A Funeral for Private Defined-Benefit Pensions

David Wessel on the regulation of pensions:

WSJ.com - Capital: The Big Pension Bill: Is That All There Is? August 3, 2006; Page A2: The 907-page bill addresses a big problem: Employers have made pension promises to 44 million workers and retirees, but many haven't set aside enough money to cover them. At last tally, they were roughly $300 billion short.

If those pension funds or the sponsoring employers go bust, the government Pension Benefit Guaranty Corp. will pay retirees -- albeit often less than those workers had been promised. Its assets are about $23 billion short of the pensions it has promised to pay, and it's likely to get stuck with more pension plans in the next several years. So far, the PBGC has been able to get by with assets it inherits from failed plans and insurance premiums paid by operating pension plans. But if it ever runs out of money, taxpayers almost surely will get the bill.

Sound public policy would discourage, if not forbid, employers and unions from promising pensions to workers unless they set aside enough to pay them. That would protect workers as well as taxpayers, many of whom don't have any employer-sponsored retirement plans at all. (About 45% of all full-time private-sector workers aren't offered a retirement plan at work.)

But if congress makes offering defined-benefit pension plans too onerous, companies will abandon them. Many have already. Only one in five private-sector workers is covered by a defined-benefit pension, the sort that pays a set sum each month. That fraction is shrinking. About four in 10 have a 401(k) or other defined-contribution plan, where the worker owns the assets but takes the risk of sour markets or outliving one's saving. (Some workers have both kinds.)

So does this bill get the balance right? It's tough to get a smart answer -- partly because the bill is so sprawling, partly because the cognoscenti focus not on the all, but on the provisions they like or dislike.... Perhaps the pension bill is best viewed as a funeral service for defined-benefit pensions. Employers don't want to be in this business, preferring to pass the risk of financial markets and longevity to workers, many of whom would rather have a 401(k) anyhow. Private-sector defined-benefit plans had $1.9 trillion in assets at year-end 2005, while 401(k)-style plans had $2.9 trillion and individual retirement accounts had $3.7 trillion

In that light, the most important provisions may be rules set for defined-contribution plans. The bill would encourage employers to automatically enroll workers in such plans: you fill out a form to opt out, instead of filling out a form to sign up. That's wise in a nation where too many people save too little. And it would raise the ceiling on tax-favored contributions to such plans, a break that helps only the best-off Americans....

The quiet word from sober pension experts is that the bill does more good than ill for most workers and taxpayers, but is disappointing, given how much time Congress spent on it.

And, as House Majority Leader John Boehner said the other day, "This bill's going to be in effect for the next 20 to 25 years." Translation: If you think we're going near this issue again soon, you're crazy.