Friday, July 21, 2006
Washington, D.C. - A congressional plan to avert a costly
taxpayer bailout of corporate pensions could end up
weakening rather than strengthening the system.
Lawmakers are on the verge of striking a deal on legislation
that would force companies to shore up their defined benefit
pension plans and raise the premiums they must pay into the
Pension Benefit Guaranty Corporation, the funder of last
resort for the pension system.
But still up in the air is whether the airline industry and
defense contractors might get 20 years to fund their
unfunded liabilities, compared with just seven years for
other companies. Exempting big swaths of corporate America
from the tighter funding rules may well worsen the PBGC's
fiscal position, raising the risk that taxpayers will get
stuck with the tab.
President George W. Bush has said that he believes, as the
Labor Department put its, "promises made to workers and
retirees must be kept."
Still, the new congressional plan could be "possibly the
worst thing," argues to David John, a pension expert at the
Heritage Foundation in Washington.
The PBGC is already $23 billion in the hole after a string
of companies, such as
UAL's United Airlines and Delphi, saddled it with huge
pension liabilities in recent years. Giving breaks to
certain companies would only exacerbate the problem, because
there's no telling whether the company will be around in 20
years --especially if it's an airline.
Under the relaxed standard, it's quite likely that a pension
plan will be forking over sums to its beneficiaries faster
than it is paying down its unfunded liability, says John.
If it goes bust in ten years, the PBGC will get stuck with a
plan that is in a worse fiscal position than it would have
been under current rules.
And that says nothing about moral hazard. The airlines have
unleashed a lobbying blitz to plead for special treatment.
But down the road, there's nothing to stop other beleaguered
industries from doing so as well.
"The theory is, when you're down, why would you put on an
additional burden?" said Alex Pollock, a pension expert at
the American Enterprise Institute in Washington.
About 44 million Americans -- mainly from the steel,
automobile and other older industries -- are covered by the
pension system, which is estimated to be underfunded by a
whopping $450 billion. Though the PBGC is not guaranteed by
the government per se, no one believes that taxpayers will
be off the hook in case it becomes insolvent.
But just who will pay introduces a sticky political problem,
as only 20% of private sector workers have a defined benefit
plan, notes Pollock. "You're asking 80% of people who don't
even get a pension like this to pay for the ones who do."