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OSEC Congressional Testimony

Testimony of Robert Reich Secretary of Labor Before the Committee on Ways and Means United States House of Representatives [04/19/94]

Mr. Chairman and Members of the Committee:

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.

Chairman Rostenkowski, I greatly appreciate the leadership that you and your Committee have brought to this issue. Mr. Pickle, I also com-mend you and the other members of the Oversight Subcommittee for your longstanding attention to pension protection. We share your view that this is the time for reform. When this administration came into office we heard your warnings about the health of the pension system. We immediately appointed a high level interagency task force to address the problem.

The Administration's legislative package, the Retirement Protection Act, is a comprehensive, balanced, and reasonable approach to the serious and growing problem of pension underfunding. We in the Administration are determined to take all necessary steps to keep the pensions of workers and retirees safe and secure.

I. INTRODUCTION

We are approaching the 20th anniversary of the Employee Retirement Income Security Act of 1974 (ERISA), the anchor of our private pension system. In those 20 years, the private pension system has become a true American success story. Thanks to ERISA, millions of hard-working Americans have gained pension coverage, and those who were already covered have found that the promise of a benefit upon retirement has become a reality. For many people, income from a pension spells the difference between "just scraping by" and a comfortable retirement.

The mainstay of our private retirement system is the defined benefit pension plan, the kind that offers set benefits to workers. These plans have enhanced productivity and stability in American industry in addition to providing retirement security for its 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. In fact, 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. In the last few years, 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.

Underfunding poses an unnecessary and unacceptable risk for workers and retirees. If their plans should terminate, they may lose benefits not covered by the PBGC guarantee.

These underfunded plans also pose a risk to the PBGC. Just last week, PBGC announced that its deficit now approaches $2.9 billion, moving us in a direction that could have significant consequences. At the same time, the insurance program - with more than $8 billion in assets - 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.

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.

III. REFORM NOW

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.

Our solutions, if pursued now, are both reasonable and affordable. If we wait, the medicine will only get stronger. We must take advantage of today's growing economy to put the nation's defined benefit system on a sound footing.

IV. RETIREMENT PROTECTION ACT

The Retirement Protection Act is the product of a task force I established last year to address the concerns about benefit security and the PBGC. The comprehensive reforms we propose 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 comprehensive but balanced. 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.

Funding

Strengthening the funding rules is the heart of our reform package. Current law permits as long as 30 years in some instances for companies to fund promised benefits. Given business realities, that is simply too long. We accelerate contributions to underfunded plans and eliminate the wiggle room that employers now have to avoid funding their plans. This should result in most new benefits being funded over five to seven years.

We also want companies to move forward with their business. Thus, we have included in the legislation a special transition rule to protect employers from extraordinary increases in their annual contributions for up to seven years.

PBGC Compliance Authority

The reforms also make important changes to PBGC's compliance authority. We must see that PBGC has the tools to effectively enforce the law and to assure that large employers remain responsible for their pension promises. Our proposals would require companies with large underfunded plans to provide PBGC with advance notice of certain transactions. When these transactions threaten the long-term health of pensions, PBGC would be allowed to apply to the federal courts for remedies other than plan termination. The proposals are carefully tailored to assure the continued pace of corporate transactions.

Premiums

To further encourage better funding, we propose to phase out the cap on the variable rate premium paid by sponsors of underfunded plans. Plans that pose the greatest risk should pay their fair share. At present, companies with 80 percent of the underfunding pay only a quarter of PBGC's total premium income. Under this proposal, they would pay half.

Participant Assistance

Finally, we will 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.

V. CONCLUSION

This is a strong, integrated package, carefully crafted. 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 pension system and improve PBGC's ability to protect it. The reforms will assure funding of all vested benefits within 15 years and, based on prior PBGC experience, will eliminate PBGC's deficit within 10 years.

The time to fix the retirement system is now. The Administration stands ready to work with Congress to expedite passage of this important legislation.

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