Is Congress *trying* to destroy pensions now?

I haven’t really read much about the late-breaking budget deal yet; here’s a Bloomberg article on the deal, though with scant details. But here’s the key paragraph as far as pensions go:

The main components of the deal include raising contributions that federal employees make to their retirement plans and increasing premiums for pensions backed by the Pension Benefit Guaranty Corp.

Not much there, eh?

Kind of a throw-away statement.

But it’s actually a big deal — to use PBGC premiums not simply to fund the FDIC-like backstop for defined-benefit pensions in an actuarially-sound manner but as a revenue source that’s appealing because it’s obscure to most Americans, is troubling. And it’s pretty stinkin’ hypocritical for the same politicians who bemoan corporate America’s abdication of its duty to provide pensions for workers, to play this game.

As a colleague of mine said this morning (in the midst of the scramble that everyone’s doing to let clients know about this): “Wait, the DB system is still moving. It’s not quite dead yet. Let’s shoot another bullet into it.”

UPDATE:
Some questions in the comments, from “Jim,” and some answers: Q: “Can you explain this a little bit further? I think I know what you’re trying to say (Congress is increasing premiums for PBGC, but that money won’t necessarily end up in PBGC, but could actually go into the federal government version of the general fund), but I am not positive.”

Yes and no. The answer that was sent around at work today is this (paraphrased): the premiums that corporations pay into the PBGC are deposited into the “Revolving Fund,” a fund which is used to pay benefits and other PBGC expenses, and which appears on the federal government’s balance sheet. Hence, increases in premiums will have the effect of showing a decrease in the budget deficit.

Now, to a certain degree, this is a rational move, since the PBGC is running deficits (see here for a quick summary), so the more the government charges in premiums, the less it has to subsidize. But at the same time, it’s not necessarily the PBGC’s “fault” — whenever a high-profile firm goes bankrupt, there’s an element of negotiation in whether plans are terminated and how much cash the company pays into the PBGC, and there’s a fair amount of politics behind it (though I can’t seem to find a good article on the topic tonight). What’s more, the federal government is not actually paying any cash into the PBGC; it’s just that the PBGC being in the red based on very conservative valuations of future liabilities.

In any case, what the “right” level of PBGC premiums should be is open for debate — charge too little and the program isn’t self-sustaining; charge too much, and the premium is that incremental increase in cost which prompts more of the financially healthy pension plans to follow the current trend of buying annuities or paying lump sums to their terminated vested and retired participants, creating a form of death spiral for the PBGC.

However, when premiums are raised as part of a budget deal, as an explicit source of revenue, whether it directly goes to pay for Head Start programs, or just indirectly improves the budget numbers, it’s still troubling. It could be worse, of course — in Ireland, at the peak of the financial crisis, the government imposed a 0.6% levy on assets in pension funds, to fund some government job-creation programs.

Q: “Also, how is the defined-benefit pension system not-quite-dead?”
I’m not sure about this question, whether Jim means that he thinks the defined benefit system is completely dead and is surprised to hear otherwise, or whether he thinks it’s still alive-and-kicking. But I’ll assume that he thinks it’s completely dead.

Which it’s not — not yet, anyway. We work with large employers, and conduct an annual survey on benefits. According to this survey, as recently as the mid-90s, a good 80% of large employers offered defined-benefit pensions. Now it’s about a quarter. There are employers who still believe it’s the right thing for their employees; there are also a significant number of union plans still around. Is this stable in the long term? No — DB pensions will disappear, but that doesn’t mean that the government shouldn’t try to keep them around for as long as possible, at least until there’s something to take their place that provides some greater degree of longevity protection and protection against investmentn risk than a simple 401(k).