Will the Pension Protection Act Do the Job?
MELISSA BLOCK, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
Today President Bush signed what he called the biggest reform of the nation's pension system in more than three decades. The legislation is designed to shore up the government's deficit-ridden pension insurance program. But some companies say the bill's stricter funding requirements could push more firms to dump their pension programs in favor of 401K plans.
NPR's Frank Langfitt reports.
FRANK LANGFITT reporting:
Forty-four million Americans participate in traditional pension plans that pay a fixed amount of money each month. But that bedrock of the country's retirement system is in trouble. The government agency that insures pensions faces a huge deficit, and financially struggling companies owe more than $100 billion to their pension plans.
President Bush said today's bill will force companies to help close those funding gaps.
President GEORGE W. BUSH: The message from this administration and from those of us up her today is this - you should keep the promises you make to your workers. If you offer a private pension plan to your employee, you have a duty to set aside enough money now so your workers will get what they've been promised when they retire.
LANGFITT: The bill will make companies pay nearly $6 billion more in premiums to the government's beleaguered Pension Insurance Agency. It will also tighten loose accounting rules, which allowed many companies to under fund their pensions in the first place.
But those changes will also make it harder for companies to predict how much they'll owe their pension plans in the future. And it could persuade some of them to halt their pension plans altogether, undermining the very purpose of the bill. Ron Gebhardtsbauer is senior pension fellow at the American Academy of Actuaries.
Mr. RON GEBHARDTSBAUER (American Academy of Actuaries): This new bill is going to increase the contributions that employers have to pay into their pension plan. In fact, it could increase it by 25 to 50 percent at some companies. So some employers may decide that they want to get out of the traditional pension plan and move over to the 401K arrangement for their employees.
LANGFITT: And everyone agrees that that would be a loss for workers. Traditional pensions tend to be more generous and more reliable because they pay a fixed amount every month. 401K plans are subject to the ups and downs of the stock market and put more responsibility on the employee to save for retirement. Again, Ron Gebhardtsbauer.
Mr. GEBHARDTSBAUER: We actually have seen that individuals don't save enough, they retire too early, they spend their money down too fast and they're more likely to run out of money in their 80s, when they can't go back to work.
LANGFITT: If some companies don't like the accounting changes in today's legislation, they're even more concerned about the changes coming in December from the Financial Accounting Standards Board. That month, companies will have to begin to show their future pension liabilities on their balance sheets for the first time. Analysts say that requirement could wipe out stockholder equity at companies like General Motors, which has huge pension obligations.
Jan Jacobson works for the American Benefits Council, an advocacy group for corporate benefit plans. She expects a significant number of companies to drop their pension programs.
Ms. JAN JACOBSON (American Benefits Council): Well, we have approximately 30,000 defined benefit plans left. I know a lot of our members are really trying to keep their plans. Although it's hard to predict, I would say at least hundreds and it could possibly get into the thousands.
LANGFITT: How many companies, if any, get out of the pension business won't be clear for some time. The accounting rules in today's legislation won't begin to take effect until 2008.
Frank Langfitt, NPR News, Washington.
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