Whichever presidential candidate prevails Nov. 2, pension policy needs a swift overhaul. That's especially true in the defined benefit arena, if only to better secure the benefits of the legacy plans in deeply underfunded positions. A new policy, of course, ought to try to revitalize defined benefit plans.
On that last point, the new administration should work with Congress to enunciate and push through a clear pro-cash-balance policy, clearing the way for conversions that don't harm accrued benefits and avoid the status quo of the uncertainty of potential litigation. Cash balance plans are the only vehicles that preserve some semblance of defined benefit coverage.
Getting agreement on such plans won't be easy. Earlier this year, a Republican-led Congress foolishly stopped a Republican-led Treasury Department proposal on cash balance rules.
Corporate sponsors must take the initiative to lobby Congress and the administration. In the face of a dynamic work force and global competition, employers aren't creating defined benefit plans, and many are continuing to freeze or even terminate existing DB plans. Cash balance plans provide a way to preserve for many employees most of the benefits of defined benefit plans by reducing the number of plan terminations.
Accommodating cash balance plans also would help relieve the Pension Benefit Guaranty Corp. of the potential of having to take over many more pension plans, burdening further its already underfunded position.
The next administration and Congress must confront the question of what would happen if companies dumped so many defined benefit plan liabilities on to the PBGC that it could not meet its obligation. Would the administration and Congress seek to have taxpayers bail it out, a perverse idea considering many taxpayers are employees not covered by any pension program? Would the PBGC reduce the maximum benefit, hurting millions of retirees? Neither solution would be tenable, short of tightening funding at existing pension plans. That, in turn, might trigger further terminations.
Perhaps confronting these questions will focus the politicians' minds on the brewing retirement income crisis.
Improving funding in the short term will be tough, especially when many corporations have such big underfunding holes to fill, and the demands on corporate cash are great.
The next administration should advance the idea of having pension sponsors more closely match the duration of the liabilities with a discount rate of similar duration. Sponsors that have mature work forces and face large pension benefit payments in the near term would have to value their liabilities using shorter-term interest rates than would companies with younger work forces. That is a fairer and sounder solution to funding.
Also, to improve funding, the administration should seek to have Congress scrap the limitations on funding that make it impossible for sponsors to bulk up pension contributions when corporations have the cash, in order to better safeguard plans during downturns.
The new administration should also make it just as easy for employees to contribute to corporate defined benefit plans as they can to 401(k) plans. That would place them at more of an even footing. The administration should seek to end any administrative and tax disadvantages of such employee DB contributions. If employees start voting with their pocketbooks for defined benefit plans, many more corporate sponsors would seek to preserve the plans. It's an idea worth discussing.
Moving to cash balance plans or tightening funding rules likely won't relieve the financial crisis at United Airlines, already in bankruptcy, or other airlines in a weak financial condition with large underfunded defined benefit plans. The financial crisis at these airlines has been building for a decade or more and they could wind up dumping more liabilities on to the PBGC. But these moves might preserve some form of defined benefit plan for more employees.
Shoring up one of the legs of the retirement income three-legged stool won't be an easy task. But if Washington comes up with the right combination of tax incentives and rule changes next year, at least existing DB plans would be better off.