June 2, 2005 - In the wake of the largest corporate pension default in history, President Bush and Congressional Republicans continue to undermine the retirement security of millions of American workers. They are promoting a plan that would damage our already weak pension system at the same time they are proposing to cut Social Security benefits for 70 percent of American workers. Democrats want to close the loopholes that allow companies to under-fund their pensions and protect Social Security from privatization, so American workers receive the benefits they have earned through a lifetime of hard work.

PENSIONS ARE SEVERELY UNDERFUNDED

PBGC Protections for 44 Million Pensioners Are at Risk Due to Pension Defaults and Rules Allowing Employers to Underfund Plans. The Pension Benefit Guarantee Corporation is a federal corporation that guarantees payment of pension benefits for 44 million American workers and retirees participating in 29,000 private "defined benefit" plans. PBGC's pension funding rules are intended to ensure that plans have sufficient assets to pay promised benefits. However, recent terminations of large underfunded plans, along with continued widespread underfunding, indicate weaknesses in these rules that may threaten retirees' incomes, as well as the viability of the insurance program maintained by the PBGC-which reported a deficit of $23.3 billion in 2004. [PBGC, 5/27/05; GAO, "Private Pensions," 5/05]

2 in 5 Pension Plans Were Underfunded Each Year Since 1995; Pensions Were Underfunded by $450 Billion in 2004 Alone. Each year from 1995 to 2002, 39 percent of defined benefit pension plans on average were underfunded, and more than half of the plans insured by PBGC were underfunded by 2002. By 2002, almost one-fourth of the 100 largest plans were less than 90 percent funded. However, according to the General Accountability Office, "because of leeway in the actuarial methodology and assumptions sponsors may use to measure plan assets and liabilities, underfunding may actually have been more severe and widespread than reported." In fact, the Department of Labor estimates that companies underfunded their plans in 2004 alone by $450 billion. [GAO, 5/05; Business Week, 5/16/05]

Pension Funding Rules Have Created Large Risk of $96 Billion Pension Termination. Because financially weak firms tend to sponsor underfunded pension plans, weaknesses in funding rules create a potentially large financial risk to PBGC-and retirement security generally. On average each year from 1995 to 2002, nine of the largest 100 plans had a sponsor with a speculative grade credit rating-indicating financial weakness and poor creditworthiness. PBGC estimates that financially weak companies with plan that had a "reasonably possible" chance of termination underfunded their pensions by $96 billion. [GAO, 5/05; PBGC, 9/30/04]

UNDERFUNDING COMPANIES HAVE ESCAPED RESPONSIBILITY

63 Percent of Employers Each Year Make No Cash Contributions to Pension Plans. According to the GAO, "62.5 percent of sponsors of the largest plans each year on average made no cash contribution because the rules allow sponsors to satisfy minimum funding requirements through plan accounting credits that substitute for cash contributions." Effectively, plan sponsors rely on an "outdated" system of credits in order to avoid making contributions to their plans. [GAO, 5/05; Philadelphia Inquirer, 6/1/05]

Most Companies That Underfunded Their Pension Liabilities Completely Escaped Penalties or Additional Funding Requirements. Very few of the companies that underfunded their pension liabilities were forced to pay penalties for being underfunded, because of loopholes in pension law. From 1995 to 2002, only 6 pension plans studied in the GAO report were subject to the "additional funding charge" (AFC) penalty, for a total of 23 times. [GAO, 5/05; Philadelphia Inquirer, 6/1/05]

BUSH HAS FAILED TO SOLVE PENSION FAILURES

Bush Pension Plan Would Increase Financial Burden on Healthy Companies Compared with Companies with Weak Pension Plans. Bush claims his January 2005 proposal is designed to ensure that employers keep pension benefit promises and to protect the PBGC from a taxpayer bailout. Yet, a Watson Wyatt analysis of 471 "Fortune 1000" companies with defined benefit plans shows that the Bush proposal would disproportionately increase the financial burden on healthy companies compared with their weaker counterparts. Healthy companies would see their total PBGC premiums increase 240 percent under the proposal, more than double the 113 percent increase for financially troubled employers. [Watson Wyatt, http://www.watsonwyatt.com/, 5/12/05]

Employee Benefits Expert Says Bush Plan Would "Damage and Already Weakened" Pension System. According to Sylvester Schieber, benefits practice director at Watson Wyatt, "While the pension funding environment desperately needs fixing, we believe that the administration's proposal will likely damage an already weakened defined benefit system… The proposal offers little incentive for companies without a pension plan to set one up. Even worse, the added burden placed on healthy companies might lead them to terminate their pension plans." [Watson Wyatt, http://www.watsonwyatt.com/, 5/12/05]

