Pension Reform Unlikely This Term

by Edith T. Carper

Washington publications are making no predictions about the likelihood that Congress will pass pension reform legislation this term. The score up to now is this: the House enacted legislation that, among other things, provides pension-funding relief for about 30,000 businesses with defined benefit plans. These plans pay retirees a set amount, which is usually based on individuals’ earnings and years of service.

The bill changes the rate (through 2005) employers use to determine their pension contributions; the current determining rate is the 30-year Treasury bond interest rate. The new language includes an index based on corporate bonds and gives the Treasury Department authority to establish a rate based on a blend of corporate bond indexes. Officials explain that as a rule, corporate bonds provide higher returns than government securities.

Editorial comments take a negative attitude. On 4 October, The Washington Post commented that the “fix” being planned by Congress “could make matters dramatically worse.” Its reasoning was based on the treatment of pension plans that fall below required funding levels. The Post declared “the scariest subset involves under-funded plans in companies that are financially shaky.” The Pension Benefit Guaranty Corp. (PBGC) — the federal entity that insures pension benefits — estimates that under-funding among such companies alone was about $80 billion at the end of 2002, while under-funding overall could be more than $350 billion.

Congress still has time, but seems to lack the will to pass a pension bill this term. On 8 October, the House passed a bill (HR 3108) that changes pension-funding rules for two years. Then, on 20 November, it passed HR 3521, which includes new funding rules, as well as special relief for airlines with chronically under-funded pensions.

While the Bush administration is said to favor “a more ambitious overhaul of the nation’s pension system,” it opposed the special provisions for the airlines, arguing that such special “outs” will have negative effects on taxpayers. Its plan would require companies to place greater emphasis on the age of the workforce when calculating pension contributions. The method would increase funding requirements by companies with a large number of workers who are close to retirement age.

In an 8 October floor debate on HR 3108, Rep. John A. Boehner (R-Ohio) described the “pension under-funding crisis” as one that has “significant implication on the retirement security of the American workers.” He said that “the chronic under-funding crisis jeopardizes the pension benefits of millions of American workers who have worked all of their lives for a safe and secure retirement.” He went on to describe some of the effects. “The termination of large under-funded pension plans in the steel and airlines industries has led to growing anxieties about the condition of the federal PBGC. These concerns were sufficient to lead the General Accounting Office in July to include the PBGC on its list of high-risk programs that require increased federal scrutiny because the PBGC’s mounting deficit had grown to $5.7 billion, the largest in history.

In a recent issue, The Washington Post termed the situation “Pension Tension.”

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