Pension Tension

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Pension Tension

The Washington Post

November 14, 2003

The pension system is in trouble, and one of the fixes Congress is considering could make matters dramatically worse. The issue involves how to treat pension plans that fall below required funding levels -- in other words, that don't have enough money put aside to meet their likely obligations.

According to Pension Benefit Guaranty Corp. (PBGC), the federal entity that insures pension benefits, the total underfunding in defined-benefit pension plans exceeds $350 billion -- seven times the level of just three years ago.

The scariest subset involves underfunded plans in companies that are financially shaky. The PBGC estimates that amount at more than $80 billion as of the end of last year. Even scarier: Those numbers may understate the actual risk.

According to PBGC Executive Director Steven Kandarian, the current funding requirements, which are based on plans' estimates of their current liability, "are set too low" and bear "no obvious relationship to the amount of money needed to pay all benefit liabilities if the plan terminates."
There are painful, real-world examples of the gap between current funding rules and reality. For example, Bethlehem Steel told the PBGC that its plan was 84 percent funded, according to the required calculations. But when the company went bankrupt, it turned out that the assets covered only 45 percent of its actual liability.

The PBGC, which is funded through insurance premiums paid by companies that sponsor pension plans, had to ante up $3.9 billion, and workers and retirees lost another $400 million in promised benefits that exceed what the agency will pay.

So what is a group of companies with underfunded plans asking Congress to do? Led by the airline industry, whose total underfunding is $26 billion, they want relief from rules known as the deficit reduction contribution, which require them to quickly plow extra money into pension plans that fall below the required funding level of 90 percent.

A pension bill approved by the Senate Finance Committee would give companies whose underfunded plans have triggered the rules a three-year holiday from having to make these payments (as long as their contributions were up to speed in 2000). In other words, the problem of having underfunded pension plans would be addressed by allowing companies to underfund their plans even further.

This exemption began as an airline-only bailout, but when lawmakers balked at a special-interest provision, the solution was to turn the rifle-shot into a howitzer that covers all underfunded plans. The PBGC estimates the provision would let companies skip $30 billion in pension contributions.
There are a number of laudable provisions in the Finance Committee's bill, among them long-term improvements that are missing from both a House-passed version and a measure approved by the Senate Health, Education, Labor and Pensions Committee. To some extent the contribution relief was the price for obtaining agreement on these positive changes -- "the legislative glue," said Finance Committee Chairman Charles E. Grassley (R-Iowa).

And some easing of the rule may be warranted: When the provision kicks in, which is probably later than it should, it requires companies to pony up the money very quickly, often at the time they can least afford it.
The system shouldn't be so tough that it pushes companies whose plans aren't headed for failure over the brink of insolvency or encourages them to terminate their plans.

The best solution would be to find a way to provide short-term, narrowly crafted relief that would take into account the circumstances of particular companies. A mechanism already allows companies to apply for an exemption from the rules. An enhanced version of this safety valve would make sense.

But an across-the-board, absolute three-year break is a bad idea -- for workers who could lose promised benefits if plans go under, for other companies whose premiums could rise if these plans fail and for taxpayers who could find themselves having to step up to the plate if the PBGC ultimately is swamped with more failed plans than it can handle.

That risk may be remote, but it's not as unthinkable as it once was: The financial position of the PBGC single-employer insurance program has deteriorated from a surplus of $7.7 billion to a deficit of $8.8 billion. That is, the agency's assets are $8.8 billion less than the liabilities of the plans that it has taken over. The PBGC isn't about to go bust -- those obligations are paid out over time -- but the numbers are chilling.
The General Accounting Office recently placed the PBGC on its list of "high risk" programs, those in need of "urgent attention." Attention must be paid, and reform should make matters better, not worse.