Federal pension insurance staggers under new load


WASHINGTON -- The federal agency that insures private pension plans faces a shortfall of as much as $71 billion in the next decade, the top congressional budget analyst said yesterday, adding urgency to efforts by President Bush and Congress to shore up the nation's increasingly troubled pension system this year.

The Pension Benefit Guaranty Corp., under strain after taking on the pension promises of airlines, steel makers and other companies that have recently declared bankruptcy, could see its losses triple over the next 10 years unless there are major changes, Douglas Holtz-Eakin, the director of the Congressional Budget Office, told a House committee.

About 34 million workers who depend on employer-sponsored pensions face major risks under the current system, which allows companies to under-fund their pensions and mask some losses.

The PBGC assumes a portion of a firm's pension obligations if the company goes belly-up -- workers in some cases have lost as much as one-third of their retirement savings. And the PBGC's problems could spell trouble for all Americans; even though the agency is not funded by taxpayers, the government would be virtually certain to step in to prevent it from becoming insolvent. A bailout could cost taxpayers billions.

There is "clearly a need for change in the law," said David S. Walker, the comptroller general of the United States and a former PBGC chief, who also testified at the Budget Committee hearing. He warned of "tremendous pressure for a taxpayer bailout" of the agency unless Congress acts.

The testimony came as Republicans on Capitol Hill unveiled legislation they said would fix the agency's problems and strengthen private pensions. The measure would increase the premiums that employers pay the PBGC to guarantee their plans and would change firms' contribution requirements in an effort to make sure they have enough money to pay workers their benefits.

"This bill strikes the right balance of establishing tougher funding requirements for employers, enhancing disclosure on behalf of workers, and protecting taxpayers from a possible multibillion-dollar bailout," said Rep. John A. Boehner of Ohio, a Republican who chairs the Education and the Workforce Committee and sponsored the measure.

Bush, who has staked much of his domestic agenda on his so-far stalled plan to overhaul Social Security, has also called for action similar to Boehner's proposal to bolster so-called "defined benefit" pensions. Those are employer-provided plans that promise workers a fixed amount of retirement benefits, as opposed to individual tax-advantaged "defined contribution" plans, such as 401(k)s.

Rep. Bill Thomas, the California Republican who is chairman of the Ways and Means Committee, indicated he wants to put the private pension bill and Bush's Social Security measure in a sweeping retirement savings measure he'd like to push through Congress this year.

Strengthening workers' private pensions might be seen as a popular add-on to the otherwise divisive idea of shifting the government retirement program toward individual retirement accounts. And if Bush's Social Security efforts should fail altogether, as some lobbyists and lawmakers privately predict, a major overhaul of the defined benefit pension system could help the president and his party claim victory anyway.

If the Social Security overhaul collapses, "doing something on [private pensions] becomes, at the end of the day, a face-saving way to say, 'OK, we did something on retirement security,'" said Bob Shepler, director of corporate finance and tax at the National Association of Manufacturers.

The measure introduced yesterday generally tracks with Bush's plan for private pensions, which sparked derision among business groups when it emerged this year. Corporate lobbyists said the president's proposal would burden companies with excessive premiums and unpredictable contribution costs, and they warned that firms might choose to eliminate their pension plans instead of meeting the new requirements.

Similar concerns were expressed yesterday about the Boehner-Thomas measure, though business lobbyists said they preferred it to Bush's.

"It's an improvement over the president's plan. But will it still be the straw that breaks the camel's back in terms of driving employers out of the system or not? Maybe," said Randel Johnson, a lobbyist for the U.S. Chamber of Commerce.

Business interests prefer Boehner's measure because it would allow limited use of "smoothing" -- eliminated under Bush's plan -- a technique companies use to mask large losses from their employees and the public.

The House measure also uses what many companies believe is a more favorable interest rate than the one Bush proposed to calculate their pension liabilities, though businesses are pushing to keep the current corporate bond rate, which they contend is much simpler and more predictable.

Administration officials praised the measure yesterday as a good first step, but both Treasury Secretary John W. Snow and Labor Secretary Elaine L. Chao suggested they are committed to ending -- not just limiting -- companies' ability to misrepresent the condition of their pension plans.

"Any reform package must ensure that pension obligations are measured and reported accurately; smoothing of assets and liabilities, and the use of phantom credit balances, are inappropriate," Chao said.

James A. Klein, president of the American Benefits Council representing companies that sponsor pension plans, said Boehner's measure appears "better than the administration's proposal" but it still hews closely to Bush's approach.

Klein said the new legislation focuses on "shoring up the financial status of the PBGC in ways that we're concerned might inadvertently make it harder for companies to have [pension] plans."

Business lobbyists also said they believe the estimates of the PBGC's financial problems are vastly overstated.

Still, the bill has considerable momentum, in part because a stopgap measure setting the rate that companies use to calculate their pension obligations is set to expire this year. The bill also allows companies to make higher tax-deductible contributions to their pension plans in good economic times.

Recent high-profile bankruptcies, such as that of United Airlines -- whose pension default was the largest in the PBGC's 31-year history, shifting $6.6 billion in liability to it -- have raised public interest in the issue.

Yesterday's estimate of PBGC's looming financial problems will add to that momentum, analysts said.

"As Congress sits and debates pension reform, low interest rates, high obligations, high liabilities for the PBGC all fuel the discussion of, 'What are we going to do about this?'" said Ken Kent, the vice president for pensions at the American Academy of Actuaries.

Bush and Congress "are very motivated to act," Kent said.

The issue also breeds strange alliances, joining Republicans and business groups with labor unions, which back provisions to shore up so-called multi-employer pensions. Those plans, also insured by the PBGC, are collectively bargained plans covering employees of multiple companies, usually in one industry, that are administered by a union and company trustees.

Teamsters President James Hoffa, in a statement, called Boehner's measure "a great first step." Boehner said he plans to push the measure through his committee this month.

Sen. Charles E. Grassley, the Iowa Republican who chairs the Finance Committee, said he was revising his private pension bill -- similar in approach to Boehner's -- in light of United's bankruptcy and reports of PBGC's deteriorating financial health.

By the numbers

About the Pension Benefit Guaranty Corporation

Year created: 1974

Number of workers covered: 44 million

Private pension plans covered: 31,000

Number of pension plans bailed out since creation: 3,520

Total funding in all insured pension plans: $450 billion

Maximum guaranteed benefit (annual): $45,613.68

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