Workers Can See Pension Protection Act in Action
What should Congress do to ensure private retirement security?
Until Congress acted last year, our nation’s retirement security laws were stuck in the 1970s, and millions of American workers and retirees were suffering the consequences. But the tide has turned, and private pension reforms — reforms that were years in the making — are now beginning to take hold. Indeed, we’re entering a new era.
In the first half of this decade, it became crystal clear to both parties in Congress that our private retirement security system was governed by laws that were — to put it bluntly — outdated and broken. The need for reform was apparent, and after years of coalition-building — both inside and outside the halls of Congress — Washington, D.C., acted last summer to restore some common sense to our nation’s pension system. In one of the few truly bipartisan reforms of the 109th Congress, we worked across the aisle and down Pennsylvania Avenue to ensure that our retirement security laws would match the new realities of a 21st-century economy, and as a result, once the Pension Protection Act is fully implemented, more U.S. workers will be able to count on their retirement savings being there for them when they need it.
In reality, as a result of our strong economy, we’re already starting to see some progress on private pension security. Towers Perrin, a leading retirement security consulting firm, recently announced that the pension plans of our nation’s largest companies ended 2006 with more than 102 percent of the assets needed to pay pensions indefinitely. That’s up more than 20 percent from 2002 — the low point at which Congress really began getting serious about pension reform.
As a result, fewer pension plans are at risk of going under — meaning workers and retirees can be more optimistic about their financial futures, while taxpayers can be more confident that a multibillion-dollar bailout of the Pension Benefit Guaranty Corporation may not be in the cards after all. Even as recently as a year ago, these were both open questions.
Add to the mix some meaningful — and long overdue — reforms made possible by the Pension Protection Act, and it’s clear that we really have made significant progress on retirement security. Here’s what’s in store:
The pension reform package we enacted last year starts by insisting on something that most people probably already assumed was the case: It defines a “fully funded” pension plan as one that is funded at a level of 100 percent. Incredibly, under the 1970s-era pension rules, “fully funded” was defined at a level of 90 percent. Even though the health of plans generally are improving these days, if the economy were to slow down and if plans weakened as a result, the Pension Protection Act has created a new safety net to ensure that the plans are fully funded — truly fully funded, at 100 percent.
The new law also restricts a loophole that led to the downfall of far too many pension plans over the past several years. Outdated pension rules permitted weak plans to skip pension contributions even if those plans were severely underfunded. For example, several years ago, retirees and workers at one major U.S. corporation were shocked to discover that no cash contributions were made to their company’s pension plan for four years when the plan was terminated and taken over by the PBGC. The Pension Protection Act closed this loophole and restricted this unfair practice.
The new pension law also levels the playing field between corporate executives and rank-and-file workers when it comes to their retirement security. As we worked toward a pension reform bill, President Bush often used the phrase “what’s good for the captain should be good for the crew.” Yet under 1970s-era pension laws, this was not always the case. We saw it play out on the evening news all too often: As major companies crumbled and their workers and retirees were left vulnerable, many of the companies’ executives were given overly generous deferred compensation arrangements. The Pension Protection Act curbed this outrageous practice by restricting the funding of such “golden parachute” arrangements.
Supporters of the pension reform law also took into account new options within the American retirement security system — options that simply weren’t available to workers and retirees in the 1970s. Gone are the days of a worker spending his or her entire professional life at one company, retiring and receiving a pension from that company — and that company alone. As employees change jobs, they often change retirement plans — including a move into 401(k)-type plans. The Pension Protection Act boosted 401(k) auto-enrollment programs to encourage Americans to build retirement nest eggs that give them the secure retirement they expect. And it made permanent the increases in annual 401(k) and Individual Retirement Account contribution limits, encouraging Americans to save more for their golden years.
While the benefits of these defined-contribution 401(k) plans are well-known, rank-and-file workers often have been forced to shoulder much of the risk related to the actual investments that produce those benefits. Unfortunately, most of these workers do not have the time or knowledge to actively manage these investments, nor do they have access to quality investment advice through their employer. Therefore, in what may be the law’s most meaningful long-term reform, the Pension Protection Act fixed an outdated law that barred an employer from providing its workers access to a qualified investment adviser who can help them choose appropriate investments and maximize their retirement savings.
The pre-Pension Protection Act retirement security laws may have served a 1970s work force well, but as the years wore on, they endangered the retirement security of millions. But now, we’ve entered a new era — one marked by a new law that ensures pension plans are fully funded, encourages companies and unions to keep their pension promises to workers and retirees, and modernizes laws to reflect the realities of a 21st-century economy. Workers, retirees and taxpayers alike are better off for it.
Rep. Howard McKeon (R-Calif.) is ranking member of the Education and Labor Committee.