As presidential candidates George W. Bush and Al Gore square off over the future of Social Security, they ignore a larger problem. A majority of Americans are not saving nearly enough to maintain their living standards in retirement. This saving gap is widening, in part, because U.S. companies are radically retooling their private pension plans -- covering fewer workers, making pensions less generous and in many cases cutting the benefits promised to older workers.

It is important to remember that Social Security is only a foundation for retirement security -- a "safety net" that guarantees a subsistence income to workers who retire or become disabled, as well as to their dependent survivors. The real retirement security crisis is not that Social Security is projected to run a big deficit in 35 years from now when the boomers are fully retired; the real crisis is today's lack of private pension saving.

Today's retirees are overly dependent on Social Security; about half (48%) would live in poverty without it, according to Social Security administration data. Maintaining a middle-class lifestyle in retirement requires income from several sources.

A study released last month by the Consumer Federation of America (CFA) reveals that only 44% of U.S. households with at least one full-time worker is accumulating adequate retirement savings. CFA's study, drawn from the Federal Reserve Board's Survey of Consumer Finance, shows that in addition to household income, the most important factor explaining shortfalls in retirement saving is participation in an employer-sponsored pension plan. The real pension crisis is coverage

Unfortunately, fewer and fewer workers can count on a pension benefit at work to achieve their retirement goals. The biggest problem is coverage: At any given time only about 45% of U.S. workers are earning a pension benefit at work. And because most pension plans require five years on the job before benefits "vest," younger workers and job hoppers accumulate very little even when they have coverage.

A more recent problem with private pension benefits is occurring at the big blue-chip companies famous for offering generous "defined-benefit" pensions. These traditional plans -- which are rapidly disappearing in favor of less costly 401(k) plans -- typically guarantee retirees a fixed monthly income based on years of service and on average annual salary during the years just before retirement. Combined with Social Security, career workers often end up with a predictable 60% to 80% of pre-retirement income.

That was then. Over the past five years -- even as the raging bull market has ballooned the surpluses in most pension trusts -- an increasing number of companies have converted their traditional pensions into so-called "cash-balance" plans. Plans covering nearly one-third of the 30 million workers who remain in defined-benefit pensions have been converted -- sparking a storm of protest among older workers who have lost up to half of their anticipated retirement benefits.

How cash-balance plans work Unlike traditional pensions, which are most generous to career workers who stay for many years until retirement age, cash-balance plans look a lot like 401(k) plans.

Companies typically contribute between 4% and 7% of a worker's pay each year into an individual cash-balance account. Because the benefit is more visible and accrues more evenly over a career, employers argue that cash balance plans help them recruit younger and more highly skilled workers who do not expect to stay with the company for 20 or 30 years. When workers leave, they can roll the balance into an Individual Retirement Account.

Each account is credited with an annual rate of return, which is generally pegged to the interest paid on a risk-free U.S. Treasury bond. Unlike 401(k) accounts, however, a cash-balance accounts are "hypothetical" -- the company invests all the money through a pooled trust and keeps any investment returns in excess of the roughly 6% interest rate credit.

So why are older and long-tenure workers so upset? Companies manage to both shave costs and help new hires to accumulate benefits faster by cutting benefits for mid-career employees. While benefits already earned cannot be taken away, many longtime employees have their pension benefits frozen -- some for as long as a decade -- until their hypothetical "cash balance" under the new plan exceeds the benefits already earned under the old plan. This "wear away" feature has led to allegations of age discrimination now being investigated by the federal Equal Employment Opportunity Commission.

A black eye for Big Blue

The poster child for critics of these new-wave pension plans is IBM -- a company once famous for coddling its career employees.

"The whole thing made me so mad that I quit," said Janet Krueger, who worked at IBM for 23 years. Krueger has helped to organize an association of thousands of current and former IBM employees that has turned IBM's broken pension promises into a national crusade. Their tactics of striking back include town meetings, Blue Shirt Tuesdays, a union-organizing drive, congressional hearings and a resolution that won 25% of the vote at IBM's annual stockholders meeting last month.

IBM employees are not alone. AT&T, Bell Atlantic, MCI WorldCom and Xerox are among scores of companies that have converted to cash-balance, in most cases to both cut costs and to compete for younger employees who prefer more portable pension benefits. "We believe it's age discrimination," explains Rep. Bernard Sanders (I-VT), who has sponsored a bill that would make what IBM did illegal. "Imagine waking up one day, after working for a highly successful company for 15 or 20 years, and learning that your pension has suddenly been slashed by 40%. You would feel betrayed."

New pensions for a New Economy?

Which side is right? Neither -- and both. Companies make a strong case that traditional defined-benefit plans are designed around the outdated idea that workers spend most of their career at a single company. Indeed, the Congressional Research Service has calculated that workers who change jobs or careers several times are likely to do better in a cash-balance or 401(k) plan, provided that they reinvest their nest egg by rolling it into an IRA when they change jobs.

At the same time, companies like IBM that break the implicit promise of pension security to workers with 15-to-25 years of service make cash-balance pensions a far more controversial option than they need be.

A better way, as Sanders and Sen. Tom Harkin (D-IA) have proposed, is to give older and longer-tenured workers a choice between the new plan and remaining under the old plan. This makes the transition more costly. But if new-style pensions serve a company's self-interest, it should pay the transition cost rather than pull the retirement rug out from under its older workers.

The ideological struggle over Social Security is likely to frame the campaign debate about how best to promote retirement security. A more meaningful debate would also look at the lack of private pension coverage and personal savings -- and might even lead to a bipartisan compromise in favor of incentives for universal saving accounts on top of (rather than in place of) Social Security's guaranteed minimum benefit.

Michael Calabrese directs the Public Asset Program at the New America Foundation, a non-partisan policy institute in Washington, D.C. His e-mail address is calabrese@newamerica.net.