LAST YEAR President Bush signed a bad bill that allowed companies to underfund their retirement promises to workers. At the time of this error, "defined benefit" pension plans -- the sort that, unlike a 401(k), guarantee a fixed benefit upon retirement -- already had $350 billion less in them than was needed to meet obligations to retirees. But Mr. Bush went ahead regardless, signing a bill that cut companies' contributions to their defined-benefit plans by $80 billion over two years and that further cut the contributions expected from ailing steel and airline companies. All this exposed taxpayers to huge bills. If companies go bust leaving underfunded pension plans, the quasi-governmental Pension Benefit Guaranty Corp. (PBGC) picks up the pieces.
Over the past year, the funding gap in the nation's defined-benefit plans has jumped to $450 billion. But the good news is that the administration has proposed a reform that would reverse some of the damage done by last year's law. The proposal sets a seven-year deadline for companies to bring retirement assets in line with promised benefits. It also toughens the definition of what fully funded means: Companies with lots of workers who are close to retirement would be required to pay more into their pension plans, because they would have to drop the rash habit of assuming that their short-term savings would earn an investment return equivalent to the long-term corporate bond rate.
Shoring up corporate pensions would reduce the risk that they will wind up being taken over by the PBGC and, hence, potentially by taxpayers if the corporation itself goes bankrupt. But the White House also wants to protect the guaranty corporation's own finances. The PBGC takes in premiums from firms that run defined-benefit plans, and these are supposed to pay the costs of rescuing failed plans that have large holes. But the premiums are too low: The PBGC has a $23 billion deficit, and airline bankruptcies are about to increase that number sharply. The administration wants to hike premiums from $19 a year for each insured retiree or worker to $30. Moreover, it rightly wants to correct last year's perverse decision to give the riskiest industries the most lenient treatment. Companies with poor credit ratings would be required to pay higher insurance premiums, reflecting the higher risk they pose to taxpayers.
Amid loud fights over Social Security, tort reform and other issues, there's a risk that this corporate-pension fix will be denied prompt action in Congress. The politics of pension reform are pernicious, as last year's bad bill showed: Company managers don't want to pay more into their pension plans; labor unions don't want money that could be used for wages to go for pensions; both sides are content with large, unfunded pension promises, underwritten by taxpayers. But this political logic must be resisted. Taxpayers are potentially on the hook for a $450 billion hole in corporate balance sheets. If Congress won't face up to this challenge at a time of economic growth, when will it?