Bush Is Pushing for Pension Reform
Chao Unveils Plan to Alter
How Companies Will Fund
Defined-Benefit Programs
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
January 11, 2005; Page A2
WASHINGTON -- The Bush administration, setting pension overhaul as a top priority, wants Congress to consider a range of proposals for changing how companies fund their defined-benefit employee-retirement plans.
Labor Secretary Elaine Chao unveiled a plan to replace what she called the current "outdated and ineffective" rules for funding pension plans with a simple formula that would ensure that companies make good on their retirement-benefit promises. The administration also would raise the pension-insurance premiums that companies must pay, to help reduce a growing deficit at the Pension Benefit Guaranty Corp., the agency that insures corporate pensions.
While the administration has downplayed the possibility that the PBGC eventually may require a taxpayer-funded bailout, Ms. Chao said that unless Congress approves changes, "the financial integrity of the Pension Benefit Guaranty Corp. will be compromised and the security of 34 million workers and retirees will be more at risk."
The PBGC, a government-owned insurance company, was created by Congress in 1974 after several high-profile corporate bankruptcies left retirees without pensions. Its mission is to guarantee defined-benefit pension plans -- those that provide workers with a set amount each month, based on wages and number of years on the job.
If a pension plan shuts down without enough money to meet its obligations, the PBGC sometimes takes over the plan's assets and pays the benefits, up to a point. Last year, the agency posted a deficit of $23.3 billion, double the gap from the year before. The agency's growing liabilities stem from the decline of the steel industry as well as troubles among airlines, which burdened the agency with plans that were underfunded by billions of dollars.
Under the proposals, the PBGC would increase basic annual premiums paid by companies to $30 per worker from the current $19 and impose automatic increases each year pegged to average wage increases of U.S. workers. The current basic premium level has been in place since 1991.
Companies with troubled plans would pay even higher premiums, based on the extent that their obligations are underfunded.
To provide more simplicity and consistency, the administration wants to wipe out a mix of funding rules that have allowed companies to legally underestimate their future pension obligations. The administration is pushing companies to use a single corporate-bond interest rate to provide current -- and more accurate -- snapshots of pension liabilities, based on the age of a company's work force.
Congress last year debated a similar proposal, but, influenced by election-year politics, instead passed a temporary rule change that eased pension-funding requirements. Senior administration officials said they expect Congress, which must replace the stopgap rule by the end of the year, will be more open to the broader proposal.
In addition, the administration proposes giving companies between seven and 10 years to make up shortfalls in their defined-benefit pension plan. That is less time than the 20 years that some industries, including airlines, have said is needed.
Furthermore, the administration wants companies to be required to tell investors and employees well before any pension plan becomes significantly underfunded, to give interested people a chance to pressure companies to increase the funding.
Getting the changes through Congress won't be easy. While some Republican leaders say they are ready to push for an overhaul, business groups and labor unions are raising concerns about how far the changes should go. Employer groups and unions say that imposing higher premiums or stiffer rules could prompt some companies to freeze or eliminate pension plans.