« Empirical Evidence on Debt Trading | Main | Parts of BAPCPA Unconstitutional »

Pension Legislation

posted by John Pottow

Congress is putting the final touches on a pension reform bill as the House-Senate Conference is ironing its final differences.  This bill deals with some relatively arcane but nontheless vital issues,
especially for workers with traditional defined-benefit pension plans.

When companies make pension promises to workers, they are in effect binding themeselves to pay future debts.  How do we know these promises aren't pie in the sky that the companies will never be able to pay?  Because the government requires companies to "fund" these future pension obligations.  It does so by making a bunch of actuarial calculations on what these future promises will cost, and how many assets the companies will need to cover them.  When companies don't have enough assets to cover these liabilities, as set forth in the pension regulators' formula, their pension plans are deemed "underfunded."

In the big pension reform of the 1980s, Congress gave companies with underfunded pension plans 30 years to make catch-up payments, and even then they only had to reach a target of assets sufficient to cover 90% of pension liabilities.

The new bill clamps down (at least somewhat).  For example, it would require fully funding underfunded pensions within 7 years (the airlines have squalked they'll fold with that requirement, so will probably get a carve-out exception).  And by "fully funded," they mean it this time: 100% coverage, not just 90%.

Good news for future pensioners (i.e., current workers, i.e., most of us), right?  Not necessarily.  One of the clear results of Congress's sensible clamp down on underfunded pensions is that other companies will do just what the airlines are doing in bankruptcy: discontinue defined-benefit pension plans for their workers.  When we account honestly for how expensive these plans really are to American businesses, the unfortunate price for our commendable transparency is the unhappy realization that many companies simply can't afford the promises they're making (or, more precisely, the promises that were made some time ago).  Whether they were dishonest in making those promises back then, grossly optimistic, or just incompetent is, sadly, now water under the bridge.  Whatever the reason, as the true costs of defined-benfit pension plans set in -- and are drawn into the light by the new pension bill which makes them harder to hide -- companies will simply get out of defined-benefit plans altogether and move to defined-contribution plans (the fancy name for 401(k)s).  We've seen this happening already with historical data gathered by the Survey of Consumer Finance.  So instead of shouldering the huge risk of uncertain future health care costs and longevity increases of a baby-boom population, businesses will pass that risk along to their workers.  If the workers make poor investment decisions and lose all their future pension money, they'll always have the final, ultimate defined-benefit plan of all: social security.  At least for now.  (That's an underfunded pension plan that Congress has so far avoided.)


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.