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The Bush Administration’s Plan for
Strengthening Retirement Security
This Administration believes that promises made to workers and retirees
must be kept. The retirement security of the 34 million Americans participating
in single employer defined benefit pension plans depends on employers keeping
the pension promises they make.
However, the current system does not ensure that pension plans are
adequately funded. When underfunded plans terminate, workers' retirement
security is threatened. Underfunded plan terminations are placing an increasing
strain on the pension insurance system and impose an increasing burden on
employers who sponsor healthy pension plans.
The Pension Benefit Guaranty Corporation (PBGC) recently reported a
record deficit of more than $23 billion. Although the PBGC will be able to pay
benefits for some years to come, large and rising deficits undermine the long
run financial solvency of the pension insurance system. Underfunding in the
pension system must be corrected to protect worker benefits and to ensure
taxpayers don't risk paying for broken promises.
To protect workers and retirees receiving PBGC guaranteed benefits, to
improve the financial status of the PBGC, and to encourage continued
participation in the voluntary pension system by healthy plans, the
Administration's proposal focuses on three areas:
- Reforming the funding rules to ensure pension promises are kept by
improving incentives for funding plans adequately
- Improving disclosure to workers, investors and regulators about
pension plan status
- Adjusting premiums to better reflect a plan's risk and ensure the
pension insurance system's financial solvency
REFORMING FUNDING RULES
Current law provides for a Byzantine and ineffectual system of funding
requirements that has allowed the nation's pension plans to become underfunded
by an estimated $450 billion. The Administration's plan will bring simplicity,
accuracy, stability, and flexibility to the funding rules, encouraging
employers to fully fund their plans and ensuring that benefit promises are
kept.
- Simplicity:
- Replaces multiple measures of pension liabilities with one
measure, adjusted to reflect risk of termination
- Replaces multiple approaches to minimum required and maximum
allowable contributions with one basic method
- Accuracy:
- Bases plan funding targets on the pension plan sponsor's
financial health
- Measures pension liabilities accurately using a current
duration-matched yield curve of corporate bond rates
- Stability:
- Requires plans to make up funding shortfalls within a reasonable
period of time, e.g., seven years.
- Requires employers to forego promising additional benefits, or
pay for them immediately, if the company is financially weak or the pension
plan is significantly underfunded
- Flexibility:
- Allows plan sponsors to make additional deductible contributions
during good economic times
IMPROVING DISCLOSURE TO WORKERS, INVESTORS, AND
REGULATORS
In order to make informed decisions about their retirements and to plan
for the future, workers need to know how secure their pensions are. Similarly,
investors and regulators need timely information about the status of pension
plans to evaluate plan sponsors' financial obligations and to ensure compliance
with the law. The Administration's plan will:
- Improve disclosure of plan funding status and funding trends
- Make publicly available certain information filed with the PBGC by
underfunded plans
- Provide for more timely reporting and limits on filing extensions of
plan annual reports
REFORMING PENSION INSURANCE PREMIUM STRUCTURE
The current premium structure does not reflect the true risk of a plan
terminating with insufficient assets to pay benefits and can be manipulated to
avoid payment of risk-based premiums. The Administration's plan will reform the
premium structure to reflect more accurately the cost of the program and to
shift the emphasis to risk-based premium funding.
- Flat rate premiums
- Adjusts the rate to reflect the growth in worker wages since
1991, when the current $19 rate was set, resulting in an index-adjusted rate of
$30.
- Indexes the premium to reflect the growth of worker wages since
1991, and into the future.
- Risk-based Premiums
- Premium determined based on plan underfunding relative to the
appropriate funding target
- The PBGC's Board will adjust the risk-based premium rate
periodically so that premium revenue is sufficient to cover expected losses and
to improve the PBGC's financial condition.
- All underfunded plans will pay risk-based premiums.
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