Fact Sheet

The Bush Administration’s Plan for Strengthening Retirement Security

This Administration believes that promises made to workers and retirees must be kept. The retirement security of the 34 million Americans participating in single employer defined benefit pension plans depends on employers keeping the pension promises they make.

However, the current system does not ensure that pension plans are adequately funded. When underfunded plans terminate, workers' retirement security is threatened. Underfunded plan terminations are placing an increasing strain on the pension insurance system and impose an increasing burden on employers who sponsor healthy pension plans.

The Pension Benefit Guaranty Corporation (PBGC) recently reported a record deficit of more than $23 billion. Although the PBGC will be able to pay benefits for some years to come, large and rising deficits undermine the long run financial solvency of the pension insurance system. Underfunding in the pension system must be corrected to protect worker benefits and to ensure taxpayers don't risk paying for broken promises.

To protect workers and retirees receiving PBGC guaranteed benefits, to improve the financial status of the PBGC, and to encourage continued participation in the voluntary pension system by healthy plans, the Administration's proposal focuses on three areas:

• Reforming the funding rules to ensure pension promises are kept by improving incentives for funding plans adequately
• Improving disclosure to workers, investors and regulators about pension plan status
• Adjusting premiums to better reflect a plan's risk and ensure the pension insurance system's financial solvency

REFORMING FUNDING RULES

Current law provides for a Byzantine and ineffectual system of funding requirements that has allowed the nation's pension plans to become underfunded by an estimated $450 billion. The Administration's plan will bring simplicity, accuracy, stability, and flexibility to the funding rules, encouraging employers to fully fund their plans and ensuring that benefit promises are kept.

• Simplicity:
  • Replaces multiple measures of pension liabilities with one measure, adjusted to reflect risk of termination
  • Replaces multiple approaches to minimum required and maximum allowable contributions with one basic method
• Accuracy:
  • Bases plan funding targets on the pension plan sponsor's financial health
  • Measures pension liabilities accurately using a current duration-matched yield curve of corporate bond rates
• Stability:
  • Requires plans to make up funding shortfalls within a reasonable period of time, e.g., seven years.
  • Requires employers to forego promising additional benefits, or pay for them immediately, if the company is financially weak or the pension plan is significantly underfunded
• Flexibility:
  • Allows plan sponsors to make additional deductible contributions during good economic times

IMPROVING DISCLOSURE TO WORKERS, INVESTORS, AND REGULATORS

In order to make informed decisions about their retirements and to plan for the future, workers need to know how secure their pensions are. Similarly, investors and regulators need timely information about the status of pension plans to evaluate plan sponsors' financial obligations and to ensure compliance with the law. The Administration's plan will:

• Improve disclosure of plan funding status and funding trends
• Make publicly available certain information filed with the PBGC by underfunded plans
• Provide for more timely reporting and limits on filing extensions of plan annual reports

REFORMING PENSION INSURANCE PREMIUM STRUCTURE

The current premium structure does not reflect the true risk of a plan terminating with insufficient assets to pay benefits and can be manipulated to avoid payment of risk-based premiums. The Administration's plan will reform the premium structure to reflect more accurately the cost of the program and to shift the emphasis to risk-based premium funding.

• Flat rate premiums
  • Adjusts the rate to reflect the growth in worker wages since 1991, when the current $19 rate was set, resulting in an index-adjusted rate of $30.
  • Indexes the premium to reflect the growth of worker wages since 1991, and into the future.
• Risk-based Premiums
  • Premium determined based on plan underfunding relative to the appropriate funding target
  • The PBGC's Board will adjust the risk-based premium rate periodically so that premium revenue is sufficient to cover expected losses and to improve the PBGC's financial condition.
  • All underfunded plans will pay risk-based premiums.

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