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OSEC Congressional Testimony

Testimony of Robert Reich Secretary of Labor Before the Committee on Finance United States Senate [06/15/94]

Executive Summary

The Administration is determined to take all necessary steps to keep the pensions of workers and retirees safe and secure. The Retirement Protection Act is a comprehensive, balanced, and reasonable approach to the serious problem of pension underfunding that could threaten retirement security.

Most pension plans are well funded, but there is serious underfunding in certain industries. Underfunding doubled in the last six years, climbing to $53 billion in 1992. This presents an unacceptable risk for workers and retirees, particularly the 1.2 million people in plans of financially troubled companies. 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, where the deficit now approaches $2.9 billion. Current law is not working.

Recent additional contributions by companies are not a cure. Pension underfunding is a chronic problem that will not go away without strong legal reform.

This legislation will strengthen our defined benefit pension system and improve PBGC's ability to protect it. At the same time, these reforms have been carefully crafted to be affordable. The Act will protect the pension benefits of American workers and retirees, while at the same time allow companies to continue in business, provide jobs, and contribute to the economy.

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. The forward movement in the economy presents us with a special opportunity to put our pension system on a sound footing.

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. This is indeed the time for reform.

When this Administration came to office, we heard the concerns that had been raised about the health of the pension system. I immediately appointed a high-level interagency Task Force to take a hard, careful look at the issue of benefit protection. The group worked intensively through 1993, defining the dimensions of the problem and the most effective way to address it.

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

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 harder to swallow. The forward movement in the economy presents us with a special opportunity to put our pension system on a sound footing.

Mr. Chairman, this Committee has consistently led the way in assuring a sound retirement system for our nation's workers. Your leadership on this most important legislation is invaluable.

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.

The PBGC plays an important role in safeguarding the nation's retirement system. The mainstay of our private retirement system is the defined benefit pension plan, the kind that offers set benefits to workers. 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. It guarantees the benefits of 41 million workers and retirees in more than 65,000 pension plans. Today more than 346,000 people rely upon PBGC for their pensions. Those who are in our trust will continue to receive their benefits. 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. PBGC's deficit now approaches $2.9 billion, and it is moving us in a direction that could have significant consequences. Indeed, the deficit has doubled in the last five years. 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.

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.

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.

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 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.

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.

It is especially important that we require companies with underfunded plans to use realistic actuarial assumptions in determining funding. Companies with large amounts of underfunding have taken liberties with the flexibility now in the law to take contribution holidays.

At the same time, we 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

Stronger funding rules will not solve the whole problem. All too often we have seen companies undertake business transactions that endanger pension promises. For instance, a healthy corporation might sell off a subsidiary in poor health with an underfunded pension plan. Breaking the corporate tie can cut off the plan's only source of funding.

The reforms would give the PBGC the tools to enforce the law effectively 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 meaningful remedies. 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. Companies with 80 percent of the underfunding now 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 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 pension 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. This can only be done with this Committee's leadership. The Administration stands ready to work with Congress to expedite passage of this important legislation.

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