NCPA - National Center for Policy Analysis

Pensions Woefully Underfunded

July 15, 2003

The U.S. pension system -- what's left of it, that is -- is in sad shape. While many employers have moved away from offering workers fixed pensions, about 34 million current and retired employees are still covered by such plans, and many of them are woefully underfunded: They don't have nearly enough money set aside now to cover their eventual costs, according to an editorial in the Washington Post.

According to the Pension Benefit Guaranty Corp., the shortfall totals more than $300 billion. The airline industry has $26 billion in underfunding, the auto industry more than $60 billion.

In light of this, the Bush administration has put forward a plan that deserves serious consideration, says the Post. It would use the corporate bond rate for two years, an approach that has multiple benefits as a short-term remedy:

  • It would help companies during an economic crunch, ease a transition to a different system and, perhaps not coincidentally, keep pensions from becoming an election-year headache.
  • After that period, however, firms would have to adopt payment rates more directly linked to the composition of their own workforces.
  • The notion is akin to certificates of deposit that pay different interest rates based on their maturity dates -- the shorter the holding period, the lower the rate.

According to the Post, under this plan, companies with a greater proportion of older workers would have to pay into their funds based on lower interest rates -- in other words, they would have to ante up more money because their costs come due earlier. The administration, commendably, also wants to beef up disclosure rules that would let workers know the true financial state of their plans.

Source: Editorial, "Fixing Pensions," Washington Post, July 15, 2003.

 

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