Defining the pension problem

The outlook for traditional pensions certainly is not bright.

But that outlook could be stabilized by new legislation, says Bradley Belt, executive director of the Pension Benefit Guaranty Corporation. The PBGC was created by Congress to ensure pension benefits for the 44 million workers who are covered by 31,000 private pension plans that offer a defined benefit plan. In such a plan, an employer promises to pay a set amount to a retired employee for the rest of his or her life. The advantage of such a plan is that an employee cannot outlive the retirement benefit.

Belt says the prospects for such pension-bolstering legislation are good. Referring to the congressional committees that oversee pensions he said, "I will take them at their word" that they "will get something done this year."

The troubled state of defined benefit plans was thrown into sharp relief last month when a judge allowed United Airlines to default on $9 billion in pension obligations in the company's bid to emerge from bankruptcy. The decision affected some 120,000 United employees and retirees, and focused Congressional attention on the pension issue.

At a lunch with reporters sponsored by the Monitor, Belt called the United case a "tragic situation," but also "a wake-up call." He said, "it is a case study of all the flaws that exist" in current pension laws. "Not a single dime has gone into [United's] pension plan since 2000," Belt said, despite having promised billions of dollars more in benefits than the airline had set aside.

The number of employers promising workers a fixed retirement benefit has been declining steadily for 20 years. Such plans are costly and tend to appeal most to workers who work at one company for many years.

But if Congress both simplifies regulations and requires companies to eliminate their unfunded pension obligations, "you can at least stabilize" the defined benefit plans that are in existence, says Belt, "and you may be able to turn the corner and head the other way."

Many of the Bush administration's pension reform ideas are contained in legislation drafted by Rep. John Boehner, (R) of Ohio, who chairs the House Committee on Education and Workforce. His bill would require firms to eliminate underfunding within seven years and boost insurance payments to the PBGC. But, Belt cautions, "in some areas the medicine needs to be a bit stronger." Specifically, Belt wants to insure pension plan resources are measured in a way that forces companies to make actual cash contributions rather than "phantom credit balances."

The pension agency executive favors tougher regulations instead of a massive infusion of taxpayer money.

"It strikes me as being fundamentally unfair in the first instance to call on the American taxpayer, the vast majority of whom do not have access to these plans...to pay the benefits of those few that are fortunate enough to have" a defined benefit plan. Only one in five American workers is now promised a fixed pension benefit.

The pension issue is one with considerable political resonance. Over 2,000 United Airlines retirees and employees submitted electronic testimony in the past two weeks to the House Education and Workforce Committee which oversees pension issues.

Former House Speaker Newt Gingrich told Washington Post columnist David Broder, "If Ford and General Motors are rated as junk bonds and United Airlines can't pay its pensioners," Gingrich said, "people feel there is something wrong. Both parties are hurt but the governing party is at greater risk." Of the political dimensions of the pension issue, Belt said, "I don't see it as a political risk, I see it as a political opportunity."

Last week, the PBGC offered updated figures on the scope of that opportunity. The agency reported on companies that said they had underfunded pension plans. Underfunded means the pension plans did not have enough money to pay all the benefits they had promised. The companies reported a record $353.7 billion shortfall for calendar year 2004, up $74.7 billion or 27 percent from the previous year.

The report covered only the 1,108 pension plans which had shortfalls of $50 million or more. If plans with smaller funding problems are included, the PBGC says the shortfall in all insured pension plans exceeds $450 billion.

Late last month, the Government Accountability Office released a report that said the funding problems of private pensions may be even more serious than current figures show. In testimony to the Senate Finance Committee, Comptroller General David Walker said, "because of leeway in the actuarial methodology and assumptions that sponsors may use to measure plan assets and liabilities, underfunding may actually have been more severe and widespread than reported."

The fact that major companies - like Bethlehem Steel, US Airways, and United Airlines - have terminated pension plans with major gaps between their assets and what they have promised retirees has hurt the PBGC's finances. The PBGC's single employer program has gone from a $9.7 billion accumulated surplus at the end of fiscal year 2000 to a $23.3 billion accumulated deficit as of September 2004, the GAO said.

GAO Director Walker added that, "there is concern that the expected continued termination of large plans by bankrupt sponsors will push the program more quickly into insolvency, generating pressure on the Congress and ultimately the taxpayers to provide financial assistance to PBGC and pension participants.

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