The Great Pension Fund Raid, Part II : Senate and House bills carry a troublesome potential for abuse

Americans covered by pension plans with defined benefits had better watch out for the frenzied congressional effort to allow companies to divert money from these employee retirement funds. Congressional Republicans are trying to lift safeguards that were imposed in 1990 to prevent raids on pension funds. Making it easier for some companies to withdraw so-called excess assets could put these plans at risk. This is one item in the huge tax package working its way through Congress that should be abandoned.

Under current law, companies may withdraw excess assets--defined as those exceeding 125% of the amount needed to meet projected pension obligations--without penalty, but only if the money is used for health benefits for retirees. For withdrawals for other purposes, companies must pay tax penalties of 25% to 50% as well as income taxes. Congress imposed the penalties five years ago in response to corporate raiders who took over companies in the 1980s and tapped surplus pension funds, a move that left both retirees and the government at risk. About $20 billion was pulled out of the private pension system then, according to the Pension Benefit Guaranty Corp., the federal agency that insures defined-benefits pension funds.

The House Ways and Means Committee has already cleared a bill, sponsored by Bill Archer (R-Tex.), to allow firms to withdraw funds for any purpose without notifying pension participants. The withdrawals would be subject to an excise tax of only 6.5% (in addition to income taxes). Any withdrawals before next July 1 would escape the excise tax--an undesirable inducement to use surplus funds quickly. The Senate Finance Committee is considering a similar measure.

Proponents stress that under the change the government stands to raise about $9.5 billion over seven years because many more companies would tap pension money. But a potentially negative effect of the legislation is that an estimated $30 billion in pension funds could be withdrawn. Raiding excess pension assets would be particularly tempting to financially weak companies.

Might current overfunded pension funds become underfunded? Yes. After all, companies are never absolutely sure of how much they will need to pay retirees in pension benefits. That depends on how long retirees live and other variables, such as interest rate fluctuations.

For all these reasons, these changes in the use of excess pension funds should be opposed. Pensions are a crucial factor in the national savings rate, and financial saving is something government policy should encourage, not discourage.