In 1987 Congress passed a bill that contributed significantly to the underfunding disaster confronting many defined benefit pension plans today.
In December of that year, Congress passed an omnibus budget reconciliation bill that limited the ability of companies to fund their pension promises. With little warning, it changed the full funding limit from 150% of the projected benefit obligation to 150% of the accrued benefit obligation, a much lower target.
That is, companies could fund on a pre-tax basis only to 150% of what they would owe to employees in pension benefits if the plan were immediately terminated, not to 150% of what they would owe to all employees at normal retirement age, the previous limit.
Congress did this to discourage corporations from contributing too much to their defined benefit plans and taking tax deductions for the contributions. This was a shortsighted, short-term effort to increase tax revenue to reduce the budget deficit.
Members of Congress obviously felt it was easier to indirectly tax employees, customers and shareholders of corporations this way than to exercise spending discipline.
Since this provision was not widely publicized before the bill was passed, there was little time for anyone in the pension industry to warn members of Congress that what they were doing was dangerous, although it should have been obvious.
Afterward, many voices warned that the change in the full-funding limit would be bad for the health of the private pension system. Pensions & Investments warned in an editorial early in 1988 that Congress had "hacked at the long-term health of the private retirement system ... in an effort to enhance revenue in the short run."
The editorial warned that the new full-funding limit "will reduce the cushion defined benefit plans have to carry them through periods of adverse market or actuarial experience. Companies that have a funding cushion will see that erode over time as they are required to reduce or eliminate contributions."
That is exactly what has happened.
As the stock market climbed through the '80s and '90s, more companies found their defined benefit plans bumping against the full-funding limit. In times of strong profits they were not able to put any of those profits into the pension plan as an extra cushion.
Now the chickens have come home to roost. The critics anticipated a bear market could strike pension funds and wipe out the minimal surplus. Few anticipated that at the same time falling interest rates could boost the pension liabilities. The combination of the stock market decline since early 2000 and the decline in interest rates has eliminated the surplus of most corporate defined benefit plans and left them significantly underfunded.
Instead of being able to contribute steadily in good times, companies with defined benefit plans now have to contribute heavily in bad times. And some face the prospect that they also will have to pay higher insurance premiums to the Pension Benefit Guaranty Corp.
The likely results of this disaster include more layoffs than the business slowdown might have caused as companies try to offset some of the increased pension costs by shedding labor costs, and, more defined benefit plan terminations when the plans are once again fully funded.
Somewhere in the Capitol there ought to be a "Hall of Shame" inscribed with the names of those members of Congress who, for reasons of short-term expediency or because of ideology, voted for bills that have harmed the private pension system.
Near the top of the list on that wall would be the names of those who inserted the tighter funding limits on defined benefit plans, and those who voted them into law.
It could serve as a warning of the dangers of expediency, and the law of unintended consequences.