Friday, October 30, 2015

New U.S. Budget Deal Continues to Discourage Private Sector Pensions .... Wrongheaded Government Legislation Enables Taxpayer Guaranteed and Underfunded Public Sector Pensions to Continue Unabated

In 1974 new federal pension legislation was enacted. ERISA became the popular name for the Employee Retirement Income and Security Act. It was established because the corrupt Teamsters Union Pension plan was underfunded --- by a whole lot, but that's another story for another day.

An important part of that legislation stated that private sector companies with 'defined benefit' (guaranteed amount at retirement) pension plans would be forced to pay a $1 per employee annual insurance premium to government. This was supposed to insure the risk and fund the promised benefits for employees of those companies that would later fail and be unable to pay earned pension benefits. {NOTE: It also was a convenient way for government to provide 'off-budget' financing by requiring solid companies to pay mandated 'contributions' to government for benefits that their own employees would never receive --- government financing for free, in other words. Sounds like ObamaCare for the overcharged young, doesn't it?}

Partly as a result, many companies then began the transition from 'defined benefit' to 'defined contribution' plans. The difference is simple and stark for both employers and employees. Under defined benefit pension plans, the individual is guaranteed a defined benefit in the form of a monthly pension payment upon retirement. Under a defined contribution plan (profit sharing, 401(k) or IRA), a funding contribution is still made by the company but there is no guaranteed retirement benefit for the employee. In one plan there's a possible shortfall to be made up by the employer, and in the other there's never a shortfall, because there's never a guaranteed pension benefit.

Government excluded itself and public sector employees from the mandates of the pension legislation, of course, so pensions have continued to dominate in the public sector. Meanwhile, defined contribution plans have largely replaced defined benefit pensions in the private sector. Taxpayers are the guarantors of public sector pensions.

Now it's 2015 and there has never been enough money in the ERISA private sector payment fund to pay the benefits. Along the way, many companies have discontinued their pension plans and adopted 401(k) plans in their place. That eliminates the necessity to pay the insurance premiums and the necessity to guarantee pension benefits as well.

The government's 1974 ERISA legislation has made pension plans for companies a bad idea for many companies. Now it's making it an even worse idea.

U.S. Budget Deal Dings Corporate Pensions provides this update:

"Companies with corporate pensions will end up paying a price if a sweeping budget and debt deal proposed by Congress becomes law.

The House of Representatives is expected to pass legislation as soon as Wednesday that would eliminate the risk of a government default until after 2016 and increase government spending for the next two years.  But the plan proposes steep increases to fees that companies pay to the nation’s pension insurer, to help fund the added budget spending.

According to the proposed budget, companies that have defined benefit pension plans would have to increase the fees they pay to the Pension Benefit Guaranty Corp. by about 25%. Companies with pensions will pay $80 per person in their plan by 2019, up from $64 in 2016.

“The increases are tough,” said Alan Glickstein, a senior retirement consultant at consulting firm Towers Watson & Co.

Those fees will apply to companies regardless of funded status. . . .

All told, the fee increases will yield roughly $1.7 billion in revenue for the government, according to the Congressional Budget Office’s analysis.

“The total PBGC fees that a pension plan sponsor is facing over the life of the fund, is now material,” said Caitlin Long, head of the pension solutions group at Morgan Stanley . “Most executives do not expect that this is the last increase.”

As CFO Journal reported last year, higher fees have been pinching companies and are encouraging them to shed their pension obligations."

Summing Up

From $1 per employee  in 1974 to $80 per employee in 2019 --- that's just the way our government has long worked. Get the legislation enacted by falsely promising affordability and then raise the needed money by raising the funding requirements later. (And now we have ObamaCare.)

And that increase from inception in 1974 to 2019 will represent an increase in 'insurance' premium payments of approximately 20 times the growth in the overall inflation rate. Such a deal!

The government's plan has long been to make good companies pay more and more for the benefits promised but not paid by failing companies.

But good managers of good companies will react, as they already have over the past 40+ years, by discontinuing their pension plans and opting for 401(k) plans instead.

It's just one more example of our government at work doing the wrong thing and making things tougher for all Americans.

That's my take.

Thanks. Bob.

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