[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





   THE PENSION UNDERFUNDING CRISIS: HOW EFFECTIVE HAVE REFORMS BEEN?

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            October 29, 2003

                               __________

                           Serial No. 108-40

                               __________

  Printed for the use of the Committee on Education and the Workforce



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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director


                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on October 29, 2003.................................     1

Statement of Members:
    Andrews, Hon. Robert E., a Representative in Congress from 
      the State of New Jersey....................................     4
    Boehner, Hon. John A., Chairman, Committee on Education and 
      the Workforce..............................................     1
        Prepared statement of....................................     3
    Norwood, Hon. Charlie, a Representative in Congress from the 
      State of Georgia, Prepared statement of....................    85

Statement of Witnesses:
    Bovbjerg, Barbara D., Director, Education, Workforce and 
      Income Security Issues, U.S. General Accounting Office, 
      Washington, DC.............................................     6
        Prepared statement of....................................     9
    Gordon, Michael S., General Counsel, National Retiree 
      Legislative Network, Inc., Washington, DC..................    42
        Prepared statement of....................................    43
    Iwry, J. Mark, Esq., Non-Resident Senior Fellow, The 
      Brookings Institution, Washington, DC......................    47
        Prepared statement of....................................    49
    John, David C., Research Fellow, Thomas A. Roe Institute for 
      Economic Policy Studies, The Heritage Foundation, 
      Washington, DC.............................................    61
        Prepared statement of....................................    63
    Krinsky, Robert D., A.S.A., E.A., Chairman, The Segal 
      Company, New York, NY, on behalf of the American Benefits 
      Council....................................................    32
        Prepared statement of....................................    33


 
   THE PENSION UNDERFUNDING CRISIS: HOW EFFECTIVE HAVE REFORMS BEEN?

                              ----------                              


                      Wednesday, October 29, 2003

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to notice, at 10:30 a.m., in 
room 2175, Rayburn Building, Hon. John Boehner (Chairman of the 
Committee) presiding.
    Present: Representatives Boehner, Petri, Ballenger, 
Hoekstra, Norwood, Ehlers, Tiberi, Gingrey, Burns, Miller, 
Owens, Payne, Andrews, Woolsey, Tierney, Wu, Holt, Majette, Van 
Hollen, and Ryan.
    Staff present: Stacey Dion, Professional Staff Member; 
Christine Roth, Professional Staff Member; Chris Jacobs, Staff 
Assistant; Ed Gilroy, Director of Workforce Policy; Kevin 
Frank, Professional Staff Member; and Deborah L. Samantar, 
Clerk/Intern Coordinator.
    Cheryl Johnson, Minority Counsel; Michele Varnhagen, 
Minority Labor Counsel/Coordinator; Mark Zuckerman, Minority 
General Counsel; and Margo Hennigan, Minority Legislative 
Assistant/Labor.
    Chairman Boehner. We are here today to hear testimony on 
the pension underfunding crisis, and how effective have funding 
reforms been.
    Under Committee rules, opening statements are limited to 
the Ranking Minority Member and the Chairman. Therefore, if 
other Members have opening statements, they will be included in 
the hearing record. And with that, I ask unanimous consent for 
the hearing record to remain open for 14 days, to allow 
Members' statements and other extraneous material referred to 
during the hearing this morning to be submitted for the 
official hearing record.
    [No response.]
    Chairman Boehner. Without objection, so ordered.

   STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    Chairman Boehner. I would like to welcome everyone and 
thank our distinguished witnesses for coming to testify on this 
very important subject. We take the issue of strengthening the 
pension security of American workers very seriously at this 
Committee, and it is a top priority for this Congress.
    Our hearing today is the fourth in a series held by our 
Committee that examines the future of defined benefit pension 
plans.
    As we all know, a perfect storm of historically low 
interest rates, the stock market decline of recent years, and 
an increasing number of retirees has led to a pension 
underfunding crisis that is threatening the future of the 
defined benefit pension system.
    While this is not the first time we have seen significant 
pension underfunding problems, we have not faced a dilemma with 
the severity as the one we are currently facing. There is a 
sense of urgency to this underfunding crisis because of the 
growing consensus that it is putting the pension benefits of 
American workers at risk.
    This financial health of defined benefit plans, and the 
fellow agency that insures them, the Pension Benefit Guaranty 
Corporation, has been widely reported. The PBGC announced 
earlier this month that it has accumulated an $8.8 billion 
deficit, by far the largest in agency history.
    On top of that, the number of employers offering defined 
benefit pension plans has declined from 112,000 in 1985 to just 
more than 40,000 last year. And more and more employers are 
freezing or terminating their plans, and either shifting to 
401(k) defined contribution plans, or they stop offering 
pension plans for their workers all together.
    Today's hearing will allow us to examine the effectiveness 
of Federal pension funding reforms over the last 20 years, 
whether those reforms have contributed to the current 
underfunding crisis among defined benefit pension plans, and 
their impact on the retirement security of working families.
    Over the last 20 years, Congress has twice made significant 
reforms to the funding rules that require employers to set 
aside money to fund the benefits they promise when they offer 
defined benefit pension plans to their workers.
    The 1987 Pension Protection Act and the 1994 Retirement 
Protection Act were intended to strengthen the defined benefit 
system and prevent pension underfunding by requiring employers 
to make additional contributions to the plan, or accelerating 
existing funding obligations.
    However, there has been much debate about whether these 
reforms have been effective in preventing plan underfunding, 
and their impact on worker pension benefits. With that in mind, 
it's very important for us to ask some fundamental questions.
    Do the current funding rules act to delay sufficient 
pension funding of worker benefits? Is current law inadequate 
to fully protect the pensions of American workers? And despite 
the measures that Congress put into place in 1987 and 1994, a 
pension underfunding crisis exists that is threatening the 
future of the defined benefit pension system. The PBGC's 
deficit is threatening the agency's ability to ensure the 
pension benefits of workers across the country.
    And there is some $80 billion in unfunded pension benefits 
looming on the horizon among financially weak companies, 
pension benefits that may ultimately have to be paid by the 
PBGC or, quite possibly, even the taxpayers.
    So, it is important to note that the issue of pension 
funding can sometimes be a Catch-22. Employers find they are 
hit with some substantial funding requirements when they can 
least afford them. But current funding rules often limit their 
funding contributions during healthier economic times, when 
they could better fund their pension plans. And these are some 
of the questions we are going to want to look at today.
    Now, this hearing will allow the Committee to examine the 
effectiveness of the pension funding reforms over the last 20 
years, and consider what additional reforms are necessary to 
strengthen the defined benefit pension system. If we could 
achieve that goal, we would be providing employers with greater 
stability and certainty, and enhancing the retirement security 
of American workers who rely on the safe, secure benefits that 
defined benefit pension plans provide.
    I am pleased to note that the House recently acted, on a 
bipartisan basis, to address this pension underfunding crisis 
in the short term by passing a 2-year pension funding fix, the 
Pension Funding Equity Act, by a vote of 397 to 2, on October 
the 8th. This bipartisan bill would strengthen defined benefit 
plans in the short term, while we carefully consider more 
permanent solutions to the underfunding problems that are 
putting the pension benefits of American working families at 
risk.
    And I want to thank my colleagues on this Committee, Mr. 
Miller, Mr. Johnson, Mr. Andrews, and others, and our 
colleagues at the Ways and Means Committee, for all of their 
hard work in moving that bill through the Floor.
    Clearly, we have got a lot of work to do in defining long-
term solutions to these problems, so I am anxious to hear from 
our witnesses today, and I look forward to working with the 
Administration and my colleagues on this issue as we move 
ahead.
    And with that, I would like to yield to my friend and 
Ranking Member today, Mr. Andrews.
    [The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education and 
                             the Workforce

    I'd like to welcome everyone and thank our distinguished witnesses 
for coming to testify on this very important subject. We take the issue 
of strengthening the pension security of American workers very 
seriously at this Committee, and it is a top priority for this 
Congress. Our hearing today is the fourth in a series held by the 
Education & the Workforce Committee that examines the future of defined 
benefit pension plans.
    As we all know, a ``perfect storm'' of historically low interest 
rates, the stock market decline of recent years, and an increasing 
number of retirees has led to a pension underfunding crisis that is 
threatening the future of the defined benefit pension plan system.
    While this is not the first time we have seen significant pension 
underfunding problems, we have not faced a dilemma with the severity as 
the one we currently face. There is a sense of urgency to this 
underfunding crisis because of a growing consensus that it is putting 
the pension benefits of American workers at risk.
    This financial health of defined benefit plans and the federal 
agency that insures them, the Pension Benefit Guaranty Corporation, 
have been widely reported. The PBGC announced earlier this month that 
it has accumulated an $8.8 billion deficit, by far the largest in 
agency history.
    On top of that, the number of employers offering defined benefit 
pension plans has declined from 112,000 in 1985 to just more than 
30,000 last year, and more and more employers are freezing or 
terminating their plans and either shifting to 401(k) defined 
contribution plans or stopping offering pension plans to their workers 
altogether.
    Today's hearing will allow us to examine the effectiveness of 
federal pension funding reforms over the last 20 years, whether those 
reforms have contributed to the current underfunding crisis among 
defined benefit pension plans, and their impact on the retirement 
security of working families.
    Over the last 20 years, Congress has twice made significant reforms 
to the funding rules that require employers to set aside money to fund 
the benefits they promise when they offer defined benefit pension plans 
to their workers.
    The 1987 Pension Protection Act and the 1994 Retirement Protection 
Act were intended to strengthen defined benefit system and prevent 
pension underfunding by requiring employers to make additional 
contributions to the plan or accelerating existing funding obligations.
    However, there is much debate about whether these reforms have been 
effective in preventing plan underfunding and their impact on worker 
pension benefits. With that in mind it is very important for us to ask 
some fundamental questions: Do the current funding rules act to delay 
sufficient pension funding of worker benefits? Is current law 
inadequate to fully protect the pensions of American workers?
    Despite the measures that Congress put into place in 1987 and 1994, 
a pension underfunding crisis exists that is threatening the future of 
the defined benefit system. The PBGC's deficit is threatening the 
agency's ability to insure the pension benefits of workers across the 
country, and there is some $80 billion in unfunded pension benefits 
looming on the horizon among financially weak companies--pension 
benefits that may ultimately have to be paid by the PBGC or even 
taxpayers.
    It is important to note that the issue of pension funding can 
sometimes be a catch-22: Employers find that they are hit with 
substantial funding requirements when they can least afford them, but 
current funding rules often limit their funding contributions during 
healthier economic times when they could better fund their pension 
plans. These are some of the issues we want to take a look at.
    This hearing will allow the Committee to examine the effectiveness 
of pension funding reforms over the last 20 years and consider what 
additional reforms are necessary to strengthen the defined benefit 
pension system. If we can achieve that goal, we will be providing 
employers with greater stability and certainty and enhancing the 
retirement security of American workers who rely on the safe and secure 
benefits that defined benefit pension plans provide.
    I am pleased to note that the House recently acted on a bipartisan 
basis to address this pension underfunding crisis in the short-term by 
passing a two-year pension funding fix--the Pension Funding Equity 
Act--by a vote of 397-2 on October 8th. This bipartisan bill would 
strengthen defined benefit plans in the short term while we carefully 
consider more permanent solutions to the underfunding problems that are 
putting the pension benefits of working families at risk. I'd like to 
thank my friends Sam Johnson and George Miller for their work on this 
bill.
    Clearly we have a lot of work to do to find long-term solutions to 
these problems, so I am anxious to hear from our witnesses today. I 
look forward to working with the administration and my colleagues on 
this issue as we move ahead.
                                 ______
                                 

 STATEMENT OF ROBERT E. ANDREWS, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF NEW JERSEY

    Mr. Andrews. Thank you, Mr. Chairman. Good morning. I 
extend regards of our friend and colleague, George Miller, the 
Ranking Member of the Full Committee, who is occupied with some 
other responsibilities this morning.
    Obviously, George Miller has a deep and abiding interest in 
these issues. He thanks you for the work you did with him and 
with the Minority on the recent legislation, and I assure you 
of his continuing interest.
    I wish the problem we were talking about this morning were 
cyclical. I wish that we had gone from a $10 billion surplus in 
the PBGC's coffers to a nearly $10 billion deficit because of a 
downturn in the business cycle. That would be troubling, but it 
would be understandable, and with some degree of confidence we 
could take the position that we would simply wait for the next 
upturn in the business cycle.
    I am convinced, having reviewed the excellent work of the 
GAO--the characteristically excellent work of the GAO --that we 
have no such luck. We are confronted with a permanent and 
structural shift in the economy that is manifesting itself in 
many ways, and one of those ways is the deficit position of the 
PBGC.
    Defined benefit plans, disproportionately, are sponsored by 
so-called ``old economy,'' or industrial economy, employers. As 
that industrial economy shrinks--and we hope that shrinkage is 
not permanent or inexorable, but we can't predicate our policy 
on the assumption that it isn't permanent and inexorable--as we 
have lost 1 million manufacturing jobs in the last nearly 3 
years in the country, we are seeing the manifestation of that 
in the PBGC. I do not see any scenario for the U.S. economy 
where the manufacturing sector and the number of sponsors of 
defined benefit plans (DB) is going to grow considerably in the 
future. I see a lot of scenarios under which the outlays of the 
PBGC are going to grow considerably in the future.
    If this were simply a problem driven by income shortages of 
the PBGC attributable to lesser earnings on its investments, 
and smaller contributions because of unprofitable companies, 
then I think that we would be justified in waiting out the 
business cycle.
    It would be an egregious mistake to wait. This is a problem 
that is going to get worse, not better. It requires us to 
confront the problem, to understand that we have to strike a 
very difficult and delicate balance between enhancing the 
revenues of the PBGC, and not suffocating the employers who 
maintain defined benefit plans.
    It would be a cruel irony, indeed, if the solution that we 
purport to find to the PBGC deficit problem smothers the viable 
sponsors of defined benefit plans that remain. We have to find 
some way to give those DB plan sponsors the room and 
flexibility to grow and prosper, while at the same time 
recognizing that we do have a serious structural problem in the 
PBGC.
    I have said a lot of theoretical words this morning. What 
this is really about is whether some future Congress and some 
future Administration is going to have to use taxpayer money to 
bail out the PBGC in order to meet its continuing pension 
obligations to pensioners.
    I do not think there is anyone here on the Republican or 
Democratic side that would stand idly by as pensioners lose 
their monthly pension check. No one wants to see that happen, 
and I doubt very much that any Congress would let that happen.
    But we all should be unified in our resolve to avoid going 
to the general treasury, to the taxpayers of the country, to 
make that promise a promise that is kept. So I approach this 
hearing this morning with a sense of grave understanding of the 
structural problems that we have, a sense of great interest in 
hearing from the panelists this morning as to how they think we 
should address that problem, and a certainty, Mr. Chairman, 
that should you and I be privileged to be members of future 
Congresses, that this is a problem that we will be addressing, 
that we just cannot wish this one away.
    And I do commend the Chairman for his serious and concerted 
approach to solving it here this morning.
    Chairman Boehner. Thank you, Mr. Andrews. We have got a 
distinguished panel of witnesses before us, and I would like to 
introduce them.
    First, we will hear from Barbara Bovbjerg, who is the 
Director of Education, Workforce, and Income Security Issues 
for the U.S. General Accounting Office, overseeing work and 
retirement income policy issues, including Social Security, the 
PBGC, and Employment Benefit Security Administration of the 
Department of Labor.
    Next we will have Robert Krinsky, who is the chairman of 
the Segal Company, which provides benefit and compensation 
consulting to corporations and non-profit organizations.
    Michael Gordon is the General Counsel for the Retiree 
Legislative Action Network, here in Washington, which monitors 
safeguards for retired participants in ERISA health and pension 
plans.
    Next, we will hear from Mark Iwry, a Non-Resident Senior 
Fellow with The Brookings Institution, here in Washington, who 
formerly served as Benefits Tax Counsel for the Treasury 
Department.
    And then last, we will hear from David John, who is a 
Research Fellow at The Heritage Foundation and a former member 
of several commissions that examine ways to improve the Social 
Security program.
    And before witnesses begin, I would like to remind Members 
we will be asking questions after the entire panel has 
testified, and under Committee rule (2), imposes a 5-minute 
limit on all questions. I think most of you have been here 
before, you know the timers.
    With that, Ms. Bovbjerg, if you would like to begin, we are 
interested in what you have to say.

    STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION, 
WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING 
                     OFFICE, WASHINGTON, DC

    Ms. Bovbjerg. Thank you, Mr. Chairman, Members of the 
Committee. I appreciate your inviting me here today to discuss 
pension funding reform. As you know, underfunded plans 
sponsored by weak employers have drained the financial 
resources of the Pension Benefit Guaranty Corporation's single 
employer program, which is now $8.8 billion in deficit.
    Minimum funding rules embedded in the tax code to help 
assure that pension plans have adequate assets did not prevent 
such plans from being severely underfunded, and thereby putting 
PBGC and insured workers and retirees alike at risk.
    Today, Mr. Chairman, we are issuing the report you 
requested detailing the causes of PBGC's financial reversal, 
and outlining various approaches to address it. In the report, 
we call for a comprehensive policy response. Reforming the 
rules that regulate how sponsors fund their plans would be an 
essential part of that response. Indeed, you have invited me 
here to discuss options to improve defined benefit pension 
plans' funding rules.
    My testimony today discusses two general approaches to 
funding reform. First, the variety of options that would change 
funding requirements directly, and second, the options that 
would strengthen plan funding through more indirect means. My 
testimony is based on information gathered from the PBGC, from 
interviews with pension experts, and our analysis of several 
individual plans that represented large losses.
    First, the direct approaches. Several types of reforms to 
the funding rules might be considered. For example, the tax 
code could be amended to base funding requirements on plans' 
termination liabilities, which are based on the amount of cash 
required to close out a plan, rather than on current 
liabilities.
    Basing funding requirements on termination liabilities 
would provide a more accurate funding target, should plans 
terminate, and would likely raise required contributions. The 
tax code could also be amended to alter the rules for requiring 
what is sometimes called the deficit reduction contribution, or 
DRC.
    Currently, sponsors must make DRCs when plan assets are 
less than 80 percent of current liability, with some exceptions 
for plans with higher funding levels in the prior few years. In 
conditions where planned funding is rapidly worsening, some 
sponsors don't have to make additional contributions until 
subsequent years.
    Altering this threshold would require more sponsors of 
underfunded plans to make DRCs on a more timely basis. Limiting 
the use of credit balances by severely underfunded plans could 
also help. Under current law, Bethlehem Steel used credit 
balances to avoid making cash contributions in 2000, 2001, and 
2002, while its plan funding was, in fact, deteriorating 
rapidly. Limiting the use of such balances might prevent 
further deterioration of already underfunded plans.
    Raising the level of tax-deductible contributions could 
also help maintain plan funding in a cyclical economic 
environment. The law restricts tax-deductible contributions to 
prevent plan sponsors from amassing tax deductions for 
contributions beyond what is necessary to cover future 
benefits.
    In effect, the rules prevent employers from making larger 
contributions during periods of strong profitability, and thus 
strengthening plans against cyclical downturns. Any 
comprehensive funding reform should consider a change to these 
limitations.
    There are other direct reforms outlined in my written 
statement, but let me now turn to the indirect approaches that 
could improve funding incentives.
    PBGC variable rate premiums are intended to influence 
sponsor commitment to plan funding, because these premiums are 
based on the plan's level of underfunding. Keeping a plan 
funded permits a sponsor to avoid higher premiums.
    However, Bethlehem Steel and other companies whose severely 
underfunded plans terminated most recently did not pay variable 
rate premiums, despite the underfunding. Clearly, these 
premiums are not much of a funding incentive, as currently 
structured, and improvements seem warranted. Variable-rate 
premiums could be restructured to better reflect the economic 
strength of the plan sponsor and other risks affecting plan 
health.
    Improved transparency of plan and sponsor financial 
condition could help, as well. Greater disclosure of plan 
investments, benefit guarantees, and termination liabilities 
could better inform plan participants, and thus provide an 
incentive for sponsors to fund benefits they have promised. 
Better public information could be a relatively inexpensive but 
important aspect of any comprehensive reform.
    In conclusion, widespread underfunding in the defined 
benefit pension system threatens not only the solvency of 
PBGC's largest program, it also threatens the retirement 
security of millions of American workers. The causes of this 
problem appear to extend beyond recent economic conditions and 
suggest that comprehensive reform is necessary to stabilize and 
enhance the long-term health of the DB system.
    Truly meaningful reform will take a long-term perspective 
and will balance employer concerns with improvements to 
employer accountability for funding and reporting.
    GAO is giving PBGC's single-employer program and its needs 
special scrutiny in the immediate future and will be pleased to 
help Congress develop effective strategies for such reform.
    That concludes my statement, Mr. Chairman. I await your 
questions.
    [The prepared statement of Ms. Bovbjerg follows:]



 Statement of Barbara D. Bovbjerg, Director, Education, Workforce, and 
 Income Security Issues, U.S. General Accounting Office, Washington, DC

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    Chairman Boehner. Thank you, Ms. Bovbjerg.
    Mr. Krinsky?

  STATEMENT OF ROBERT D. KRINSKY, A.S.A., E.A., CHAIRMAN, THE 
SEGAL COMPANY, NEW YORK, NY, ON BEHALF OF THE AMERICAN BENEFITS 
                            COUNCIL

    Mr. Krinsky. Mr. Chairman and Members of the Committee, 
thank you for the opportunity to appear today. I am Robert 
Krinsky, chairman of The Segal Company, a benefits compensation 
and human resources consulting firm that I have been with for 
over 49 years, more than 20 years before ERISA passed.
    I am appearing on behalf of the American Benefits Council, 
of which I am a member of the executive committee of the board, 
and a former chairman.
    As you are undoubtedly aware, the pension funding rules are 
extraordinarily complex. We commend the Committee for holding 
this hearing to study them more fully. Because of the complex 
nature of the funding rules, it is critical that the 
ramifications of any proposed changes be understood. Otherwise, 
hasty policy action is likely to produce counter-productive 
results that would further harm our already troubled defined 
benefit system.
    When examining the rules, we must remember that old 
admonition, ``First, do no harm.'' Before addressing the 
funding rules generally, I wanted to call attention to the most 
bothersome--even, I will say nonsensical--of them all, and one 
which I know the Members of the Committee are aware, the 
required use of the 30-year Treasury rate for various pension 
calculations.
    The Council strongly endorses adopting a corporate bond 
rate replacement for this obsolete rate. We thank the Members 
of this Committee, and particularly you, Mr. Chairman, Ranking 
Member Miller, and Mr. Andrews, for working to develop and pass 
H.R. 3108, which provides a 2-year corporate bond rate 
replacement.
    When ERISA was first enacted in 1974, the goal was to 
strike the proper balance between encouraging employees to 
maintain defined benefit plans and ensuring the security of 
participants' benefits. The initial ERISA regime was largely 
successful because it recognized the long-term nature of 
pension promises and sought to reduce the volatility of 
contributions.
    ERISA also succeeded because it was the result of a 
deliberative, inclusive process that sought to address the 
concerns of pension system stakeholders. This positive start 
was disrupted in the 1980's, however, as Congress built layer 
upon layer of overlapping and sometimes contradictory rules. 
Congress lowered the maximum deductible contribution that 
employers could make to pension plans, imposed an excise tax on 
contributions that were not deductible, and placed confiscatory 
penalties on withdrawals of surplus assets after plan 
termination.
    These changes severely limit the ability to fund plans 
during good economic times while requiring sizable 
contributions during difficult times, a result that makes no 
sense and that encourages employers to keep their plans as near 
as possible to the minimum funding level.
    This is not to say that a wholesale reworking of the 
defined benefit funding rules is in order. It is not. The use 
of the obsolete 30-year Treasury rate, coupled with recent 
market interest rate and economic conditions--a veritable 
perfect storm, as the Chairman indicated--of adverse pension 
funding circumstances, should be expected to produce temporary 
funding deficiencies that will correct as conditions improve, 
and once Congress replaces the 30-year rate. We have, in fact, 
seen the beginning of such corrections recently.
    The real challenge is to look beyond today's unique 
circumstances to identify areas where reform is both desirable 
and achievable, and to act only after careful deliberation. 
Already, at a specific request from the administration, the 
Council has begun developing suggestions for constructive 
reforms, and we also look forward to working with Congress and 
Members of this Committee.
    We have identified a number of areas, discussed in much 
greater detail in our written testimony, where changes might be 
warranted.
    First, the funding rule should seek to reduce volatility 
and allow for more regular and predictable contributions. 
Conversely, any changes that would increase funding volatility, 
such as the spot rate yield curve approach that has been 
advanced by the Treasury Department, should be rejected.
    Second, restrictions on the deductibility of pension 
contributions should be eased.
    Third, the deficit contribution regime should be reformed 
so that it still achieves the goal of ensuring that plans are 
well funded, but does so in a less punitive manner.
    Fourth, the current rules regarding assets and overfunded 
plans, which are a deterrent to funding in good times, should 
be reviewed.
    Last, the rules should be streamlined where possible, such 
as streamlining the multiple definitions of plan viability.
    While it is possible to identify these general areas in 
which improvements may be feasible, the devil is always in the 
details. Our particular concern is that any changes be 
accompanied by appropriate transition rules, without which even 
constructive reforms could be detrimental.
    I want to close by saying a few words about the financial 
status of the PBGC, which has attracted significant attention 
recently. Council members that voluntarily maintain retirement 
plans and pay the premiums to support the PBGC strongly believe 
that the agency should be operated on a sound financial basis.
    Having said that, we believe that the long-term position of 
the PBGC is strong, and do not see cause for alarm. While the 
PBGC is currently reporting a deficit, it has done so for most 
of its history.
    Moreover, the relatively modest size of its reported 
deficit in relation to its assets ensures that it will remain 
solvent far into the future, a point that the PBGC itself has 
acknowledged repeatedly.
    Thank you. I would be pleased to answer your questions.
    [The prepared statement of Mr. Krinsky follows:]

   Statement of Robert D. Krinsky, A.S.A., E.A., Chairman, The Segal 
   Company, New York, NY, on Behalf of the American Benefits Council

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to appear today. I am Robert D. Krinsky, A.S.A., E.A., 
Chairman of The Segal Company. I am appearing on behalf of the American 
Benefits Council (the Council). I am a former chair of the Council and 
currently serve on the Executive Committee and Board of Directors. The 
Council is a public policy organization representing principally 
Fortune 500 companies and other organizations that assist employers of 
all sizes in providing benefits to employees. Collectively, the 
Council's members either sponsor directly or provide services to 
retirement and health plans covering more than 100 million Americans.
    The Segal Company is a benefits, compensation and human resources 
consulting firm with about 1,000 employees and 17 offices in the United 
States and Canada. Our Company is owned by its employees. Since the 
late 1950s, we have sponsored a final-average-pay pension plan for our 
employees, plus an employer-funded profit sharing plan that now 
includes a 401(k) feature. Our Company has been successful in retaining 
long-service employees, despite all the discussion about increased 
employee mobility. For example, I have been working for Segal in one 
capacity or another for some 49 years, rising from statistical clerk 
(during summer vacation) to head of the actuarial department (I am an 
Associate of the Society of Actuaries and an Enrolled Actuary) to CEO 
and then Chairman of the Board. While tenures of that length are rare 
even within our company, we are proud of the longevity of our 
employees' careers with us. Even after 40% growth in our employee 
population in the past 2 to 3 years, 235 of our employees have been 
with us for more than 10 years, 85 of them for more than 20 years. I 
cannot say that it is our defined benefit plan, standing alone, that 
has instilled such loyalty, but it is certainly an important element in 
the long-term commitment that we make to our employees in return for 
their commitment to our enterprise.
    Recently, there has been considerable attention focused on defined 
benefit pension funding and the unprecedented set of financial 
circumstances currently facing these pension plans. Today, we are here 
to examine the current rules--found in the Employee Retirement Income 
Security Act (ERISA) and the Internal Revenue Code--that govern defined 
benefit pension funding. As you undoubtedly are aware, the pension 
funding rules are extraordinarily complex. The Council commends the 
Committee for convening this hearing to study and come to a better 
understanding of the operative rules. Absent such careful study and 
deliberation, hasty action is likely to produce counter-productive 
results for the millions of American workers and retirees who depend on 
defined benefit pensions for retirement income.
    Indeed, let me emphasize at the outset that largely because of the 
complex nature of today's pension funding rules, it is critically 
important that the full ramifications of any proposed changes to these 
rules be fully understood. Given the density of the interlocking 
statutory constraints, cross-references and directives, serious 
unintended consequences are almost guaranteed unless the impact of each 
change is clearly and fully identified. Otherwise, severe harm could be 
done to our defined benefit system, which is already in grave danger of 
spiraling toward extinction. As we examine the rules governing defined 
benefit funding, we must remember that old admonition--``First, do no 
harm.''
    Before I turn to addressing the defined benefit funding rules 
generally, I want to call attention to an issue about which I know the 
members of this Committee are all aware--the urgent need to replace the 
30-year Treasury bond interest rate for various pension funding 
calculations. I will discuss the 30-year Treasury rate in more detail 
later, but suffice it to say that the required use of this obsolete 
rate is the most nonsensical of all the current funding rules--and one 
that requires immediate action. The Council strongly endorses replacing 
the obsolete 30-year Treasury rate with a corporate bond rate based on 
a blend of one or more conservative long-term corporate bond indices. 
We commend the efforts of the members of this Committee, and 
particularly you, Mr. Chairman, and Ranking Member Miller, in working 
to develop and pass H.R. 3108, which provides for a two-year corporate 
bond rate replacement.

Background on Defined Benefit Plans
    Defined benefit plans play a vital role in our voluntary, 
employment-based retirement system, and offer a number of unique 
features that enhance the retirement security of American workers and 
retirees. Employers generally bear responsibility for designing these 
plans to match their human resources objectives, funding them, 
investing plan assets, and ensuring that assets are sufficient to pay 
promised benefits. Defined benefit plans also offer annuity benefits 
for both retirees and their spouses, which are guaranteed by the 
federal government through the Pension Benefit Guaranty Corporation 
(PBGC). In addition to these many advantages for employees, employers 
also value defined benefit plans as a means of rewarding and managing 
their workforce. And, these plans benefit the economy as a whole by 
providing a ready source of professionally-managed, long-term 
investment capital.\1\
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    \1\ Private-sector defined benefit plans held $1.6 trillion in 
assets as of 2002. See Joint Committee on Taxation, Present Law and 
Background Relating to the Funding Rules for Employer-Sponsored Defined 
Benefits Plans and the Financial Position of the Pension Benefit 
Guaranty Corporation, JCX--39-03, April 29, 2003, page 49. These 
defined benefit plan holdings represent approximately 6 percent of all 
U.S. stock equity holdings. See Flow of Funds Accounts of the United 
States, Board of Governors of the Federal Reserve System, June 5, 2003, 
page 103; U.S. Census Bureau, Statistical Abstract of the United 
States, 2002 , page 732, Table 1173.
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    As of 1998 (the most recent year for which official Department of 
Labor statistics exist), approximately 42 million Americans were 
participants in defined benefit pension plans, and these plans paid 
more than $111 billion in benefits to more than 18 million retirees in 
that year alone.\2\ Yet while the defined benefit system helps millions 
of Americans achieve retirement income security, it is a system in 
severe decline. Employer sponsors confront a variety of threats that 
have led many of them to terminate their defined benefit plans. The 
total number of government-insured defined benefit plans has decreased 
from 114,500 in 1985 to fewer than 33,000 such plans in 2002.\3\ 
Looking at this decline over just the past several years makes this 
downward trend all the more stark. From 1999 through 2002, there has 
been a decrease of over 7,500 PBGC-insured defined benefit plans--from 
39,882 to 32,321 plans--or 19 percent in just three years.
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    \2\ Private Pension Plan Bulletin, Abstract of 1998 Form 5500 
Annual Reports, U.S. Dept. of Labor, Number 11, Winter 2001-2002, Table 
E1; U.S. Census Bureau, Statistical Abstract of the United States: 
2002, No. 524.
    \3\ 2002 PBGC Annual Report, page 13.
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    And these statistics do not even take into account pension plans 
that have been frozen by employers (rather than terminated), an event 
that, like termination, results in no new pension benefits for existing 
employees and no pension benefits whatsoever for new hires. If frozen 
plans were officially tracked by the government (and they clearly have 
been on the increase in recent months), the decline of our nation's 
defined benefit pension system would be even more apparent. Information 
from Council members that serve as benefits consultants to employers is 
that between 15 percent and 20 percent of defined benefit plan sponsors 
have either already frozen their plans in recent months or are 
seriously considering doing so. Moreover, there are virtually no 
examples of frozen plans ``thawing out'' so that benefits begin to 
accrue once again. In the face of this decline in the defined benefit 
system, it is critically important to be certain that any policy 
changes under consideration ameliorate, rather than exacerbate, the 
problems in the current regime.
    Even if the decline in employment-based defined benefit plans 
levels off, the consequences could be ominous for our public retirement 
income programs. It is unlikely that the baby boomers will be content 
with a sharp drop in their standard of living in retirement. Without 
reasonable pensions to rely on, they will be all the more dependent on 
Social Security, and on Congress's willingness to continue providing 
generous Social Security benefits.

