Pension Peril: Congress Addresses Deteriorating Retirement

How would you feel if you worked at a company for 30 years only to find your promised pension wasn’t there when you retired? How do you feel about your tax dollars paying for pensions that failing companies can’t cover?

The U.S. pension problem is going from bad to worse. Without new pension legislation, the choices seem to be between pensioners losing billions or taxpayers covering those billions.

The recent bankruptcies of Delta Airlines Inc. and Northwest Airlines Corp. are pushing Congress to act fast. If Delta and Northwest terminate their pension plans it could add as much as $12 billion to the deficit of the federal agency that insures private pension plans, the Pension Benefit Guaranty Corporation (PBGC).

What’s the PBGC?

The Pension Benefit Guaranty Corporation covers retirement pensions that companies can no longer afford to pay to employees. The agency is considered "high risk" by the General Accounting Office because of its record deficit of about $30 billion.

But some say the estimated PBGC deficit is inflated. The American Benefits Council, an organization that represents corporations, says that the PBGC should be using higher interest rates when estimating liabilities. According to an American Benefits Council report released September 23, 2005, the PBGC interest rate assumptions are "unnaturally low," and using a higher interest rate could lower the estimated deficit to $14.3 billion or even $4.6 billion.

The Center on Federal Financial Institutions, a non-partisan public policy organization that focuses on the federal government’s lending and insurance activities, holds a different point of view. The Center’s president, Doug Elliot, says that the exact amount of the current deficit matters little if the PBGC is going to lose between $60 - $120 billion over the next 20 years, as a recent Congressional Budget Office report suggests.

These numbers have lawmakers scrambling.

Proposed legislation in the Senate

In the Senate, Republican and Democratic lawmakers cooperated to create a bill that would ease the strain on the PBGC (the taxpayers) and encourage companies to invest more in their pensions.

Finance Committee Chairman Charles E. Grassley of Iowa (R) and Michael B. Enzi of Wyoming (R) worked with Max Baucus of Montana (D) and Edward M. Kennedy of Massachusetts (D) to create a bill that’s likely to pass in the Senate.

The legislation would require companies to fund their plans 100 percent instead of taking money out of pension funds and "smoothing" it over. "Smoothing" is a term critics use to refer to an accounting technique that hides the true amount in the pension funds.

The Senate bill would require companies to be measured according to the quality and safety of their bonds, or bond ratings. Companies with low bond ratings would be required to put more money into their pension funds and companies in bankruptcy would not be allowed to increase their retirement benefits.

Further, the bill requires companies to pay a higher insurance premium to the PBGC. The rate would be $30 per year per participant, up from $19. Lawmakers hope that this extra revenue will loosen the budget and prevent drastic cuts.

In the House

The House bill is moving along more slowly and is expected to reach the floor in November. The Social Security overhaul legislation was supposed to be attached to the House version, but Ways and Means Chairman Bill Thomas of California (R) says that the American people have "no appetite" for that policy change right now.

The White House has not chimed in on the proposed pension legislation, but has had significant disagreements with Congress in the past. President Bush is wary of any sort of pension bailout that seems to reward companies’ risky behavior and send the message that the government will come to the rescue in financial trouble.

Who will be affected if companies can’t pay their pensions and the PBGC does not come to the rescue?

If the PBGC were unable to cover its plans, those with corporate defined-benefit pensions would be affected. Defined-benefit pensions are traditional plans that promise workers a specific monthly benefit at retirement. The amount of the benefit is known in advance, usually based on factors such as age, earnings, and years of service. Defined contribution plans and 401(k)s are not covered by such insurance, and therefore would not be affected.

Only about 20% of Americans are covered by defined-benefit pensions, but if the PBGC were to go under, we would all be impacted. Taxpayers are ultimately responsible for the PBGC guarantees. We all share each other’s risk - that’s the purpose of insurance.

How do pensions relate to the stock market?

The PBGC is funded by employer-paid premiums, some of which are invested. Returns on these investments provide an important portion of the PBGC’s revenue. So, a dipping stock market makes the PBGC unstable.

The stock market also affects corporate pension plans’ investment portfolios, so when the stock market falls, more corporations struggle to afford promised pensions.

Broader context

The PBGC deficits are yet another weight on taxpayers’ shoulders, in addition to the costs of the war in Iraq and Hurricane Katrina. But if taxpayers don’t hold up the PBGC, millions of Americans could lose their pensions. If the PBGC were self-sustaining through its premiums, taxpayers would save billions of dollars.

What should Congress do to correct the pension problem? Should the American public insure company pensions or should a private insurance group cover the risk? Should companies pay higher premiums? Are you counting on a pension when you retire?

What do you think?

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Article Posted on: 10/1/2005