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OSEC Congressional Testimony

Testimony of Robert Reich Secretary Department of Before the Labor Subcommittee on Labor-Management Relations Committee on Education and Labor U. S. House of Representatives [07/19/94]

I am pleased to appear before you today to discuss the Administration's pension reforms to assure retirement security for America's workers and retirees. This is indeed the time for reform.

Mr. Chairman, I commend the longstanding leadership that the Education and Labor Committee, and your subcommittee, have brought in forging a meaningful retirement system for our nation's workforce.

As this Administration was coming to office, your subcommittee was asking about the impact of pension underfunding on the retirement security of workers and the health of the retirement system. One of my first acts as Secretary of Labor was to appoint a high-level interagency Task Force to take a hard, careful look at the issue of benefit protection.

There had been a lot of talk about problems. We wanted to make sure that we understood the nature of the problem and came up with a solution targeted precisely to deal with the problem in the most effective way.

If there is one clear message that the Task Force delivered, it is that pension underfunding is a serious problem that can only be addressed through legislative reform. The Administration's legislative package, the Retirement Protection Act, is a balanced and reasonable approach to the problem of pension underfunding.

My message is simple. We should reform the system now. Our solutions, if pursued now, are reasonable and affordable. If we wait, the medicine that will be necessary will only be stronger. Now is the perfect time to take action, while the economy is recovering, while jobs are coming back, and while profits are being restored.

This is not a crisis, but it is the kind of problem that calls for firm legislative action. Promises are being broken. The longer we wait, the more promises will be broken and the more people will be hurt.

I. INTRODUCTION

We are approaching the 20th anniversary of the Employee Retirement Income Security Act of 1974 (ERISA), the anchor of our private retirement system.

The mainstay of our private retirement system is the defined benefit pension plan, the kind that offers a set benefit to workers. The PBGC plays an important role in safeguarding the nation's retirement system. It guarantees the benefits of 41 million workers and retirees in more than 65,000 pension plans. The agency stands behind the promises of defined benefit plans and assures that most benefits will be paid to the workers who depend on them. Today, more than 346,000 people rely upon PBGC for their pensions. Those who are in our trust will continue to receive their benefits now and in the future. For them as well as for others, we must keep the PBGC on a sound footing.

II. THE PROBLEM

Most of the pension plans insured by the PBGC are well funded. The retirement system is a strong one, but there are growing chinks in the armor. Underfunding of pensions is persistent. Year after year, the gap between pension promises and pension assets has widened. Underfunding has nearly doubled -- from $27 billion in 1987 to $53 billion in 1992. This chronic underfunding can undermine our retirement system.

It is important to note that underfunding is concentrated in a few industries, such as steel, automobile, tire manufacturing, and airlines, where working people have labored long and hard for retirement benefits.

Underfunding poses an unnecessary and unacceptable risk for workers and retirees. Right now there are 1.2 million workers and retirees in underfunded plans maintained by companies with below investment grade bond ratings. If their plans should terminate, they may lose benefits not covered by the PBGC guarantee. In all, eight million people have underfunded pensions.

These underfunded plans also pose a risk to the PBGC. PBGC's deficit now approaches $2.9 billion, and it is moving us in a direction that could have significant consequences. The deficit has doubled in the last five years. At the same time, the insurance program is not in immediate danger. Because PBGC's payments are spread out over many years, it can continue paying benefits for a long time. So long as chronic underfunding persists, however, the long-term health of the nation's pension system - and the insurance program that protects it - is uncertain.

III. NEED FOR REFORM

Our Task Force heard from 77 people -- representative of employers, unions and retiree groups, as well as pension experts. Virtually all agreed that serious legislative reform is in order. This pension task force, as well as the General Accounting Office and the Congressional Budget Office, have all concluded that reform is needed now.

Current law simply is not working. Underfunding will not disappear of its own accord. Much of the build-up in underfunding is due to too much flexibility in our funding rules for those who wish to minimize contributions. Some employers, in fact, operating within the framework of current law, have been able to take contribution holidays even though their plans are severely underfunded. Underfunding will continue unless we close the avenues for companies to legally avoid their funding responsibilities.

In recent weeks, there has been positive news on pension funding. With encouragement from the PBGC, some companies have announced their intention to make additional pension contributions. This is to be applauded. Additional intermittent contributions will help, but they do not assure a cure. Underfunding is chronic and persistent, and it will continue unless there is systematic legal reform.

Now is the time to enact the pension reforms of the Retirement Protection Act. The growing trends in underfunding and the PBGC deficit are clear and irrefutable -- and must be reversed. It is simple common sense to deal with these problems while they are still manageable.

We cannot stand by and watch while the situation worsens. This is not a theoretical problem. Real people are being hurt. They will continue to be hurt until their pensions are more secure.

IV. RETIREMENT PROTECTION ACT

The Retirement Protection Act would mandate faster and more certain funding and would guarantee increased contributions to underfunded pension plans. If enacted, this legislation will eliminate the problem of chronic underfunding.

The legislation is designed to fix only what is broken. Fully funded plans would not be affected by our major reforms.

These reforms are carefully crafted to be affordable. The Act will protect the pension benefits of American workers and retirees, while at the same time allowing companies to continue in business, provide jobs, and contribute to the economy. This is important. We spent long hours analyzing corporate balance sheets and projections to assure that business and job growth continue while the underfunding gap is closed.

Our reforms will:

  • Strengthen funding rules by taking away the wiggle room that employers now have to minimize contributions and speeding up funding so that new benefits are funded in five to seven years.
  • Provide the PBGC with tools to enforce the law and prevent companies from walking away from their pension promises;
  • Assure that hugely underfunded plans pay their fair share of premiums; and Require employers with underfunded plans to provide their workers -- in plain language -- an explanation of their underfunded pension plan and the limits of PBGC's guarantee. Workers have every right to know whether their pensions are at risk. Only then can they make informed choices about their retirement and their future.
  • Our bill does not call for explicit restrictions on benefit increases. Such restrictions are unfair to workers and retirees. Funding is the problem. Benefit increases should not be restricted; rather, they should be funded rapidly.

V. CONCLUSION

This is a strong, integrated package, carefully crafted to solve an identifiable problem. We need these reforms because current law simply is not working. Pension underfunding has swollen substantially since 1987, and the legal loopholes are putting retirees and the American taxpayer at risk.

The Retirement Protection Act takes a firm, balanced approach that will strengthen our defined benefit system and improve PBGC's ability to protect it. The reforms will help assure funding of all vested benefits within 15 years and, based on prior PBGC experience, are forecast to eliminate PBGC's deficit within 10 years.

The time to fix the retirement system is now. We do not want to look back on this point years from now and ask ourselves why we did not deal with this problem before it became a crisis.

I know that this is a short legislative season. This is a problem that is manageable. This is a targeted, straightforward bill that is manageable. We ask for your help in moving our reforms forward this year.

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