Today's Defined Benefit Funding Regime
    When the first comprehensive pension funding regime was enacted in 
1974 in ERISA, the goal was to strike the proper balance between 
encouraging employers to maintain defined benefit plans for their 
employees and ensuring the security of benefits earned under these 
plans.\4\ And following ERISA's enactment, the rules generally worked 
well. Funding levels of company pension plans improved, and defined 
benefit plan sponsorship and coverage increased.\5\ The initial ERISA 
regime was successful in large part because it recognized the long-term 
nature of pension plans and their underlying liabilities, and sought to 
reduce the volatility of pension contribution requirements by allowing 
plans to use so-called ``smoothing'' techniques that average interest 
rate and asset value fluctuations over a number of years. Another 
primary reason for ERISA's initial success is that it was the result of 
a deliberative, multi-year process that was inclusive and sought to 
address concerns raised by the various pension system stakeholders.
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    \4\ The ERISA rules were crafted in part in response to events at 
certain companies--the Studebaker automobile company being the most 
oft-cited example--where the company had not adequately funded its 
pension plan and was unable to meet the pension obligations it owed its 
employees and retirees.
    \5\ From 1978 to 1983, the percentage of plans with accrued benefit 
security ratios of 1.0 or greater increased every year, rising from 25 
percent in 1978 to 64 percent in 1983. Watson Wyatt Worldwide, 1983 
Survey of Actuarial Assumptions and Funding, p. 15, 1986 Survey of 
Actuarial Assumptions and Funding, p., 4., (Bethesda, MD: Watson Wyatt 
Worldwide). During that same time period, the number of defined benefit 
pension plans and participants in those plans also increased--from 
128,407 plans in 1978 to 175,143 plans in 1983 and from 29,036,000 
participants in 1978 to 29,964,000 participants in 1983. U.S. 
Department of Labor, Pension and Welfare Benefits Administration, 
Private Pension Plan Bulletin (Spring 1999), no. 8, pp. 64, 67, 77, and 
80.
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    Beginning in the 1980's however, Congress began to interfere with 
the operation of the funding rules, building layer upon layer of often 
overlapping and sometimes contradictory rules (all too often enacted in 
response to hypothetical or isolated abuses or as a means of raising 
federal revenue). By way of example, beginning in 1986, Congress 
enacted short-sighted, revenue-driven restrictions that lowered the 
maximum tax-deductible contribution that employers could make to 
pension plans, imposed a significant excise tax on employer 
contributions that were not tax-deductible, and placed potentially 
confiscatory penalties on withdrawals of surplus assets after plan 
termination.
    Each of these actions served to discourage employers from 
contributing to their pension plans. These rules severely limit the 
ability of companies to fund their plans during good economic times, 
while requiring sizeable additional contributions during difficult 
economic times--a result that makes no sense from either a business 
planning or a policy perspective. Thus, by 1995, only 18 percent of 
plans had a funded ratio of assets over accrued liabilities of 150 
percent or more as compared with 45 percent in 1990.\6\ Although some 
limited relief from these deduction restrictions has been provided 
since 1997, the overall result of the current pension funding rules is 
to strongly encourage employers to keep their plans as near as possible 
to the minimum funding level instead of providing a healthy financial 
cushion above that level. As we examine today's funding rules, we 
should pay heed to the mistakes that have been made in the past, make 
reforms and improvements where needed, and be sure not to repeat the 
policy errors that have placed our defined benefit system in jeopardy.
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    \6\ Table 11.2, EBRI Databook on Employee Benefits, 1997, 4th 
Edition, the Employee Benefit Research Institute, Washington, D.C.
---------------------------------------------------------------------------
    This is not to say that a wholesale reworking of the defined 
benefit funding rules is in order. It is not. Nor should anyone make 
the mistake of assuming that the underfunding caused by the recent 
business cycle and an anomalous asset and interest rate environment 
indicate a need for a hasty overhaul of the funding rules. They do not. 
The nonsensical use of the obsolete 30-year Treasury rate, coupled with 
recent market, interest rate, and economic conditions--a veritable 
``perfect storm'' of adverse pension funding circumstances--should be 
expected to produce temporary funding deficiencies that will correct as 
conditions improve and once Congress replaces the 30-year rate. We 
have, in fact, seen the beginning of such corrections over the past few 
months. Indeed, it would be a surprise if there were not a reduction in 
the funded status of pension plans during periods of general economic 
downturn. Thus, the real challenge with respect to the current funding 
rules is to look beneath today's unique circumstances to identify those 
areas where reform is both desirable and achievable and to act 
accordingly only after careful study and deliberation.
    It should also be noted that reexamination of the defined benefit 
funding rules and the specter of changes to these rules is itself 
destabilizing to the defined benefit system. Companies need to make 
long-term judgments concerning the costs associated with their defined 
benefit plans and how such plans integrate with their financial and 
business strategies. Thus, the long and continued history of gyrations 
in the defined benefit funding rules is itself a negative feature.
    With that in mind, let me discuss a number of areas where we 
believe improvements to the current rules may be possible. Already, as 
a result of a specific request from the Bush Administration, the 
Council has begun engaging with Treasury Department and other 
Administration officials on constructive reforms that we believe are 
achievable. We look forward to working with Congress and Members of 
this Committee on these issues as well. In particular, we have 
identified the following areas where further study of possible changes 
is warranted:
      Funding Volatility--Funding Opportunities and 
Requirements. Both funding opportunities and funding requirements in 
the defined benefit system are too erratic and do not offer enough 
flexibility to plan sponsors to make contributions. The funding rules 
should seek to reduce volatility, and allow for more regular and 
predictable contributions regardless of the funded status of the plan. 
In this regard, smoothing mechanisms that recognize the long-term 
nature of pension commitments by allowing plans to average interest 
rate and asset value fluctuations over a number of years must be 
preserved, and should be expanded where appropriate. Concomitantly, any 
changes to the system that would increase funding volatility should be 
rejected, as volatility in required contributions is already one of the 
primary factors driving employers from the defined benefit system.
      Deductibility of Contributions. The current funding 
regime disallows employer tax deductions for defined benefit plan 
contributions when plans are reasonably well-funded, and, indeed, 
imposes an excise tax on such contributions. Legislative enactments in 
recent years have made improvements so that more employers can continue 
funding their plans as their funded status improves, but further 
improvements in this area are warranted. The business reality is that 
if employers are discouraged from making additional contributions when 
they may be in the very best financial position to do so, they cannot 
build the cushion of funding needed for future periods of economic 
stress.
      Deficit Reduction Contributions. While the two-tiered 
funding regime embodied in current law--which requires sponsors of all 
plans to make sufficient contributions to meet estimated future 
liabilities and requires additional, so-called ``deficit reduction'' 
contributions to certain underfunded plans--is effective to some extent 
in customizing funding requirements to plans' actual funded status, the 
current deficit reduction contribution regime is often unduly punitive. 
If deficit reduction contributions are imposed on a plan, very 
substantial amounts of cash must be contributed very quickly, often at 
a time when companies are less well-positioned to make such substantial 
contributions. The policy logic behind this structure is particularly 
questionable when one considers the long-term nature of pension 
promises. The sudden and onerous nature of the deficit reduction 
contribution regime leads some pension plan sponsors to freeze their 
defined benefit plans, which is typically preparatory to an outright 
termination. Consideration should be given to restructuring the deficit 
contribution regime so that it still achieves the underlying goal of 
ensuring that plans are well-funded, but does so in a less punitive 
manner.
      Lump Sum Payments. The payment of lump sum distributions 
to defined benefit plan participants exacerbates funding problems for 
many plans. In part because lump sum calculations are currently based 
on the obsolete 30-year Treasury rate, lump sum payments are 
artificially inflated, and inappropriately drain plan assets. It is 
important to address the growing prevalence and use of the lump sum 
distribution option and determine whether this necessitates changes in 
the funding rules.
      Definition of ``Liability''. The multiple definitions of 
liability in the funding rules are unduly complex, and should be 
streamlined.
      Treatment of Assets in Overfunded Plans. The current 
rules regarding the treatment of assets in overfunded plans act as a 
deterrent to building funding cushions in good times, and should be 
reviewed.
    Some in Congress have already advanced proposals for targeted 
reforms to the pension funding rules, and I will mention three that the 
Council strongly endorses.\7\
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    \7\ The first of these proposals is included in the National 
Employee Savings and Trust Equity Guarantee Act, as reported by the 
Senate Finance Committee on September 17. The other two proposals are 
included in H.R. 1776, the Pension Preservation and Savings Expansion 
Act of 2003, as introduced by Representatives Rob Portman (R-OH) and 
Ben Cardin (D-MD).
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      Deductibility of Defined Benefit Plan Contributions. The 
limit on deductions for contributions to a defined benefit plan would 
be increased so that the maximum amount otherwise deductible is not 
less than 130 percent of the plan's unfunded current liability (instead 
of 100 percent of unfunded current liability as under present law).
      Plan Asset Valuations. Instead of the overly rigid 
current law rules regarding the timing of plan asset valuations, 
employers would--for funding and deduction purposes--be allowed to 
value liabilities as of the first day of the plan year, while valuing 
assets as of the last day of the plan year. This would allow employers 
to fund their plans with increased contributions to compensate for 
asset declines during the course of the year.
      Deduction Rule Relief for Employers That Sponsor Both 
Defined Benefit and Defined Contribution Plans. Another proposal would 
revise the current law rules that restrict the deductibility of 
contributions by employers that sponsor both defined benefit and 
defined contribution plans to the greater of defined benefit minimum 
funding requirements or 25 percent of pay. Specifically, this proposal 
would allow contributions to a defined contribution plan equal to up to 
6% of participants' pay to be disregarded in applying this rule.
    While it is possible--as we have done above--to identify general 
areas in which improvements to the pension funding rules may be 
feasible, the viability of any proposed changes will turn largely on 
the details of such proposals. One area of particular concern to the 
Council is that any changes be accompanied by appropriate and adequate 
transition rules. If such transition rules are not provided, even 
otherwise constructive reforms could have a detrimental effect on 
defined benefit plans and the employees and families who depend on 
these plans. As such, the ultimate position of the Council or any of 
its member companies with respect to pension funding reform proposals 
will depend on a careful review of the details and specifics of any 
such proposal, including fair transition into any new regime.

