Real Pension Reform Demands Employee, Retiree Control
Bernstein, Merton, Ghilarducci, Teresa, Aging Today
Although about 50 million Americans participate in pension plans with some $6 trillion in assets, U.S. institutions--Congress, firms, federal agencies-have suffered from attention deficit disorder about plan inadequacies. Now, rudely awakened to find this pension cupboard bare for rank-and-file employees of Enron, Global Crossings, WorldCom, Polaroid and others, this country's leaders fumble with rules that already have failed. Indictments will not remedy either past or future like abuses; only structural change by law will do the job. The reforms enacted in response to accounting scandals do not address the high cost but poor performance of private pension plans.
The dramatic and distressing decimation of employee holdings in 401(k) and similar defined-contribution plans, for which employers provide a set amount, rightfully command national attention. However, basic flaws in traditional employee pension plans threaten even larger groups with at least equally appalling results. Existing arrangements have resulted in drastically reduced values in defined-benefit plans, which promise to pay employees set benefits defined by a formula. Keeping the plans from defaulting on their promises requires legislative cures.
The impaired ability of defined-benefit plans to meet their obligations does more than endanger the security that employees believe they can expect upon retirement. In addition, current law guarantees a portion of the promised benefits will be paid by the federal Pension Benefit Guaranty Corporation (PBGC). This agency was created in 1974 partially to protect employees against the inability of defined-benefit plans to meet their obligations. But PBGC has accumulated mounting liabilities over the years. Last year's PBGC shortfall quadrupled to $111 billion-and that figure does not include recent plunges in stock value.
In 2000, the Employee Retirement Income Security Act limited the pension benefit PBGC guarantees. To make good on even the reduced benefits will require additional PBGC funding. PBGC'S usual funding source, modest insurance premiums that the pension plans pay, does not meet current circumstances when so many plans are under stress. PBGC may need money from the U.S. treasury, thereby enlarging projected federal deficits
Whether and how soon that would be done involves a decision pitting the pension guarantee-which provides added security to employees with pension coverage, those who are clearly the best off-against other national priorities, especially adequate unemployment benefits, housing needs, coverage for the 40 million Americans without health insurance, and prescription drug benefits for the millions without such protection.
Taxpayers subsidize private pensions. The amounts contributed to plans, plus interest earnings over the years, escape taxation until the money is paid as benefits. When retirees pay taxes on their pension benefits, they generally do so on lower incomes-and, therefore, at a lower tax rate than they had when they were in the workforce. Also, employees who have pensions help to fund them because they receive lower wages.
However, company executives dominate plan decisions by making crucial investment and other choices regarding their pension programs. Employers, for example, chose where to place plan funds, possibly to obtain favorable treatment from financial institutions. In addition, employers may use io% of the assets in traditional defined-benefit plans-and as much as 100% of 401(k) assets-by restricting plan holdings to company stock. (See "Is Company Stock Hazardous to Retirement?" on page one.)
More subtly, the accountants, actuaries, lawyers and depositories who nominally work for the plan become company captives. Such professionals get and keep plan business by satisfying the plan sponsor's top officials. Need we say more than "Arthur Andersen"? …