By Sylvester J. Schieber
The Department of Energy's announcement that it will discontinue reimbursement of pension costs for new contractors raises serious concerns about the Bush administration's commitment to a healthy defined benefit plan system.
Tax law in the United States first regulated employer-sponsored retirement plans in the 1920s. Since then, the regulatory structure governing retirement plan operations has evolved, but it has always sanctioned both defined benefit and defined contribution plans and has never explicitly endorsed one form of plan over the other for any particular employer or set of workers.
Today, virtually all economists who analyze these plans consider them to be an element of compensation paid to workers. There is a rich economic literature that explains why some employers may want to use one form of retirement plan or the other, or even both in some circumstances, because of productivity considerations related to the plan sponsor and its employees.
For some time there has been a growing concern on the part of certain people who work in the retirement area that the Bush administration would like to see the defined benefit plans go away and this element of the retirement system shut down. Until now, this concern has been based on intuitions that policies advocated by the current administration were hostile toward this style of plan. Now, a member of the Bush Cabinet — Secretary of Energy Samuel W. Bodman — made it explicitly clear in his April 27 announcement that at least one agency of the federal government does not support defined benefit coverage of workers who perform contract functions for his department.
It might be appropriate for the Bush administration to make a public policy case against employer-sponsored defined benefit plans but, if it desires to do so, it should do it through the traditional mechanisms under which retirement plans of this sort are regulated — namely, through legislative committees with oversight of the tax provisions of federal law regulating pensions, and the counterpart committees with oversight of the labor provisions of federal law that regulate these plans.
In the context of the thousands of pages of legislative history and regulatory proclamations on employer-sponsored retirement plans that exist today, there is not one single reference to the U.S. Department of Energy as having any role in setting policy for employer-sponsored pensions in this country. If Mr. Bodman wants to declare that his agency will not reimburse any employer for extraordinary retirement plan costs, that is fine. To say that his agency will not reimburse any costs associated with defined benefit plans covering future hires for contracting employers is tantamount to setting pension policy for those employers who work for that agency.
Such a proclamation is beyond the scope of the Department of Energy's legislative mandates. If this policy expands beyond the Department of Energy in the context of other federal agencies contracting with private employers, it has the potential to become the de facto regulatory killing of employer-sponsored defined benefit plans, achieved with no public discussion by the policy-makers who are charged under current law with regulating these plans. In that context, this is an outrageous abrogation of regulatory authority.
Sylvester J. Schieber is director of U.S. benefits consulting, Watson Wyatt Worldwide, Arlington, Va.