Other Defined Benefit Plan Issues
    Replacement of the Obsolete 30-Year Treasury Rate--As I mentioned 
at the beginning of my remarks, the need to replace the obsolete 30-
year Treasury rate for pension calculations is the most pressing issue 
facing the defined benefit pension system today. Without prompt action 
to correct this problem, the exodus of employers from the defined 
benefit system will only accelerate.
    Under current law, employers that sponsor defined benefit pensions 
are required to use the 30-year Treasury rate for a variety of pension 
calculation purposes, including plan funding requirements, calculation 
of lump sum distributions, and liability for variable premium payments 
to the PBGC. The various provisions of federal law requiring use of the 
30-year Treasury rate for pension calculations were enacted in 1987 and 
1994 when there was a robust market in 30-year Treasury bonds and the 
yields on those bonds were thought to be an acceptable proxy for other 
long-term investments. While a variety of rates were discussed when the 
30-year Treasury rate was first selected in 1987, it was believed at 
the time that it reflected the appropriate benchmark whereby companies 
could reasonably set aside appropriate assets to meet their long-term 
funding obligations. That assumption is no longer valid.
    In 1998, the U.S. Treasury Department began retiring federal debt 
by buying back 30-year Treasury bonds. In October 2001, the Treasury 
Department discontinued issuance of 30-year bonds altogether. With 
commencement of the buyback program, yields on 30-year Treasury bonds 
began to drop and to diverge from the rest of the long-term bond 
market--a divergence that increased precipitously after the October 
2001 discontinuation. As a result of the shrinking supply of these 
bonds (particularly when coupled with continuing demand for the 
relative safety of U.S. government debt), the interest rate on existing 
30-year Treasury bonds has reached historic lows and no longer 
correlates with the rates on other debt instruments. In testimony 
before Congress, Bush Administration officials have stated that, 
``[The] Treasury Department does not believe that using the 30-year 
Treasury bond rate produces an accurate measurement of pension 
liabilities.'' \8\
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    \8\ Testimony of Peter Fisher, Undersecretary for Domestic Finance, 
U.S. Department of Treasury, before the House Ways and Means 
Subcommittee on Select Revenue Measures (April 30, 2003).
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    The result of using the obsolete 30-year Treasury is that pension 
liabilities are artificially inflated, and employers are required to 
make excessive pension contributions and PBGC variable premium 
payments. Perhaps more than any other factor, these inflated and 
uncertain financial obligations imposed on employers have contributed 
to the spate of plan freezes and terminations in recent years. Today's 
inflated funding requirements also harm the economy and have a direct 
adverse impact on workers since cash inappropriately mandated into 
pension plans diverts precious resources from investments that create 
jobs and contribute to economic growth. Facing pension contributions 
many times greater than they had reasonably anticipated, employers are 
having to defer steps such as hiring new workers, investing in job 
training, building new plants, and pursuing new research and 
development. Indeed, some employers may be forced to lay off employees 
in order to finance the required cash contributions to their pension 
plans.
    Last year in the March 2002 economic stimulus act, Congress enacted 
a temporary interest rate adjustment that expires at the end of this 
year. Since 2002, the 30-year Treasury rate has only become 
progressively more obsolete, and the associated problems described 
above have become more grave. For this reason, action on a 30-year 
Treasury rate replacement is imperative.
    We strongly believe that the appropriate replacement for the 
defunct 30-year Treasury rate is a rate based on a composite blend of 
the yields on high-quality corporate bonds. A corporate bond blend 
steers a conservative course that fairly and appropriately measures 
pension liabilities. High-quality corporate bond rates are known and 
understood in the marketplace, and are not subject to manipulation. A 
benchmark based on such rates would also provide the predictability 
necessary for a company to plan its pension costs in the context of its 
overall business.
    Use of such a conservative corporate bond blend would also ensure 
that plans are funded responsibly. Substitution of a corporate bond 
blend would merely mean that companies are not forced to make the 
extra, artificially inflated contributions required by the obsolete 30-
year Treasury rate. This is why many stakeholders from across the 
ideological spectrum--from business to organized labor--agree that the 
30-year Treasury rate should be replaced on a permanent basis by a 
conservative, high-quality corporate bond blend.
    We commend the House for passing H.R. 3108, which provides for the 
use of a corporate bond rate for the next two years, in an overwhelming 
bipartisan vote earlier this month. In particular, Mr. Chairman, we 
commend your leadership and the efforts of Ranking Member Miller and 
other members of this Committee in passing H.R. 3108. We urge you to 
continue these efforts by working with the Senate to promptly enact 
this critically important legislation.
    Yield Curve. Separately, the Treasury Department has put forward a 
proposal to utilize a so-called ``yield curve'' concept in place of the 
30-year Treasury rate, following a transition period during which a 
corporate bond rate would be used. While a fully developed yield curve 
proposal has not been issued and the specifics underlying the concept 
are not yet known, it appears that such a yield curve concept would 
mark a major change in our defined benefit system to a volatile and 
complicated regime under which the interest rates used would be based 
on immediate spot rates and vary with the schedule and duration of 
payments due to plan participants.
    We believe the yield curve--and the associated proposals to 
eliminate interest rate averaging--would exacerbate funding volatility 
and increase complexity, all for, at best, only a marginal increase in 
accuracy. Such a spot rate approach ignores the long-term nature of 
pension plans, and represents an approach to valuing pension 
liabilities rooted in theoretical economics. This academic mechanism 
disregards the real world business environment that companies actually 
face--one in which extremely volatile pension contribution patterns 
cause employers to abandon defined benefit plans altogether.
    There also are a host of unanswered questions created by the yield 
curve. For example, how would such a concept apply to the calculation 
of lump sums? to the payment of interest credits under cash balance 
plans? or to the calculation of PBGC variable premium obligations? The 
effect of adopting such a spot-rate yield curve has not been properly 
analyzed, and there is simply no way that all of the outstanding issues 
could be addressed in the short time available to replace the 30-year 
Treasury rate. Even if there were time to study these issues, we 
believe--based on the information available to date--that the yield 
curve is a flawed approach that could do serious harm to our defined 
benefit system.
    Moreover, even if these technical and financial problems with the 
yield curve were resolved, there is another dimension that, we submit, 
merits consideration. We have all heard that young, mobile employees 
attribute little value to defined benefit plans, preferring 401(k) 
accounts that they control. From my experience as an advisor to plan 
sponsors and as the head of a company that sponsors a defined benefit 
plan, I can assure you that that is largely true. But, ``young, mobile 
workers'' are only part of our labor force. There is no question that 
defined benefit plans are of real interest and appeal to older 
employees. Emerging demographics demonstrate that employers will 
increasingly need to attract and retain older employees, and I am 
convinced that defined benefit plan offerings will be powerful 
instruments for doing so. The aging of the American workforce could 
provide an impetus for a revival of defined benefit plans.
    But, any such movement to revive defined benefit plans as 
employers' and employees' need for them revives would be blunted by use 
of a yield curve approach to plan funding. Quite simply, it would make 
it extra expensive for employers to provide or enrich decent retirement 
income for older workers. In years past, pension plans were initiated 
at the instigation of older employees, or as a result of management's 
wish to offer them a graceful, dignified route out of the workforce. 
Those motivations will return, with the modern goal being to attract or 
retain experienced workers with the promise of reliable retirement 
income after their extended careers. Yet the yield curve funding 
approach, elegant as it may appear to financial economists, would make 
defined benefit pension plans unaffordable for the very companies and 
employees that most need them.
    Administration Proposals Regarding Disclosure and Mandatory Pension 
Freezes. I also want to touch briefly on proposals that the 
Administration has advanced that are also related to pension funding--
namely additional disclosure of pension information and mandated 
freezes of certain pension plans. First, while we certainly support the 
goal of transparency of pension information, it is important that any 
required disclosure be responsible and serve a clearly defined need. 
Disclosure that provides a misleading picture of pension plan finances 
or that is unnecessary or duplicative of other disclosures could be 
counter-productive. For example, the Administration's proposal to key 
disclosure off a plan's termination liability could provide a 
misleading depiction of plan finances for well-funded, ongoing plans 
that are not in any danger of terminating. This type of misleading 
disclosure could unnecessarily and falsely alarm plan participants, 
financial markets, and shareholders. Not only would the information be 
of questionable merit, the need to determine it would impose yet 
another costly administrative burden on pension plan sponsors.
    Similarly, the Administration's proposal to allow publication of 
certain information that today is provided on a strictly confidential 
basis to the PBGC whenever a plan is underfunded by more than $50 
million would provide yet another impediment to companies' willingness 
to sponsor defined benefit plans, and ignores the size of the plan and 
its assets and liabilities. For many pension plans with billions of 
dollars in assets and obligations, such a relatively modest amount of 
underfunding is normal and appropriate. It should not be cause to 
trigger publication of information on an ad hoc basis that could again 
sound unnecessary alarm bells. The disclosure of confidential business 
information would also be problematic for public companies. For 
closely-held companies like ours, the risk that gyrations in the stock 
market could force disclosure and publication of the details of our 
finances would be a powerful reason not to sponsor a defined benefit 
plan at all.
    The Administration has also come forward with a proposal that would 
freeze accruals, remove lump sum rights, and prohibit benefit 
improvements in defined benefit plans when a company reaches a certain 
level of underfunding and receives a junk bond credit rating. We share 
the Administration's concerns about PBGC guarantees of benefit 
improvements that are made by financially troubled companies, and 
believe this is an area for further study and possible action. From a 
policy perspective, it does not make sense to allow financially 
troubled companies with underfunded plans to continue offering benefit 
improvements; and it is the well-funded, PBGC premium-paying plan 
sponsors that will be on the hook for these liabilities. We also 
believe that it is appropriate to examine whether the health of these 
plans (and ultimately the PBGC) is harmed by allowing participants in 
these plans to drain plan assets by taking lump sums. At the same time, 
however, the Administration's proposal raises technical and policy 
issues that require further examination. We would, for example, draw a 
distinction between prohibiting benefit improvements and freezing the 
plan altogether, i.e., not allowing participants to continue benefit 
accruals under the current plan formula. In addition, from a technical 
perspective, the Administration has not provided a definition of ``junk 
bond'' status, resulting in confusion about the scope of the proposal. 
In short, we agree with many of the goals of the Administration's 
proposal for underfunded plans, but believe it merits further analysis 
and likely some modifications.
    Financial Status of the PBGC. Because of concerns about the overall 
funded status of private-sector pension plans, some have also raised 
the specter of the PBGC needing to take over more of these plans. This, 
in turn, has raised some concern regarding the financial condition of 
the PBGC, and indeed the PBGC has moved from a net surplus to a net 
deficit in recent years. Nonetheless, while the PBGC's deficit should 
be monitored, we believe that the long-term financial position of the 
PBGC is strong and we do not believe the PBGC's current deficit 
indicates a threat to its viability. In short, it would be 
inappropriate to be alarmed and overreact.
    Today, the PBGC has total assets in excess of $25 billion, and it 
earns money from investments on those assets. While the PBGC reports 
liabilities of approximately $29 billion, the annuity pension 
obligations underlying those liabilities come due over many decades, 
during which time the PBGC can be expected to experience investment 
gains to offset any ``paper'' deficit that exists today. It should also 
be noted that these liability projections by the PBGC are based on 
unrealistic interest rate and mortality assumptions, which make the 
agency's liabilities appear larger than they actually are.
    It is also important to remember that when the PBGC takes over a 
plan, it assumes all of the plan's assets, but not all of its 
liabilities. Instead, the PBGC insures a maximum guaranteed normal 
retirement age benefit for each participant ($43,977 for 2003). While 
this limits the benefits of some pensioners, it also serves to limit 
the maximum exposure of the PBGC. The substantial assets that the PBGC 
holds and the relatively modest size of its deficit when viewed in the 
context of its capped and long-term liabilities ensures that the PBGC 
will remain solvent far into the future even under current rules and 
economic conditions--a point that the PBGC itself has acknowledged 
repeatedly.
    Some have also attempted to draw an analogy between the PBGC's 
financial condition and other financial threats such as the savings and 
loan (S&L) crisis. We believe that such comments are seriously 
misplaced. Most important, as just discussed, the PBGC's long-term 
financial position is strong. Moreover, the PBGC is an entirely 
different entity than an S&L. S&L depositors had the ability to demand 
the full amount of their deposits at any time, raising a genuine risk 
of lack of sufficient funds and creating a fertile ground for financial 
panic. When assets were insufficient to meet customer demand for 
deposits, the government was forced to step in and make up the 
difference. Because pensioners insured by the PBGC have no right to 
demand their full benefits at a given point in time (rather the 
benefits are paid out over decades), there is no comparable risk to the 
government of having to step in to compensate for insufficient funds.
    Thus, at this point in time, we do not believe that the PBGC's 
finances should be cause for alarm. In times of economic hardship, more 
pension plans (and the companies that sponsor them) confront economic 
difficulty (including bankruptcy), more pension plans suffer declines 
in asset values, and more pension liabilities are assumed by the PBGC. 
At the same time, the PBGC may enjoy sub-par investment gains on its 
assets while finding itself responsible for more troubled plans. As the 
economy improves, this cycle reverses itself, returning the PBGC to 
robust financial health.
    Let me close my remarks on the PBGC by underscoring that the 
Council has been at the forefront of past Congressional efforts 
promoting strong funding standards to ensure that the weakest plans 
would not be able to terminate their plans and impose their liabilities 
on other PBGC premium payers. Because we have always predominantly 
represented companies with very well-funded plans, the Council has no 
incentive to trivialize any problems at the PBGC that will come back to 
haunt us if other companies are not able to keep their promises to 
retirees. At the same time, however, we all must recognize that pension 
policy should not be driven by seeking to entirely eliminate all 
financial risk to the PBGC. As an entity that is essentially in the 
insurance and risk management business, a limited number of plan 
failures is to be expected and, indeed, that is what pension premium 
income is for. Complete elimination of PBGC risk could only be achieved 
by an extraordinarily rigid and expensive pension funding system--one 
in which no employer would be willing to participate. The key is to 
monitor the PBGC's position with a long-term view and to foster 
policies that promote a healthy and vibrant defined benefit system in 
which employers representing the full range of American business 
participate.
    Threats Facing Hybrid Pension Plans. Hybrid pension plans (such as 
cash balance and pension equity) have been a rare source of vitality 
within our defined benefit system, yet today these plans are under 
assault on a variety of fronts. Hybrid plans were developed to offer a 
way to correct a mismatch between the traditional pension design and 
the needs of mobile workers. The traditional pension design focuses its 
benefits on employees with long service relative to employees with less 
than career-long employment at their firm. In industries in transition 
and with mobile workforces, numerous studies show that the more even 
benefit accrual formula of hybrid pension plans can deliver higher 
benefit levels to a greater number of workers. At the same time, hybrid 
plans include the features that make traditional defined benefit 
pension plans popular with employees--namely, an insured, employer-
funded benefit for which the employer bears the investment risk. Today, 
according to the PBGC, there are more than 1,200 hybrid pension plans 
in the U.S., covering more than 7 million employees.
    Unfortunately, the rules applicable to defined benefit plans have 
not been updated to reflect the development and adoption of hybrid 
pension plans, leaving unresolved a number of pressing compliance 
issues regarding hybrid plans. At the regulatory agencies, there are 
several pending projects to provide needed guidance to address these 
unresolved issues. These pending regulatory projects need to be 
completed, but there have been efforts to use the current 
appropriations process--particularly the Transportation-Treasury 
appropriations bill--to deny funding for such projects. The Council 
strongly opposes these efforts to affect complex pension policy through 
the appropriations process, and urges Congress to reject them. If the 
Treasury Department and IRS are prevented from resolving the 
outstanding legal issues involving hybrid pension plans, the resulting 
uncertainty will lead many employers to abandon these plans, further 
eroding Americans' retirement income security.
    We are also concerned about legislative proposals (H.R. 1677 and 
H.R. 2101 in the House and S. 825 in the Senate) that would mandate 
that employers converting a traditional defined benefit plan to a 
hybrid pension plan allow employees to elect whether they wish to 
receive their hybrid pension plan benefit or a benefit under the 
traditional defined benefit plan. Our voluntary pension system is 
premised on the idea embodied in current law that benefits already 
earned are absolutely protected (the ``anti-cutback'' rule) but that 
employers have flexibility to adjust to changing circumstances by 
increasing or decreasing benefits that will be earned in the future. 
Under the mandated choice legislation however, businesses would be 
unable to alter future benefit levels in conjunction with a conversion 
as employees could simply choose to receive benefits under the prior 
formula. Yet business circumstances--such as increased international 
competition, the presence of competitor firms with lower or no pension 
expense, possible company bankruptcy, the need to attract new workers, 
or employee preference for a reallocation of benefit dollars--sometimes 
necessitate adjustments to pension plans. If this plan design 
flexibility were hobbled, in effect freezing all corporate policy 
decisions regarding pensions in concrete, responsible managers--who 
would be unable to make these unalterable benefit commitments--would be 
pushed to depart the defined benefit system as quickly as possible.

Conclusion
    Thank you for the opportunity to present our views. Defined benefit 
plans offer many unique advantages for employees, and the employers 
that sponsor these pension plans sincerely believe in their value. 
Today, however, these plans are in danger--largely as a result of 
short-sighted and counter-productive changes to the pension funding 
rules over the past two decades. These flaws must be corrected, but 
only in the context of a considered and careful review. The 
consequences of error and misstep in this endeavor for the retirement 
security of American families are simply too great. We look forward to 
working with Members of this Committee, Congress, and the 
Administration to address the challenges facing defined benefit plans 
and to ensure a healthy and vibrant defined benefit system.
    I would be pleased to answer whatever questions you may have.
                                 ______
                                 
    Chairman Boehner. Thank you, Mr. Krinsky.
    And Mr. Gordon?

   STATEMENT OF MICHAEL S. GORDON, GENERAL COUNSEL, NATIONAL 
       RETIREE LEGISLATIVE NETWORK, INC., WASHINGTON, DC

    Mr. Gordon. Thank you, Mr. Chairman and Members of the 
Committee. I am appearing on behalf of the National Retiree 
Legislative Network, which is a kind of unique grassroots 
retiree organization that formed recently out of concerns about 
the potential threat to not only their pensions caused by the 
presence of some of these suddenly underfunded plans, but also 
by--their concerns are magnified, really, by the continuing 
loss of their retiree health benefits, which are not protected 
like pensions under ERISA, and which forces many of them to 
raid their pensions to pay the health bills their employees no 
longer pay.
    Indeed, the pending Medicare legislation will probably make 
this problem worse, by encouraging employers to drop their drug 
programs and shift these retirees into an inferior drug program 
which--where they will have to raid their pensions even more to 
cover their drug costs, which are not being picked up by either 
their employer or Medicare.
    Of course, if their pensions are watered down because of 
inadequate funding and an inadequate PBGC back-up, we will have 
an old-age disaster on our hands not experienced since the 
Great Depression.
    We believe, therefore, that, yes, we do need a 
comprehensive approach to these funding problems, and you're 
going to probably hear that word until it comes out of your 
ears.
    We think that it is necessary because of the contracting 
nature of the defined benefit plan universe, a situation which 
did not exist when ERISA was enacted, and the funding rules 
were put into place, and probably wasn't even perceived in 
1994, when the deficit reduction rules were put in, that we 
need to take a completely fresh look at this situation.
    We think that only a comprehensive approach will work now, 
and we think that the situation which requires a comprehensive 
approach is exacerbated by the pathology of a number of 
industries such as steel and airlines, where there is also 
severe pension underfunding, also a situation which didn't 
exist when ERISA's funding rules and PBGC rules were put into 
effect.
    So, we have a new ball game, in our opinion, and we have to 
confront it head on. We believe that the temporary switch to 
the corporate bond discount rate is counter-productive. We know 
that the House passed it, we understand it, but we think that 
the resolution of the discount rate issue should be part and 
parcel of a comprehensive approach, and not the other way 
around.
    Even assuming that continuing to use a modified Treasury 
bond rate is no longer feasible, we think that the case for 
switching to a corporate rate has not been made since, as GAO 
has indicated in its report in February, there are major 
problems of transparency and selectivity in adopting a 
corporate bond rate.
    Therefore, this is not just a question of moving from an 
artificially low rate--arguably artificially low rate--to a 
more moderate rate, but one that also involves the reliability 
of the corporate bond rate.
    We believe that there ought to be another extension of the 
modified Treasury rate, with perhaps some minor tweaking of the 
upper limit there, of 120 percent.
    We believe that the chief target of a comprehensive 
approach should be reforming the deficit reduction rules. We 
suggest that a funding waiver procedure be adopted that 
relieves the stress businesses feel from having to make catch-
up contributions if they agree to essentially freeze accruals 
for anyone except older service employees, stop lump sums, 
undergo stiffer fiduciary and independent actuarial 
supervision, and a few other things that are detailed in our 
testimony, written testimony, on page seven.
    We think that that is the first place to attack this 
problem, and it will balance off the interests of protecting 
PBGC's fiscal integrity, while at the same time not squeezing 
employers who are under stress to the point where the situation 
really becomes worse, rather than better.
    Finally, we think that a special PBGC insurance fund, high-
risk fund, with tighter rules and higher premium schedules, is 
necessary for distressed industry plans like steel and 
airlines. These plans should no longer be regulated on just a 
plan-by-plan basis. And just looking at them through the prism 
of their specific funding situation, without taking account of 
what's going on in the industry that surrounds them, we think, 
is being myopic.
    We think that there should be special rules for these 
programs, special premiums for these programs, special 
oversight for these programs, and particularly, an all-new 
approach to not forcing employers and healthy industry plans 
who are doing a good funding job, having to continue to 
subsidize these distressed industry plans which, whatever they 
try to do, however hard they try to do it, are not going to 
come up to snuff for quite some time.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Gordon follows:]

   Statement of Michael S. Gordon, General Counsel, National Retiree 
               Legislative Network, Inc., Washington, DC

    Mr. Chairman and Members of the Committee:
    I appreciate the opportunity to present this testimony on ERISA 
funding issues on behalf of the National Retiree Legislative Network, 
Inc. (NRLN). NRLN is a unique Washington, D.C. based grassroots retiree 
organization that was started a little over two years ago by a number 
of large company retiree groups alarmed over increasing threats to the 
preservation of their health and pension benefits. NRLN represents 
nearly 2 million retirees from the Association of BellTel Retirees, 
Association of U.S. West Retirees, Prudential Retirees, Monsanto 
Retirees, Raytheon Retirees, along with groups from Boeing, General 
Electric, General Motors, IBM, Johns Manville, Lucent, Southern New 
England Telephone (SNET), Portland Electric (Enron), Western Union and 
many others.1
---------------------------------------------------------------------------
    \1\ For more on NRLN, visit its website, www.NRLN.org.
---------------------------------------------------------------------------
    For reasons that will be described shortly, from the outset NRLN 
has opposed temporarily changing the discount rate used to calculate 
defined benefit plan pension liabilities from the current modified 30-
year Treasury bond rate to a composite corporate bond rate. 
Notwithstanding the recent House action of October 8 approving the 2-
year use of a corporate bond rate, NRLN remains opposed to this switch.
    Concisely stated, NRLN's position is that we are in the midst of 
the greatest pension underfunding crisis since ERISA was enacted almost 
30 years ago. In these circumstances, piecemeal measures, like the 
corporate bond discount rate fix, will not make matters better, and 
probably will make them worse.
    NRLN believes that only a comprehensive approach that is grounded 
in ERISA's core principles will overcome this crisis and provide both 
needed flexibility to defined benefit plan sponsors as well as adequate 
protection to defined benefit plan beneficiaries. In addition, only a 
comprehensive approach will prevent a potential meltdown of the Pension 
Benefit Guaranty Corporation and a savings-and-loan type rescue mission 
at taxpayer expense.
    Moreover, those on this Committee, and those in the Congress, who 
believe that granting a temporary 2-year corporate bond discount favor 
to defined benefit plan sponsors will create pressure for a more 
comprehensive solution have got it backwards. Instead, it will create 
pressure for more and more quick fixes while a genuine comprehensive 
and principled solution becomes ever more elusive. The rather 
uninspiring history of the modified 30-year Treasury bond discount rate 
due to expire at the end of this year supports this view, and some 
brief attention must be paid to it in order to appreciate NRLN's 
concerns.

