Passing Pensions: Senate Takes the First Step Towards Pension Reform

What happens if you have retired from a company that is now in trouble and may not be able to continue to give you your promised pension? What happens if you currently work for a company that is in financial trouble and might declare bankruptcy? Will whatever money the company has go to you as a current employee or go to the retirees who are no longer with the company?

People with pensions are looking towards Congress with hopeful eyes. In our global economy many companies that have been in business a long time and are now in difficulty use their funds to keep the current business going and are cutting back on their promises to retirees. Reforms that could help to support the failing pension system are slowly passing through the lawmaking process and may reach President Bush’s desk by the holidays.

Legislation passed in the Senate

On November 16, 2005, the Senate passed a bill 97-2 that Republicans and Democrats created together in order to 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 would require companies to fund their plans 100 percent instead of taking money out of pension funds and "smoothing" them over. "Smoothing" is a term critics use to refer to an accounting technique that hides the true amount in the pension funds.

Possible Solution

The Senate bill requires 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 operating while in bankruptcy would not be allowed to increase their retirement benefits.

Companies are required by federal law to buy insurance in case they cannot pay their pension obligations to retirees. The Senate bill requires companies to pay a higher insurance premium to this insurance pool, the Pension Benefit Guaranty Corporation or, PBGC. The rate would be $30 per year per participant, up from $19.

Democratic Senators Debbie Stabenow and Carl Levin of Michigan voted against the bill because they worried that the new pension requirements would hurt manufacturing companies in their state that are struggling to compete in the global marketplace.

What’s the trouble with the PBGC?

The Pension Benefit Guaranty Corporation is a private insurance fund that operates under federal rules. It is supposed to pay for retirement pensions that companies can no longer afford to pay to employees. It’s a federal corporation created by the Employee Retirement Income Security Act of 1974. PBGC receives no funds from general tax revenues.

The agency is considered "high risk" by the General Accounting Office because of its record deficit of about $23 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.

In the House

The House is considering its own version of the bill and is expected to vote on it after the Thanksgiving recess. The House bill does not include amendments passed by the Senate to address issues in the airline industry. Primarily, the Senate version gives airlines 20 years to make up for pension plan underfunding, while the House version provides only 14 years. The airlines are in trouble. Should the current pilots have to work to fund the pilots who have already retired because the airlines failed to fund those pensions?

Further, the Senate version would lower to 60 the age at which pilots can receive the maximum pension benefits allowed by the PBGC. Currently, pilots must retire at age 60, but they cannot draw their maximum pension benefits from the PBGC until they are 65.

House negotiators who disapprove of industry-specific language in the bill say that the Senate amendments should be removed during the final Senate-House conference committee, but most Senators believe the changes are necessary.

Should the government protect businesses that fail? The Bush White House has not chimed in on the proposed pension legislation, but has disagreed with Congress about pensions 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.

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 traditional plans that promise workers a specific monthly benefit at retirement (corporate defined-benefit pensions) would be affected. Plans that give employees money that they invest for themselves (defined contribution plans) and 401(k)s are not covered by pension insurance, and therefore would not be affected.

Only about 20% of Americans are covered by defined-benefit pensions, but if the country goes into a recession and the PBGC were to go under, seniors would lose purchasing power and many families would be impacted.

How do pensions relate to the stock market?

What does the PBGC do with its funds that come from employer-paid premiums? Some are invested in the stock market. 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.

At issue is the quality of life for America’s seniors, present and future in a drastically changed global economy. Which is more important the current employees’ jobs or the pensions of retirees? How do you think the pension problem should be addressed? Should companies that promise pensions, and then go bankrupt, be held accountable? What is government’s responsibility?

What do you think?

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Article Posted on: 11/25/2005