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Getting It Mostly Right On Pension Reform

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As anyone who reads my posts with regularity knows, I'm not a big fan of President Bush. However, he occasionally does something right. And his proposal for pension reform is one of them.

The basic problem is this: pensions are underfunded by a staggering amount — $450 billion or so. This puts workers' retirements at risk, but it also threatens the survival of weaker companies. And when those companies shed their pension liabilities in bankruptcy, taxpayers pick up the tab.

Why the underfunding? Some of it can be blamed on corporations promising more than they could afford, or chintzing on their contributions. But some of it results from the complexity of trying to estimate how much money you will have 30 years from now.

Such a calculation requires assumptions about what the economy, as well as specific investments, will do over that time span. No one really knows what will happen that far out, so all you can do is make educated guesses. Change your guess, and you change the result; a pension fund that is paid up under one set of assumptions could show up as deeply in the red under another set.

Then you have complications, like when companies make their contribution in stock instead of cash or other assets. Enron's pension fund, for instance, would have been fully funded right up until the day it collapsed.

We could simply require companies to make up the difference immediately. But there are trade-offs there, too. If United Airlines had been forced to retain its pension liabilities when it declared bankruptcy it would have been liquidated, throwing 57,000 employees out of work and sending additional shockwaves through the broader economy. Would that have been a preferable result?

So it's not a simple question of forcing companies to pay up. And the administration's proposals reflect that.

They have three basic ideas:

1. Strengthen minimum funding rules. This would replace the current hodgepodge of funding methods with a single set of acceptable procedures. It would require healthy companies to fund the full normal liability, while weaker companies would have to cover "at-risk" liability — the amount that would have to be paid out if the plan terminated early and resulted in accelerated payment of benefits. They would also set minimum payments for plans that are underfunded, and not allow underfunded plans to increase benefits. In the worst cases, benefits would be frozen until the company made up the shortfall.

2. Improve disclosure. Requires that plan participants be notified of any underfunding.

3. Raise pension insurance premiums. This is a direct effort to fix the financing of the Pension Benefit Guaranty Corp., which is $23 billion in the red after absorbing the pension liabilities of several large corporations.

The cumulative effect should be more reasonable funding of pension benefits and less exposure for taxpayers.

The one glaring hole in this proposal is that government pension plans remain exempt from the rules. There's a reason for that: it lets the government buy off its workers with ever-increasing pension benefits without having to account for the true cost of those benefits. Taxpayers 30 years from now will find themselves on the hook for huge pension costs that were never properly discussed or provided for. That's inexcusable; the government should have to abide by the same rules it imposes on the private industry.

In the end, though, this whole discussion — and the spate of pension fund failures — should probably convince workers that pension promises are largely worthless, a form of deferred payment that is not guaranteed. Lucrative as they can be for workers who qualify for maximum benefits — working their entire careers at companies that last long enough to pay up — they're much less valuable to today's workers, who move around from job to job and work for companies that aren't likely to survive 30 years.

With defined-contribution pensions, workers get the money now, and they can take it with them when they change jobs. Though we need protection for older workers as we transition to a system without defined-benefit plans, the new global economy makes clear that trusting your retirement to your company has become a foolish gesture indeed.

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