Politics and pension plans — who wins, who loses

By Brian Donohue

Few voters are going to choose between President Bush and Sen. John Kerry based on their position on pension policy. Pensions haven't been a big issue in the campaign. But, in their acceptance speeches at their respective conventions, both the president and Mr. Kerry did touch on pensions, providing a good starting point in assessing their views in this area.

Here's President Bush: "Many of our most fundamental systems — the tax code, health coverage, pension plans, worker training — were created for the world of yesterday, not tomorrow. We will transform these systems so that all citizens are equipped, prepared and thus truly free to make your own choices and pursue your own dreams."

Here's Mr. Kerry: "What does it mean when Deborah Kromins from Philadelphia, Pa., works and saves all her life only to find out that her pension has disappeared into thin air — and the executive who looted it has bailed out on a golden parachute? America can do better."

These soundbites hit the mark in representing each candidate's larger approach to pension policy. President Bush wants to reform the system in the image of an "ownership society" (a major theme of his campaign). Mr. Kerry wants to stop employer abuse and ensure an adequate retirement for rank-and-file workers.

The American retirement system is a broad mix of Social Security and employer-provided traditional defined benefit plans and account-based plans (like 401(k) and cash balance plans). One key to its success has been sound financing of the employer-based portion.

In the coming years, this system will face significant challenges. Some companies are likely to default on pension obligations, and the Pension Benefit Guaranty Corp. insurance fund will be put under stress. The move toward mark-to-market accounting and recent financial conditions (the severe bear market and historically low interest rates) have combined to expose risks associated defined benefit plan finances. As baby boomers begin to retire, the ability of the economy to support them in retirement will be a challenge.

President Bush's solution is to move away from this current system, to a simpler one focused on individual savings. He has sponsored initiatives to move both Social Security and private retirement savings toward individual accounts. There are legitimate arguments in favor of this approach: it's fiscally sound, builds on America's tradition of self-reliance, and allows the people who are most affected — individual workers and retirees — to make the key choices about retirement planning.

Democrats generally support the current system. Would a Kerry administration implement policies that provide the long-term support needed? Perhaps. But the tendency of some Democrats to demonize employers and focus solely on the interests of rank-and-file and union employees might undercut such policies.

Whatever criticisms may be made, the current system isn't broken. American baby boomers — at least compared with their counterparts in other industrialized nations — are in pretty good shape for retirement. And that's largely because of the success of private pensions, most emphatically including defined benefit plans.

If the current system is to weather the storm, a pension policy is needed that squares the long-term nature of pension liabilities with the PBGC's interest in solvency. Reconciling these goals is an enormous challenge, but the need for ongoing government and employer commitment to such a policy is vital.

The Bush administration has given priority to solvency issues (e.g., using the yield curve and other steps to tighten funding rules) because it is less inclined to support the current system over the long haul. For Mr. Kerry, pension funding reform requires a more delicate balancing act.

Cash balance conversions highlight a second knotty problem for the two camps. The Democrats are inclined to restrict employers' ability to move to cash balance plans in order to protect employees, while the Republicans are more sensitive to preserving employers' latitude with respect to what is, after all, a voluntary system.

On this score, the Bush team faces the tougher balancing act, if for no other reason than the political clout of aging baby boomers. Proposed Treasury regulations issued last year tried to forge a compromise by formally legitimizing cash balance conversions while requiring protections for current employees. Employer groups didn't like the restrictions, but employee advocates such as AARP hated the move to legitimize these designs at all. Eventually, the Republican-controlled Congress forbade the Treasury Department from pursuing the new rules.

With this broad background, let's consider the candidates' possible approaches to some hot issues.

If President Bush is re-elected, we're likely to see a continued push to expand the individual's role in retirement savings — expanded individual retirement accounts, retiree health savings accounts and lifetime savings accounts.

Under Mr. Kerry, we're likely to see continued attacks on employer "abuses" — contrasting executive and rank-and-file treatment. Look for a Kerry administration to adopt a compromise position on cash balance conversions, because a hard-line pro-employee stance might chase more employers from the defined benefit world altogether. Finally, Mr. Kerry will also want to "do something" about coverage — providing more benefits for lower-paid employees, but there are not a lot of good, new ideas around.

The president also is likely to push for making the Economic Growth and Tax Relief Reconciliation Act — and the increased pension contribution and benefit limits it included — permanent. If not made permanent, those increases will expire in 2010. Mr. Kerry has attacked EGTRRA and is likely to oppose attempts to make it permanent.

On the tough issues of pension funding reform and cash balance conversions, continued "drift" is likely regardless of the outcome of the election, due to the lack of anything like a national consensus. The Bush administration has been successful in enforcing party discipline from Congress in many policy areas, but not on pensions. Mr. Kerry will have difficulty implementing any policy in the face of a divided Senate and (at least until 2006) a Republican House.

The candidates have distinctly different visions of pension policy. Voters sympathetic to the current system will probably find Mr. Kerry a more congenial — but not risk-free — choice. Those who support the move toward more individual accounts will likely support President Bush.

Brian Donohue is a principal at Chicago Consulting Actuaries, Chicago.