The Discount Rate Controversy
    The current modified 30-year Treasury bond discount rate originated 
in the Job Creation and Work Assistance Act of 2002, which was signed 
into law by President Bush on March 9, 2002. The main purpose of this 
$42 billion bill was to provide tax breaks aimed at spurring business 
investment and to extend unemployment compensation for individuals who 
had exhausted their existing benefits. In short, it was intended to 
stimulate the economy.
    The bill included a temporary pension funding relief measure 
focused on inclusion of the Treasury discount rate in question. This 
action was based on the assertion that the 30-year Treasury rate was 
artificially low (especially after Treasury stopped issuing 30-year 
bonds) and, therefore, forced plan sponsor to make unnecessarily higher 
contributions to their pension plans by exaggerating the amount of 
liabilities that had to be funded.
    Even then, however, the companies seeking this relief claimed that 
it was more appropriate to calculate liabilities by using a long-term 
high-quality corporate bond discount rate rather than the modified 
Treasury bond rate. That view was rejected by Congress in 2002 and all 
sides agreed that the entire issue would be studied during the 
temporary relief period, with the aim of securing a permanent solution 
by the time the temporary relief period expired at the end of 2003.
    As the end of 2003 approaches, do we have such a permanent 
solution? No, as far as the House is concerned we have another 2-year 
temporary solution, only this time the companies have achieved in 2003 
what they could not achieve in 2002--a temporary switch to a corporate 
bond discount rate and the abolition of the modified Treasury bond 
rate.
    Was this switch to a corporate bond rate the product of any 
independent, non-self-serving study performed after March 2002? Not as 
far as we know. In fact, in February, 2003, GAO issued a report 
containing explicit warnings against use of a corporate bond rate. The 
GAO report identified problems of transparency and methodology 
involving the construction of corporate bond rates. See GAO-03-313.
    In view of this history, it is unlikely that the House adoption of 
the 2-year corporate bond rate will encourage a definitive ERISA 
funding study. Instead, it can be safely predicted that this 
politically expedient temporizing process will be repeated indefinitely 
until either the economy takes off and companies are less concerned 
about making funding contributions, or PBGC collapses. In case of the 
latter, the advocates of these temporary fixes will probably say--no 
doubt with the utmost sincerity--that it would have happened sooner 
absent the temporary fixes.
    Stepping aside momentarily from the pro's and con's of the 
corporate bond rate switch, what is more significant is the failure of 
both the Congress and the Administration to get on top of the real 
problem sooner. The real problem has very little to do with the 
discount rate and tinkering with it so that many companies can take 
undeserved funding holidays is tantamount to playing Russian roulette 
with defined benefit plan pensions.

The Real Problem
    The real problem is that the defined benefit plan universe that 
existed when ERISA's funding and plan termination insurance provisions 
were first enacted no longer exists. Indeed, it probably had stopped 
existing when the Retirement Protection Act of 1994 (RPA) was enacted 
but that development may not have been as apparent then as it is now. 
RPA, of course, substantially toughened the funding rules for 
underfunded single-employer defined benefit plans by, among other 
things, imposing certain deficit reduction or ``catch-up'' contribution 
requirements on plans whose current liability was less than 90% funded.
    It is unlikely that the defined benefit plan universe will ever 
return to anything resembling its former self. These plans were 
primarily a creature of the manufacturing industry which has suffered a 
sharp and probably irreversible decline. They also tend to be not well-
suited for use by the services industry which is now, and for the 
foreseeable future, in the ascendancy.
    Furthermore, these plans have also lost ground because of the 
decline of the trade unions. They will persist mainly in those sectors 
of the economy where unions are influential, but those sectors are 
shrinking as well.
    Moreover, structural changes in the Nation's economy make 
traditional defined benefit plans unappealing to many employers and 
employees alike. Due primarily to the telecommunications and Internet 
revolution, a long-serving permanent workforce does not now fit the 
business model of many companies regardless of their earlier histories.
    As a corollary, employees who do not expect to spend all or most of 
their working careers with one or two employers want pension plans that 
provide quick results, usually in the form of lump sum payments when 
they exit a particular company after only several years of work. In 
combination, these forces have sapped the historic mission of defined 
benefit plans which was to provide past service credit for older 
workers (i.e., credit for service performed before the inception of the 
plan or before an amendment improving benefit levels was adopted).
    In this regard its needs to be recalled that prior to ERISA 
employers were only compelled to make annual contributions to cover the 
interest costs on these past service liabilities and were not required 
to fund the liabilities themselves (i.e., the principal). It was 
because of this regulatory deficiency that the pre-ERISA funding 
disasters arose and it was this deficiency that the ERISA funding--PBGC 
system was designed to correct.
    Finally, to make matters worse, another problem that did not exist 
when ERISA's funding standards (including its most recent refinements) 
were under consideration, is that there are just not more numerous 
underfunded plans but there are several sick industries with mostly 
underfunded plans. This problem has begun to assume critical importance 
because up to now the entire funding--PBGC regime has been centered on 
treating the defined benefit plan sponsor as a fully autonomous funding 
decision-maker in which considerations relating to specific industries 
or national security were irrelevant.
    Because of the developments just described it should be plain that 
a major overhaul of the ERISA funding and PBGC apparatus is needed. 
ERISA was enacted on the premise of a constantly expanding defined 
benefit plan universe in which only individual employers got sick not 
entire industries. Just the reverse is true today and we need to adapt 
to this new reality with all deliberate speed.

Priorities
    In order to pull together a new funding-PBGC policy for an ever-
contracting defined benefit pension world, it is necessary to have some 
sense of the priorities that should guide such an effort. From our 
standpoint, the most important priority, the one to which all others 
must yield, is assuring the protection of those who are most vulnerable 
to the loss or reduction of their precious pensions.
    This means that legislative revisions to the current funding--PBGC 
framework must guarantee that existing retirees and older workers with 
substantial service are protected in their full pension expectations to 
the maximum feasible extent. Some employers refer euphemistically, and 
perhaps disdainfully, to these earned pensions, as ``legacy costs''. 
But behind each of these so-called ``legacy costs'' is a human being 
whose life was committed to faithful service with the employer and 
whose life would be ruined if his or her pension was gutted. Nothing 
will more quickly undermine the legitimacy of new funding--PBGC reforms 
than the perception that they have been structured so that companies 
can shed their financial obligations to these beneficiaries.
    The next priority is to redesign the funding--PBGC rules so that 
the business prospects of companies with underfunded plans are not 
irreparably threatened by the inflexible application of these rules. At 
the same time, we must assure that any additional funding flexibility 
provided to business does not end up threatening the fiscal integrity 
of PBGC. We have some specific recommendations below on how to balance 
these two objectives.
    The remaining priority that we would like to emphasize is that 
funding--PBGC revisions must be accompanied by an upgrading of the 
administration of the remaining defined benefit pension plans. No one 
really understands how plans that were swimming in huge pension 
surpluses just a few years ago suddenly became so monumentally 
underfunded. Furthermore, no one really understands how or why some of 
the same companies whose pension plans went from overfunded to 
underfunded so quickly were still rewarding their top executives with 
increased compensation, including juicy cash bonuses and stock options.
    From where we stand, blaming the funding entirely on the economy 
doesn't quite add up. We think this experience signals the need for 
tighter fiduciary oversight and we have a number of specific 
recommendations in this area as well.

Recommendations
    1. The first step--one that is needed to restore credibility to 
this funding--PBGC overhaul process--is to withdraw the 2-year 
temporary use of corporate bond discount rates which the House 
approved. This decision by the House lacks the authoritative quality 
that should be associated with a decision of this kind.
    We agree that there is a need to avoid subjecting business to 
unrealistic funding rules, but the source of the problem is not the use 
of the modified Treasury rate but rather the funding rules themselves. 
It is these rules, principally the deficit reduction contribution rules 
imposed by the RPA, which need adjustment.
    In the meantime, we recommend that the modified Treasury rate be 
extended for another year, with perhaps a slight extension of the upper 
limit of the permissible range of the weighted average of the interest 
rates on 30-year Treasuries, which is now at 120 percent. Since it 
cannot be claimed that all defined benefit plan sponsors are in 
desperate need of temporary funding relief, our proposal would 
represent a principled approach to the issue and would avoid the 
impression that all Congress is interested in doing is giving defined 
benefit plan sponsors the economic equivalent of a tax break via a 
questionable corporate bond rate formula.
    We are equally unpersuaded that adopting a ``yield curve'' 
approach, as proposed by the Treasury, is the best option for the 
future. There is no automatic correlation between ostensibly adverse 
plan demographics (e.g., higher proportion of retirees to actives) and 
a given employer's ability to discharge its future retirement benefit 
obligations. Indeed, in some cases the appearance of adverse 
demographics may be deceiving in that the installation of labor-saving 
devices may have made the company more productive and profitable and 
more capable of discharging its future obligations.
    Without attempting to detract from the seriousness of funding 
problems confronted by companies or potentially explosive demographic 
issues confronted by PBGC, the establishment of a permanent discount 
rate replacement for the 30-year Treasury rate should be governed by 
purely objective criteria relating to the general domestic economic 
universe. Only in that way can more integrated measures be taken to 
address the fundamental funding issues involved.

    2. The most important step is to tackle the real source of the 
trouble, the deficit reduction or ``catch-up'' rules. These rules were 
enacted in 1994 when PBGC's single-employer fund was deeply in the red 
and there was fear of a savings-and-loan type calamity overtaking the 
agency.
    Whatever their virtues in theory, in practice these RPA rules place 
inordinate demands on those employers whose businesses are suffering at 
the very time that their defined benefit plans are falling below the 90 
percent of liabilities funding test. Moreover, RPA fails to provide any 
direct funding variance relief procedure to employers who, for reasons 
of business hardship, are unable to come up with the contributions to 
satisfy the 90 percent test.
    Without attempting to describe an exhaustive set of possible 
revisions, and bearing in mind the social policy priorities previously 
discussed, we propose that employers that cannot meet the 90 percent 
requirement because of demonstrable business hardship, be given a 
special funding waiver for an appropriate period provided that they: 
(a) stop all lump sum payments, (b) freeze all future accruals for 
employees with less than 10 years of service; (c) refrain from any 
further benefit improvements, (d) suspend any benefit improvements made 
within 3 years of the application for a waiver, (e) agree to a special 
future experience-rated premium increase on terms satisfactory to PBGC, 
and (f) become subject to special monitoring and disclosure 
requirements during the period of waiver.
    Some of the foregoing resembles the ``reorganization'' requirements 
now in effect for multiemployer plans. See Internal Revenue Code 
section 418. However, even these rules may have to be reevaluated under 
current circumstances. In addition, the legal requirements concerning 
``partial terminations'' may have to be rewritten.
    For employers that cannot meet the 90 percent requirement and are 
members of ``sick'' industries (e.g., steel, airlines), additional 
precautions should be taken. Employers with reasonably healthy plans in 
reasonably healthy industries (at least as indicated by their overall 
demographics) should not be dragged down by having to increase their 
PBGC premium subsidization of these ``sick'' industry plans. Plans in 
these ``sick'' industries should pay higher PBGC premiums regardless of 
whether they meet the 90 percent test and should be subject to more 
intense scrutiny.
    It may be more efficient to spin off these ``sick'' industry plans 
into a special high-risk PBGC guarantee fund that has its own special 
rules. Whether the federal government should also provide some form of 
direct assistance to help stabilize these plans is beyond the scope of 
this testimony, but may warrant further study, especially in the case 
of industries that impact national security.

    3. Hand-in-hand with rearranging the ``deficit reduction'' 
requirements, it is also imperative to increase fiduciary oversight of 
plan sponsors who seek hardship relief from the 90 percent rule. It 
would be appalling to grant such relief without determining first 
whether the applicant made prudent investment decisions on behalf of 
the plan and whether the plan fiduciaries acted prudently in approving 
the actuarial assumptions used under the plan.
    These are not trivial matters. There is a strong evidence, for 
example, that many of the plans now in funding trouble used much too 
high investment earnings assumptions and are still using them. Several 
months ago, NRLN urged the Secretary of Labor to conduct a thorough 
investigation of this subject and, as of this date, has not even 
received the courtesy of an acknowledgement letter.
    Any plan that seeks funding relief of the type outlined above 
should be compelled to have all of its actuarial assumptions, including 
its earnings assumptions, certified to by an actuary independent of the 
plan's actuary. In addition, any plan seeking such relief should be 
compelled to submit a report by an independent investment manager or 
fiduciary concerning the adequacy of the investment policies followed 
by the plan during the prior 5 years. Only in this way can we assure 
the integrity of the ERISA funding process and get private sector 
defined benefit plans back on the right track.

Conclusion
    The recommendations discussed above merely scratch the surface of 
policy options that Congress needs to consider to ensure that the 
defined-benefit plan system weathers the current underfunding storm and 
that both the most vulnerable beneficiaries and the most vulnerable 
employers, as well as the PBGC, are adequately protected. NRLN urges 
this Committee to continue its active exploration of these problems and 
provide the leadership essential to resolve them in a more satisfactory 
way. Do not leave these problems unattended; they will only get worse.
                                 ______
                                 
    Chairman Boehner. Thank you, Mr. Gordon.
    Mr. Iwry?

 STATEMENT OF J. MARK IWRY, ESQ., NON-RESIDENT SENIOR FELLOW, 
           THE BROOKINGS INSTITUTION, WASHINGTON, DC

    Mr. Iwry. Thank you, Mr. Chairman. After spending much of 
the previous decade in the Treasury Department, overseeing the 
regulation of defined benefit and defined contribution 
retirement plans and other benefits, and after participating in 
the effort 10 years ago to reform the pension funding rules and 
shore up the PBGC's financial situation, I am convinced that 
there is no simple solution here. There is no silver bullet, 
because of the obvious need to reconcile a number of legitimate 
interests that are intertwined with one another.
    And first and foremost, there is the interest of employees 
in actually getting the benefits promised to them, for which 
they previously gave up current wages, as well as employees' 
interest in having employers stay in the game, having employers 
continue to sponsor employer-funded plans, and employees' 
interest in not having funding obligations push their employer 
over the edge, financially.
    Second, there is the interest of financially strong 
employers in not having to excessively subsidize weak employers 
through undue levels of PBGC premiums, or otherwise, and the 
interest of financially strong employers in keeping their 
funding obligations predictable.
    Third, the interest of financially troubled plan sponsors 
in predictable funding obligations that don't push them into 
bankruptcy.
    And finally, the interest of taxpayers in avoiding a large, 
unexpected bill, or a deeper budget deficit in order to help 
PBGC pay unfunded benefits.
    That said, I have several recommendations. Congress needs 
to begin by enacting a short-term replacement of the 30-year 
Treasury interest rate without going too far to compromise 
responsible funding in the long term, and without going so far 
as to tie its own hands, or narrow its own options, with 
respect to the more comprehensive phase of reform that you're 
about to consider.
    At the same time, Congress has to take into account the 
potential impact of large funding demands on plan sponsors and 
an industry's financial situation, and on economic growth, and 
has to balance that against the need for adequate funding over 
the long term, the need to eliminate chronic underfunding, and 
the need to minimize volatility for plan sponsors, so that 
increases in funding from year to year stay on a reasonably 
smooth, predictable path.
    Once it puts a temporary fix in place, Congress will be 
able to turn its attention back to working with the executive 
branch and stakeholders to develop a common understanding of 
where we are, and what needs to be done to reform the system. 
And this hearing is a constructive part of that process.
    To that end, I hope that a bipartisan approach and a 
transparent approach will be followed, and that the executive 
branch will not only allow, but direct the PBGC to share with 
Congress and with the premium-paying plan sponsors and the plan 
participants all of its data and modeling to the extent that it 
would not compromise confidential information, to the extent 
that it would not disclose information regarding particular 
companies.
    But with that constraint, share the numbers, the 
assumptions, the methods that it uses to estimate the effect of 
alternative funding policies, and also to estimate its own 
financial situation, to project its liabilities, to take into 
account assets that it will recover from future plan 
terminations, and that it will do so in an open and transparent 
manner.
    Specifically, we need to strengthen the deficit reduction 
contribution, as others have suggested, and make it less 
volatile. As you know, this is an accelerated funding 
requirement that has not kicked in soon enough in many cases, 
and that has shut off too quickly in other cases.
    We need to address the rules concerning credit balances and 
other methods that companies have had of avoiding contributions 
at times when they really should be contributing, and Bethlehem 
Steel is a case in point--contribution holidays at times when 
the plan is really becoming dangerously underfunded.
    We need better disclosure on the funding status of plans, 
improving both the transparency and the timeliness of 
disclosure. We need to allow companies to fund for lump sum 
distributions, even when the value of those exceeds the value 
of annuities, which the IRS does not let them do today.
    And revised rules have to continue to protect the 
reasonable expectations of employees and retirees with respect 
to promised benefits. And, to the extent possible, continue to 
encourage employers to provide pensions and maintain plans. 
Restricting benefits or benefit improvements should be a last 
resort, as should curtailing the PBGC's guarantee.
    As a final point, though, Mr. Chairman, as you know, a 
major portion of the DB universe now consists of cash balance 
and other hybrid plans. I suggest that as part of this overall 
strategy toward defined benefit plans, the system would benefit 
from a resolution of the cash balance controversy by Congress, 
working with Treasury and the other agencies, to settle the law 
governing these plans in a reasonable way, giving older workers 
substantial protection from the adverse affects of a 
conversion, and allowing companies to maintain the plans free 
of concern that they be held to be age-discriminatory, and with 
reasonable flexibility to change the plans going forward, 
including to make cash balance conversions.
    I would be happy to answer any questions that you or the 
members of the Committee might have.
    [The prepared statement of Mr. Iwry follows:]

 Statement of J. Mark Iwry \1\, Esq., Non-Resident Senior Fellow, The 
                  Brookings Institute, Washington, DC
---------------------------------------------------------------------------

    \1\ The witness is a lawyer and a Nonresident Senior Fellow at the 
Brookings Institution. He served as the Benefits Tax Counsel of the 
U.S. Department of the Treasury from 1995 through 2001. The views 
expressed in this testimony are those of the witness alone. They should 
not be attributed to the staff, officers, or trustees of the Brookings 
Institution or to any other organization.
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    Chairman Boehner, Ranking Member Miller and Members of the 
Committee, I appreciate the opportunity to appear before you to discuss 
issues relating to underfunding in our private defined benefit pension 
system and pension funding reforms.\2\
---------------------------------------------------------------------------
    \2\ The majority of this testimony is drawn verbatim from my 
September 15, 2003 testimony before the Subcommittee on Financial 
Management, the Budget, and International Security of the U. S. Senate 
Committee on Governmental Affairs. Several portions of the September 
15, 2003 testimony draw heavily, in turn, on my previous testimony 
regarding the same or similar issues.
---------------------------------------------------------------------------
    After providing brief background on defined benefit plans, pension 
insurance, the PBGC, and the taxpayers' investment in the private 
pension system (part I, pages 1-4 and Appendix A), this written 
statement reviews recent developments affecting pension funding and 
pension insurance (part II, pages 4-7) and the often conflicting public 
policy objectives that need to be reconciled when formulating policy in 
this area (part III, pages 7-8). Next, the statement turns to two 
threshold questions--whether legislation is needed in the short term 
and whether broader, permanent changes to the system are called for 
(part IV, pages 8-9). The main portion of the testimony then suggests 
ten specific cautions and considerations to bear in mind when 
considering longer-term reforms (part V, pages 9-17).

