America’s Pension Plan Problem

By Macauley Verona, Public Policy Intern 2016

Pension plans are financial mechanisms widely embraced by the newspaper industry that allow for employees to retire after years of service knowing they still have the security of an income to rely on. Employers and employees will make periodic contributions to these common asset pools, comprised of anything from a fixed-income government bond to common stock, hoping to see a return on their investment so that come retirement, they will have the income security of a salaried job.

The pension system is not without its flaws. Whether they are attributed to the slow recovery of interest rates or the flawed aspects of the Employee Retirement Income Security Act (ERISA), America has a pension problem. Interest rates have stayed relatively low since the economic recession in 2008, mostly because the economy lacked the strength to absorb a hike. Low interest rates mean lower yields for fixed-income securities such as government bonds. And since many pension plans are heavily invested in these fixed-income securities, lower interest rates mean lower returns for pension funds. These lower yields are forcing some funds to take higher investment risks, taking their investment strategies to the stock markets, increasing the volatility of their yields and putting their solvency in jeopardy.

The Pension Benefit Guaranty Corporation (PBGC) has long been recognized as insurance or security blanket for these plans in the event that any become insolvent and fail. The PBGC is a government entity that protects the retirement incomes of millions of Americans in thousands of private sector defined pension plans. Established by ERISA, the PBGC is responsible for insuring the solvency of these employer plans and to keep pensions flowing to retired members of the plan if by chance they were to fail. Employers and employees rely on this government entity to provide them with the security knowing their pensions will be there for them come retirement.

The PBGC has run into its share of issues, putting the stability of its budget that has long been a staple of the corporation’s image, in question. An entity responsible for protecting America’s pensions simply cannot operate with instability surrounding its budget. One of the main reasons these problems have started to occur is due to the practice of “double counting.” Double counting in this sense is the practice of taking the premiums paid to the PBGC and counting them as revenue to be used as the corporation’s budget, but also counting them as receipts to the treasury used to offset other government spending, even though these funds are non-tax generated revenue that does not belong to government. This has not only led to questions surrounding the corporation’s funds, as more money is being used for purposes other than insuring pension plans, but also to dramatic increases in premium payments so that the government has a higher balance of funds to work with, albeit illusionary.

Over the past nine years, the rate per participant for single employer plans has more than doubled, from $31 in 2007 to $64 in 2016. These massive increases are extremely bad for both the financial health of the companies contributing to the fund and their employees, but also to the PBGC itself. Companies are finding these higher premiums and pressures are making it harder to stay in the pension system while maintaining their necessary business ventures and expenses. These higher premiums, put in place to replenish the Corporation’s budget, could have the opposite effect if companies feel the pressure and payments are too high and decide to leave the PBGC entirely.

Fortunately, Congress has introduced H.R. 4955, the “Pension and Budget Integrity Act”, which would end this process of double counting and help restore some of the PBGC’s security, hoping to avoid the continued increase in premiums. Introduced by Representative James Renacci (R-OH), H.R. 4955 would amend ERISA to exclude receipts and disbursements from the PBGC from being included in the totals of the budget of the United States Government. In short, this bill ends the practice of double counting, and restores some of the stability of the PBGC’s premium base used to insure millions of American’s pensions. Senator Mike Enzi (R-WY) has sponsored S. 3240, a similar bill introduced in the senate, which carries the very same effect of eliminating double counting through slightly different measures. Both of these bills could be big steps towards fixing the flawed pension system.

Where we don’t see as easy of a fix, is with low interest rates. With the rate determined largely by the strength of the economy, a change would be seen more over the long term. While they will likely remain unchanged for now, they too have been addressed through legislation. S. 1813, a bill reauthorizing the federal aid to highways, among other things, amends ERISA with the intention to work through this period of low interest rates and low yields. Sec. 40312, titled “Stabilizing Pension Funds,” allows for interest rates to be set according to a 25-year average if the rate for that year is lower than the treasury set threshold. The language has the intention of creating a more stable rate for pension plans by setting periodic minimum and maximum rates while leaving the federal interest rate alone. While not perfect, the language at the very least acknowledges the harm low interest rates can do to pension plans and the retirement security of America’s workers.

Pensions allow for workers to put in years of service, and then retire knowing that they will be taken care of by their employers and the investments that they made throughout their career. Double counting and the lower interest rates have put these plans and funds in jeopardy by lowering yields and creating uncertainty around the PBGC. H.R. 4955 seeks to reverse the unsound budgetary policy of counting these premiums as revenues for the PBGC as well as receipts to the US Treasury, while S.1813 addresses a potential fix to interest rates associated with pensions plan returns. While these are steps in the right direction, Congress would be wise to continue to analyze ERISA to ensure that America’s retirement security remains stable.


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