According to USA Today, a new law recently passed by Congress and signed by the President will allow companies to avoid contributing billions of dollars owed to the already underfunded employee pension funds. Though this is meant to free up money for the companies in the short-term, the long-term health of the pension funds that millions of Americans count on for their retirement is in jeopardy.
That change also includes language which will allow companies to estimate their pension fund earnings by assuming the interest rate will be near the average of the past 25 years, rather than the past two years when interest rates have been extremely low. Since they will now be able to assume that their pension investments are earning higher profits, they will not be required to contribute as much money as before. The Society of Actuaries, a group which assesses financial risk, estimates that the new law will cut the $80 billion in required company pension contributions this year by no more than $35 billion. Though it's certainly a big number, it should be viewed in the context of the $1.9 trillion companies have invested in these plans.
Advocates of the plan are saying that the law will hopefully keep some companies from dropping their pension plans entirely and that, in the end, it will prove to be a good thing for many people. Moreover, business representatives said by freeing up money, the law will allow them to hire more workers, build more factories and generally help lift up the ailing economy.
Employee advocates and union leaders were opposed to the measure but found themselves outgunned given the current stalled economy. A spokesperson from the AFL-CIO said they supported the legislation. They say that forcing companies already in precarious positions to make pension contributions they cannot afford would not do their members any good. AARP lobbyist Debbie Chalfie echoed the same feelings, saying that while the organization is concerned about contributions to pension plans, "We want to make sure employers continue offering these plans."
According to a poll by the Associated Press, almost 50% of Americans have said they are counting on their pension to fund their retirement. Despite this, it is clear that times are rough for pension funds across the country. In 2008, barely 15% of private sector employees participated in a defined benefit plan - those plans that guarantee monthly retirement payments. This represents a major decline from the 38% that participated in such plans in 1979.
Four of every five of the 27,000 pension plans insured by the government's Pension Benefit Guaranty Corporation were deemed underfunded in 2009, meaning their liabilities exceeded their assets. According to the PBGC, the average plan carried just 81 percent of the money it needed, a record low. More bad news is that one in four companies has frozen benefits, meaning employees can no longer receive bigger checks in their retirement by working longer or getting promotions.
Workers have not been totally left out in the cold though, as this period saw a dramatic rise in the number participating in defined contribution plans, such as 401(k)s. However, these plans are seen as less beneficial to workers because workers themselves contribute the bulk of the money and bear the risk of poor investment decisions.
Sources:
New Law to Give Companies a Break on Pensions by Alan Fram, Associated Press, published at USAToday.com, July 9, 2012.
Looking for Cash, Congress Finds Some in a Corporate Pension Rule Tweak by Mary Williams Walsh, The New York Times, June 29, 2012.
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