Time to Tackle the Pension Crisis

With its $23 billion shortfall double any previous deficit, the government's Pension Benefit Guaranty Corp. needs fixing -- fast

By Nanette Byrnes

Is a $23 billion hole enough to get Congress to take action on the pension crisis? On Nov. 15, the Pension Benefit Guaranty Corp. (PBGC) revealed a deficit of that amount, more than double any previous shortfall reported by the government-sponsored pension insurer. Interested parties were quick to jump to the conclusion that the figure is too high for Congress to ignore. "This event will focus their attention," predicts James A. Klein, president of the American Benefits Council, which lobbies on behalf of companies with pension plans.

When Congress turns to the issue, possibly early in 2005, it will find a big problem and no easy answer. According to the PBGC, which is funded by the assets of the plans it takes over and annual premiums paid by all companies with traditional pension schemes, the insurer lost $12 billion in fiscal 2004 as its long-term deficit rose to $23.3 billion, from $11.2 billion in 2003.

Last year, the PBGC paid more than $3 billion in benefits to over 1 million people, all veterans of companies that had pushed their plans over to the PBGC when they fell into financial turmoil. The PBGC guarantees the pensions of 44 million Americans and has taken on more than $62 billion in pension promises. And the rate at which retirees and employees are looking to the PBGC is alarming: From September, 2003, to September, 2004, 192 plans were terminated and sent to the PBGC, vs. 155 in the prior 12 months.


  Those numbers, which include a series of bankruptcies in the steel and airline industries, show how badly a minority of underfunded plans have hurt the entire system.(The PBGC's numbers are based on the assumption that it will soon become the repository for the pensions of both US Airways (UAIR ) and United Airlines (UALAQ ).)

Although investment income has grown this year, and rising interest rates have somewhat tempered expected pension payouts, those positive trends haven't been strong enough to compensate for the influx of unhealthy plans. PBGC Director Bradley Belt immediately called for comprehensive funding reform that would better insure that companies fully fund the pension promises they make "so that the problem doesn't spiral out of control."

Funding the $23 billion hole will largely fall either to the other companies that sponsor pension plans, to the government, or both. Companies that already pay premiums to the PBGC argue that it would be unfair to increase their premiums because other plan sponsors were irresponsible and that any increase in their contributions would fall far short of making a difference in these numbers. Certainly, the government could kick in $23 billion, but that, too, seems unfair to the majority of working taxpayers who have no traditional pension at all.


  While comprehensive funding reform will be politically delicate and clearly complicated, advocates hope the drumbeat of headlines this year will force a true attempt to right the system now.

Representative John Boehner (R-Ohio), chairman of the House Education & the Workforce Committee, issued a press release in response to the PBGC numbers that termed the trend of underfunded plans "alarming" and promised that comprehensive pension legislation is currently being put together. A temporary fix on the interest rate that companies use to calculate their obligations will also expire this year, providing another impetus for action.

Acting fast is crucial because the longer Congress waits, the bigger the problem becomes. "There's more than enough money in the short term to pay the promised benefits." says Klein of the American Benefits Council. "But the problem will only get worse." Worse than $23 billion is pretty bad indeed.

Byrnes is a senior writer for BusinessWeek in New York

Edited by Patricia O'Connell

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