 The
demise of the private pension plan
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Do you hear a faint, but ominous-sounding,
bell? It's ringing the death knell for traditional pension plans.
Some folks believe that these so-called "defined
benefit" plans will all but disappear over the next 20 years. These plans
pay a lifelong pension benefit that is determined by an employee's tenure and
salary. Many plans are in deep trouble. Companies are supposed
to fund their pensions each year to cover the benefits they're promising, but
many aren't funding them enough.
The shortfall for corporate plans totals more than
$450 billion, according to the Pension Benefit Guaranty Corp., a
quasi-government organization that takes over pension plans dumped
on it by financially troubled companies. The PBGC recently
announced that its exposure to financially weak companies --
those flirting with bankruptcy -- rose to $108 billion in fiscal
year 2005, from $96 billion the previous year.
The PBGC guarantees that workers will get the pensions
promised them -- to an extent. It will pay the promised amount up
to about $45,000 a year for workers who retire at age 65. The cap
is lower for younger retirees, higher for older ones.
Public pensions are also in
bad shape. These are the pension plans promised to government employees -- firefighters,
policemen, teachers, etc. Some 90 percent of public employees are promised a pension
for life versus 20 percent of corporate employees. But public plans are also short
of funds, by as much as $760 billion, according to Barclays Global Investors. If
nothing is done, who's ultimately going to bail out these public and private plans?
If you answered "the taxpayers," you are right. Congress
in action
Over the past year, members of the House and Senate have been working
hard on legislation that addresses private pension deficits in an
attempt to avert such a taxpayer bailout. Their goal is to put a
finalized bill on the president's desk for his signature before
the end of the year. A chief concern is the PBGC's own deficit of
nearly $23 billion -- the difference between its assets of $56.5
billion and liabilities of $79.2 billion. A bill that recently passed
the Senate imposes strict time limits, generally seven years, for
companies to eliminate their funding shortfalls. It also calls for
an increase in annual premiums to the PBGC, from $19 to $30 per
covered employee.
Does that strike you as a ridiculously low premium
payment, considering the guarantee that companies are getting? For
2005 alone, the PBGC received roughly $1.5 billion in premiums from
companies. Yet in that same time frame the agency took over the
payments of 120 terminated company plans, which were only half-funded
on average, involving 235,000 workers.
The extra 11 bucks per person that the agency may
collect, if the bill becomes law, won't even come close to eradicating
the agency's current deficit, let alone future liabilities.
But companies are not thrilled about paying
the $30 annual premium because it will add to their pension fund
burden. And that's another reason why we are closer to the demise
of the corporate pension plan.
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