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Disclaimer: The author of this site maintained the campaign weblog of John Kline's opponent in the 2006 election, which made Congressman Kline a bit testy.

As with all blogs, review the facts carefully and draw your own conclusions.

Sunday, March 05, 2006

Pension Protection? Security? Transparency?

The last floor speech John Kline gave in 2005 was a brief one in support of legislation introduced by John Boehner, which Kline co-sponsored, the Pension Protection Act of 2005 (H.R. 2830). This bill ultimately passed the House by a somewhat bipartisan vote of 294-132 (one Republican voted against it; 70 Democrats supported it). What Kline said about it isn't nearly so interesting as the problem of defined-benefit pensions or the legislation itself, or why it's unlikely that real pension reform will be enacted any time soon.

The rest of this post goes into some pretty deep and only moderately informed wonkery. The upshot is that the Boehner bill is basically a good bill with one major flaw. Readers may prefer to move on to lighter fare.

America's defined-benefit pension plans are in crisis, with current unfunded liabilities estimated at around $600 billion. Compare that with the greatly-hyped future Social Security 'crisis' over which Republicans like Kline were in such a lather a year ago, which they claim will encounter a shortfall of $3.7 trillion over the next 75 years, starting around 2041. Given that the shortfall in pension funding is much more real and is actually affecting people right now, it's good to see that Congress finally made some effort to address it after their Social Security reform fizzled.

And as I said, in my nonprofessional opinion, Boehner's bill doesn't seem like a bad bill. It mandates the correct and necessary course of action, that businesses which have chronically underfunded their defined-benefit pension plans for years must now take concrete steps to close the gap to eliminate the current funding liability. It does this by increasing the per-worker amount businesses must pay in to the Pension Benefit Guaranty Corporation (PBGC, a federal insurance program established in 1974 to protect workers with defined-benefit pensions in the event their employer declares bankruptcy) if their pension plans are less than 80 percent funded, and providing tax incentives for employers to make additional contributions to their defined-benefit plans. And this is as it should be: employers promised these benefits to their employees, and they should provide the funding necessary to make sure those employees get their benefits.

There are a handful of objections to Boehner's plan. The AARP objects because the plan doesn't protect older workers when businesses choose to transition from a defined-benefit to a different benefit model, and because although the plan encourages businesses to provide financial advice to their employees, it weakens restrictions on which institutions can do the advising, raising the possibility of conflict of interest.

A few Democrats also pointed to the CBO estimate that Boehner's plan will actually hurt the bottom line for PBGC, increasing its projected funding shortfall by $9 billion over the next 10 years. But the real downside to the Boehner plan is that, under certain circumstances, it lets businesses off the hook.

In the event that a business with an underfunded pension plan goes bankrupt, the bill mandates that employee benefits paid out under the plan are reduced as well (look closely or you'll miss it: "restrict benefit payments and benefit accruals in underfunded plans"). In other words, although the bill makes an effort to bring defined-benefit pension plans up to full funding, if a business declares bankruptcy and dumps their plan on the PBGC, the employees still lose out. Some "pension protection".

The most startling part about this is that it doesn't need to be this way. The Senate has actually passed similar legislation, by a 97-2 margin (the two dissenters were both Senators from Michigan), which not only guarantees full pension benefits to workers (the only exception is that the Secretary of the Treasury can approve specific benefits reductions for businesses which request them), it does so at less cost to the PBGC.

The question is, why aren't Kline and Boehner championing the Senate legislation? This is purely speculation, but House Democrats make the reasonable argument that the real goal of Boehner's bill is to put an end to defined-benefit plans. By increasing the cost to businesses of maintaining a defined-benefit plan while making it easy to drop their plan in bankruptcy, this bill would have the natural consequence of moving businesses away from providing defined-benefit pensions and into more modern pension mechanisms, like 401ks. While it is probably true that defined-benefit pensions are an anachronism, and there is nothing fundamentally wrong with shifting to a defined-contribution system, Kline and Boehner aren't exactly looking out for the best interests of workers by encouraging business to shortchange them on the promises they've made. Especially if, as the AARP claims, the plan doesn't protect older workers when companies make a transition in their plans.

And of course, it's ironic that the same folks who are encouraging businesses to drop their defined-benefit pension plans are the ones who earlier in the year made such a concerted effort to fundamentally change our federal defined-benefit plan, Social Security.

Here's Kline's speech:

I would like to echo my colleague from Georgia's comments on this important subject. I, too, come from a district full of hardworking airline employees that have genuine concerns about the future of their pension plan. Throughout this process, I have worked to ensure that we address this issue in a way that does two critical things: One, make sure airlines can continue to afford participation in their defined benefits system; two, support the policy priorities of our committee, the Education and the Workforce Committee, in our efforts to protect employees by making sure the promises they have been made are backed with well-funded pension plans.

Madam Speaker, I commend the chairman for all his work on this bill and ask for his continued good efforts on behalf of the airline industry as we go forward.

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