                           I. BACKGROUND \3\

---------------------------------------------------------------------------
    \3\ Further context regarding the private pension system is 
provided in Appendix A, which is drawn nearly verbatim from my June 4, 
2003 testimony before this Committee's Subcommittee on Employer 
Employee Relations.
---------------------------------------------------------------------------
A. Defined Benefit Plans and the PBGC
    The Pension Benefit Guaranty Corporation (PBGC), a federal 
government corporation created under Title IV of the Employee 
Retirement Income Security Act of 1974 (ERISA), provides insurance to 
protect the retirement benefits of most participants in tax-qualified 
defined benefit plans. The PBGC's guarantee generally applies when the 
plan terminates while inadequately funded and the plan sponsor has 
failed or is otherwise demonstrably unable to make up the deficiency. 
PBGC guarantees more than 32,000 defined benefit plans that are 
sponsored by private-sector employers and that cover nearly 44 million 
workers and retirees.
    PBGC pays statutorily-defined guaranteed pension benefits to 
participants monthly up to specified dollar limits (currently just 
under $44,000 for pensions beginning at age 65 and significantly less 
for pensions beginning earlier). If a defined benefit plan terminates 
without adequate funding to pay promised benefits, and the employer 
goes out of business or is otherwise financially unable to fund the 
benefits (a ``distress termination''), PBGC generally steps in and 
takes over trusteeship of the plan and its assets, assuming 
responsibility for paying guaranteed benefits. In addition, in 
appropriate circumstances, the PBGC may obtain a court order to 
involuntarily terminate a plan that the employer has not terminated.
    Following a distress or involuntary termination, the plan sponsor 
and its affiliates are liable to PBGC for unfunded liabilities, and 
PBGC may place a lien on the sponsor's property for up to 30% of its 
net worth. An employer that is financially capable of fully funding a 
plan's benefits when the plan terminates is required to do so (in a 
``standard termination'').
    In a sense, PBGC operates as an insurance company for pension 
plans. However, it has a special public responsibility to protect the 
interests of plan participants in a social insurance system. The agency 
has often acted as an advocate for participants' pension interests in 
negotiating with corporations that are in financial distress regarding 
pension plan funding and benefits in connection with corporate 
bankruptcy.
    PBGC maintains separate insurance programs for ``single employer'' 
plans and ``multiemployer'' plans, covering about 34.4 million and 
about 9.5 million employees and retirees, respectively. The separate 
programs correspond to the somewhat different legal frameworks that 
apply to the two types of plan.
      ``Single employer plans'' include the conventional 
corporate plan sponsored by a single employer for its employees (as 
well as a plan sponsored by several related employers where the joint 
sponsorship is not pursuant to collective bargaining).
      ``Multiemployer plans'' are sponsored by related 
employers in a single industry where employees are represented by 
collective bargaining and where the plans are jointly trusteed by 
representatives of corporate management and of the labor union.
    Defined benefit plans cover employees of private-sector and public-
sector employers. Plans maintained by State and local governments (and 
by the Federal Government) for their employees comprise a large portion 
of the defined benefit universe. However, those plans generally are 
exempt from ERISA and are not covered by PBGC termination insurance.
    The PBGC is funded in part by insurance premiums paid by employers 
that sponsor defined benefit pension plans. All covered single-employer 
plans pay a flat premium of $19 per plan participant. Single-employer 
plans that are considered underfunded based on specified assumptions 
are subject to an additional variable premium of $9 per $1,000 of 
unfunded vested benefits.
    PBGC's sources of funding are
      the premiums it collects,
      assets obtained from terminated plans PBGC takes over,
      recoveries in bankruptcy from former plan sponsors, and
      earnings on the investment of PBGC's assets.
    General tax revenues are not used to finance PBGC, and PBGC is not 
backed by the full faith and credit of the United States Government. 
The U. S. Government is not liable for any liability incurred by PBGC.

B. Taxpayers' Current Investment in Private Pensions
    It is often observed that if the defined benefit pension funding 
problem becomes severe enough, PBGC might eventually become unable to 
pay insured benefits as they come due, and a federal taxpayer bailout 
might be necessary. By way of context, it is worth recalling that the 
taxpayers already are partially subsidizing the private pension system, 
including defined benefit plans, through federal tax preferences for 
pensions.
    Those tax preferences represent a significant investment by the 
taxpayers. The Treasury Department has estimated the cost of the tax-
favored treatment for pensions and retirement savings--the amount by 
which the pension tax advantages reduce federal tax revenues--as having 
a present value of $192 billion.\4\ Of that total, some $100 billion is 
attributable to defined benefit plans and defined contribution plans 
other than section 401(k) plans (and the remainder is attributable to 
401(k) plans and IRAs).\5\
---------------------------------------------------------------------------
    \4\ Pensions can be viewed as increasing national saving to the 
extent that the saving attributable to pensions (net of any associated 
borrowing or other reductions in other private-sector saving) exceeds 
the public dissaving attributable to the tax preferences for pensions.
    \5\ Budget of the U.S. Government, Fiscal Year 2004, Analytical 
Perspectives, Table 6-4, page 112 (``fiscal year 2004 Budget, 
Analytical Perspectives''). The budget documents also contain other tax 
expenditure estimates that are based on alternative methods.
---------------------------------------------------------------------------
    This present-value estimate is designed to take into account not 
only the deferral of tax on current contributions and on earnings on 
those contributions but also the tax collected when the contributions 
and earnings are distributed in the future, whether within or beyond 
the ``budget window'' period.\6\ Because large portions of the defined 
benefit plan universe are in each of the private sector and the public 
(mainly state and local government) sector, a significant percentage of 
the tax expenditure for non401(k) pensions is attributable to the plans 
in each of those sectors.
---------------------------------------------------------------------------
    \6\ FY 2004 Budget, Analytical Perspectives, page 102.
---------------------------------------------------------------------------
II. RECENT DEVELOPMENTS AFFECTING PENSION FUNDING AND PENSION INSURANCE

    After running a deficit for the first 21 years of its history, 
PBGC's single-employer program (which accounts for the vast majority of 
PBGC's assets and liabilities) achieved a surplus from 1996 through 
2001. By 2000, the surplus (the amount by which assets exceeded 
liabilities) was in the neighborhood of $10 billion. Recently, however, 
PBGC has seen the financial condition of its single-employer program 
suddenly return to substantial deficit: $3.6 billion in fiscal year 
2002 and, according to PBGC, an estimated $8.8 billion as of August 31, 
2003 (based on PBGC's latest unaudited financial report). \7\
---------------------------------------------------------------------------
    \7\ Testimony of Steven A. Kandarian, Executive Director, Pension 
Benefit Guaranty Corporation, before the Special Committee on Aging, 
United States Senate, October 14, 2003 (``PBGC October 14, 2003 
Testimony''), page 3.
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    PBGC's financial condition could alternatively be expressed in 
percent funded terms--taking PBGC's assets as a percentage of its 
liabilities. For the purpose of estimating PBGC's funding percentage, 
it has been suggested that, when PBGC takes into account ``probable'' 
future claims, it count not only expected total liabilities but the 
total assets PBGC would be expected to take over and recover in 
connection with those claims.
    PBGC's financial condition has deteriorated because a number of 
major plan sponsors in financial distress have terminated their defined 
benefit plans while severely underfunded. Others may well follow suit. 
In addition to structural weakness in certain industries, low interest 
rates--increasing the valuation of plan liabilities--and low returns on 
investment--reducing plan assets as well as PBGC's own assets--have 
contributed dramatically to the underfunding problem.
    According to PBGC estimates, its losses might ultimately include an 
additional $35 billion of unfunded vested benefits that the agency 
would have to take over if certain plans maintained by financially weak 
employers were to terminate. (About half of the $35 billion is 
attributable to plans in the steel and air transportation industries.) 
As a result, the General Accounting Office has recently placed PBGC's 
single-employer insurance program on its high-risk list of federal 
agencies with significant vulnerabilities.\8\ PBGC also expects that, 
by the end of fiscal year 2003, its estimate of underfunding in 
financially troubled companies will have grown from $35 billion to more 
than $80 billion.\9\
---------------------------------------------------------------------------
    \8\ However, the PBGC's assets in the single-employer program 
exceeded $25 billion as of September 30, 2002 (and are greater now). 
For some time to come, these assets will be more than sufficient to 
meet PBGC's current benefit payment obligations and administrative 
expenses--about $2.5 billion in fiscal year 2003, and expected to 
increase to nearly $3 billion in fiscal year 2004--which are partially 
offset by premium income that is somewhat less than $1 billion a year.
    \9\ PBGC October 14, 2003 Testimony, page 7.
---------------------------------------------------------------------------
    To help put the amounts into perspective, the total amount of 
defined benefit pension benefits PBGC insures is approximately $1.5 
trillion, and PBGC estimates that total underfunding in the single-
employer defined benefit system amounted to more than $400 billion as 
of the end of 2002. (Before 2001, the previous high water mark in 
underfunding had been little more than one fourth of that amount, in 
1993.) Of the $400 billion, the $35 billion (fiscal year 2002) and $80 
billion (fiscal year 2003) figures cited earlier represent estimated 
underfunding in plans sponsored by financially troubled companies 
(where PBGC estimates that plan termination is ``reasonably 
possible).''
    The downturn in the stock market during the past several years, 
unusually low interest rates, and the Treasury Department's buyback of 
public debt and decision to stop issuing 30-year Treasury bonds have 
contributed in a major way to converting defined benefit plan surpluses 
into deficits. Significant underfunding has developed because plan 
asset values have fallen below their levels during the late 1990s, 
while the present value of plan liabilities has increased because the 
four-year weighted average of interest rates on 30-year Treasury bonds, 
used as a basis for valuing defined benefit liabilities, has been at an 
unusually low level.
    The greater likelihood of corporate failures associated with the 
weak economy also has contributed significantly to this situation. PBGC 
estimates that half of the underfunding in financially weak companies 
is attributable to two industries: steel and airlines. Together, these 
two industries account for nearly three fourths of all past claims on 
the PBGC while representing fewer than 5% of participants covered by 
PBGC.\10\ For example, in 2002, PBGC involuntarily terminated a plan of 
Bethlehem Steel Corporation that shifted about $3.7 billion of unfunded 
liabilities to PBGC. (Reportedly, the plan had been 97% funded as 
recently as 1999, dropping to 45% by 2002.)
---------------------------------------------------------------------------
    \10\ Most of the financial data in this testimony regarding PBGC 
and its exposure are from recent PBGC testimony: Testimony of Steven A. 
Kandarian, Executive Director, Pension Benefit Guaranty Corporation, 
before the Special Committee on Aging, U.S. Senate, October 14, 2003, 
and Mr. Kandarian's testimony before this Committee's Employer-Employee 
Relations Subcommittee on September 4, 2003.
---------------------------------------------------------------------------
    In addition, a fundamental demographic trend has raised the cost of 
funding defined benefit plans, making them harder to afford: increased 
longevity combined with earlier retirement. It has been estimated that 
the average male worker spent 11.5 years in retirement in 1950, 
compared to 18.1 years today.\11\ Of course longer retirements increase 
plan liabilities because the life annuities provided by defined benefit 
plans are paid for a longer period.
---------------------------------------------------------------------------
    \11\ See testimony of Steven A. Kandarian, Executive Director, 
Pension Benefit Guaranty Corporation before the House Committee on Ways 
and Means, Subcommittee on Select Revenue Measures, April 30, 2003, 
pages 7-8.
---------------------------------------------------------------------------
    Increased longevity and retirement periods also mean that the 
single-sum payments many of these plans offer (``lump sum 
distributions'') are significantly larger, as they generally are based 
on the actuarial present value of the life annuity. Combined with this 
is the separate tendency of an increasing number of defined benefit 
plans to offer and pay lump sums either at retirement age or at earlier 
termination of employment, or both. The effect is to accelerate the 
plan's liability compared to an annuity beginning at the same time.
    Another trend adversely affecting the system and the PBGC is the 
gradual decline of defined benefit pension sponsorship generally. (A 
number of the major factors accounting for the decline are discussed in 
my June 4, 2003 testimony before this Committee's Employer-Employee 
Relations Subcommittee.) One effect of the overall decline is the 
increasing risk that financially stronger plan sponsors will exit the 
defined benefit system, recognizing their exposure to the ``moral 
hazard'' of financially troubled companies adding benefits that they 
know may well be paid by PBGC. This risk grows as the premium base 
narrows and as financially strong sponsors find their premiums are 
increasingly subsidizing the financially weak employers that pose the 
risk of underfunded plan terminations imposing liability on PBGC.
    Combined with these developments is a fundamental structural 
problem and growth in the scale of the issue. As economic adversity has 
hit certain industries and companies, and as their ratio of active 
employees to retirees has dwindled, unfunded pension obligations (as 
well as other unfunded ``legacy costs'', chiefly retiree health 
liabilities) loom larger in the overall financial situation of 
individual companies and entire industries.
    When the pension insurance system was enacted as part of ERISA in 
1974, plan liabilities typically were not large relative to plan 
sponsors' market capitalizations. However, during the ensuing 29 years, 
pension and retiree health obligations have grown relative to assets, 
liabilities and market capitalization of the sponsoring employers (and 
some financially troubled companies now have underfunding in excess of 
their market capitalization).
    Moreover, contrary to what might have been the prevalent 
expectations in 1974, these economic troubles and associated 
underfunding have come to affect not only individual companies but 
entire industries. In view of these fundamental structural 
developments, the issue no longer is only a pension policy problem; it 
has become a larger industrial and social policy problem.
    These developments have been saddling plan sponsors with funding 
obligations that are large and--in the case of the unusually low 
interest rates and low equity values--unexpectedly sudden. These 
obligations in turn are hurting corporate financial results. As a 
result, while some have noted that recent poor investment performance 
in 401(k) plans should give employees a new appreciation of defined 
benefit plans, some corporate CFOs have been viewing their defined 
benefit plans with fresh skepticism. The prospect that more defined 
benefit plans will be ``frozen'' (ceasing further accruals under the 
plan) or terminated is a very real concern. Congress must take it 
seriously.
    Defined benefit plans have provided meaningful lifetime retirement 
benefits to millions of workers and their families. They are a central 
pillar of our private pension system.\12\ National retirement savings 
policy should seek to avoid a major contraction in the defined benefit 
pension system while protecting the security of workers' pensions 
through adequate funding.
---------------------------------------------------------------------------
    \12\ For an evaluation of defined benefit plans from a pension 
policy standpoint, a discussion of the role of these plans in the 
private pension system, and an analysis of the decline in defined 
benefit coverage, see Testimony of J. Mark Iwry before this Committee's 
Subcommittee on Employer-Employee Relations, June 4, 2003, as well as 
the testimony of other witnesses presented at a hearing of the 
Subcommittee on that date.
---------------------------------------------------------------------------
     III. GUIDING PRINCIPLES TO BE RECONCILED IN FORMULATING POLICY

    As suggested, a number of often conflicting public policy 
objectives need to be reconciled or balanced in responding to this 
situation. They include the following:
      Provide for adequate funding over the long term to 
protect workers' retirement security, with special attention to 
reducing chronic underfunding.
      Take into account the potential impact of very large 
funding demands on a plan sponsor's overall financial situation and on 
economic growth (which may suggest, among other things, close attention 
to appropriate transition rules).
      Minimize funding volatility for plan sponsors so that 
required increases in funding from year to year are kept on a 
reasonably smooth path.
      Protect the reasonable expectations of employees and 
retirees with respect to promised benefits, and, to the extent 
possible, avoid discouraging the continued provision of benefits. (This 
may suggest an emphasis on requiring sponsors to fund adequately in 
preference to direct restrictions on their ability to provide benefit 
improvements or curtailment of the PBGC's guarantee.)
      Do not penalize the plan sponsors that are funding their 
plans adequately and that are not part of the problem. Minimize any 
impact on those sponsors--who are subsidizing the sponsors of 
underfunded plans--and, more generally, encourage employers to adopt 
and continue defined benefit pension plans.
      To the extent possible, avoid rules that are 
unnecessarily complex or impractical to administer.
      Be mindful of the impact of rule changes on the federal 
budget deficit, including the long-term impact that extends beyond the 
conventional budget ``window''.

