Guarantor of pensions faces deficit

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Guarantor of pensions faces deficit

By Marilyn Geewax The Atlantic Journal Constitution

October 15, 2003

So many corporate pension funds are collapsing that the agency charged with bailing them out is falling deeper into trouble as its deficit soars toward a record $8.8 billion, its director said Tuesday.

The Pension Benefit Guaranty Corp.'s deficit, up from $3.6 billion in 2002, "is the largest in its history and is still growing," director Steven Kandarian told the Senate Special Committee on Aging.

Even though the agency has been forced to take over thousands of failing private pension funds, Congress is preparing to pass legislation that would let corporations put $26 billion less into their retirement plans over the next two years.

Though that may seem counterproductive at first glance, virtually everyone involved in the debate over pensions agrees that allowing reduced contributions is necessary -- for now -- in order to avoid even more pain for workers, companies and stockholders in the still-recovering economy.

Indeed, both corporations and workers support the legislation so strongly that the House passed the bill to reduce contributions last week on a 397-2 vote. The Senate has not yet voted.

In the long run, Kandarian said, Congress must reform the private pension system, which covers about 44 million Americans. Over the past three years, pension funds have been battered by low interest rates, stock market losses, lower corporate earnings and an increase in retirees.

"If companies do not fund the pension promises they make, someone else will have to pay -- either workers in the form of reduced benefits, other companies in the form of higher PBGC premiums, or taxpayers in the form of a PBGC bailout," he said.

The agency is funded with the insurance premiums paid by companies sponsoring pension plans. Currently, it has enough cash to make benefit payments for the pension plans it has taken over. But the General Accounting Office, the auditing arm of Congress, said last month that "the program's long-term financial viability is in doubt."

The PBGC's increasingly precarious financial position has some parallels with the crisis that struck the savings-and-loan industry. In fact, Tuesday's Senate hearing was titled "America's Pensions: The Next Savings and Loan Crisis?"

Between 1986 and 1995, 1,043 thrifts failed, overwhelming the resources of the Federal Savings and Loan Insurance Corp.

Because the FSLIC could not keep pace with the failures, taxpayers had to make good on the commitments made to insured depositors at bankrupt institutions. By the end of 1999, the crisis had cost taxpayers roughly $124 billion.

If the pension problem is not addressed, "the result could eventually be the same," said Sen. Larry Craig (R-Idaho), the panel's chairman. "We don't want to see a repeat of the S&L performance."

The PBGC estimates the private pension system is underfunded by more than $350 billion. Already, the agency has taken over more than 3,200 pension plans with nearly 1 million participants. Payments totaled $2.5 billion in the fiscal year ended Sept. 30 and will rise to nearly $3 billion in fiscal 2004, Kandarian said.

Still, Congress is ready to lower pension contribution obligations for two years while it decides how to fix how the government calculates requirements.

Under existing law, companies must estimate pension-benefit liabilities by using a formula based on the 30-year Treasury bond interest rate. But the Treasury Department stopped issuing 30-year bonds in 2001.

Since then, companies have been using a temporary formula that expires at the end of the year. Firms argue that the formula erroneously sets liabilities too high, forcing them to put cash into pension funds instead of using it to hire workers or buy equipment.

The House bill creates a new formula that uses a blend of corporate bond index rates through 2005. That change would reduce pension payments by about 10 percent.

Unions support the bill because they fear troubled companies, especially in the steel and airline industries, will abandon or default on their pension plans unless Congress provides some relief.

GAO Director Barbara Bovbjerg told the special Senate panel that a two-year fix is OK for now, as long as Congress addresses the long-term problem. "While there is not an immediate crisis, there is a serious problem," over time.

The Senate Finance Committee has approved legislation that would offer a three-year funding reprieve before establishing a more permanent and stringent funding formula.

The Bush administration supports the House legislation but wants a tougher long-term reform that would tie pension contributions to the age of a company's work force. Employers with older workers, such as steel makers, would have to set aside more pension money than those with younger workers.

The reform efforts are directed at the sponsors of traditional pension plans, which provide long-time employees with monthly checks tied to pay and years of service.

To keep their financial promises to retirees, employers must set aside money that can be invested to grow and keep pace with obligations. During the 1990s, when the stock market was shooting up, pension funds grew rapidly.