Retirement with a Plan

Retirement with a Plan: The Pension Paradox December 11, 2008

Robin Blackburn, writing in his 2004 book “Banking on Death” (Verso) portrayed pensions as “tedious” in large part because they are “horribly complicated, or because they sacrifice the present for a remote future, and spontaneity to calculation, or because they embody a vain human attempt to control the future – an attempt never more fruitless, some claim, than in today’s ever more uncertain world”.

Are these retirement plans, as Peter Drucker thought almost four decades ago simply “pension fund socialism”? Possibly, but lets not throw the towel in on this system of rewards in exchange for human capital.

Key to any pension plan is the tacit agreement entered into by the employer and the employee. In return for loyalty, hard work and the commitment to the company’s goals, employees receive a latent benefit, one that kicks in years after punching the clock on that first day of work. But forces both insidious and political have taken their toll on these plans.

Defined benefit plans offer the employee the comfort of knowing that not only a portion of their paycheck (albeit indirect and in lieu of take-home pay) along with a contribution from their employer will ensure at least some financial stability in the worker’s retirement years. The company, in return offers a fiduciary responsibility to look after these funds as the employee, many of whom are from industries that are not friendly to the current “working after you retire” mentality, expect and in some cases trust that these plans will be there when they can no longer work.

As we watch markets decline, bailouts ensue and the automotive industry prostrate itself, it seems that the worker is being left to pay the price. The Pension Protection Act of 2006 may need to be repealed as soon as the current president leaves office. The provision, tucked inside what appears to be a worker friendly piece of legislation encourages companies to take drastic steps with their plans in the event they become under funded.

I have written about the poor management of the Pension Benefit Guaranty Corporation and the misguided efforts by its chief Charles Millard to invest (in a declining market without any former investment experience aside from legal counsel to Wall Street) assets designed to be conservatively held in the event they may be needed to cover defaults. And it has been duly noted that the losses from that folly has left the PBGC in the red to the tune of almost $14 billion.

This comes at a time when the market downturn has found many of the companies that have pensions, scrambling to make the catch-up payments required by the PPA. The requirement that these companies make good their pension obligations within seven years has left few options on the table for not only public and private companies but non-profits as well.

There are several things that can be done not only now but when president-elect Barack Obama takes office that would sooth the crisis and make the 2009 year much more hopeful for millions of Americans.

In November of 2008, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Chuck Grassley (R-Iowa), Senate Health, Education, Labor and
Pensions (HELP) Committee Chairman Edward Kennedy (D-Mass.) and Ranking Member Mike Enzi (R-Wyo.) released a series of proposals that would offset any knee-jerk reactions but businesses, some of which would not only freeze plans for new workers but also encourage bankruptcy protection to dissolve current obligations. These senators recognize the need for Americans to feel as though “their retirement savings are safe and sound and available to them when they need it”.

Among the proposals are tax credits for expensing property costs, speeding up the depreciation process which would have the net effect of freeing up additional moneys to be directed toward pension funding, restructuring the mandatory distribution age, which forces seniors to take a distribution from their retirement plans whether they need it or not, and giving some relief for single employer pension contributions, allowing them to fund up to a certain percentage instead of the PPA’s required 100% funding. These changes would cost less that $12 billion.

On the flip side of the coin, this proposed legislation would allow the workers to take a lump sum distribution from plans that have language prohibiting such actions (the proposal limits those distributions at $5,000 and although the legislation does not say as much, it would be an added benefit if that lump sum payment was taxed at the capital gains rate instead of the employee’s current tax rate), increase the deduction limits for any plan contribution above the 6% range and more importantly, allow for rollovers out of the plan for non-spousal beneficiaries. The cost of these changes would not exceed $10 billion.

One item the legislation did not address was how to help the employee recover from the financial crisis outside of the defined benefit plan. Giving the employer a three for one tax credit if they institute a defined contribution plan to reside alongside the pension plan in place and match the funding of it up to 5% of the employees contribution. This would encourage the creation of more economically stable pension plans while giving the worker added opportunity to invest. This would cost at least $100 billion bridged over three to five years.

Add that up and remove the operational deficit currently dragging on the PBGC, and the net result would be a much more stable retirement picture for all working Americans.

If I were to divide the remaining $300 billion, $150 billion would go to the restructuring of the pension plans with the additional $150 billion to health insurance (but that is another column altogether). This would provide some measure of comfort for those still employed, stop the whining from private equity moguls like Sam Zell, who mimicked with great disdain the worries of his employees at the Tribune Company about their future without consideration for the “bills he has to pay”. It would allow automotive giants like GM, Ford and Chrysler to keep their hands off their employee pension funds which are, in case you haven’t noticed, fully funded. And it would make the creation of pension plans in the future much more appealing to companies with long-range goals.