Thank you, Sheila. [Sheila R. Cherry, President of the National Press Club.]
First of all, I want to thank the Press Club for giving me this forum to speak on a key retirement security issue affecting millions of workers.
And I’d like to recognize several key players in the pension security arena: Ann Combs, Assistant Secretary of Labor for Employee Benefits; Kathleen Cooper, Undersecretary of Commerce for Economic Affairs; Mark Warshawsky, Assistant Secretary of the Treasury for Economic Policy; and Brad Belt, Executive Director of the Pension Benefit Guaranty Corporation.
Today, more Americans look forward to a secure retirement that was once available only to a few. Just consider the estimated total value of our nation’s pension assets—a staggering $12 trillion dollars.
About $4.3 trillion of these assets reside in retirement plans provided by private sector employers. Some of these assets are in 401(k)s—an increasingly popular retirement instrument. Some are in Individual Retirement Accounts, known as IRAs. And $1.8 trillion are in traditional defined benefit plans. Today, I want to talk about the President’s proposals to strengthen this last type of plan—the single-employer, private defined benefit pension plans that cover 20% of the nation’s workforce, or about 34 million people.
Historically, defined benefit plans were the favored retirement plans of the Ozzie and Harriet generation, when workers stayed with one company for most of their working lives. But the workplace has undergone revolutionary changes and so have pension plans. Today, workers change jobs more often—an average of 9 times by the time he or she is 34 years old! So the demand for more portable pension plans has skyrocketed. That’s why in recent years, 401(k)-type plans have become the primary source of retirement income for workers.
But defined benefit plans remain prevalent in older industries, such as automobile manufacturing, steel and the airlines. Today, as recent news stories have pointed out, an increasing number of these defined benefit pension plans are significantly underfunded. They have been battered by a perfect storm of declining equity markets, which didn’t begin to recover until 2003, and low interest rates. In addition, the concentration of defined benefit plans in older industries under transition has made the situation worse.
But that’s only part of the reason for the shortfalls in these pension plans. Outdated and ineffective pension rules allow employers and unions to underestimate future pension liabilities and make promises they cannot keep. In fact, current estimates place the total amount of underfunding in private, defined benefit pension plans at $450 billion.
As you know, President Bush has made retirement security one of the highest priorities of his second term. A critical component of his agenda is ensuring that the defined benefit pension system is viable and that the promises made to the workers enrolled in these plans are kept.
The Pension Benefit Guaranty Corporation is the federal insurance program for private defined benefit pension plans. When companies fail and cannot make good on their retirement security promises, the PBGC steps in and guarantees these workers a basic benefit.
As Chairman of the Board of Directors of the PBGC, I have become increasingly concerned as the number of terminated plans grows and the PBGC is forced to assume ever larger liabilities. In November 2004, the PBGC reported a record deficit of $23.3 billion for private, single-employer pension plans.
Let me emphasize that the federal insurance program for private, defined benefit plans is not in immediate danger of collapse. It has enough resources to meet the needs of current beneficiaries and those in the near future. But if nothing is done, the financial integrity of the Pension Benefit Guaranty Corporation will be compromised. And the pension security of 34 million workers and retirees will be more at risk. Our country must act now to protect the workers enrolled in these plans.
That’s why the President is proposing—and I am announcing today—a comprehensive plan to reform private sector, single-employer, defined benefit pension plans.
The President’s plan is based on three main principles:
First, reform the funding rules to ensure that employers fully fund their retirement promises.
Second, reform the premiums that private sector employers pay to the federal insurance program to better reflect the real risks and costs. To give you one example, Bethlehem Steel paid $60 million to the Pension Benefit Guaranty Corporation to insure its pension plans. That’s not $60 million annually. That’s a total of $60 million in the history of the company! But when the Bethlehem Steel’s pension plans were terminated, the PBGC was forced to assume $3.7 billion of the company’s underfunded liabilities.
Third, increase disclosure to workers, investors and regulators to ensure greater transparency and accountability. That includes making timelier information about the financial health of pension plans more widely available.
The goal of these reforms is to better protect workers and retirees, so they can be confident of the secure retirement they have worked for all their lives.