Reasonable Companies That Honor Pension Commitments Would be Penalized. According to Julia Coronado, senior research analyst at Watson Wyatt, "By disproportionately allocating the financial obligation, the administration would force healthy companies to subsidize weaker ones far more than in the current system…Pensions provide an essential stream of income for many retirees. While it's important to keep the PBGC healthy, responsible companies that honor their pension commitments should not be unduly penalized." [Watson Wyatt, http://www.watsonwyatt.com/, 5/12/05]

BUSH TRIED TO UNDERMINE TRADITIONAL PENSIONS

Bush Pushed Cash Balance Scheme that Would Have Reduced Pension Benefits by 20 Percent. As part of his 2005 proposed budget, Bush proposed to make it easier, through tax advantages, for companies to switch from traditional pension plans to cash balance schemes. Cash-balance plans are pensions that, instead of guaranteeing a stream of monthly payments in retirement as traditional pensions do, provide hypothetical accounts for individual employees that grow each year with contributions. According to the Wall Street Journal, "Employees can see their ultimate pensions cut by 20 percent or more. Whereas the traditional pensions grow rapidly in later years on the job, cash-balance plans instead provide a small 'contribution' each year." Corporations view the plans as a way to reduce costs and boost profits. [Washington Post, 2/3/04; Wall Street Journal, 2/3/04]

Bush Plan Would Have Helped Overturn Court Rulings Against Cash Balance Plans. "If the [Bush] proposal were enacted, it could help employers in efforts to overturn the findings of three appeals courts-most recently in a case against Xerox Corp.-which concluded that companies with cash-balance plans underpaid departing workers, and the decision of a federal district court, which said that International Business Machines Corp. discriminated against older workers when it adopted a cash-balance plan." According to the EEOC, 800 age discrimination complaints have been filed against companies that have switched to cash balance plans. The IRS has not approved any new conversions since 1999 because of concerns regarding age discrimination. [Wall Street Journal, 2/3/04; Equal Opportunity Commission, http://www.eeoc.gov/35th/1990s/combating.html]

CONGRESSIONAL REPUBLICANS TRIED TO UNDERMINE PENSIONS

House Republicans, with Bush Support, Passed Weak Pension Bill. In April 2002, House Republicans passed a flawed pension reform bill, supported by the White House, which protects executives more than workers. This bill passed 255-163 with only 2 Republicans voting against. Bush's OMB released a Statement of Administration Policy endorsing the House GOP plan: "The Administration strongly supports H.R 3762, which encompasses important principles outlined in the President's retirement security plan." [H.R. 3762, Roll Call Vote #92, 4/11/02, http://thomas.loc.gov; SAP on H.R. 3762, 4/11/02, http://www.whitehouse.gov]

House Plan Would Weaken Rules Protecting Low-Income Workers. A provision of the House bill, supported by business groups, would scale back the rules requiring pension plans to meet specific tests that balance between benefits for lower paid and higher paid workers in order to qualify for favorable tax status. Under current law, pension plans must meet at least one of two mathematic criteria to be eligible for preferred tax status. Under the House bill, firms would be eligible if they are approved by the Treasury Department based upon the "facts and circumstances" of their plan, which was the criteria before the mathematical formulas were introduced. [New York Times, 4/10/02; CBPP 6/5/02]

House Plan's Provision Would Allow Firms to Exclude More Workers And Reduce Benefits for Low-Income Employees. J. Mark Iwry, who oversaw employee-benefits policy and regulation at the Treasury Department from 1995 to 2001, said that the House pension bill "would allow corporations in some cases to exclude more employees from pension coverage and reduce the level of benefits for average- and lower-paid workers who remain covered." [New York Times, 4/10/02]

Under House Plan, "Employees Lose, the Chief Executive Wins." According to the New York Times, "Congress ought to consider ways to hold corporate executives more accountable. Instead, the House last week passed a so-called pension reform bill that might actually encourage companies to drop lower-paid employees from pension plans to direct even more resources to top executives. Employees lose, the chief executive wins." [New York Times, Editorial, 4/14/02]

SOCIAL SECURITY MORE CRUCIAL THAN EVER

Because of Switchover to 401(k)s and the Danger to Traditional Pensions, Protecting Social Security Is Even More Crucial. In the past 2 decades, personal investments and pensions have become more and more dependant on financial markets. For example, traditional defined-benefit pensions have been replaced with 401(k)s. Social Security is the only sure thing left. It is still a guaranteed benefit that is not dependant on market fluctuations. [Diamond and Orszag, Saving Social Security, 2004; Testimony of J. Mark Iwry, 4/29/04]