President Bush Signs Overhaul of Pension Plan Laws
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GWEN IFILL: Forty four million workers are covered by traditional pension plans, and 70 million have 401(k)s, but the nation’s pension system has been on shaky ground, falling $450 billion short of expected future obligations. The new law was designed to close some of that gap by forcing companies to spend more, employees to save more, and to invest differently.
To help walk us through the changes, we’re joined by NewsHour economics correspondent Paul Solman.
So, Paul, what do the bill’s sponsors say about what the benefits of this new law would be?
PAUL SOLMAN, NewsHour Economics Correspondent: Well, companies have to pay higher insurance premiums to the government insurance agency, the Pension Benefit Guaranty Corporation, and that will be several billions of dollars over the next few years, so they’re ponying up more for the insurance that they’re getting.
And also there’s a change in how fast you are allowed to write off the losses. If your pension assets have less money in them than you owe to workers — today, let’s say — you have to make up that money more quickly than you had to in the past. In the past, it might have been 30 years; today, it’s only seven years.
Well, at least according to the people I talked to, and I’ve been talking to a lot of experts about this today, one guy said it was Orwellian to call it “full funding.” It is no such thing, because the companies are still going to be investing in stocks, which obviously go up and down, when they’ve got promises that are etched in stone. And the reason the government winds up taking over those promises is because the companies can’t actually meet their payments if the stocks go down, the companies do badly, as, for example, with the airlines.
So that big problem really doesn’t seem to be covered here. And in fact, the Pension Benefit Guaranty Corporation did a study showing that the gap won’t be closed in the next 10 years, according to the assumptions of the bill, the breaks for the airlines, for example.
A shift in responsibility
GWEN IFILL: You mentioned the airlines. Do the new laws apply to every corporation or are there loopholes that have been drawn in here?
PAUL SOLMAN: Well, the airlines are one loophole. There are other classes of companies that have loopholes, as well. United Parcel Service, UPS, has been pointed as one that is a particular beneficiary. And some airlines get more benefits than others, so there's a struggle within the airline industry.
And, of course, once you have special benefits for some companies, then the problem is, is that going to happen the next time a company is weak and comes to Congress? And is Congress going to then exempt them?
But it may be the best we could do, because otherwise those airlines were probably going to offload their pension obligations on the government anyway. So, you know, you're in a political world here of trying to figure out what's best among a bunch of bad options.
But, remember, I said that was just for the companies that had defined benefits, right, had defined benefit plans. Most companies have defined contribution plans.
GWEN IFILL: Which shifts the onus...
PAUL SOLMAN: They encourage 401(k)s...
GWEN IFILL: Right, which shifts the onus -- I'm sorry, most companies have defined contribution plans, which shifts the onus to employee. So how does this bill change the responsibility for the employee?
PAUL SOLMAN: Well, remember, you and I are in that situation, right? That's our company.
Well, one thing it does is it keeps the Bush tax breaks for companies like ours. It encourages them to encourage us to put away more money, OK? The Bush tax breaks were going to -- they were going to expire in 2010, remember, and now they're extended indefinitely.
But one of the big things that this bill does -- and this is something that most everybody I talked to thought was unambiguously good -- is that now you, Gwen, me, any of us are going to have to choose -- if our employer chooses to do this -- but our employer now can make it so that we choose not to contribute, because otherwise automatically our money goes into a 401(k).
Moreover, the company can say that it's automatically going to go in a little more every year, 3 percent the first year, 4 percent the second year, 5 percent, 6 percent. So it's encouraging, the bill is encouraging people like you and me and anybody out there who has a 401(k) to contribute more by the automatic part of how you decide to contribute being, yes, contribute, as opposed to, no, contribute. Do you follow?
GWEN IFILL: I do follow. You're saying that if we have 401(k)s, the onus is on us to opt out not opt in?
PAUL SOLMAN: That's exactly the language they use. I see you have been boning up here.
Right, we are now going to have to opt out as opposed to opt in, and that's a big, big difference, because a lot of very conservative, scared people say, "I don't want to be bothered. I'm afraid to contribute."
It's crazy not to put money into your 401(k), particularly since most companies match the contribution that you make to some extent. It's free, tax-exempt money that means, and so of course you'd want to do it. So this is a good bill, in the sense that it encourages that, or encourages companies to go that route.
Third, investment advice -- sorry...
Taking a risky gamble
GWEN IFILL: No, you're getting to just the point I was about to make, which is this money goes somewhere. It doesn't just go anymore to your bank account or certainly not to a Social Security account. Where does it go, and how does that bill change that?
PAUL SOLMAN: Well, you've got to decide. And part of the problem, part of something that people are worried about here, is that there's too much onus, to use your word, on an individual.
Right now, a company cannot have its investment adviser give investment advice without the company being liable. Think of the Enron situation. You could sue the company for bad advice even if the company didn't give it.
But this bill protects companies from that, so now you have the investment industry, according to certain strictures, being able to offer advice, or the company saying -- the investment company can offer advice. You could see how that would be problematic, right, because the investment company wants to make profits. They want to get you to change your mind. They want you to be in the highest-profit items for them, and so you wind up taking more of a risk, and, of course, that's a problem.
GWEN IFILL: Well, it's a program if something happens to the stock market. If you take your money from safer money market-type accounts and put them into stocks, that's great if the stocks go up. What happens if the stocks go down?
PAUL SOLMAN: Right, and, by the way, you bring up another thing, which is another point of this bill, which is now you have to opt out of a riskier portfolio -- or at least a company can set up a situation where you opt out of a riskier portfolio, as opposed to the old way, which is that most companies, or all companies, perhaps, had you automatically in a money market, low interest rate, very safe, money market fund.
Now companies can automatically put you in a riskier, more diversified portfolio, with a presumably higher rate of return, but, again, more risk, right?
GWEN IFILL: If the risk goes the wrong way, does that mean that that $450 billion gap we have been talking about doesn't close?
PAUL SOLMAN: Well, no, the $450 billion gap is for the companies -- the defined benefit companies. That's where you're guarantied the pension. You and me, we have no guarantees from the Pension Benefit Guaranty Corporation. If our portfolios go to zero, we get nothing.
More options for the worker
GWEN IFILL: So, Paul, now, at the end of the day, now that this bill is law, what are the experts saying the effect will be?
PAUL SOLMAN: Well, workers are going to take more risk. Opting in is good, especially if your company matches, right, inducing you to opt in as opposed to opt out of putting your money away, if you're in one of the defined contribution plans, like a 401(k).
And a lot of people are too cautious and put their money in money market funds or don't go in at all when they perhaps should take more of a risk. On the other hand, if the industry is telling you what to do, and that's a profit-driven industry, the securities industry, they could be reinforcing our own worst instincts about investing, because most Americans, most people, human beings, are lousy investors.
And one guy, Jeremy Gold, a pension expert, was telling me about and reminding me about Japan: 1989, you were a worker in the middle of your life, 39,000 their stock market at the time. You could get a bond that was paying 4.25 percent. 2003, 14 years later, their stock market was below 8,000. Bonds were paying zero.
So if you had been safe and uneducated, the industry hadn't gotten to you, and you'd taken the equivalent of a money market or near equivalent of a money market fund, back in those days you would have been far, far better off than anybody who -- you know, anybody who took the riskier, educated strategy, right?
GWEN IFILL: Right. OK, Paul Solman, thank you very much.
PAUL SOLMAN: You're very welcome.