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Vanishing Pensions


Potential pension woes continue to mount for millions of Americans, as a hidden insolvency spreads like a virus through the retirement system.

Total underfunding of private pension-plan obligations exceeds $45 billion, two-thirds higher than it was six years ago. General Motors alone has more than $20 billion in unfunded pension liabilities. Bethlehem Steel owes $2.4 billion to the employee retirement coffers, and fellow steel maker LTV Corp. is short by $2.1 billion after years of bankruptcy-court protection.

The federal Pension Benefit Guaranty Corp., which insures private pensions for more than 41 million participants, says that nearly 20 percent of those people are covered by funds that don't now have enough money in them to meet their projected obligations.

Add to that recent calculations of underfunding of federal civilian and military pensions of more than $1 trillion -- which would increase the federal deficit by one-third -- and the prospect of a massive public bailout grows even darker.

So how many people failed to get their promised pensions this year? Very few, if any, and none who is in a plan covered by the Pension Benefit Guaranty Corp., which has been in business since 1974. (The agency only insures pensions up to $29,250 a year, so some retirees in failed plans are not receiving full promised benefits.)

The problem is that big employers continue to put aside too little money to fund their future obligations. Despite nearly 20 years of federal pension-protection laws, companies face relatively minor penalties for failing to maintain the funding level of their plans.

And many employers use outdated, inflated interest-rate tables to forecast their future assets, tables that ignore the reality of the current lower interest levels of stocks and bonds. A recent survey of the largest U.S. corporations found that about 90 percent of them assumed an interest rate of more than 7 percent, about the current yield of high-quality bonds.

The U.S. Securities and Exchange Commission sent letters warning companies that they must recognize the decline in interest rates and accordingly plan to contribute more money toward pensions because their plan assets are expected to earn less. The underfunding total could grow considerably as these pension-plan earnings assumptions are revised.

The comfortable growth of stocks and bonds in pension portfolios in recent years encouraged a number of companies to stop making new contributions, as assets increased to meet projected needs. (And paradoxically, income-tax laws penalize significant overfunding of plans.) Now, strong demands for catch-up contributions could play havoc with the balance sheet, reducing earnings and shareholder equity.

Employers, of course, decide whether they wish to offer defined-benefit pensions, which pay a fixed amount based on lifetime earnings and years of service. They don't have to (unless required to by collective bargaining contracts with unions), but most large corporations do. In fact, the number of such plans offered by larger employers has grown in recent years.

A number of companies neglect their pension plans and understate their ultimate costs because there is, after all, federal insurance to as sure future payment. But funding of that government insurance program has been inadequate to meet projected retirement pledges that may come due, a trend that some ominously predict will mirror the massive shortfalls in the federal deposit-insurance program for the failed S&Ls.;

While the Pension Benefit Guaranty Corp. is now solvent and paying retirees in nearly 1,800 failed pension plans, it faces a current deficit of some $3 million if anticipated future losses are calculated. And its projections foresee a shortfall of as much as $30 billion when the baby boomers start to retire in about 20 years.

The agency concedes that its premiums do not reflect the actual risks involved. They are political rates approved by Congress. And there are enormous loopholes and delays in the funding and reporting system that permit generous abuse: Some seriously underfunded plans don't even pay enough annual premiums to cover interest on their plan deficiencies.

Furthermore, the guaranty corporation has to be cautious in raising rates for financially shaky companies, which could decide to terminate a pension plan and drop it in the lap of the government insurer. Remember, it's not the company but the company's workers' retirement funds that the agency insures.

Pension-insurance rates have soared from $1 per employee in 1974 to as much as $53 for a severely underfunded company today. The guaranty agency proposes increasing those rates to $140 a year, accelerating catch-up payments by the most poorly funded plans, and to close funding loopholes. Its legislative package would also make underfunded plans inform their participants each year of their status.

That won't cure all ills, but it is a needed stiff dose of medicine for a worsening malady.

It's true that the majority of working Americans do not have insured pensions. Some don't have any, others have IRA and 401k plans that allow tax-free contributions to retirement plans but the employee assumes the full risk for investment and growth.

That may dampen sympathies for those with government-insured traditional pension plans. But the need for strengthening the finances of the pension-insurance system now, in order to avoid a massive infusion of taxpayer funds in the future, is a shared concern.

Michael K. Burns writes editorials for The Baltimore Sun.

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