But since January, a deep chasm has opened between the two over what to do about the sorry state of corporate pension plans. These plans, which guarantee a set retirement payout for 44 million workers and pensioners, have taken a big hit since the end of the 1990s bull market. Coupled with years of skimpy employer contributions, Corporate America finds itself $450 billion short of what it has promised workers, down drastically from a $300 billion surplus as recently as 1999. The rapid reversal has left companies scrambling to make up the difference, with the worst-off heading for bankruptcy protection. Their plight, in turn, has triggered waves of billion-dollar plan terminations and takeovers by the government-backed insurer, the Pension Benefit Guaranty Corp. (PBGC). Today the agency faces its own $23 billion shortfall.
Employers and the White House are at odds over how to solve the problem. To bolster pensions and avoid a taxpayer bailout of the PBGC, the Labor Dept. proposed legislation in January that would require many companies to hike their pension-fund spending sharply. The Bushies also want employers to stop using interest-rate assumptions that help smooth out the annual fluctuations in plan assets and liabilities. The Administration says this has added to the shortfall by allowing companies to get away with making smaller contributions to the plans. They also want companies with low credit ratings to contribute to their plans at an accelerated rate. "The retirement security of more than 34 million American workers and their families is at risk if nothing is done to fix the pension system," warns Labor Secretary Elaine L. Chao.UNHEALTHY CURE?
Corporate America argues that the Administration's proposed fixes could actually make the problem worse. Financially troubled companies, like most of the major airlines, warn that onerous new rules could put them into bankruptcy. Healthy ones don't like the prospect of paying more for their pensions, especially since the immediate crisis lies not with them but with the sick companies. In addition, they object to the volatility and uncertainty that would result if they can't smooth contributions through the ups and downs of the stock market. The moves would make the system more burdensome than it already is and could prompt even more employers to stop offering pensions to their employees altogether, says Kenneth W. Porter, director of global benefits at DuPont (DD
The goal is clear enough: getting the PBGC and pension plans themselves back on stable footing. It's also obvious that part of the solution needs to involve companies coughing up more money. After all, the current shortfalls stem in part from companies trying to get by with paying less. So the Administration's focus on upping contributions makes sense. But it's also true that employers face no legal obligation to offer pensions to new employees at all. Many could just freeze their plans to new employees, or even close them out, if the funding rules become too difficult.
While the 2000 stock market crash wiped out a big chunk of pension-fund assets, the roots of the current problem run much deeper. Although companies can only take tax deductions for their pension contributions up to a certain level, as far back as the early 1980s many began putting even less into their pensions than the tax code allows. One reason: a desire to avoid punitive taxes of 15% that kick in over the deduction limits. Even higher punitive taxes of up to 90% apply to withdrawals, a system designed to protect the plans from raiders. Indeed, between 1980 and 1995, companies reduced their pension contributions by up to 20%, or as much as $262 billion, largely out of fear of triggering the tax, according to a 2002 study by former PBGC chief economist Richard A. Ippolito.PUSH FOR COMPROMISE
Some employers also used the strong stock market gains in their pension plan assets to avoid making their own contributions, leaving them with better earnings and extra money for other costs. This strategy was particularly tempting during the 1990s stock market boom, which ballooned most pension funds to record heights. In fact, U.S. employers could have put in at least $80 billion more a year between 1996 and 2002 without hitting the deductible limits, according to a PBGC study. Now some are paying the price with sharply higher makeup contributions. "Even in the best of years, more than two-thirds of companies never hit their maximum contribution limit," says PBGC Executive Director Bradley D. Belt.
The stalemate between Uncle Sam and Corporate America notwithstanding, political pressures on both sides may yet prompt a resolution. Although companies don't like the Administration's proposals, they want action because of the looming expiration of a temporary 2004 law that dictates the interest rate used to calculate long-term pension obligations. Without an extension, they would revert to an older, more expensive method of basing liabilities on Treasury bonds. The Bush plan would peg pension returns to a volatile mix of corporate bonds.
For its part, the Administration is anxious to head off a savings-and-loan type bailout of the PBGC. The agency has enough assets to cover its obligations through 2020, but it's currently paying $2 billion more in benefits per year than it's getting in premiums. On Apr. 28, Congress budgeteers approved a $6.6 billion premium increase over the next five years. However, that's less than the Administration asked for and is a drop in the bucket compared with the amount at stake if a wave of bankruptcies hit at airlines, auto-parts suppliers, and other industries overwhelmed by pension shortfalls.
The real key to solving the PBGC's problem is getting those plans in the black. Overall, the companies most likely to end up dumping their plans on Washington have a combined underfunding of a frightening $96 billion, according to the PBGC. Last month, the insurer agreed to take over the pensions of UAL Corp.'s United Airlines Inc., (UALAQ
) which has been in bankruptcy protection since 2002. That one company will cost the agency $6.6 billion in pension obligations it must make good, its biggest hit ever.
Reaching middle ground is possible, says Ron Gebhardtsbauer, senior pension fellow at the nonpartisan American Academy of Actuaries. He suggests that new rules could require higher and more regular funding, even as they allow companies to keep the credit for making extra contributions during flush years -- something the Bush plan proposes to end. He thinks it might even be smart to give companies the chance to use some of the pension-fund surpluses they build up during bull markets to pay for health care or other employee benefits. On the other hand, it may be that special rules are required to help employers in or near bankruptcy to make sure they're not pushed over the brink by new burdens just when they can least afford it. "Solvency and smoothing don't have to be enemies," says Gebhardtsbauer.
Clearly, the current underfunding problem dictates an extensive overhaul. But a plan that drives more companies out of the pension business isn't a good way to go. The number of defined-benefit pension plans has plunged from 112,000 in the mid 1980s to fewer than 30,000 today. The tally of workers earning a pension has fallen more slowly, but their ranks now total just 17 million, down from 22 million 20 years ago. If Washington doesn't get it right, the U.S. could end up with the worst of all worlds: less retirement security for workers and a taxpayer bailout to boot. By Nanette Byrnes in New York and Amy Borrus in Washington