The Bush administration on Monday proposed a far-reaching regulatory revamping of the troubled federal fund that insures the pensions of 34-million workers.
The proposal is designed to head off more pension plan failures, which result in retirees receiving reduced benefits. It also seeks to head off a taxpayer bailout of the government's Pension Benefit Guarantee Corp.
Among its provisions: a boost in premiums employers with defined pension plans pay to the government and an added risk-based premium for troubled companies that get behind in funding their plans.
In response to the proposal, some critics said placing new costs and regulations on employers could lead them to abandon their defined-benefit plans and dump their obligations on the PBGC.
The pension agency estimates its 2004 deficit has doubled since 2003 to $23-billion, as failed companies in automotive parts manufacturing, steel and now major airlines have abandoned their pensions.
"If nothing is done, the financial integrity of the Pension Benefit Guaranty Corp. will be compromised, and the pension security of 34-million workers will be more at risk," said Labor Secretary Elaine Chao, who unveiled the proposal in a speech at the National Press Club.
Officials emphasized the system is not in imminent danger of collapsing.
The rescue plan doesn't provide any taxpayer-financed cash infusion for the PBGC. But it would require employers sponsoring defined-benefit plans to:
+ Pay a higher annual insurance premium of $30 per covered employee, which would then be adjusted upward based on an index tied to wages. Today's premium is $19.
+ Pay additional risk-adjusted premiums if they are operating under bankruptcy protection and have underfunded pension plans. The premium would be determined by the size of the shortfall.
+ Adequately fund their plans based on more accurate measures of the value of their investments and obligations.
The new rules would require companies to value investments closer to current market conditions. Long-term obligations would be calculated using a yield-curve tied to corporate bonds.
+ Disclose more details on a timely basis about the condition of their pension plans and their funding history to workers, investors and regulators.
The Business Roundtable, a group of chief executives, urged the White House and Capitol Hill not to enact pension changes that would "cause broad economic harm or harm to the overall pension system, stakeholders, retirees, investors or providers."
Senior administration officials said they were hopeful a stronger system would encourage employers to offer pensions.
And they said a proposal in their plan to allow employers to overfund their plans during profitable years would help.
President Bush plans to send the proposal to Capitol Hill, where lawmakers have signaled an interest to take up pension reforms. Bipartisan leaders welcomed the proposal but are expected to have their own ideas about what details to include.
Congressional leaders sounded a theme similar to the one by the Bush administration: Corporations should be compelled to honor the promises they made to employees and not dump retirement obligations on taxpayers.
"Our goal should be to ensure that pension promises made to workers are kept, and that the companies making those promises are the ones keeping them," said Sen. Chuck Grassley, R-Iowa, chairman of the Senate Finance Committee.
Sen. Max Baucus of Montana, the ranking Democrat on the Finance Committee, added: "When companies don't fund their pension plans adequately, it is workers and retirees who ultimately lose."
The PBGC insures pensions similar to the way the Federal Deposit Insurance Corp. backs deposits at member banks. If a pension lacks enough money to pay benefits and shuts down, the agency guarantees up to $45,614 for workers who retire at age 65.
Once the PBGC takes over a plan, retirees may have to accept less in benefits than originally promised by their employers. This can be especially painful for higher-paid workers, such as pilots whose plans are in jeopardy with five major carriers in bankruptcy.
Indeed, bankrupt United Airlines Inc. and US Airways Inc., which both seek to abandon some pension plans to the PBGC, have pressed the agency closer to the brink. The airline pensions are underfunded by billions of dollars.
The agency has $39-billion in assets accumulated from taking over employer plans, which means it is not at risk of going broke immediately. But it has $62.3-billion in long-term obligations, leaving it with a $23-billion deficit _ double the previous year's shortfall.
PBGC officials said that in 2003, the latest data available, there were 1,050 companies that had underfunded their pensions by $50-million. In all, the agency estimates that private pensions are underfunded by about $450-billion.
Companies found their pension plans seriously underfunded with the 2000 downturn in the stock market _ especially employers who failed to keep up with funding during the 1990s when times were good.
The problems have been compounded by lower interest rates, which reduced the earnings on bonds.
"They have been battered by a perfect storm of declining equity markets, which didn't begin to recover until 2003, and low interest rates," Chao said. "In addition, the concentration of defined benefit plans in older industries under transition has made the situation worse."
About 20 percent of the nation's work force participates in a defined-benefit pension plan. But those figures have fallen precipitously, as employers have favored less-expensive and more predictable defined-contribution plans like 401(k)s.
The number of pension plans declined 25 percent between 1999 and 2003, according to the American Benefits Council. "The defined benefit system is heading for the cliff's edge," said James Klein, president of the council.
Not all the problems have been caused by the economy and stock market, Bush administration officials said. They also blamed companies that made overly generous benefit promises and underfunded their obligations knowing the PBGC would pick up failed plans.
Officials said their proposals are designed to make companies more honest by imposing stiffer regulatory and market discipline. And rather than tinker with existing regulations, the White House proposal reflects a view that the existing regime is too complex and should be replaced.
For instance, companies would have to disclose more details about the adequacy and track record on funding the plans. The idea is that employees and stockholders would demand that companies not make promises they cannot afford and would make sufficient contributions to their plans.
Financially troubled companies would be required to pay a risk-adjusted premium based on the level of underfunding, an amount that would be set by the PBGC board. Companies behind in funding would be given seven years to make up shortfalls.