Uniting to repair pensions

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Uniting to repair pensions

By James A. Klein, The Washington Post

September 1, 2003

Adversity often brings together unlikely allies. So, as we celebrate Labor Day, it is not surprising that business and organized labor have come together to express their common concern for the future of the pension system — specifically, defined benefit pensions funded by employers that pay a prescribed and guaranteed lifetime benefit.

This alliance cannot come too soon, because defined benefit pensions face extinction like no other time in their history.

According to the AFL-CIO, these pensions "are workers' best bet for retirement security on top of Social Security payments." Many businesses, especially large companies, agree and they voluntarily sponsor these plans for their workers. But this system is in steep decline and the looming threats make the outlook bleak.

According to the Pension Benefit Guaranty Corp. (PBGC), the federal agency that guarantees these benefits, the number of insured plans in the U.S. dropped from about 114,000 plans in 1985 to just more than 32,000 in 2002.

The challenges to the system are varied and complex. Changes in work patterns, such as the decline in job tenure for U.S. workers from a long career with a single employer — often typical when these plans were first established — to just 4.7 years today, can make it difficult to accrue a meaningful retirement benefit under a traditional plan. Moreover, the portability and opportunity to accumulate substantial wealth under a 401(k)-type plan makes such arrangements extremely attractive (the negative stock market notwithstanding). But ill-advised public policy is preventing defined benefit plans from fulfilling their role in ensuring retirement income security.

The one bright light in this dismal declining pension system picture is the growth of so-called "cash balance" and other "hybrid" plans. These employer-funded and federally insured defined benefit plans accrue benefits more evenly and have features akin to 401(k) plans. For many workers cash balance/hybrid plans deliver a more meaningful retirement benefit than traditional pensions. Yet recent court decisions and a hostile atmosphere in Congress cast the future of these plans — and therefore the defined benefit system itself — in doubt.

Compounding these threats are limits on employer contributions to well-funded pension plans and Congressionally mandated use of the interest rate on 30-year U.S. Treasury bonds (no longer even issued by the government) for purposes of calculating pension liabilities. The anomalous result: During the 1990s prosperity boom, companies couldn't make additional contributions to their plans.

But in today's down economy, businesses must use an outdated interest rate that inflates the required funding at a time when they can least afford it. Actuaries estimate if the interest rate problem is not fixed, employers may be forced this year to expend 6 times the $14 billion they contributed in 2001. That money is needed to create jobs, secure health benefits, and engage in myriad things workers and retirees also value this Labor Day.

Couple these upside-down disincentives for responsible funding with employer uncertainty over potential changes in the accounting rules for pensions and it's a miracle any company today takes on the long-term obligation of sponsoring a defined benefit plan.

The permanent solutions to these problems are not easy — but the initial steps are breathtakingly straightforward. And we have no choice but to start now if we think these plans deserve to be saved — let alone encouraged to thrive.

Congress should immediately act to fix the interest rate dilemma by passing the bipartisan Pension Preservation and Savings Expansion Act introduced by Reps. Rob Portman, Ohio Republican, and Ben Cardin, Maryland Democrat. That measure also promotes other reforms for both defined benefit pension and defined contribution retirement savings plans. The U.S. Treasury Department should quickly finalize rules establishing the legitimacy of cash balance and other hybrid plans.

The U.S. Department of Labor notes that Labor Day observances in bygone years were marked by emphasizing "the economic and civic significance of the holiday." There cannot be a more important economic and civic need than ensuring the future of the defined benefit system to support workers in their retirement years. Labor Day 2003 is the right time to commit ourselves to that goal.