Pension Fund Rules Facing Debate, Change
The Reagan Administration wants to make it easier for corporate managements to get hold of excess cash in company pension funds. Is that a cause for concern?
No, it isn’t--but expect a year of debate and controversy because the Administration plans to propose legislation on that score, along with measures to reduce the danger of bankrupt pension plans and--a significant addition--to address the issue of health insurance for retirees.
Anything that touches on pensions is politically potent, of course. That’s where the money is: $1.5 trillion in the pension funds of U.S. private industry, an additional $500 billion or so in public employee plans. That’s the biggest sock of capital in the world, larger by hundreds of billions than the gross national product of Japan, more than double the GNP of the Soviet Union.
Whose Money Is It?
Also, the public is frightened by suggestions that corporate managements should take any money out of pension plans--even money in excess of what’s required to pay the promised benefits. Who does that money belong to? is a frequently asked question. Well, the legal fact is that the money belongs to the corporation, which owes the employee the promised benefit. In order to meet its obligation, the company gauges its annual contributions to the plan according to what it can earn by investing the money. In times of a bull market, or high interest rates, it frequently earns more than it needs to meet obligations.
That is when surpluses arise in pension plans, money that to date company managements, and worrisomely in recent years corporate raiders, can recover by terminating the pension plan--after buying an insurance company annuity to guarantee the benefits thus far accrued. The proposed reform would end the disruption of such terminations, allowing the corporation to take out some money, but also requiring that a cushion of surplus be left behind.
The reform is a compromise in other words, recognizing an interest of the entity our society calls a corporation in having freedom of action with money it “won” in investment, and an interest of employees and retirees in security of benefits. Many people argue contrary to such thinking, saying, for example, that surpluses should be used to hike retiree benefits or as a hedge against future investment losses.
In the real world, though, either restriction would probably encourage the corporations to switch their pension plans from the type that promises a specific payout in retirement--called a defined benefit--to those that make no such promise--called a defined contribution plan. Or else to fulfill their minimum specific obligations by investing in fixed-income securities, there being no incentive for the corporation to build surpluses. If you want higher benefits, in other words, invest your own money.
Source of Concern
On the other hand, the underfunded pension plans of companies in troubled industries such as steel are a real worry. Pension plans representing roughly $25 billion in obligations are seriously underfunded today, as troubled companies have been forced (with permission of the Labor Department) to suspend contributions. That’s more than enough to break the already deficit-plagued Pension Benefit Guarantee Corp., the government-backed agency which assures that retirees will get their pensions even if a company goes bankrupt. Ways to protect PBGC and to shore up pension plans of troubled companies will be hammered out in legislative debate.
As intricate as those matters appear, however, they are routine compared to health insurance for retirees, which is the issue to watch this year.
Currently there is no requirement that corporations offering health insurance to their active employees extend that benefit past retirement. Some do, some don’t, and none fund it in advance with tax-deductible contributions, as is the case with money set aside for pensions. But they could be making such contributions soon.
Both Congress and President Reagan gave a preview of coming attractions last year when they acted double-quick to pass and sign emergency legislation that maintained health insurance for the retirees of LTV Corp., after the steel company had declared bankruptcy. Sen. Howard Metzenbaum (D-Ohio) is now going to introduce a bill to protect employee benefits at all bankrupt companies.
But the Administration wants to go well beyond Metzenbaum, to have corporations set up medical insurance funds for retirees. Such a program could be enormous, perhaps one-third to one-half the size of the current pension system. Just to illustrate, General Motors today pays more than $800 million a year for health and life insurance for its retirees, compared to roughly $1.7 billion that it contributes to its pension plans.
Why is the avowedly free market Reagan Administration so interested in getting private companies to shoulder such a burden? Because of financial reality, not ideology. Medicare--the Social Security program for medical care--faces huge and growing deficits beginning in the 1990s, just three years from now. Hiking Social Security taxes to cover such deficits is politically impossible, so the government wants private industry to reduce Medicare’s burden. “It could be that in the future, Medicare will be the secondary payer and the corporate health plan the primary,” suggests James Ozark, a partner of Hewitt Associates, the pension consulting firm.
Clearly that sounds like the real world, American society providing another social good, not by direct taxation but indirectly, through the mechanism of that entity called the corporation--which already collects most of the government revenue (through withholding) and pays most of the medical bills and, of course, most of the retirement benefits.