Assuring corporate pensions

November 2005

Abstract:
The U.S. "system" of corporate employee pensions has led to thousands of Americans losing everything they've counted on for their retirement.  Congress needs to change the system radically and quickly, not merely fiddle with it as they're in the process of doing.  A proposal for a national pension system is offered.

But the corporate pension is an uncertain bet.  Time and time again, we've seen employees lose all or much of their promised pensions as a result of corporate mergers, buy-outs, closures, or bankruptcies.

To try to patch up this problem, Congress enacted the Employee Retirement Income Security Act (ERISA)  in 1974, and through it Congress funds a federal agency, the Pension Benefit Guaranty Corporation (PBGC), that insures corporate pension plans and takes over bankrupt plans.  The PBGC insurance fund is partly funded through modest corporate premiums (currently $19 annually per covered employee, due to rise to $30 when and if a current ERISA amendment is passed by Congress and goes into effect)  and by fund investments, but the taxpayer is the ultimate guarantor.  The ERISA amendments being considered by Congress (recently passed by the Senate) would try to fix some of the abuses and problems of the current system by, for example, placing restrictions on benefit cuts after a corporation declares bankruptcy.

(While ERISA does not require firms to offer their employees a pension plan, firms that choose to do so must meet the requirements of ERISA.  These include standards of disclosure and accountability of fiduciaries, and rules for vesting, funding, benefit accrual, and more.)

But the private pension system that 44 million Americans depend on is in deep trouble.  According to Senate Finance Committee Chairman Charles Grassley, "Corporate pension plans are in a $500 billion deficit."  The PBGC reported a $23 billion shortfall in the 2004-05 fiscal year, following an even greater deficit the year before.  Corporate pension plan defaults are occurring at a rate far greater than envisioned by Congress.  And for individuals caught up in a failed plan, the PBGC, while it soothes the pain, is no replacement:  PBGC takeover of failed plans leads to a reduced pension for a large portion of the retirees. The 97-2 vote in the Senate for the current rescue amendment reflects the desperation of Congress to do something.  But what Congress is doing is barking up the wrong tree.  It thoroughly misses the main failings of the current system, and completely fails to bring fresh thought to bear on the problem.

Among the chief failings of our current system are:

• Corporate pension plans are privately held and managed, and depend on the fidelity and the survival of private companies.  As a result, many retirees lose pension benefits.
• For highly mobile workers, dealing with a large number of pension plans can be daunting.  Employment mobility increases both the chance of part of one's pension failing, and the difficulty of keeping track of multiple plans.
• Short term employment usually does not give access to the pension plan, even if one exists.  As a result such retirees may have meager or no pension benefits.
• Corporations are not required to provide pension plans.  As a result many retirees have no pension benefits.

Here's a scenario to ponder:  A young man or woman just out of high school in Evansville takes a job in a restaurant; stays four years, then figures that joining the Army might be a good way to get some direction.  After three years in the service, our hero is back in Indiana looking for work.  Gets a job in a hotel that pays the bills for another four years, then decides to move to New Jersey for a change of scene.  Goes to work for a casino, but after a couple of years tires of the environment and finds work selling cars at a local lot.  Sells a few cars, but after four years thinks there's more money in selling real estate.  Goes to school and gets a license after a year, then makes a decent effort but a marginal income for a couple of more years until a sick mother in Gary wants her child home.  The pattern of 3-5 year jobs continues, and by the mid-forties our hero is essentially unemployable in anything resembling a career, though still managing to earn a living from odd jobs.

What kind of a pension do we think this individual will be receiving at age 65?  Probably none whatever.  Having worked for a lifetime, as industriously and honestly as anyone else, the work has resulted in nothing for the "sunset years."  Is this right?  Is poverty in old age the result we actually want for this person?

Our hero's problem was not lack of work, but lack of steady work.  He/she was never vested in a pension plan.  This honest worker, unsuccessful by common standards, has fallen through the cracks.  And the cracks are unfortunately wide and numerous enough to admit tens of thousands of similar workers.  It's past time to fix the conditions that lead to such results.  A suggestion follows.

I am constitutionally reluctant to propose massive government programs, but in this case I will because it is needed:  not a taxpayer funded program, but a self-funding quasi-governmental national pension system.   A system that our beloved Congress will have no access to.  This system (let's call it the National Pension System – NPS) will receive all employee and employer contributions from private corporations, and keep and invest these as individual accounts, just as the corporate pension plans currently do.

A national pension system will immediately take care of the two first serious failings of our current system, listed above:  No one would need to fear for their pension if their firm fails or is reorganized (at least not fear for the pension already accumulated) because the fund no longer depends on the firm's survival or fiduciary faith.  And whether you've worked for one firm or for twenty, you would still have one single pension account, easy to keep track of.  As for the remaining two drawbacks to our current system (above), it's likely that a unified national pension system will act similarly to accreditation programs for colleges, in that firms that do not participate in the "NPS" will have difficulty finding employees.  This will motivate firms to participate, even without legislative compulsion (which might be a doubtful undertaking on constitutional grounds, though the debate would be worth having).

The NPS would quickly become the world's largest financial institution, which leads to questions about managing such a behemoth, as well as about its impact and influence in financial markets.  There are dangers inherent in its size;  however, the example of, for example, California's Public Employees' Retirement System (PERS), currently the nation's largest investor, suggests that a giant public retirement system can function effectively.  PERS has managed to retain humane communication with its millions of members, and could be a useful model for the proposed  – much larger –  NPS.  As for NPS' investment behavior, this must clearly be regulated and limited to prevent its undue influence on financial markets.

As for other drawbacks to the proposed system, the greatest danger is a predatory Congress.  They've made an art of diverting Social Security funds;  how can we keep their claws out of a multi-trillion dollar national pension system?  The legislation establishing a NPS would need to establish the basis for contractual, fiduciary relationships between the NPS and each pension plan member.  Management would need to be extraordinarily transparent, responsive, and non-political.  The details of how to secure the plan against congressional incursion can of course be worked out;  national pension plans that exist in several other countries can serve as models.

What will be the response of corporations to this proposed change?  They should love it, as they will no longer need to manage a pension plan in-house, or to contract with a pension services company.  The only "drawback" will be that corporate owners may no longer be able to raid their employees' pension plans, as some have succeeded in doing.  But that's just the point, isn't it?

We the public should not insure private pension plans.  We should assure them.