The Association of U S West Retirees



The Big Pension Bill:  Is That All There Is?
By David Wessel
The Wall Street Journal
Thursday, August 3, 2006

There is a bill pending in the Senate that offers something for almost everyone.  For those at the bottom, there's an increase in the minimum wage.  For those at the top, there's a lower estate tax.  And for many of those in the middle, there's the pension bill.

The first two are simple.  The pension bill isn't.  But it touches more Americans.

The 907-page bill addresses a big problem:  Employers have made pension promises to 44 million workers and retirees, but many haven't set aside enough money to cover them.  At last tally, they were roughly $300 billion short.

If those pension funds or the sponsoring employers go bust, the government Pension Benefit Guaranty Corp. will pay retirees -- albeit often less than those workers had been promised.  Its assets are about $23 billion short of the pensions it has promised to pay, and it's likely to get stuck with more pension plans in the next several years.

So far, the PBGC has been able to get by with assets it inherits from failed plans and insurance premiums paid by operating pension plans.  But if it ever runs out of money, taxpayers almost surely will get the bill.

Sound public policy would discourage, if not forbid, employers and unions from promising pensions to workers unless they set aside enough to pay them.  That would protect workers as well as taxpayers, many of whom don't have any employer-sponsored retirement plans at all.  (About 45% of all full-time private-sector workers aren't offered a retirement plan at work.)

If the bill makes offering defined-benefit pension plans too onerous, companies will abandon them.  Many have already.  Only one in five private-sector workers is covered by a defined-benefit pension, the sort that pays a set sum each month.  That fraction is shrinking.  About four in 10 have a 401(k) or other defined-contribution plan, where the worker owns the assets but takes the risk of sour markets or outliving one's saving.  (Some workers have both kinds.)

So does this bill get the balance right?  It's tough to get a smart answer -- partly because the bill is so sprawling, partly because the cognoscenti focus not on the all, but on the provisions they like or dislike.

"More funding is good. It means that people who are covered by these plans are more likely to get benefits," says Alicia Munnell of Boston College's Center for Retirement Research.  "But it will be bad if it makes sponsors follow through with threats to close down their plans.  We don't know whether it'll make benefits more secure or hasten the demise of defined-benefit plans."

Some provisions make sense.  Current law says companies must set aside 90% of what's needed to pay future pensions;  the new law sets 100% as the target.  Make that effective immediately, and companies will drop their pension plans.  Give them too long to meet the goal, and it's meaningless.  The bill gives most companies seven years, but then carves out exceptions for troubled industries such as airlines and autos.

Some provisions reflect political compromise more than logic.  Should federal law allow American Airlines and Continental to use one formula to measure their pension liabilities, and Northwest and Delta another?

The bill is best viewed as a funeral service for defined-benefit pensions.  Employers don't want to be in this business, preferring to pass the risk of financial markets and longevity to workers, many of whom would rather have a 401(k) anyhow.  Private-sector defined-benefit plans had $1.9 trillion in assets at year-end 2005, while 401(k)-style plans had $2.9 trillion and individual retirement accounts had $3.7 trillion

In that light, the most important provisions may be rules set for defined-contribution plans.  The bill would encourage employers to automatically enroll workers in such plans:  you fill out a form to opt out, instead of filling out a form to sign up.  That's wise in a nation where too many people save too little.  And it would raise the ceiling on tax-favored contributions to such plans, a break that helps only the best-off Americans.

More controversial are provisions that would allow brokers and mutual-fund firms that administer 401(k) plans, and eventually IRAs, to give investment advice.  The issue is whether they'll steer workers toward investments with higher fees.  The bill calls for investment houses to use an "objective computer model" that is "certified by an independent party," a compromise that seems somewhere between cumbersome and unrealistic.

The quiet word from sober pension experts is that the bill does more good than ill for most workers and taxpayers, but is disappointing, given how much time Congress spent on it.

And, as House Majority Leader John Boehner said the other day, "This bill's going to be in effect for the next 20 to 25 years."  Translation:  If you think we're going near this issue again soon, you're crazy.

David Wessel, The Wall Street Journal's deputy Washington bureau chief, writes Capital, a weekly look at the economy and the forces shaping living standards around the world. He also appears frequently on CNBC.

David has been with The Wall Street Journal since 1984, first in the Boston bureau and then the Washington bureau, where he was chief economics correspondent. During 1999 and 2000, he was the newspaper's Berlin bureau chief. He also has worked for the Boston Globe and at the Hartford (Conn.) Courant and Middletown (Conn.) Press. He has shared two Pulitzer prizes, one for a Boston Globe series on race in the workplace in Boston and the other for Wall Street Journal stories on the corporate scandals of 2002.

He is the co-author, with fellow Journal reporter Bob Davis, of "Prosperity: The Coming 20-Year Boom and What It Means to You" (Random House/Times Books, 1998), which argued that the next 20 years will be better for the American middle class than the previous 20 years. Each Thursday online, David responds to reader comments about the previous week’s column.

Write to him at