Fixing the Pension Problem

Everyone agrees that the method for figuring pension liabilities is outdated. Now lawmakers must find a system that works before more pensions go under.

By Dan Rutherford

September 15, 2003

Will your pension be there when you need it? Probably, but changes are needed to fix the nation's troubled pension system before more plans turn to the government for help.

At the core of the issue is the Pension Benefit Guarantee Corporation, the government agency that insures the pensions of nearly 44 million workers and retirees. Steven Kandarian, executive director of the PBGC testified Monday that if all insured employers were forced to pay all of their pension promises, they would fall nearly $350 billion short. At the end of 2000, pension underfunding totaled less than $50 billion.

Compounding the problem of underfunded plans is the PBGC's growing deficit, Kandarian says. If pension rules are not reformed, he testified earlier, PBGC would need to reduce benefits, raise premium payments by companies or seek a taxpayer bailout.

A lousy stock market and low interest rates have wrecked corporate accounts, but adding to companies' pension woes is the way pension liabilities are calculated.

First the company must add up its promised benefits and calculate their present value using the rate on the 30-year Treasury bond. The problem is, the long bond is no longer issued and demand for those in circulation has driven down yields.

One proposal put forward by the the Bush Administration would base future pension calculations on a "yield curve," a variable formula for calculating pension liabilities that would weigh younger workers less than older workers. Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), introduced similar legislation Monday.

Critics of the variable formula say it is too complicated and too radical and could hurt firms with older workers. Pension sponsors also oppose the idea, though they agree that the present law needs to be updated.

One thing is certain. Congress will have to act before December. That's when earlier legislation that eased pension liability rules sunsets.

And workers, if you're covered by a pension plan, consider opening and funding an IRA. It's a win-win proposition. Even if this pension scare calms down, at least you'd have a little extra money saved to supplement your golden years.

For more see:

• Is Your Pension Safe?
  The government's safety net is straining under the weight of increasing bankruptcies. MORE...
  
  
• Looking for Help in a Pension Crisis
  In case your company gets into financial trouble, your pension is likely insured by a government agency to provide payment. But the rules can get complicated. Know your rights and responsibilities, and find out what effect such a situation could have on your retirement benefits. MORE...
  
  
• News: Underfunded Pensions Shouldn't Sweeten Benefits

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