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.