Working hard and “playing by the rules” has for generations of Americans been the guiding ethic for leading an honorable life and attaining financial security. Millions charted their career and finances based on a promise that when they retired they would have a stable income from a defined pension plan to live on the rest of their life. These workers trusted in that promise, planned around that promise and reasonably assumed that it was inviolable.
The $12 trillion dollars in current pension assets is testament to the American peoples’ hard work and faith in the future. Nearly $2 trillion of these assets reside in traditional defined benefit pension plans covering 20 percent of the nation’s workforce. The 34 million Americans covered by these traditional plans played by the rules. The disturbing truth is that some companies and their unions have taken advantage of inadequate federal pension rules and recklessly underfunded their plans. Those who behave responsibly and strive to maintain well funded plans for workers and retirees suffer when the Pension Benefit Guaranty Corporation (PBGC) has to assume the pension liabilities of bankrupt plans and these costs are passed through to the remaining plan sponsors paying insurance premiums. The current rules also failed to protect the pension system from the “perfect storm” of historically low interest rates, equity markets that began sliding in 2000 and the economic downturn that followed.
Without systemic reform, workers and retirees in defined benefit plans will continue to suffer financial uncertainty and many will experience real loss. Ultimately, taxpayers could be on the hook for bankrupt pension plans. The PBGC estimates that pension plans are presently underfunded by more than $450 billion. It is a rapidly deteriorating situation with the PBGC’s $10 billion surplus in 2000 a stark contrast to 2004’s record $23 billion PBGC deficit.
President George W. Bush firmly believes that promises made to workers and retirees must be kept and that taxpayers must be protected from the failing pension system. To protect workers, retirees and taxpayers, get the PBGC on sound financial footing and encourage continued participation in the voluntary pension system, the President is advancing comprehensive reform. The President’s plan would bring simplicity to the pension funding rules by replacing multiple measures of pension liabilities with one measure that is adjusted to reflect risk. Accuracy in the system would be achieved by measuring pension assets at current market value and liabilities using a duration-matched yield curve of current corporate bond rates and by basing funding targets on the sponsor’s financial health. Stability would be gained by providing a reasonable period to reach funding targets and requiring financially weak companies with underfunded pension plans to forego promising additional benefits unless they were paid for immediately. Flexibility would be granted to plan sponsors to make additional deductible contributions during good economic times.
Workers and retirees could make better informed decisions under the President’s proposal to improve disclosure of pension plan funding status and trends. More stringent reporting requirements would better equip regulators in conducting oversight and enforcement.
To shore up the PBGC as a safety net, the President’s proposal reforms the premium structure to more accurately assess and better align actual program costs with newly emphasized risk-based premium funding. Going forward, premiums that have been static since 1991 would be updated and indexed to wage growth and risk-based premiums would reflect the degree of a plan’s underfunding and be periodically recalibrated.
There are no good arguments for maintaining the failing status quo and at least 34 million reasons – the number of Americans covered by these defined benefit plans – to enact the President’s sweeping reform plan. The President’s retirement security initiatives recognize that the increasingly mobile workforce will demand increasingly agile pension systems. At the same time, traditional defined pension plans represent promises made to workers that the President is determined will be promises kept now and in the future.