Pension reform is job one
Not able to take advantage of the recent reductions in air fares? Too bad. You may pay anyway.
The airlines, led by Delta, have slashed ticket prices. Meanwhile, they have dumped billions of dollars in pension obligations on the government fund that insures benefits for 34 million Americans. Drunks take better care of their empties.
Monday, the Bush Administration announced a plan to sober up some of those irresponsible corporate citizens.
The Pension Benefit Guaranty Corp. insures pensions in much the same way the Federal Deposit Insurance Corp. insures bank deposits. Companies with pension programs that provide a fixed benefit to retirees pay PBGC premiums according to the number of employees. If the companies end up in bankruptcy, the PBGC picks up responsibility for paying benefits up to $45,514 annually to retirees age 65 and over.
Fixed contribution plans like 401(k)s are not insured.
The demise of several major steel companies and the airlines’ struggles have put the PBGC in a deep hole. Rescue of Bethlehem Steel pensions alone cost $3.6 billion in 2003. Kaiser Aluminum did its share in 2004, handing over $566 million in obligations. Some former employees will not receive all the benefits they anticipated.
At the end of its 2004 fiscal year, PBGC reported a deficit of $23.3 billion, twice that of 2003. Some analysts have warned that the trend, if unchecked, could end with a taxpayer bailout. The administration’s plan could head off that eventuality, and good thing. Pension funds in the United States are underfunded by an estimated $450 billion.
The simplest of the proposed changes would raise premiums from $19 per employee to $30, and keep adjusting them in the future as wages increase. The premium has not been adjusted since 1991. Also, companies with plans no longer fully funded because of investment losses — as many were post-2000 — would have seven years to catch up, and pay premiums reflecting the risk they represent to the fund.
The proposal would encourage responsible plan management by allowing administrators to cache funds in excess of full funding when times are good. The surplus would offset losses during bad times. Surplus funding was blocked by the Reagan Administration because one side effect was an increase in federal deficits. If surpluses are allowed again, safeguards that prevent corporate raiders from skimming that money away must be included. Maxxam, majority holder or Kaiser stock, sucked millions from the Pacific Lumber plan after a takeover in 1986.
Some of the formulas used to calculate the soundness of company plans would be simplified to discourage bogus accounting. Companies would not be allowed to promise additional pension benefits if their existing program is underfunded.
To help keep corporations honest, the administration’s proposal would also require better disclosure of pension plan health. Employees and investors become powerful advocates for setting things right if the truth is known.
And setting things right can be costly. Avista Corp., not a particularly big company, has set aside $39 million the last three years to catch up with its obligations.
Even short of direct taxpayer bailout, there are consequences for workers and consumers.
Higher premiums will increase labor costs, however slightly, which will cause employers to reassess hiring plans, and the extent of the pension benefits they can offer in the future. Some might use higher costs as an excuse to terminate their plans.
In the marketplace, corporate reorganization plans that allow failing companies to continue doing business hurts healthy companies that have more carefully managed their finances. The airline industry is Exhibit A.
The administration took a half-hearted stab at pension reform last year. Congress made things worse, not better, by cutting the airlines and steelmakers still more slack. Having put a well-thought-out, comprehensive package together for this session, the president and Labor Secretary Elaine Chao should work hard for its enactment. Private pension plans and PBGC are in far worse shape than Social Security. The quicker the corrective action, the better.
Also, a successful campaign on behalf of pension reform, including a major effort to educate all Americans on retirement planning, would be a good exercise to work through before tackling the adjustments — and only adjustments — needed to assure the solvency of the Social Security program for the rest of this century.