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Speaking of Your Pension The basis of the Portman-Cardin bill officially referred to as "The Comprehensive Retirement Security and Pension Reform Act," (H.R. 10) was introduced on March 14th to much fanfare and positive bipartisanship. The way it is written is solid and fundamental hitting some of the basic points that should in theory aid people in their effort to save for retirement. "The good news is that more and more Americans are starting to save for retirement," Steve Judge said in a press release issued on March 14th. Mr. Judge is the Securities Industry Association's senior vice president, government affairs. He quickly added that "the bad news is that they aren't accumulating as much as they will need to retire comfortably." Based on some firm numbers, the amount of people who have failed to save an adequate amount for their future is staggering in spite of increased plan participation by many workers. A full 70% of the current workers have amassed less than $50,000 in retirement savings. While this number is horrible in itself, the average person is making some basic assumptions concerning that savings that Congress might be overlooking. Retirement is being redefined in this country by folks who realize that the everyday cost of living does not allow them to save large portions of their income for retirement. Those that do make a contribution to their 401(k) plan in most instances barely meet their employers matching funds. Saving more even in a pre-tax situation as this proposed bill will allow can be difficult to justify when the wages we receive are not what they used to be. As this nation drags its feet out of a prolonged economic downturn it is important to note that the current unemployment number does not help the overall savings rate. More importantly, that number of people out of work usually leads to less workplace security. less security in the workplace means that saving for far off future events such as retirement get bumped down the to-do-list to least important. I have taken Mr. Bush to task over the wisdom of this tax cut and the underlying theory behind it. His belief that returning money to the tax payers in the highest brackets will in turn create an atmosphere of reinvestment. Returning money to the lesser brackets will create a new consumer confidence and increase spending. Neither is likely to happen without jobs and the security that accompanies them. And now, in another ill-conceived move the administration has sought to attach some pension reforms to the bill which lie in direct conflict with the spirit of the legislation. Currently we have problem in the pension industry some of which was brought on by the companies themselves. What were once healthy overfunded plans are now falling dramatically short of the mark. Much of that problem does come from the fall of portfolio value and aggressive money management but a good portion of it originated with the disappearance of the 30 year long bond. In the name of pension reform the administration has launched yet another salvo in the battle to change the way we think money should work. In review, the long bond was retired to create a more efficient method to increase the deficit (er...I mean to allow the government to borrow). The once healthy surplus paid off old debt and new debt was issued that was much more attractive. So from those same folks that brought you that thinking comes the solution to the pension problem. Trouble is the fire is almost out. If the recovery is as robust as supporters of the tax cuts propose, underfunding will seem like a bad dream. If the tax cut does its what it was supposed to do, we will have a rally in confidence to revitalize this country's economic outlook and and the direct beneficiary, the stock exchange. The plan which would appear as an amendment would allow the company to use the same fuzzy math the often used in the past by this administration. It works like this: If you unleash the companies estimates from the long bond and tie them instead to a corporate bond, balances and underfunding take on a whole new perspective. If you can shrink the liability by changing the benchmark interest rate you will do two perhaps three things. First and I agree with this wholeheartedly it will force companies to disclose their real liabilities (and assets) on a yearly basis that is grounded wth better use of termination numbers. Secondly companies with shaky plans would be forced to live within their means which on the surface is not such a bad idea. With one exception. Companies are notorious for using their pensions when they're good to bolster their balance sheets. When they're doing poorly or underfunded, they bury the information on the lowliest pages of the financial statement. And lastly, this is only postponement of the inevitable. Companies with high termination rates, meaning that their employment base is older, likely to retire soon, and will severely drain the pool of available cash sooner and faster than expected will not have their problem solved with a change in accounting. The financial chicanery that will be used will instead set the stage for a more subtle change in pensions. What would come under fire is the traditional defined benefit pension that creates greater value for the employee (and on the flip side, a greater burden to the employer and the plan) in the last ten years of employment. The Bush administration strongly supports a complete overhaul of the pension program in favor of cash balance plans that favor younger workers. Changes in this type of accounting would diminish the amount of promised benefits to older workers. The argument for the change is simple. The insurance industry copes with similar methods of estimation called duration, the pension industry should as well. |