Deficit Strains Pension Agency Guaranteed Benefits in No Danger Now, but Long-Term Worry Grows
By Albert B. Crenshaw Washington Post Staff Writer Friday, August 8, 2003; Page E01 Ten years ago, the government agency that insures traditional corporate pension plans racked up record deficits. Some policymakers feared that the agency would collapse, requiring a government bailout. Five years later, thanks to the bull stock market of the late 1990s, the Pension Benefit Guaranty Corp. was on its way to record surpluses. Today, the agency is in deficit again, raising new concerns for its future. "Workers don't have to be worried that we are going to run out of money here in the near term," said Steven A. Kandarian, the PBGC's executive director. "But there are serious structural problems, in my judgment, in the system that need to be addressed soon." Many of the pension plans the agency insures are also in deficit. The combination has prompted a political debate on Capitol Hill. The immediate focus is on proposed changes in the rules for pension plan funding. The Treasury Department is calling for rules that would force many companies to put more money into their pension plans, while employers are seeking changes that would ease the funding requirements until markets return to "normal." A broader issue is the future of the nation's retirement system, when only about half the workers in the country are covered by any kind of pension plan. Traditional pensions, also known as "defined benefit" plans because they promise a specific benefit in retirement, became very popular after World War II, especially in unionized industries, but have been in decline in recent years. Growing numbers of employers are using "defined contribution" plans, such as 401(k)s, instead. The federal pension agency covers about 33,000 pension plans for a total of 44 million workers. The number of plans is down from more than 100,000 in the mid-1980s. The number of 401(k) type retirement savings plans rose from just over 200,000 in 1975 to nearly 700,000 in 1998. A key difference is who bears the investment risk. In a traditional pension, the company promises to pay the benefit and the government stands behind that promise through the Pension Benefit Guaranty Corp. In a 401(k), the worker and/or employer make specified contributions and the retirement benefit is whatever the invested money produces. The Bush administration favors a system in which workers invest and save for retirement on their own, encouraged by tax benefits. It has proposed a wide-scale system of tax-favored lifetime and retirement savings accounts that would cover almost everyone. They, and backers of defined contribution plans, say such plans better serve workers who change jobs often, as so many do. They also note, and employers agree, that all private pensions are voluntary, and forcing additional funding, or boosting regulation and federal insurance premium costs, will encourage employers to drop their traditional plans entirely or switch to 401(k)s. Some employers view the administration's proposals on funding as part of an agenda to further reduce the number of traditional pensions. One business lobbyist complained of opposition from a group of very conservative Republicans who seem to view such pensions "as a form of corporate socialism" they would like to see go away. The immediate concern for the federal pension agency is whether loosening the rules would allow pension plans to get further into the red so it would have more to make up if it should have to take them over. Last year, the agency estimated its exposure to claims regarded as "reasonably possible" was more than $30 billion. So far this year, it has added the pension plans of Bethlehem Steel ($3.9 billion in claims), National Steel ($1.3 billion), and the US Airways pilots ($600 million). The funding rules have been tightened over the years, most recently in 1994. But changes in the U.S. economy raised new worries. With traditional pensions concentrated in old unionized companies, many of which are under pressure from imports, the agency is concerned that more plans will be thrust upon it in the next few years. While the situation is not analogous to that of federal deposit insurance for savings and loans, there are some similarities. During the S&L crisis, regulators repeatedly relaxed rules governing thrifts in hope that they could recover. When they didn't, the cost to the government was much higher than it would have been had the rules been tightened earlier. Among the "lessons learned" from the S&L debacle is "you don't want to mask the problem by defining away the problem," Kandarian said. "You also don't want to get to the point where you're encouraging more risk to be taken within a system, as was the case with the S&Ls, where they were investing in riskier and riskier assets, tying to get themselves out of a hole." Employers don't foresee such problems. Just as in the case of their own plans, a resurgence of the stock market and a rise in interest rates would do much to eliminate the pension agency's deficit, they say. Many view suggestions that insurance premiums be increased, or that pension plans be compelled to invest less in stocks and more in less volatile assets such as bonds, as likely to drive more and more companies to drop their pensions. The Pension Benefit Guaranty Corp. is "not in peril at the moment," and "they would not be imperiled" by changes in the funding rules that employers want, said Mark J. Ugoretz, president of the ERISA Industry Committee, an employer group. How much money does a pension plan need to be secure? That answer depends not only on investment performance over decades, but also on calculations of the cost of those promises. Under current law, a pension fund's adequacy is gauged by comparing the current market value of its assets to the "present value" of the benefits it is obligated to pay in the future. A present value is reached, broadly speaking, by adding up the benefits that will be paid over the years and applying a discount factor, or interest rate, to figure how much those benefits would be worth as a single sum today. The lower the interest rate used, the higher the present value. For the past three years, both the stock market and interest rates have plunged, so pension plan assets have lost value while the present value of their liabilities has soared. The PBGC, which has an investment portfolio of its own, has suffered similarly. Compounding the problem is a federal law requiring pension plans to use the average interest rate on 30-year Treasury bonds over the past four years in their liability calculations. That bond has been discontinued, but investors still want it, resulting in demand that has pushed its rate even lower than the overall market. Congress two years ago enacted a temporary fix, allowing companies to use a higher rate, but that law will expire at year-end. The current fight is over what to use instead. Employers, generally big-name U.S. companies, are backing use of four-year average rates for high-quality corporate bonds. Those rates are considerably higher than those on Treasury bonds and using them would reduce the present value of pension liabilities, making the plans appear better funded. The Treasury Department's plan, by Peter R. Fisher, the undersecretary for domestic finance, would also switch to high-grade corporate bonds, but with a twist. Companies would have to compute their liabilities using an interest rate "yield curve," meaning that liabilities for older workers -- those closest to retirement -- would be figured using short-term rates, which are usually lower than long-term rates. According to an analysis by the nonprofit Employment Policy Foundation here, the Treasury Department's proposal would result in slightly higher current liabilities than existing law for a company with an aging workforce -- its benefit promises would come due sooner -- but would give a modest break to a company with a lot of young workers. An employer-backed measure in the House, sponsored by Rob Portman (R-Ohio) and Benjamin L. Cardin (D-Md.) and approved by the House Ways and Means Committee last month, would sharply reduce liabilities, regardless of the workers' ages, according to the analysis. Fisher argued before Congress last month that his plan would provide a better measure of the liabilities pension plans face. "We must undertake comprehensive reform," he said. The predicate for doing any of this is accurate measurement of current pension liabilities."
