The Pensions Endgame
THE HOUSE has passed a 900-page pension bill that ostensibly plugs the holes in the private retirement system. The bill's focus is not quite laserlike: It includes a clarification of the tax treatment of donated stuffed animals and extends the suspension of the all-important ceiling-fan tariff. But the bill also changes the rules on both "defined-contribution" retirement plans, such as IRA and 401(k) accounts, and the traditional "defined-benefit" ones that promise workers a fixed proportion of salary upon retirement.
To encourage workers to put more money into defined-contribution plans, the bill has two sensible provisions. It gives workers the option of having their tax refunds transferred directly into an IRA, and it helps employers make participation in 401(k) plans the default option. Experiments have shown that workers often don't get around to signing up for a 401(k) if the ball is left in their court, even though they know that they would benefit; requiring workers to opt out rather than opt in turns inertia from an enemy into an ally. Unfortunately, the bill includes other tweaks that would help only better-off workers.
The bill's main focus is defined-benefit retirement plans. Employers are not putting enough money into these plans to fund the pension promises they've made: The gap is estimated to be $450 billion. When firms go into bankruptcy, they often terminate their underfunded pension plans and hand the wreckage over to the federal Pension Benefit Guaranty Corp. This agency is supposed to keep paying the pensions with the insurance premiums that it collects from healthy pension plans. But these premiums are inadequate, and one day the pension guarantor may require a taxpayer bailout.
The House bill offers some remedies. It tells companies to close their pension funding gaps, though it gives them seven years to do so. It lays down that underfunded pension plans should pay extra premiums to the PBGC to reflect the extra risk that they pose to the system. It also requires companies to make realistic assumptions about the life expectancy of their workers and the investment returns on pension-fund assets, thus making it harder for corporations to dream up scenarios that minimize the amount of money they must put into their pension plans.
Unfortunately, the House phases these reforms in slowly, and it has been especially lenient toward airlines. Northwest and Delta are getting an astonishing 17 years in which to fund their pension promises, and they are allowed to assume that the investment returns on their pension assets will be 8.85 percent -- about a third higher than other companies are permitted to assume. American and Continental are being treated less generously, though they still get away with looser provisions than companies in other industries.
House and Senate leaders want to chalk up some legislative achievements, and they hope the pension bill will become law quickly. Senate Majority Leader Bill Frist hopes to pass the House bill without amendment. But the House bill is complex, and last-minute changes make it unclear whether it's likely to increase the underfunding of pensions or decrease it. A speedy outcome is less important than a good one. If the bill worsens the underfunding problem, it is not worth having.