                        IV. THRESHOLD QUESTIONS

    Balancing these objectives is exceedingly difficult. In considering 
how best to do so, it is worth addressing two threshold questions.
    First, should the situation be allowed to right itself without 
legislation? Are the problems affecting pension funding and PBGC's 
finances so clearly cyclical that they can reasonably be expected to 
solve themselves with continued economic recovery, rise in equity 
values, and rise in interest rates?
    In my view, the answer is no. Plan sponsors need some degree of 
short-term, temporary funding relief now, largely because of the 
distortions in the level of the 30-year Treasury discount rate. As 
noted, that rate has been unusually low, affected by buybacks and 
Treasury's decision to discontinue issuance of the 30-year Treasury 
bond. Accordingly, the temporary relief for employers enacted for 2002 
and 2003 in the Job Creation and Worker Assistance Act of 2002--
allowing plan sponsors to increase their pension funding discount rate 
from 105% to 120% of the four-year weighted average of the 30-year 
Treasury rate--should not be allowed to expire at the end of 2003 
without an appropriate legislative replacement.
    Earlier this month, the House passed H.R. 3108 (the ``Pension 
Funding Equity Act of 2003'', sponsored by Chairman Boehner and 
cosponsored by Ranking Member Miller and Rep. Johnson of this 
Committee), which would not only continue the temporary funding relief 
but expand it significantly. For purposes of determining the pension 
funding discount rate (and PBGC variable-rate premiums) for 2004 and 
2005, the bill would replace 105% of the four-year average of the 30-
year Treasury rate with the four-year average of interest rates on 
amounts conservatively invested in a blend of long-term corporate 
bonds.
    The Senate Finance Committee has reported out a bill (the National 
Employee Savings and Trust Equity Guarantee Act, or ``NESTEG'') that 
includes a similar change not only for 2004 and 2005 but also for 2006, 
and that would go much further in other respects.\13\ In addition to 
proposing certain more permanent changes to the funding rules, NESTEG 
would waive the ``deficit reduction contribution'' (``DRC'') 
requirement for 2004-2006 for any plan for which a DRC was not required 
for the 2000 plan year. The DRC, which calls for accelerated funding of 
plans that are essentially less than 90% funded, is the linchpin of the 
funding requirements for underfunded plans and of the 1987 and 1994 
pension funding reforms.
---------------------------------------------------------------------------
    \13\ As of the date of this hearing, the Senate Health, Education, 
Labor, and Pensions Committee is scheduled to mark up a bill that would 
also provide short-term pension funding relief.
---------------------------------------------------------------------------
    The Administration has objected strongly to this proposed three-
year waiver of the DRC \14\ (which is not included in the legislation 
passed by the House) on the ground that it would expose workers and the 
PBGC to unnecessary risk of underfunding in the highest-risk plans. As 
originally contemplated, the provision would have applied to a more 
narrowly defined set of plans, but the proposal was expanded to include 
all plans for which a DRC was not required in 2000. According to PBGC, 
nearly 90% of the underfunded plans that have actually terminated since 
2000--the very riskiest category of plans--would be able to take 
advantage of this proposed DRC waiver if they were still in existence, 
because they, like most major plans, were not subject to the DRC in 
2000.\15\
---------------------------------------------------------------------------
    \14\ PBGC October 14, 2003 Testimony, page 10.
    \15\ Ibid.
---------------------------------------------------------------------------
    PBGC estimates that the three-year DRC waiver would increase 
underfunding by $40 billion. It estimates that the proposal would allow 
cessation of accelerated funding by the corporations that represent 
close to $60 billion of the estimated total of $80 billion of 
underfunding in plans sponsored by financially weak employers.\16\
---------------------------------------------------------------------------
    \16\ Ibid.
---------------------------------------------------------------------------
    A three-year waiver of the DRC for most underfunded plans would 
have broad ramifications. While focusing on potential replacements for 
the 30-year Treasury discount rate--particularly the use of a single 
corporate bond rate versus a yield curve--Congress has not given close 
attention to a possible DRC waiver, which could go as far or further to 
perpetuate or expand underfunding.
    It is entirely appropriate to take short-term financial distress 
into account when considering pension funding policy. However, in order 
to strike a reasonable balance between competing policy objectives, 
exceptions need to be studied thoroughly, crafted narrowly to avoid 
compromising adequate funding in the longer term, and considered in the 
context of other possible changes designed to ensure adequate long-term 
pension funding.
    A second threshold question is whether other, permanent changes 
should be made to the defined benefit funding and insurance system. 
Here too, Congress needs to act soon, although not this year. It is 
important for the system to transition from temporary funding relief in 
the short term to an improved, stronger and less volatile funding 
regime in the medium and longer term, including a broader policy 
approach to the industry-wide problem of large underfunded legacy 
costs.

                V. SPECIFIC CAUTIONS AND CONSIDERATIONS

    The major statutory reforms of 1986, 1987 and 1994 have left the 
system in far better condition than would otherwise have been the case. 
But significant unfinished business remains. In large part, it is 
unfinished because it has proven so difficult to accomplish. Important 
policy objectives and values are in sharp tension with one another, as 
discussed. Accordingly, Congress needs to proceed with caution, after 
thorough analysis, to adjust the funding and related rules in a way 
that carefully balances the competing considerations. The remainder of 
this testimony suggests ten specific cautions and considerations.

A. Protect Plan Sponsors from Funding Volatility
    It is hard to improve funding in underfunded plans without 
jeopardizing some plan sponsors' financial stability. Sudden, large 
funding obligations can push a company over the edge, threaten its 
access to credit, or prompt management to freeze the plan (i.e., stop 
further accruals). The current situation--in which short-term relief is 
needed--makes it harder still. This is because funding relief generally 
does not actually reduce the amount the plan sponsor must ultimately 
pay, as opposed to merely postponing payment. The promised plan 
benefits are what they are, regardless of the funding rules, and must 
be paid sooner or later (absent a distress termination).
    Accordingly, if short-term relief went too deep or lasted too long, 
it would put off the day of reckoning, and could cause greater 
volatility when the temporary relief expired. This could make it harder 
to implement the necessary longer-term strengthening of pension funding 
in a gradual manner that would minimize volatility and enable plan 
sponsors to engage in appropriate advance budgeting.

B. Avoid Penalizing the Plan Sponsors That Are Funding Adequately
    Plans of financially healthy companies, even if underfunded, do not 
present a risk to PBGC or the participating employees so long as the 
company continues healthy and continues to fund the plan. To attempt to 
close the premium shortfall by imposing heavy premiums on financially 
strong plan sponsors would tend to discourage those companies from 
adopting or continuing to maintain defined benefit plans.
    Because the financially stronger defined benefit plan sponsors with 
adequately funded plans are effectively subsidizing the pension 
insurance for the weaker ones, there is already a risk, as noted, that 
the stronger employers will exit the system, leaving a potentially 
heavier burden to be borne by the remaining premium payers or 
ultimately by the taxpayers. This risk would be exacerbated to the 
extent that the subsidy from stronger to weaker employers was 
increased.
    Although PBGC insures benefits in underfunded plans sponsored by 
insolvent employers, the PBGC premium structure takes into account only 
the risk of underfunding and not the risk of insolvency (and does not 
fully take into account even the risk associated with underfunding). 
Yet PBGC has observed that a large proportion of the sponsors that have 
shifted their obligations to PBGC in distress terminations had below 
investment-grade credit ratings for years prior to the termination. 
This leaves a major element of moral hazard in the insurance program. 
It is understandable, therefore, that the Administration is exploring 
whether it would be feasible and practical to better adjust the 
premiums to the risk by relating the level of premiums--or possibly 
funding obligations--to the financial health of the company, as 
determined by an independent third party such as a rating agency.

C. Improve Transparency and Disclosure of Underfunding
    Current law requires plan sponsors to report annually the plan's 
``current liability'' and assets for funding purposes. The 
Administration has stated in testimony that ``workers and retirees 
deserve a better understanding of the financial condition of their 
pension plans, that required disclosures should realistically reflect 
funding of the pension plan on both a current and a termination 
liability basis, and that better transparency will encourage companies 
to appropriately fund their plans' \17\ (in part on the theory that 
employees will then be better equipped to press for such funding).
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    \17\ Testimony of Ann L. Combs, Assistant Secretary for Employee 
Benefits Security, U.S. Department of Labor, before the Subcommittee on 
Employer-Employee Relations of the House Committee on Education and the 
Workforce and the Subcommittee on Select Revenue Measures of the House 
Committee on Ways and Means, July 15, 2003 (``Combs testimony''), page 
5.
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    Accordingly, the Administration has proposed to require defined 
benefit plan sponsors to disclose in their annual summary annual 
reports to participants the value of plan assets and liabilities on 
both a current liability basis and a termination liability basis. In 
general, a plan's current liability means all liabilities to 
participants accrued to date and determined on a present value basis, 
on the assumption that the plan is continuing in effect. By contrast, 
termination liability assumes the plan is terminating, and, according 
to PBGC studies, is typically higher because it includes costs of 
termination such as ``shutdown benefits'' (subsidized early retirement 
benefits triggered by layoffs or plant shutdowns) and other liabilities 
that are predicated on the assumption that participants in a 
terminating plan will tend to retire earlier. This is often the case 
because, when PBGC takes over a terminating plan, the employer 
typically has become insolvent or at least has ``downsized'' 
significantly.
    In addition, the Administration has proposed public disclosure of 
the special and more timely plan asset and liability information--the 
underfunded plan's termination liability, assets, and termination 
funding ratios--that sponsors of plans with more than $50 million of 
underfunding are currently required to share with PBGC on a 
confidential basis.\18\
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    \18\ Generally similar requirements have been proposed in H.R. 
3005, the ``Pension Security Disclosure Act of 2003,'' introduced by 
Rep. Doggett and Ranking Member Miller.
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    Improved transparency and disclosure is desirable. Plan sponsor 
representatives have raised concerns, however, about the cost of 
generating these additional actuarial calculations and about the risk 
that these disclosures would confuse or unnecessarily alarm 
participants in plans sponsored by financially strong employers that 
are able to pay all benefits in the event of plan termination. As noted 
earlier, Congress should be slow to impose additional costs on sponsors 
of defined benefit plans that do not present the greatest risks to the 
PBGC or participants. It is worth considering, therefore, whether such 
additional disclosure requirements should be limited to sponsors that 
are financially vulnerable and arguably present some risk of being 
unable to pay all benefits upon plan termination.

D. Protect Against ``Moral Hazard'' in Ways That, to the Fullest Extent 
        Possible, Protect Workers' Reasonable Expectations and Allow 
        for the Provision of Continued Benefits
    The Administration has put forward several proposals to address the 
``moral hazard'' associated with the current system of pension funding. 
As stated in the Administration's testimony, a defined benefit plan 
sponsor ``facing financial ruin has the perverse incentive to underfund 
its--plan while continuing to promise additional pension benefits. The 
company, its employees, and any union officials representing them know 
that at least some of the additional benefits will be paid, if not by 
their own plan then by other plan sponsors in the form of PBGC 
guarantees. Financially strong companies, in contrast, have little 
incentive to make unrealistic benefit promises because they know that 
they must eventually fund them.'' \19\ In addition, a company in 
economic distress that is strapped for cash might be tempted to respond 
to pressure for some kind of compensation increase by increasing 
pension promises rather than providing an immediate pay raise. And 
employers faced with collective bargaining pressures often have been 
reluctant to contribute too much to collectively bargained plans out of 
concern that the unions will demand that any resulting surplus be 
converted to higher benefits.
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    \19\ Combs testimony, pages 6-7.
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    To address this longstanding problem, the Administration has 
proposed to require plan sponsors that have below investment grade 
credit ratings (or that file for bankruptcy) to immediately and fully 
fund any additional benefit accruals, lump sum distributions exceeding 
$5,000, or benefit improvements in plans that are less than 50% funded 
on a termination basis, by contributing cash or providing security.\20\ 
Thus, continued accruals, lump sum distributions of more than $5,000, 
and benefit improvements would be prohibited unless fully funded by the 
employer.
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    \20\ The Administration's proposal would go significantly beyond 
current law, which requires sponsors of plans that are less than 60% 
funded on a ``current liability'' basis to immediately fund or secure 
any benefit increase exceeding $10 million.
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    These proposals--particularly a freeze of benefit accruals--should 
be viewed with caution. First, an empirical question: to what extent 
are underfunded plans covering hourly paid workers in fact amended to 
increase benefits in the expectation that the employer might well be 
unable to ever fund the additional benefits, and that the PBGC will 
ultimately assume the obligations?
    In addressing this question, it is relevant to recall the 
differences between two common types of defined benefit pension plans: 
plans that use a benefit formula based on the employee's pay and so-
called ``flat benefit'' plans, which, in mature industries, account for 
a large proportion of the actual and potential claims on PBGC's 
guarantee.
    Pay-based or salary-based plans commonly express the employee's 
pension benefit as a multiple of final pay or career average pay for 
each year of service for the employer (for example, the annual pension 
benefit might be 1.5% of the employee's final salary, averaged over the 
last few years of the employee's career, times years of service). This 
type of formula--typical in defined benefit plans for salaried 
workers--has the effect of increasing the amount of benefits 
automatically as salary typically rises over time and over the course 
of an employee's career. This tends to protect salaried employees' 
pensions from the effects of inflation and to maintain retirement 
income at a targeted replacement rate relative to the active employee's 
pay. The plan sponsor projects and funds for the expected increases in 
pay over the employee's career.
    By contrast, flat benefit plans have pension benefit formulas that 
are not based on salaries or wages--such as a formula for an hourly-
paid workforce that expresses the pension benefit as a specified dollar 
amount per month multiplied by the employee's years of service. Many 
collectively bargained plans are designed as flat benefit plans in 
order that the amount of the pension benefit not vary among employees 
based on differences in pay levels but only based on differences in 
length of service. Typically, the monthly dollar amounts are increased 
every three or five years when labor and management renegotiate union 
contracts because--unlike a pay-based plan formula--benefit increases 
do not occur automatically as pay rises.
    Typically, the negotiated increases to benefit levels apply not 
only to future years of service but to past years as well. This 
accounts for part of the funding problem affecting bargained flat 
benefit plans: it often is hard for funding to ``catch up'' with the 
rising benefit levels because new layers of unfunded benefits 
attributable to past service are often added before the employer has 
funded all of the previous layers.
    On the other hand, without periodic formula improvements, the fixed 
hourly benefit would be exposed to inflation and could represent a 
diminishing portion of the employee's pay over time. Accordingly, many 
hourly plan benefit improvements can be likened to the automatic 
salary-driven increases inherent in a salary-based formula, which are 
designed to meet employees' reasonable expectations regarding the level 
of post-retirement income replacement. It can be argued, therefore, 
that hourly plan benefit improvements, to the extent they do not exceed 
an amount that reasonably serves this regular updating function, should 
not be subjected to special premiums, guarantee limitations, or funding 
strictures that might be proposed for other types of benefit 
improvements in underfunded plans.
    Second, new rules in this area need to take into account the fact 
that PBGC's guarantee of new benefits provided by a plan amendment that 
has been in effect for less than five years before a plan termination 
generally is phased in ratably, 20% a year over five years. The five-
year phasein provides PBGC with some protection (though far from 
complete) from claims attributable to benefit improvements that are 
granted during a corporate ``death spiral'' before the plan terminates 
and is taken over by PBGC.
    Third, formulation of policy here should take into account the fact 
that the employees participating in underfunded plans have already 
given up a portion of their wages in exchange for the promised benefits 
and generally do not control either the funding of the plan or their 
employer's financial condition. To what extent should employees suffer 
the consequences of the employer's failure to fund adequately or the 
employer's financial weakness? As noted, some would argue that 
restricting flat benefit plan improvements that essentially reflect 
wage or cost of living increases would unduly interfere with employees' 
reasonable expectations regarding their promised retirement benefits. 
(Others would contend that such restrictions would unduly interfere 
with collective bargaining as well.) Of course such concerns would be 
even more applicable to a mandatory freeze of continued accruals at 
existing benefit levels or a suspension of lump sum payments above 
$5,000. Requirements to immediately fund or secure benefits can also 
discourage an employer from increasing benefits if it is willing and 
able to fund the increase over time but unwilling or unable to secure 
or fund it immediately.

E. Allow Funding to Take Into Account Expected Single-Sum Benefits
    Current IRS rules restrict the ability of a defined benefit plan 
sponsor to fund based on expected future single-sum distributions even 
when those would impose larger obligations on the plan than annuity 
distributions. Instead, employers are required to fund based on the 
assumption that all employees will choose annuities, even when that 
assumption is unrealistic. In the interest of more accurate and 
adequate funding, the rules should allow employers to anticipate 
funding obligations associated with expected single sums.

