The Latest on Pensions

by Edith T. Carper

The news on the pension front of late is both good and bad, depending on where you’re sitting.

The bad news is that the U.S. pension system continues to face severe problems. The Pension Benefit Guarantee Corporation (PBGC), the federal agency established as the ultimate pension fund guarantor, must soon raise premiums to cover the costs of defaulted programs. This action puts the other remaining plans under even more severe financial stress. According to Senate Commerce Committee chair John McCain (R-Ariz.), there’s “a possibility of a looming train wreck that could cost the taxpayers of America untold billions of dollars.” The rationale for the “looming” dangers is that traditional pension systems — those that guarantee a retirement income until death — are in sharp decline.

According to news accounts, “the domino effect may be in full swing. As more company plans go under, the PBGC has had to raise the premiums it charges to insure company pensions” It charged $1 per employee in 1975 and $8.50 10 years later; today’s charge is $19 per employee, plus a variable premium. PBGC’s director testified before a Senate committee in early October, saying the agency’s deficit for the last fiscal year would “eclipse” the previous year’s record deficit of $11.2 billion. He also warned that the “longer-term solvency of the pension insurance program…is at risk.”

According to the Washington Post (12 October 2004), government regulations require companies to assume a very conservative rate of return on pension fund assets (tied to the 30-year Treasury bond) and base their fund deposits accordingly. But the stagnant economy has brought record low interest rates, which, in turn, require ever larger pension fund deposits just when companies can least afford them. General Motors and Ford Motor Corporation, for example, have had to borrow billions of dollars to keep their pension plans afloat.

The Post also said another contributor to the pension system crisis is that U.S. companies must compete in a global marketplace. In this arena, they compete both European companies whose governments assume the burden of generous pension plans as well as with developing companies that have no pension plans at all.

On a More Positive Note

Virginia Sen. George Allen (R) recently introduced a bill to allow individuals to use their IRA, 401k and 403b plans to purchase long-term care insurance with pre-tax dollars — at any age and without withdrawal penalties. On 7 October, Allen said the bill would allow consumers to purchase long-term care insurance for themselves and their spouses at the amounts most appropriate for their needs. Changes need to be made, he said, because “only 6 percent of Americans own a long-term care policy...Individuals wait too long to purchase long-term care insurance. In fact, purchasing (this) insurance at age 65 is about twice as expensive as purchasing it at age 55. By purchasing long-term care insurance at a younger age, individuals will be saving money in the long run and not depleting their life savings.”

Every American, Allen said, should prepare now for future health care needs. “It is important that we encourage people to take responsibility today for those costs, be it with the purchase of long-term care insurance or investment in a Health Savings Account,” he said. “If Americans fail to act, it will result in an increased and unsustainable financial burden on the federal government and on taxpayers.”

 

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Edith T. Carper is a special correspondent for IEEE-USA Today’s Engineer. Views expressed in this article are the author's and do not necessarily reflect those of IEEE-USA.