Last Friday, in advance of the July Fourth holiday week -- when almost no one was paying attention -- Congress passed a law that affects old-fashioned defined benefit pensions and the government entity charged with shoring them up -- the Pension Benefit Guaranty Corp., or PBGC.
The law, which was linked to highway funding legislation, tinkers with the amount of money businesses have to keep on hand to fund their pension obligations.
Here's how the deal works:
Currently, businesses that have an obligation to pay pensions to past and current employees are required by law to calculate how much money they must keep on hand based on current interest rates, which are tied to long-term, high-quality corporate bond rates. Because bond rates are so low, companies must earmark a lot more money than they did when bond rates were higher.
Companies were unhappy with that, and they lobbied Congress to change the way their pension obligations were calculated, so they wouldn't have to set aside as much. Congress listened and agreed that instead of using current bond rates, under this new legislation, companies can base their pension obligations on an average of bond rates over the last 25 years, reducing their obligations by about 2.5 percentage points.
This easier standard has an advantage for Congress, which has not been able to bring itself to pay for highway construction the obvious way, which is to raise the gas tax. Under the bond-rate scheme, Congress believes companies will have to report higher profits to the Internal Revenue Service and pay higher corporate income taxes -- $9.4 billion over 10 years, Congress has calculated. That is enough to not only pay for highway construction, but also to freeze the student loan rate for another year -- a second problem that Congress has been unable to resolve easily.
The losers in all of this are clearly retirees and people close to retirement who are counting on defined benefit pensions.
Congress did do something to offset this cutback in required funding levels -- it raised the amount of the premium that companies must pay to the PBGC to insure that they'll be able to meet their pension obligations. PBGC flat-rate premiums will increase from $35 to $42 per participant in 2013 and go to $49 in 2014. After that, they will be indexed for inflation. That's something, but it doesn't compensate for the fact that the PBGC is already $9.4 billion in the hole.
Meanwhile, Mercer management consulting estimates that this deal will save corporations that are part of Standard & Poor's 1500 composite index some $40 to $50 billion in 2012, and the savings could total well over $100 billion through 2014.
If you're counting on getting a defined benefit pension, you'd better consider this maneuver in your retirement planning -- and when you go to the polls in November.