WASHINGTON – For the second time in two years, Congress is targeting employers that still offer traditional pensions for a hefty increase in their insurance premiums to help finance a budget deal.
The latest increase comes after Congress moved last year to raise the basic annual premium for pension insurance from $42 for each covered worker in the private sector to $49 in 2014. Under the budget agreement given final congressional approval Wednesday, premiums will rise again to $57 in 2015 and $64 the following year.
The U.S. Chamber of Commerce and National Association of Manufacturers support the overall deal, yet they and other business groups warn that the move to increase premiums more than 50 per cent over the next three years will only encourage more companies to freeze plans or close them to new workers.
“It only provides another reason for sponsors to exit the system, thus further harming retirement security and the participants the system is intended to help,” said Scott Macey, president of the ERISA Industry Committee, a group that represents large employers on benefits issues. ERISA is an acronym for Employee Retirement Income Security Act.
The House passed the bill last week and the Senate sent it on to President Barack Obama on Wednesday.
The estimated $8 billion in new premiums over the next decade would go toward reducing deficits by the Pension Benefit Guaranty Corp., a government agency that covers pension payments to retirees when bankrupt companies can’t.
The PBGC has complained for years that operating in the red threatens the agency’s ability to act as a safety net in the future, as more employers default on their pension plans.
Pensions used to be the most common type of retirement benefit, guaranteeing workers a specific monthly payment for life regardless of the ups and downs of the stock market. Fewer than 9 per cent of private-sector employers still offer them, while 88 per cent of employers opt instead to sponsor 401(k) retirement plans.
The number of pension plans the PBGC insures for individual employers has plunged from an all-time high of 112,208 in 1985 to about 23,000 this year. The number has continued to drop by about 1,000 per year since 2010, according to PBGC figures.
Macey’s group argues that the PBGC deficit is artificially high in part because interest rates have been unusually low, the result of temporary Federal Reserve policies aimed at bolstering the economy. With low interest rates, both pension sponsors and the PBGC get lower rates of return on their investments and have to set aside more cash to meet future obligations to retirees. Once interest rates rise, Macey says, the PBGC will be in better financial shape.
Lawmakers can count the $8 billion as new revenue without having to raise taxes, even though the higher premiums can hit businesses just as hard as a tax increase.
Overall, the budget agreement would ease some of the harshest cuts required under automatic spending curbs known as sequestration. The deal would also increase the contributions that federal workers pay into their retirement plans.
Olivia Mitchell, a pension expert at the University of Pennsylvania’s Wharton business school, said the trend of companies ending or freezing their pension plans has been playing out regardless of rising premiums. She said the latest increase may be painful for some businesses but argues that it’s needed because the system is not solvent in the long run.
“I think the reality is that we have undercharged premiums for defined benefit insurance since the beginning,” Mitchell said. “We have to start now to help the system bail out its shortfalls before it’s too late.”
The PBGC protects the pension benefits of nearly 44 million current and future beneficiaries. It now pays out benefits to 1.5 million people in plans that have failed.
The agency has about $85 billion in assets from the pension plans it has taken over, premiums and investment income to cover its annual operating losses. But it estimates its potential exposure to future pension losses from financially weak companies at about $292 billion. Some business groups say that estimate is too high.
In a report last year, the Government Accountability Office, Congress’ auditing and investigative arm, recommended that the PBGC restructure its premium rates to make it more risk-based and better reflect the risk of future claims. Financially healthier firms would pay less and financially riskier sponsors would pay more.
The Obama administration has proposed similar changes in the way pension premiums are charged. When PBGC Director Josh Gotbaum testified before Congress last year, he called it unfair that financially sound companies are being asked to make up the difference for those that are not.
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