Explained | Why Boeing workers rejected a new contract

A decade ago, Boeing stopped offering the gold standard of pension plans -- one that pays out guaranteed sums to retirees. The loss of the pension still angers many members of the company's largest union.

On Wednesday, the union's members voted by a large margin to reject an improved contract proposal from management largely because the agreement would not restore the pension. The vote will prolong a five-week strike that is frustrating the jet-maker's efforts to recover from years of crisis.

Retirement benefits have become the biggest sticking point in the impasse between Boeing and its workers after the company came close to meeting the union's demands in other areas, including offering raises of nearly 40 per cent over the life of the new four-year contract.

Retirement and labor experts say reaching a compromise on the issue could be difficult. That's because Boeing is highly unlikely to want to shoulder the much higher cost of a traditional defined-benefit pension plan compared with the defined-contribution plans that have become standard in much of corporate America.

Members of the union, the International Association of Machinists and Aerospace Workers, seem just as determined not to back down from their demands for greater retirement security.

"I believe all workers deserve a defined-benefit pension," Jon Holden, president of District 751 of the union, which represents the vast majority of the workers, said Wednesday after 64 per cent of those voting rejected the offer. "It wasn't right to take it away, and it's a righteous fight to try to retrieve it back."

Boeing has previously said it is unwilling to restore the pension plan it froze in 2014. "They're prohibitively expensive and that's why virtually all private employers have transitioned away from them," the company said in a statement last month, referring to defined-benefit pension plans.

The aerospace manufacturer didn't comment on Wednesday's vote beyond saying it was "disappointed" in the result.

Boeing, like most large American corporations, now offers 401(k) plans, which do not guarantee payments. Such plans also largely rely on contributions by employees, who may not be able to afford to set enough money aside, ultimately reducing retirement income.

Companies often match a certain portion of the money contributed by workers, which effectively caps how much money they spend on retirement benefits.

Even though Boeing executives would like the strike to end -- so they can focus on efforts to restore the company's reputation after two fatal crashes roughly five years ago and poor financial results -- few labor experts expect them to soften their stance on pensions.

"I don't think Boeing is going to go back," said Harry Katz, a professor at Cornell University's School of Industrial and Labor Relations, noting that the company is focused on controlling expenses as it tries to regain the confidence of Wall Street.

Most investors are likely to oppose the reinstatement of a defined-benefit plan because such pensions could undermine Boeing's financial position. Bank of America stock analysts estimate that offering such a plan would on average cost Boeing $300 million to $400 million more annually than what it spends on its 401(k) plan.

Defined-benefit pensions peaked during the 1970s. Nearly 62 per cent of the private-sector workers who had access to workplace plans had only defined-benefit pensions at the time, according to the Employee Benefit Research Institute, an independent organization that tracks retirement issues.

Corporations began shifting away from pensions in the early 1980s in favor of 401(k) plans. These newer plans were easier and less expensive to manage because companies were on the hook for only their portion of contributions to the plan.

Unlike a defined-benefit plan, a 401(k) plan leaves companies under no obligation to put in more money if it does not generate enough income to meet a guaranteed payment to retirees.

By 2021, just 1 per cent of workers with employer plans had access to only a defined-benefit plan and 84 per cent had only a 401(k), the institute found, while 15 per cent had access to both.

At the turn of the century, after the tech bubble burst and interest rates declined, many pension funds became noticeably underfunded. Stricter funding and accounting rules followed in 2006 -- those changes made defined-benefit plans even less appealing for corporations because they forced businesses to put more money into the plans and recognize pension liabilities as debt, according to the Center for Retirement Research.

As a result, private-sector pensions began to vanish more rapidly. Employers began closing the plans to new workers and freezing benefits for those already enrolled in them, reducing their liabilities.

In a deal that lives in infamy in the minds of many Boeing machinists, their union's leaders agreed in 2014 to stop offering the defined-benefit pension to new employees and froze it for existing workers.

In the lead-up to the deal, Boeing signaled that it might move production of a new plane out of the Seattle area, where most of the machinists lived. The union's leaders believed compromise on the pension was necessary to stop Boeing from moving to a state with labor laws that favored employers over unions. But many in the rank and file believed the company would not have been able to make good on its threat to move vast amounts of its production elsewhere. (Boeing does have a nonunion plant in South Carolina, where it makes the 787 Dreamliner.)

"We vowed to never be placed in a position where we had no leverage," Holden said in an interview in September, describing the events of 2014.

Today, 42 per cent of IAM members are still part of the defined-benefit pension, according to Boeing. In the rejected proposal, the company offered to increase the payout from the pension. Under that offer, a worker with 20 years of eligible employment under the plan would get a pension payment of about $2,100 a month, up from $1,900.

Although few labor specialists expect the machinists to secure the return of the defined-benefit pension, the company and the union could strike some sort of a deal on retirement benefits, Holden said Wednesday.

He said Boeing hadn't "gone far enough in other ways" to persuade members to give up their demand to restore the frozen pension plan. And Holden said he was willing to explore "other defined-benefit options" and "to see what we can do to be creative and provide something that our members deserve."

It is not exactly clear what Boeing could offer that would satisfy a majority of the Machinists union. Retirement experts say there are several options, though all of them include trade-offs.

Boeing could increase how much money it contributes to its 401(k) plan. In the rejected proposal, it offered to make a one-time contribution of $5,000 to 401(k)s and said it would match 100 per cent of employee contributions, up from 75 per cent, on the first 8 per cent of a worker's pay. Boeing already contributes 4 per cent of wages regardless of whether an employee contributes.

One option Boeing and the union could consider, retirement experts said, is a cash balance plan. Instead of guaranteeing a lifetime paycheck based on a specific formula, such plans promise a certain account balance. Workers earn credits, typically a percentage of their salary plus an interest rate that tracks a benchmark, toward their plan for every year of employment.

"There are other hybrid plans that are out there that we've explored," Holden said, "So I certainly wouldn't say no to anything that provides a defined benefit to our members."

The IAM did not respond to an email seeking details about its demands for retirement benefits.

Alicia Munnell, director of the Center for Retirement Research at Boston College, said the workers and management had to ultimately divide up "one pot of money" among wages, retirement plans and other benefits.

"So if workers just want more compensation, then cash wages may not be a bad way to solve this standoff," Munnell said. "If the issue is really more symbolic, then I think an alternative way to go might be a cash balance plan, which is technically a defined-benefit plan."

These plans have certain advantages, she said, since they are more portable than traditional pensions and participants can choose to receive fixed payments in retirement.