Pension funds pinched, stirring calls for reform

The Pension Benefit Guaranty Corp., which insures the traditional "defined benefit" pensions of 44 million Americans, has seen such a deterioration in its long-term financial position in the last year or so that the General Accounting Office recently put the PBGC on its "high-risk" list of government programs. Companies with so-called defined-benefit pension programs fund the PBGC with annual contributions. In a worst-case scenario, a spate of corporate bankruptcies could leave taxpayers to foot the bill for keeping pensions flowing to many retirees.

Under present law, if a plan is less than 90 percent funded to cover its pension liabilities, the sponsoring firm must make additional contributions to the plan to reduce the funding deficiency within three to five years. (There are exceptions.)

Last April, Reps. Rob Portman (R) of Ohio and Benjamin Cardin (D) of Maryland, Introduced a bill in the House they said would strengthen private pensions and help corporations bridge their gaps.

Some economists are concerned that companies putting more money into their pension plans will have less money for spending on new plant and equipment - thus damaging the economic recovery.

To avoid this problem, the Portman-Cardin bill would change the way pension liabilities are calculated. Since 1987, federal law has required that pension liabilities, which determine minimum pension contributions, be computed using the interest rate on the 30-year Treasury bond - a bond no longer issued.

When that interest rate fell sharply, it shrank the assumed future income of pension funds, and so funding requirements grew. Last year, Congress passed a bill temporarily boosting the rate to provide companies funding relief. That provision expires at the end of 2003. So the Portman-Cardin bill would phase in a higher rate based on long-term corporate bond returns. If that bill dies in Congress, experts foresee a separate bill will be introduced setting a higher rate.

"This almost has to happen," says a congressional staffer.

David Certner, federal affairs director for the AARP, a powerful membership group of older Americans, objects to a higher rate if it applies to the lump-sum payments that some companies allow retirees to take instead of a pension. A payment of $100,000 for a 45-year-old could shrink to $75,000 with a 1 percent higher rate, Mr. Certner notes. About half of corporate defined-benefit plans permit lump-sum payouts.

Some firms with underfunded pension funds fear that a run of concerned employees seeking lump-sum payments will deplete their fund quickly, creating a severe financial burden for the firm.

Norby wants Congress to tackle the long-term funding problems of defined-benefit plans. Portman-Cardin, he charges, masks "the real problem" of pension underfunding.

Further, the bill includes tax provisions to boost personal savings, but costing Uncle Sam revenues. Those provisions are controversial, but Mr. Cardin, in a telephone interview, calls the $50 billion cost "within the range we think is responsible."

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