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Pension funds pinched, stirring calls for reform The Christian Science Monitor September 03, 2003 Millions
of Americans, retired or getting close to it, now face questions about the
health of their pension plans. Large companies from IBM to
General Motors Corp. are struggling to meet their obligations to retirees. The reasons, in the view of
experts, range from poor planning to a deep and surprisingly long bear
market in stocks - in which pension funds invest. Whatever the cause, a rainy
day has arrived, and many companies are not prepared. Consider: Of the
companies in the Standard & Poor's 500 index, 353 offer traditional
pension plans, as opposed to voluntary savings plans for employees such as
401(k)s. Of those firms, at least 322 pension plans were underfunded as of
mid-June. The total shortfall: $226 billion, despite this year's nascent
stock market recovery. Congress, among others, is
taking note. Thursday, the House Education and the Workforce committee plans
to consider ways to strengthen America's pension system and the federal
agency that guarantees corporate plans. The challenge represents a
long-term threat more than an immediate crisis. An "underfunded"
pension plan generally succeeds in paying retirees, even as the company
scrambles to rebuild the fund to meet its long-term obligations. But the sharp turnaround in
corporate fortunes is worrisome, both at specific companies and in
aggregate. General Motors, for
example, recently had to issue a stunning $13 billion in debt to bolster its
pension plan. Such debts could make it harder to compete in the
no-money-down world of automobiles. "There's no way
General Motors can eliminate all its deficit by selling cars," says
Alicia Munnell, an expert at Boston College, noting that GM's pension funded
is underfunded by $19.2 billion. As recently as 2001 - and
for all of the 1990s - the pension funds of the S&P 500 firms, taken as
a whole, were fully funded. In 1999, their surplus exceeded $200 billion -
as big as today's shortfall. The reversal highlights a
crucial factor in pension-fund success: investment rates of return. The bear
market has shrunk the value of their corporate pension funds - overall, by
nearly $1 trillion, leaving about $3.69 trillion in assets at the end of
2002. While some experts urge
far-reaching changes in the corporate pension system, most expect Congress
to focus for now on more temporary measures, such as allowing companies to
forecast a higher rate of return on their investments. "It's all piecemeal,
patchwork, finger-in-the-dike measures," complains A. James Norby,
president of the National Retiree Legislative Network, a group representing
millions of retirees of major firms. 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." Copyright ©
2002 Global Action on Aging
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