Is Congress trying to destroy pensions now?

Last updated on: December 11, 2013 at 10:08 pm by Jane the Actuary

Is Congress *trying* to destroy pensions now? 2013-12-11T22:08:00-06:00 Jane the Actuary

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

I haven’t really read much about the late-breaking budget deal yet; here’s a Bloomberg article on the deal, though with scant details. But here’s the key paragraph as far as pensions go:

The main components of the deal include raising contributions that federal employees make to their retirement plans and increasing premiums for pensions backed by the Pension Benefit Guaranty Corp.

Not much there, eh?

Kind of a throw-away statement.

But it’s actually a big deal — to use PBGC premiums not simply to fund the FDIC-like backstop for defined-benefit pensions in an actuarially-sound manner but as a revenue source that’s appealing because it’s obscure to most Americans, is troubling. And it’s pretty stinkin’ hypocritical for the same politicians who bemoan corporate America’s abdication of its duty to provide pensions for workers, to play this game.

As a colleague of mine said this morning (in the midst of the scramble that everyone’s doing to let clients know about this): “Wait, the DB system is still moving. It’s not quite dead yet. Let’s shoot another bullet into it.”

UPDATE:
Some questions in the comments, from “Jim,” and some answers: Q: “Can you explain this a little bit further? I think I know what you’re trying to say (Congress is increasing premiums for PBGC, but that money won’t necessarily end up in PBGC, but could actually go into the federal government version of the general fund), but I am not positive.”

Yes and no. The answer that was sent around at work today is this (paraphrased): the premiums that corporations pay into the PBGC are deposited into the “Revolving Fund,” a fund which is used to pay benefits and other PBGC expenses, and which appears on the federal government’s balance sheet. Hence, increases in premiums will have the effect of showing a decrease in the budget deficit.

Now, to a certain degree, this is a rational move, since the PBGC is running deficits (see here for a quick summary), so the more the government charges in premiums, the less it has to subsidize. But at the same time, it’s not necessarily the PBGC’s “fault” — whenever a high-profile firm goes bankrupt, there’s an element of negotiation in whether plans are terminated and how much cash the company pays into the PBGC, and there’s a fair amount of politics behind it (though I can’t seem to find a good article on the topic tonight). What’s more, the federal government is not actually paying any cash into the PBGC; it’s just that the PBGC being in the red based on very conservative valuations of future liabilities.

In any case, what the “right” level of PBGC premiums should be is open for debate — charge too little and the program isn’t self-sustaining; charge too much, and the premium is that incremental increase in cost which prompts more of the financially healthy pension plans to follow the current trend of buying annuities or paying lump sums to their terminated vested and retired participants, creating a form of death spiral for the PBGC.

However, when premiums are raised as part of a budget deal, as an explicit source of revenue, whether it directly goes to pay for Head Start programs, or just indirectly improves the budget numbers, it’s still troubling. It could be worse, of course — in Ireland, at the peak of the financial crisis, the government imposed a 0.6% levy on assets in pension funds, to fund some government job-creation programs.

Q: “Also, how is the defined-benefit pension system not-quite-dead?”
I’m not sure about this question, whether Jim means that he thinks the defined benefit system is completely dead and is surprised to hear otherwise, or whether he thinks it’s still alive-and-kicking. But I’ll assume that he thinks it’s completely dead.

Which it’s not — not yet, anyway. We work with large employers, and conduct an annual survey on benefits. According to this survey, as recently as the mid-90s, a good 80% of large employers offered defined-benefit pensions. Now it’s about a quarter. There are employers who still believe it’s the right thing for their employees; there are also a significant number of union plans still around. Is this stable in the long term? No — DB pensions will disappear, but that doesn’t mean that the government shouldn’t try to keep them around for as long as possible, at least until there’s something to take their place that provides some greater degree of longevity protection and protection against investmentn risk than a simple 401(k).

Uncategorized

Previous Post

December 10, 2013

Parking a link: Mandela's past?

Next Post

December 12, 2013 On the minimum wage

Browse Our Archives

Select a Category Actuarial/Retirement Issues Politics Uncategorized

Select a Month September 2026 August 2026 July 2026 June 2026 April 2026 March 2026 February 2026 January 2026 December 2025 November 2025 October 2025 July 2025 June 2025 May 2025 April 2025 March 2025 February 2025 January 2025 December 2024 November 2024 October 2024 September 2024 August 2024 July 2024 June 2024 May 2024 April 2024 March 2024 February 2024 December 2023 November 2023 October 2023 September 2023 August 2023 July 2023 December 2022 September 2022 August 2022 July 2022 June 2022 May 2022 February 2022 January 2022 December 2021 August 2021 June 2021 April 2021 February 2021 January 2021 December 2020 November 2020 October 2020 September 2020 August 2020 July 2020 June 2020 May 2020 April 2020 March 2020 February 2020 January 2020 December 2019 November 2019 October 2019 September 2019 August 2019 July 2019 June 2019 May 2019 April 2019 March 2019 February 2019 January 2019 December 2018 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 March 2018 February 2018 January 2018 December 2017 November 2017 October 2017 September 2017 August 2017 July 2017 June 2017 May 2017 April 2017 March 2017 February 2017 January 2017 December 2016 November 2016 October 2016 September 2016 August 2016 July 2016 June 2016 May 2016 April 2016 March 2016 February 2016 January 2016 December 2015 November 2015 October 2015 September 2015 August 2015 July 2015 June 2015 May 2015 April 2015 March 2015 February 2015 January 2015 December 2014 November 2014 October 2014 September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013

TAKE THE

Religious Wisdom Quiz

What New Testament letter includes the "fruit of the Spirit"?

Select your answer to see how you score.

Hebrews James Galatians Ephesians