I’d like to discuss each of the President’s proposals in more detail because it’s so important that we all understand what is at stake.
First, the key words to describe the funding reforms are simplicity, accuracy, stability and flexibility. Following these principles will help ensure that every defined benefit pension plan is financially sound and that workers are protected.
Today, for example, the rules that govern how much money an employer must put in a pension plan are complex, confusing and ineffective.
The maze that has been created by the current funding rules is virtually incomprehensible. When you put it on paper, it looks like an engineering schematic! If we’re going to ensure that companies can prudently plan for their workers’ retirement, they shouldn’t need a rocket scientist.
This kind of confusion is not an accident. It was created by the government, by the current laws and by regulations that have been layered on over the years. This Administration proposes to do away with the confusion by replacing the multiple measures of pension liabilities with one basic concept. The goal is to ensure that the assumptions that go into measuring a plan’s liability better reflect whether or not it will be terminated. That way, if a pension plan is terminated, the money will be there to pay benefits.
In addition, this Administration will require employers to provide the resources necessary to make good on the pension promises they have made in the past. But we also propose to give employers a reasonable transition time to reach their funding targets.
At the same time, we will put a stop to financially strapped companies promising generous new retirement benefits they cannot afford. That is one of the major factors responsible for the long-term deficits currently projected in the federal insurance program for defined benefit pension plans.
Conversely, we will inject new flexibility into the current rules so that employers can make additional contributions to their pension plans in good economic times. The current tax code discourages this. In other words, we want to make it easier for employers who want to do the right thing to build up a rainy day fund to cushion their pension plans against economic downturns.
In the area of premium reform, the President’s proposals will protect the financial integrity of the federal insurance system and move to a more risk-based premium structure.
For healthy pension plans the Administration proposes to adjust the flat rate premium, which hasn’t been increased since 1991. And the Administration proposes to index the flat rate premium to the growth in workers’ wages.
For financially troubled companies with underfunded plans, the proposal strengthens premiums based on level of risk. In other words, the greater the risk, the higher the premium. And the President also proposes to give the PBGC Board—which consists of the Secretaries of Labor, Commerce and Treasury—the ability to adjust these risk-based premiums periodically. The goal is to ensure that the federal insurance program has sufficient revenue to cover expected losses and begin paying down the deficit. By charging riskier plans more, employers will have an additional incentive to step up to the plate and fully fund their pension promises.
And finally, the President proposes to empower workers, investors, regulators and the public with more and better information about the financial health of defined benefit pension plans. Greater transparency includes:
* Disclosure of the actual financial health of the pension plan to workers, including recent trends in funding status;
* Making available to the public more information that is filed with the PBGC on underfunded plans; and
* More timely reporting of information on the funded status of the plans.
Let me summarize the key elements of the President’s plan, especially for the wider audience who will be hearing and watching these remarks on television.
The proposals announced today will help ensure that the promises made to the 34 million workers with private, single-employer, defined benefit pension plans are kept. These proposals will ensure the financial integrity of the federal insurance system that protects these plans. And they will help ensure that defined benefit plans remain an option for workers.
The key elements of the President’s plan to protect workers, retirees and the federal insurance system are:
* A single, accurate way to measure pension fund liabilities.
* Funding targets that better reflect a plan’s real risk of termination.
* Reasonable transition periods for plans to reach their funding targets.
* Flexibility for companies to make more generous contributions during good economic times.
* Restrictions on the ability of financially strapped companies to promise more benefits than they can afford, and
* Measures to ensure the long-term solvency of the PBGC.
I am delighted to report that we already have a commitment to start on reform. Chairman John Boehner of the House Education and Workforce Committee, and Chairman Bill Thomas of the House Ways and Means Committee, have shown extraordinary leadership in this area. I understand they will be considering legislation in their Committees on this subject, this year.
In the Senate, Finance Committee Chairman Chuck Grassley has also indicated that he will be examining this issue, as well as Health, Education, Labor and Pension Committee Chairman Mike Enzi. I look forward to working with these visionary leaders. Together, we will bring our nation closer to the day when the President’s vision of a secure retirement for every worker is a reality.