Protecting Pensions

Demographics are squeezing defined-benefit plans

For 44 million Americans, the Pension Benefit Guarantee Corporation is as important to their retirement as the Federal Deposit Insurance Corporation is to their savings account.

But there's disturbing news: The General Accounting Office, Congress's investigating arm, recently put the PBGC - the agency that insures defined-benefit pensions - on its "high risk" list of government programs. Remember the savings-and-loan crisis of the 1980s? Congress spent about $124 billion in taxpayer money reimbursing savers whose S&Ls went under, "bankrupting" the federal insurer, the FSLIC.

A gathering pension crisis could require a similar bailout.

Defined-benefit pensions are traditional plans in which a retiree receives a guaranteed payment based on salary and years of service. The company's pension fund invests in stocks and bonds. The more the investment earns, the less the company must contribute to the plan. If the investments don't perform as predicted, the fund may become underfunded.

In recent years, pension funds have been squeezed by the stock market and demographics. Most people covered by defined-benefit plans work for or have retired from older companies with an aging workforce. Many of these companies - in the auto and steel industries, for example - have far fewer workers than they used to. In 1986 there were three workers for every pensioner. By one estimate, in 2006 retirees in defined-benefit plans will outnumber workers by 12 percent.

Experts peg current underfunding of defined-benefit plans nationwide at $300 billion. The number of bankrupt companies for which the PBGC must pay pensioners - firms like Eastern Air Lines or Bethlehem Steel - is growing. The agency now serves some 1 million retirees, up from 350,000 in 1993.

The GAO estimates the PBGC may soon have to cover another $35 billion. Yet the agency ran a $3.6 billion deficit in fiscal 2002.

In the midst of all this, business wants accounting changes that would decrease a plan's assumed liabilities, reducing the amount employers must contribute. Current assumptions are based on a 30-year bond that the Treasury Department no longer issues; these assumptions overestimate plan liabilities.

But many observers worry the changes employers want would exaggerate the funds' health, thus endangering pensions - and requiring more from the PBGC. The Bush administration has proposed a reasonable phased-in compromise. But business complains that the Bush plan would still undervalue pension funds and cost employers too much in contributions needed to comply.

The federal treasury can't afford another S&L-type bailout. Taxpayers and retirees would be better served by Congress adopting the administration's sensible proposal. Pension funds must be as strong as they look.