IE 11 is not supported. For an optimal experience visit our site on another browser.

White House offers plan for pension system

The Bush administration Monday proposed raising company premiums nearly 60 percent as part of a plan to rescue the federal agency that insures pension benefits for one out of five U.S.  U.S. workers.
/ Source:

The Bush administration Monday proposed raising company premiums nearly 60 percent as part of a plan to rescue the federal agency that insures pension benefits for one out of five U.S. workers.

The federal Pension Benefit Guaranty Corp. saw its long-term deficit widen by more than $11 billion last year to a record $23 billion, largely because it has had to assume massive new obligations for ailing companies like US Airways and United Airlines, both of which have sought bankruptcy protection.

The agency, which guarantees the benefits of the 34.6 million workers who have single-employer “defined benefit” pension plans, has $62 billion in long-term liabilities and only $39 billion in assets.

In a speech at the National Press Club, Labor Secretary Elaine Chao said the system “is not in immediate danger of collapse.”

“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,” she said, according to her prepared remarks. “Our country must act now to protect the workers enrolled in these plans.”

Under the administration’s proposal, companies with healthy pension plans would pay $30 per worker annually to participate in the program, up from $19 currently, and the premium would be indexed to reflect wage inflation. That increase alone would raise nearly $400 million annually.

Companies with underfunded pension plans, which include about half the 30,000 plans, would pay higher premiums depending on how much of a risk they pose to the agency.  Administration officials did not immediately say how much the new risk-based premiums would raise. The PBGC received $1.5 billion in premium income last year and paid out $3 billion in benefits for the pension plans it administers.

The administration proposal also calls for a streamlined set of measures to determine whether a pension plan is properly funded, and it would require greater disclosure of pension funds’ financial condition to workers and the public.

Congress, which passed a temporary measure to shore up the pension agency last year, is likely to attempt a more permanent fix this year, said James Klein, president of the American Benefits Council, which represents pension plan sponsors.

“At least they will make a valiant effort to do so,” he said. “There is a lot of interest in both the Senate and the House.”

He said plan sponsors are still awaiting details of the plan outlined by Chao Monday, but he highlighted several potential areas of controversy, including the proposed switch to a single measure of whether a plan is fully funded.

“In theory that’s a good idea, but it all depends what that single measure is,” he said.

Also, he said that requirements for greater financial disclosure, depending on how onerous, could discourage some companies from offering defined-benefit plans.

In any case, the number of companies that offer such plans is shrinking rapidly, down some 25 percent in just the past five years, said Klein. Increasingly, private employers that offer retirement benefits have moved to “defined contribution” arrangements like 401(k) plans that are more portable are not backed by any insurance.

The vast majority of companies that offer old-fashioned pensions pay their obligations as promised, but a few highly publicized bankruptcies, mainly in the airline and steel industries have pushed the system “to the cliff’s edge,” in Klein’s words.

In December, the PBGC said it was moving to assume responsibility for the pensions of more than 14,000 active and retired pilots at United Airlines, resulting in a loss of $1.4 billion. If the agency is forced to assume responsibility for United’s other pension plans, the total $6.4 billion loss would be the largest ever for the PBGC, an agency spokesman said.

The administration proposal did not include any provisions for changing the laws that allow companies to avoid their pension obligations if they go into bankruptcy reorganization.