Fixing Pensions

Tuesday, July 15, 2003; Page A18

THE U.S. PENSION SYSTEM -- what's left of it, that is -- is in sad shape. While many employers have moved away from offering workers fixed pensions, about 34 million current and retired employees are still covered by such plans, and many of them are woefully underfunded: They don't have nearly enough money set aside now to cover their eventual costs. According to the Pension Benefit Guaranty Corp., the shortfall totals more than $300 billion. The airline industry has $26 billion in underfunding, the auto industry more than $60 billion.

The problems stem from the declining stock market (which has devastated the assets of many plans) and low interest rates (which require the plans to have more money on hand to fund future costs). Now, some in Congress are pushing a "fix" that would, in essence, define part of the problem away by reducing the amount of money that companies have to put into their plans. This approach -- contained in a measure proposed by Reps. Rob Portman (R-Ohio) and Benjamin L. Cardin (D-Md.) -- would ultimately put more funds at risk of not having enough money to pay workers what they are owed.

The central issue involves the interest rate that companies use to calculate how much they must pay into plans. Companies argue, and with some justification, that the current rate, which is tied to the 30-year Treasury bond, is so low that they are being required to put too much money into the plans to cover future liabilities. This is a problem because it drains cash away from other uses and risks driving companies to freeze their plans or drop them entirely. But the proposed replacement -- a long-term corporate bond rate -- would go too far in the opposite direction.

The administration has put forward an alternative that deserves serious consideration. It would use the corporate bond rate for two years, an approach that has multiple benefits as a short-term remedy. It would help companies during an economic crunch, ease a transition to a different system and, perhaps not coincidentally, keep pensions from becoming an election-year headache. After that period, however, firms would have to adopt payment rates more directly linked to the composition of their own workforces. The notion is akin to certificates of deposit that pay different interest rates based on their maturity dates -- the shorter the holding period, the lower the rate. Under this plan, companies with a greater proportion of older workers would have to pay into their funds based on lower interest rates -- in other words, they would have to ante up more money because their costs come due earlier. The administration, commendably, also wants to beef up disclosure rules that would let workers know the true financial state of their plans.

There are many wrinkles to be worked out -- for example, how to make certain that workers who take lump-sum distributions are treated fairly by lower rates. But the first step to fixing the pension system is to work out an approach based on factual, accurate projections of future costs, not convenient fictions that may boost corporate profits now but create more problems down the road.