Tough Times for Pensions

by Edith T. Carper

These are difficult times for pensions and for the “ultimate source” that guarantees that funds will be available when needed. Currently, front-page stories bear such unnerving headlines as “New Rules Urged to Avert Looming Pension Crisis” (New York Times, 26 July 2003). The savvy economist Robert Samuelson discusses pension problems in a Washington Post story headlined “The Pension Time Bomb,” writing that the pension problem poses a “huge dilemma” for the President and for Congress.

Samuelson says “forcing companies to raise contributions too quickly could harm the fragile economy by making it harder for businesses to increase investment in new plants and equipment. But under-funding might lead to a congressional bailout of the Pension Benefit Guaranty Corporation, costing tens of billions of dollars or more.” The figures Samuelson notes are dispiriting. “Rising pension costs may cause companies to limit workers’ wage increases…Though either could provoke a backlash among workers, a generational competition seems certain to intensify. In 1985 there were about three workers for every retiree in pensions insured by the Pension Benefit Guaranty Corp. Now workers and retirees balance, and by 2006 beneficiaries are expected to outnumber workers by nearly 12 percent.”

In late July, news accounts stated that “top government officials” are endeavoring to bring public attention to “the perilous state of the pension system.” The Comptroller General placed the Pension Benefit Guaranty Corporation on a list of “high-risk” government operations. The same day, Secretary of Labor Elaine Chao warned that the system is “at risk.” Government officials responsible for pensions want to get the attention of federal agencies but don’t want to scare the public or roil the financial markets. The New York Times account said some government officials are considering requiring companies to put more money into pension plans but also are encouraging funds to reduce their heavy reliance on the stock-market, this being described as “a radical remedy.”

The Times account goes on to explain that defined-benefit plans are the plans at issue. “Today, about 44 million private-sector workers and retirees are covered by such plans. Three years of negative market forces have wiped away billions of dollars from the funds, triggering the defaults of some pension plans and leaving the rest an estimated $350 billion short of what they need to fulfill their promises.”

The Wall Street Journal (22 July 2003) describes “the Administration proposal for fixing the system as a ‘carrot-and-stick’ proposal that would reform the treatment of liabilities. The discount rate based on 30-year Treasury bills would be replaced by an index of corporate bond rates for the next two years, which would raise the discount rate and reduce liability size. After a five-year phase-in, the discount rate for liabilities would have to correspond to the terms of the liabilities. Promises not due for 30 years would be matched with rates on 30-year corporate bonds, and promises due in five years would be matched with raises on five-year bonds.”

Administration spokesperson Peter Fisher told a House committee recently that the plan would require companies to use current market rates, and to treat short-term obligations to be discounted at lower, short-term rates. Fisher proposes a new way of calculating pension obligations that would take employee demographics into account. The method would recognize that pension payments owed to workers retiring soonest would need to be funded more securely than those for younger workers. He also called for less reliance on “smoothing,” the practice of averaging factors over several years to calculate pension values.

The Times explains that since pension calculations involve using interest rates that constantly change, the practice is to “smooth” the rates as a way to keep the pension numbers stable. The smoothed rate in effect today is an average of historic rates from the past four years. The Times also quotes “pension specialists” who believe that what Fisher is describing is a way to shift pensions into conservative bond investments.

According to The Wall Street Journal (1 July 2003), many corporate officials are waging a successful battle to keep “crucial” pension plan information from employees. The Journal says some employers — steelmakers, for instance — have killed decades-old pension plans. Other companies have reduced pension benefits by restructuring their plans. “And employers are now lobbying Congress for formula changes that would let them make smaller pension contributions and smaller payouts when people retire.”

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Edith T. Carper is a special correspondent to IEEE-USA Today’s Engineer.