July 25, 2006 in Business

Pension system needs help, but not the wrong kind

Bert Caldwell The Spokesman-Review
 

With an August congressional recess fast approaching, this week will be critical for a prolonged effort to reform the nation’s extremely troubled private pension system. Failure to act could be disastrous for millions depending on company pensions to support them in retirement, and for taxpayers as well, although a new report suggests reform may not be all its backers promise.

The pending bill is also important for Idaho and Washington residents because it includes a provision that would extend the sales tax deduction on federal income tax returns. The deduction is scheduled to expire at year’s end.

House and Senate negotiators failed again Monday night to resolve differences in their versions of reform legislation.

Without reform, the federal agency that insures the pensions of 44 million American workers may continue an accelerating spiral into insolvency. The Pension Benefit Guaranty Corp. ended 2005 with a $23 billion deficit. Unsettling, even by federal accounting standards, but just a fraction of the $450 billion in pension commitments companies have made but not funded. And the only thing standing behind the PBGC is we, the taxpayers, who as matters stand today are exposed to a potential bailout perhaps three times the estimated $124 billion it took to cover losses by the savings and loan industry in the 1980s.

By comparison, the Social Security system is a rock of financial stability.

The PBGC, financially healthy until just a few years ago, has been drained by bankruptcies, particularly those in the steel and airline industries. Locally, Kaiser Aluminum did more than its part, sticking the agency with $555 million in obligations to thousands of former workers at its Mead and Trentwood plants, among others. In fact, bankruptcy and the threat that underfunded pensions will be handed to the PBGC has become the stick of choice for companies like Northwest Airlines that want as accommodating a pension bill as possible. The carrier threatens to unload its plan if Congress does not give the airlines 20 years to catch up on pension funding.

Hey, that’s close for an industry on time less than 80 percent of the time.

The bill allows all employers seven years, and the Bush administration has so far insisted that be the limit, with a veto possible if Congress proves too flexible. That hawkish posture is a good one. There’s little point passing a bill that allows the scofflaws to continue abusing the system while responsible companies face the prospect of higher premiums to keep PBGC afloat. They have already taken one hit: Congress earlier this year hiked annual premiums from $19 per worker to $30.

Employee advocacy groups fear changes that will allow companies to freeze benefits and move employees into 401(k) plans, a step the courts have blocked. Pension plans define how much an employee can expect in benefits, 401(k) and similar plans stipulate only the employer’s contribution, not what that might yield in the way of income when a worker retires. Numerous studies indicate many workers do poorly managing their own money, and the bill does require more guidance for 401(k) participants. Good thing, because the bill would let employers automatically enroll workers in such plans unless they opt out. Too many are not saving for their own retirements despite the partial match in contributions offered by many companies.

The bill would also give employees more information about the financial condition of their company’s pension fund. Full funding would be redefined as full funding, 100 percent of the money necessary to fulfill pension commitments, not the 90 percent that qualifies today. Also, workers with company stock in their 401(k)s would be allowed to sell their shares. The change will avoid a repeat of the losses suffered by Enron Corp. employees who, barred from selling their stock, saw their pensions evaporate when the energy company declared bankruptcy.

Like last year’s energy bill, the pension reform measure could become freighted with so many special provisions as to make it counterproductive. The PBGC already calculates the measure will be a loser that fails to stop the dumping of pension obligations, although the assumptions made to reach that conclusion have been challenged. Senate Majority Leader Bill Frist, R-Tenn., wants estate tax relief added, a step that could kill the bill.

That would be unfortunate for millions of baby boomers on the threshold of retirement who could have a comfortable living plucked from their grasp. There’s been too much cheating, often with the complicity of unions and other groups willing to wink at obvious pension under-funding. Another year or two of the status quo and the PBGC could be in jeopardy, and the taxpayers with it.


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