been a major contributor to the higher ratio existing at General Motors. For instance, if Delphi were excluded, GM would have a retiree-to-active worker ratio of 1.7:1.

What are the average ages and years of pension service of UAW members in the Big Three, Delphi and Visteon?

Based on the most recent data that we have, the average UAW member at the Big Three is 46.3 years of age, with 19.6 years of service. Many workers, of course, are older and have a length of service higher than this average figure, which is why so many are eligible to retire.

In addition, based on the hiring patterns of the three companies, those averages vary by company. Currently, our members at DaimlerChrysler are younger and, on average, have less seniority than the other two employers. General Motors has the oldest and longest-service workers.

Age and service of UAW workers, Dec. 31, 2001
Company	Average Age	AverageYears of service
GM/Delphi	48.9	23.3
Ford/Visteon	44.1	16.6
DaimlerChrysler	43.0	14.8
Source: United Auto Workers, based on company data

Have pension improvements for retirees kept up with the COLA received by active workers?

Yes. A major UAW goal in pension negotiations is to provide basic lifetime pension benefits that replace a reasonable percent of the worker’s pre-retirement income. This is part of the “three-legged stool” of retirement security, which includes a pension, government Social Security benefits and personal savings.

Our goal for the 30-and-out benefit has been a larger percent of wages (because these workers are in most cases not yet eligible to receive Social Security). We have maintained a range in both targets in order to be flexible to the needs of the economics of the automobile industry at various points in the business cycle. Nevertheless, the UAW has more than kept pace with these twin goals throughout the 1990s and to the present.

What is the difference between a defined-benefit retirement plan and a defined-contribution retirement plan?

UAW members at the Big Three, Delphi and Visteon have negotiated defined-benefit pension plans. In a defined-benefit plan, the employer guarantees a set payment to retired workers for as long as they live. Funds to pay these benefits are set aside each year by the employer, and managed as a trust on behalf of all beneficiaries.

In the case of UAW-negotiated contracts, the defined benefit is based on a formula which takes into account years of service at the company.

Defined-contribution plans, by contrast, do not offer retirees any form of guaranteed income. A certain amount is contributed each year for each employee (sometimes by the employee, sometimes by the employer, sometimes by both). These accounts, such as 401(k) accounts and Employee Stock Ownership Plans (ESOPs), are usually managed individually, for the benefit of each individual employee.

When the employee retires, he or she receives whatever principal and interest has accumulated in the account.

Why does the UAW view defined-benefit plans as better for employees than defined-contribution plans?

During the stock market boom of the late 1990s and 2000, many people came to believe that a 401(k) plan was the surest route to a wealthy, healthy retirement. The balance in many IRA accounts seemed to go up and up each quarter, with no end in sight.

But now that the stock market has lost 40 percent of its value since early 2000, and trillions of dollars of assets have evaporated, it’s possible to engage in a more sober evaluation of the relative merits of different forms of retirement plans. There are a number of reasons defined-benefit plans offer enhanced retirement security:

A defined-benefit plan offers a guaranteed income for life for retirees. A defined-contribution plan carries no guarantees.
Defined-benefit plans are backed by a government insurance program – the Pension Benefit Guaranty Corporation (PBGC). If an employer goes out of business, the PBGC will step in to pay pension benefits. There is no insurance available for defined-contribution plans.
Under a defined-benefit plan, the employer is responsible if pension investments have not performed well and additional money must be contributed to fund plan benefits. Under a defined-contribution plan, each individual worker is responsible.

An actuarially sound employer-funded pension plan, which covers a large number of individuals, can be adjusted to meet changing circumstances. If the plan is well-managed, it will have sufficient resources to pay benefits to current retirees while adjustments are made to contribution or benefit levels to ensure the continuation of benefits.

An individual attempting to manage his or her defined-contribution plan cannot adjust to a changing market in the same way. The funds accumulated in an individual account are required for living expenses by individual retirees. If the fund balance drops below the level required to maintain sufficient retirement income, an individual retiree has nowhere to turn to replace those funds.
Because defined-benefit plans are managed as a group, the cost of administering the fund is shared among all beneficiaries, so less of the funds needed to pay retirement benefits are taken up by account management fees. In a defined-contribution fund, a significant chunk of an individual’s account can be absorbed by management fees, leaving fewer funds available for retirement income.
A defined-benefit pension plan pays benefits for as long as a retiree lives. In a defined-contribution plan, the retiree faces the real possibility of outliving the so-called “nest egg.” At a time of increasing life expectancies, longevity risk is a critical defect in defined-contribution plans.
Defined-benefit plans generally provide pensions for workers who become disabled, but are too young or who do not have enough years of service to retire. This important protection is absent from typical, defined-contribution plans.

Do UAW members also have access to 401(k) plans?

Yes. Although the defined-benefit plan, when combined with Social Security, remains the foundation of our members’ retirement income, the UAW has always believed in a balanced three-legged stool approach to retirement: a defined-benefit pension plus Social Security plus personal savings.

UAW members view 401(k) plans as an effective way to build the third leg of the retirement stool: personal savings, as a supplement to defined-benefit pensions and Social Security. We have negotiated 401(k) plans with the Big Three, Delphi and Visteon to supplement the other two forms of retirement security. These are personal savings plans, funded entirely by worker contributions.

Because the value of individual 401(k) accounts can vary a great deal depending on market performance, they are not, by themselves, a reliable vehicle for a secure retirement income.