Phil Davies - Staff Writer
Published June 1, 2005 | June 2005 issue
Depending on your perspective, President Bush’s proposal to reform pension insurance is either a life preserver for the Pension Benefit Guaranty Corp., or an iron yoke that will pull the private pension system straight to the bottom. The White House plan, unveiled in January by U.S. Labor Secretary Elaine Chao (also chair of the PBGC board of directors) has provoked strong responses from almost everyone with a stake in the private pension system. PBGC Executive Director Bradley D. Belt has endorsed the proposal. Business and employee groups, including the American Benefits Council and the United Auto Workers union, have come out against its key provisions.
The plan promises to put the PBGC on a firmer financial footing and does much to counter moral hazard, taking away the opportunity and incentive for employers to offer their workers generous pension benefits and then fail to follow through. It also inflicts pain on companies, especially those already at high risk for defaulting on their plans. “The good thing about the plan is that they’ve actually proposed something that I believe if passed would take care of the PBGC’s financial problems,” said Douglas J. Elliott, president of the Center on Federal Financial Institutions. “The bad part of it is that they’re doing it in a way that’s going to put very heavy pressure on weak companies that have substantial underfunding.”
If enacted, the plan would
In contrast, employers with healthy, well-funded plans catch a tax break; the proposal eases restrictions on overfunding (making additional tax-deductible contributions to cushion plans against hard times).
The administration claims that adopting a yield curve would more accurately gauge funding requirements by matching the discount rate to a company’s specific workforce demographics. A company with a high proportion of older workers approaching retirement would use a shorter-term rate—and therefore be required to make bigger pension contributions today—than a firm with more young workers on its payroll. Business groups disagree, arguing that such an approach would increase funding volatility and be too complex for small companies to implement.
The Bush proposal would also freeze the PBGC guarantee limit when a company enters bankruptcy and eliminate coverage of shutdown benefits (that is, additional pension benefits negotiated by unions to protect older workers when manufacturing plants close). One idea that the plan doesn’t broach is erasing the PBGC’s deficit with general revenue; the premium hikes, tightened funding rules and other reforms are intended to balance the agency’s books going forward, thereby shrinking the deficit over time.
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