F. Beware of Unduly Restricting the Size of Benefit Payments in the 
        Interest of Funding Relief
    For an employer, funding is a long-term, aggregate process 
involving obligations to numerous employees coming due over a period of 
years. Oftentimes, the employer can manage its risk over time, by 
adjusting to temporary shortfalls, funding demands, and other changes 
so that the ebbs and flows can even out in the long run.
    For any particular employee, however, the determination of the 
amount of that individual's pension ordinarily is a one-time, 
irrevocable event, especially in the case of a single-sum distribution. 
If, for example, Congress gave employers funding relief in the short 
term by increasing the funding discount rate, and also applied a higher 
discount rate to the calculation of single-sum benefits in a way that 
unduly reduced their value, employees who received those reduced 
single-sum benefits during such a temporary relief period would suffer 
irrevocable consequences.
    Congress could respond to further developments and experience 
affecting plan funding by revisiting and readjusting the discount rate 
and related rules, and employers could adjust accordingly. But an 
individual who received a reduced pension benefit in the interim would 
presumably have incurred a permanent reduction relative to the higher 
value the employee might reasonably have expected, without any 
opportunity to adjust or recoup the shortfall. Accordingly, a higher 
discount rate used to provide temporary funding relief should not 
automatically be applied to determine the lump sum equivalent of an 
annuity under the plan. As in the past, determining the appropriate 
discount rates for funding and for single-sum distributions entails two 
different, albeit related, analyses involving two different sets of 
considerations.

G. Don't Discourage Defined Benefit Plan Investment in Equities
    Defined benefit plans should not be precluded or discouraged from 
continuing to be reasonably invested in equities. Defined benefit plans 
in the aggregate reportedly have been more than 60% invested in US and 
international stocks. It is evident that many plan sponsors have come 
to view stocks, as well as real estate and other assets that are not 
fixed income securities, as playing an important role in their 
investment portfolios. They see investment of a substantial portion of 
defined benefit plan assets in diversified equities as consistent with 
the duties ERISA imposes on fiduciaries to invest prudently, in a 
diversified manner, and to act in the best interests of plan 
participants.
    Of course, as a general matter, stocks traditionally have been 
expected to generate higher returns, together with greater risk or 
volatility, than a dedicated portfolio of bonds whose maturities match 
the durations of the plan's benefit payment obligations. Accordingly, 
over the long term, many view reasonable investment in equities as 
consistent with good pension policy--likely to produce higher 
investment returns that will benefit plan sponsors and, ultimately, 
participating employees. Any changes to the funding or premium rules 
that may be intended to take account of the additional risk associated 
with equities should be crafted with care to avoid penalizing or 
discouraging defined benefit plan investment in a reasonable portfolio 
of diversified equities.

H. Be Guided By the Numbers
    It is worth bearing in mind the obvious: funding discount rates and 
other pension funding rules do not directly determine the magnitude of 
a plan's actual liabilities to pay benefits. Instead, in the first 
instance the funding rules affect when and how much a company pays into 
the plan to prefund those liabilities. Accordingly, since funding 
policy is ultimately a matter of dollars over time, it should be 
informed by the numbers, rather than focusing on abstract propositions 
or on doctrinal positions regarding particular elements of funding 
whose consequences depend on interactions with other elements.
    Policymakers in Congress and the Executive Branch need specific 
data and modeling to help them weigh the likely impact of alternative 
policies on the funded status of plans. Given particular rules, how 
many dollars will go into plans and when? The necessary data and 
analysis are extensive, in part because they must focus on particular 
industries and even on those specific companies and plans that are 
large enough to have a material impact on overall policy and on PBGC's 
financial condition.
    Therefore, as Congress approaches the end of the first phase of 
this policy process--devising a short-term fix--and turns its attention 
to the next phase--more comprehensive, permanent reform--it needs the 
active cooperation of the Executive Branch to give it access to the 
best available data, analysis and modeling. ``Number crunching'' is 
essential to responsible policymaking in the pension funding area. 
Transparency of analysis--sharing of data and modeling capability by 
the PBGC, the plan sponsor community, their professional advisers, and 
others--will be important in the coming months. Of course, the process 
must carefully protect proprietary and other confidential or sensitive 
information specific to individual employers, including taxpayer 
confidential information.

I. Be Cautious of Piecemeal Reforms
    The pension funding rules are complex and interrelated. 
Accordingly, it generally is desirable to develop permanent reforms in 
a comprehensive manner, as opposed to enacting piecemeal changes to 
interdependent elements of the system. For example, the valuation of 
plan liabilities is affected by a set of actuarial assumptions, 
including a discount rate, mortality and expected retirement 
assumptions. Each of these represents a simplifying assumption about 
the amount and timing of a complex and inherently uncertain array of 
benefit obligations. It generally is preferable to consider possible 
long-term changes to the discount rate--including any trailing averages 
or other smoothing or averaging mechanisms and any minimum and maximum 
rates--in conjunction with possible changes to the mortality tables, 
the rates at which plan sponsors are required or permitted to amortize 
their obligations, the funding levels that trigger accelerated funding 
and other obligations, and the funding levels above which employers 
cannot make tax-deductible contributions.
    In particular, the crucial objective of controlling volatility in 
funding is harder to pursue through piecemeal changes that fail to take 
into account the entire fabric of rules confronting the plan. An effort 
to smooth in one place, for example, might interact with other rules so 
as to create sharp discontinuities elsewhere.

J. Clarify the Rules Governing Cash Balance and Other Hybrid Plans
    Hybrid plans, such as cash balance pension plans, are plans of one 
type--defined benefit or defined contribution--that share certain 
characteristics of the other type. Currently, a major portion of the 
defined benefit universe takes the form of cash balance or other hybrid 
plans, as hundreds of sponsors of traditional defined benefit plans 
have converted those plans to cash balance formats in recent years. 
However, the precise application of the governing statutes to such 
hybrid plans has been the subject of uncertainty, litigation and 
controversy.
    Like the regulation of pension funding, the regulation of cash 
balance plans has potentially far-reaching consequences for the 
survival of the defined benefit system and for workers' retirement 
security. The system as a whole would benefit from a resolution of the 
cash balance controversy that would settle the law governing those 
plans in a reasonable way. While testifying in June before this 
Committee's Subcommittee on Employer-Employee Relations, I expressed 
the view, in response to a question from a Subcommittee Member, that 
Congress could resolve the cash balance issue in a manner that provides 
substantial protection to older workers from the adverse effects of a 
conversion while allowing employers reasonable flexibility to change 
their plans. At the Subcommittee's request, I submitted additional 
written testimony illustrating such a legislative approach.\21\ If any 
Member of this Committee is interested, I would be happy to discuss 
this issue further.
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    \21\ Testimony of J. Mark Iwry before the U.S. House of 
Representatives, Committee on Education and the Workforce, Subcommittee 
on Employer-Employee Relations, July 1, 2003.
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    Mr. Chairman and Ranking Member Miller, I would be pleased to 
respond to any questions you and the Members of the Committee might 
have.

     Appendix A - More Context Regarding the Private Pension System

    In assessing our nation's private pension system, one can readily 
conclude that the glass is half full and the glass is half empty. The 
system has been highly successful in important respects. It has 
provided meaningful retirement benefits to millions of workers and 
their families, and has amassed a pool of investment capital exceeding 
$5.6 trillion (excluding IRAs) that has been instrumental in promoting 
the growth of our economy \22\.
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    \22\ Board of Governors, United States Federal Reserve System, 
Statistical Release Z.1, Flow of Funds Accounts of the United States 
(March 6, 2003), tables L.119, 120. This total is as of the end of 
2002. It excludes amounts rolled over from plans to IRAs as well as 
other IRA balances. It is unclear how much of these accumulated assets 
in retirement plans represent net national saving (private saving plus 
public saving), because this dollar amount has not been adjusted to 
reflect the public dissaving attributable to government tax 
expenditures for pensions or to reflect any household debt or reduction 
in other private saving attributable to these balances. See Engen, Eric 
and William Gale, ``The Effects of 401(k) Plans on Household Wealth: 
Differences Across Earnings Groups.'' NBER Working Paper No. 8032 
(October 2000) (``Engen and Gale 2000'').
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    Some two thirds of families will retire with at least some private 
pension benefits, and at any given time, employer-sponsored retirement 
plans cover about half of the U.S. work force.\23\ However, the 
benefits earned by many are quite small relative to retirement security 
needs. Moreover, moderate- and lower-income households are 
disproportionately represented among the roughly 75 million working 
Americans who are excluded from the system. They are far less likely to 
be covered by a retirement plan.\24\ When they are covered, they are 
likely to have disproportionately small benefits and, when eligible to 
contribute to a 401(k) plan, are less likely to do so. (Fewer still 
contribute to IRAs.) Accordingly, the distribution of benefits--
retirement benefits and associated tax benefits--by income is tilted 
upwards.
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    \23\ Testimony of J. Mark Iwry, Benefits Tax Counsel, Office of Tax 
Policy, Department of the Treasury, before the Committee on Health, 
Education, Labor and Pensions, United States Senate (Sept. 21, 
1999)(``Sept. 21, 1999 Testimony'').
    \24\ It has been estimated that over 80% of individuals with 
earnings over $50,000 a year are covered by an employer retirement 
plan, while fewer than 40% of individuals with incomes under $25,000 a 
year are covered by an employer retirement plan. See Testimony of 
Donald C. Lubick, Assistant Secretary (Tax Policy), U.S. Department of 
the Treasury, before the House Committee on Ways and Means, 
Subcommittee on Oversight, page 6 (March 23, 1999) (``March 23, 1999 
Testimony'').
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    Yet providing retirement security for moderate- and lower-income 
workers--in other words, for those who need it most--should be the 
first policy priority of our tax-qualified pension system. This is the 
case not only because public tax dollars should be devoted to enhancing 
retirement security as opposed to retirement affluence--minimizing the 
risk of poverty or near-poverty in old age, reducing retirees' need for 
public assistance and potentially reducing pressure on the nation's 
Social Security system.\25\ It is also because targeting saving 
incentives to ordinary workers tends to be a more effective means of 
promoting the other major policy goal of our pension system: increasing 
national saving.
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    \25\ March 23, 1999 Testimony, page 3.
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    Tax expenditures that are of use mainly to the affluent tend to be 
inefficient to the extent that they induce higher-income people simply 
to shift their other savings to tax-favored accounts, direct to tax-
favored accounts current income that would otherwise be saved in 
nontax-favored vehicles, or offset additional contributions with 
increased borrowing. But contributions and saving incentives targeted 
to moderate- and lower-income workers--households that have little if 
any other savings that could be shifted--tend to increase net long-term 
saving.\26\ This enhances retirement security for those most in need 
and advances the goals of our tax-favored pension system in a 
responsible, cost-effective manner.
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    \26\ See Engen and Gale (2000).
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    These goals have been articulated by the Department of the Treasury 
in congressional testimony as follows:
        ``First, tax preferences should create incentives for expanded 
        coverage and new saving, rather than merely encouraging 
        individuals to reduce taxable savings or increase borrowing to 
        finance saving in tax-preferred form. Targeting incentives at 
        getting benefits to moderate- and lower-income people is likely 
        to be more effective at generating new saving...
        ``Second, any new incentive should be progressive, i.e., it 
        should be targeted toward helping the millions of hardworking 
        moderate- and lower-income Americans for whom saving is most 
        difficult and for whom pension coverage is currently most 
        lacking. Incentives that are targeted toward helping moderate- 
        and lower-income people are consistent with the intent of the 
        pension tax preference and serve the goal of fundamental 
        fairness in the allocation of public funds. The aim of national 
        policy in this area should not be the simple pursuit of more 
        plans, without regard to the resulting distribution of pension 
        and tax benefits and their contribution to retirement 
        security''.
        ``Third, pension tax policy must take into account the quality 
        of coverage: Which employees benefit and to what extent? Will 
        retirement benefits actually be delivered to all eligible 
        workers, whether or not they individually choose to save by 
        reducing their take-home pay?'' \27\
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    \27\ March 23, 1999 Testimony, pages 3-4.
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    There are a number of reasons why the system is not doing more to 
address the needs of moderate- and lower-income workers.
    First, tax incentives--the ``juice'' in our private pension 
system--are structured in such a way that they prove to be of little if 
any value to lower-income households. Workers who pay payroll taxes but 
no income taxes or income taxes at a low marginal rate derive little or 
no value from an exclusion from income for contributions to a plan, 
earnings on those contributions, or distributions of the contributions 
and earnings, or from a tax deduction for plan contributions. Roughly 
three quarters of our population are in the 15%, 10% or zero income tax 
brackets. (Refundable tax credits--or even currently nonrefundable tax 
credits such as the saver's credit for 401(k) and IRA contributions (as 
well as voluntary employee contributions to defined benefit plans) 
under section 25B of the Internal Revenue Code--would help address this 
problem.)
    Second, obviously, after spending a higher proportion of their 
income on immediate necessities such as food and shelter, lower-income 
families often have little if anything left over to save.
    Third, lower-income families have less access to financial markets, 
credit and investments, and tend to have little if any experience with 
tax-advantaged financial products, investing and private financial 
institutions.
    Fourth, the qualified plan rules permit many moderate- and lower-
income workers to be excluded from coverage. The rules provide 
considerable leeway with respect to proportional coverage of moderate- 
and lower-income employees, and do not require any coverage of millions 
of workers whose work arrangements are part-time, based on independent 
contractor status, contingent or otherwise irregular.

                      Appendix B - A Personal Note

    About a decade ago, the PBGC, together with the Departments of the 
Treasury, Labor, and Commerce, as well as representatives of OMB, the 
Council of Economic Advisers, the White House staff and others launched 
an intensive interagency process to review and reform the funding and 
pension insurance rules. This process, strongly encouraged by then 
Congressman Pickle, entailed research, fact-finding, modeling, 
economic, legal and legislative analysis. Input was solicited from 
management, organized labor, the financial services industry, other 
service providers, and other stakeholders in the private pension 
system, and a serious attempt was made to forge consensus among the 
various interests.
    After months of work in 1993-94 involving several interagency 
meetings per week under the outstanding leadership of the late Martin 
Slate, then Executive Director of the PBGC, the Executive Branch made 
legislative recommendations to reform the funding rules and pension 
insurance regime. These proposals became the Retirement Protection Act 
of 1994, enacted as part of the GATT legislation.
    Marty Slate saw to it that the PBGC's management processes were 
significantly improved and that its capacity to intervene in corporate 
transactions to protect workers' pension security was expanded and 
actively exercised. Within about two years after enactment of the GATT 
legislation incorporating the funding and insurance premium reforms, 
the budgetary deficit that PBGC had run for 21 years was reversed for 
the first time, and pension funding was improved.
    Formerly Director of the Employee Plans Division at the Internal 
Revenue Service, Marty Slate was, as President Clinton characterized 
him, ``the quintessential public servant.'' He was driven to achieve 
excellence and constructive results, and was dedicated to good 
government and to fairness of process and outcome. Those of us who 
worked with him in that major effort are the better for it, as is the 
private pension system.
    Now, after an additional decade of experience, it is time to build 
on that effort and on the 1987 and earlier funding legislation that 
preceded it. In 1987 and 1994, political pressures and other 
constraints prevented the accomplishment of all that was needed to 
reform the system. Meanwhile, the stakes have gotten higher. Over the 
past decade, the scope of the funding problem has expanded, largely 
because of the structural industry-wide and demographic developments 
outlined earlier. Congress and the Executive Branch now confront the 
challenge of drawing the appropriate lessons from 1994 and the ensuing 
decade of experience, and completing the unfinished business of 
reforming the pension funding system.
                                 ______
                                 
    Chairman Boehner. Thank you, Mr. Iwry, for your testimony.
    Mr. John?

  STATEMENT OF DAVID C. JOHN, RESEARCH FELLOW, THOMAS A. ROE 
INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION, 
                         WASHINGTON, DC

    Mr. John. Thank you for inviting me to testify today on a 
problem that is growing in importance, and growing, I'm afraid, 
in emotion.
    It is tempting to look at a problem like--well, that uses 
terms like ``deficit reduction contribution,'' and the 
``appropriate discount rate for current liabilities,'' and 
think that we're talking about dry facts and figures and 
numbers.
    The reality is that we are dealing with real people. Last 
week, I was on a radio show with a steelworker from Weirton 
Steel, who had been told by both a union and his management 
that their pension plan was fully funded. A few days later, it 
went to the PBGC, and they discovered that it was about 35 
percent funded.
    The difference was not a lie, it was a matter of which 
measure you were using, whether you were using the current 
liability or the termination liability. And the--how this 
Congress resolves such seemingly very technical issues is going 
to affect the lives of very real people, some of whom have 
worked for 40 and 50 years in rather incredible conditions.
    About 20 years ago, I was working with a Member from this 
side of the House on banking issues, and we started dealing--
hearing about problems with the S&L industry. And we were told 
that the S&L industry was absolutely vital to our nation's 
housing markets, but that it had a few minor problems here and 
there, but just a couple of corrections--and most key, is that 
Congress had to forebear. Congress had to ease off on some of 
the funding requirements that the S&L's had, and all would be 
well.
    Well, Congress passed legislation that did that, and it 
discovered very shortly thereafter that precisely the opposite 
was true, that if they had taken some very stern steps--which 
would have been politically uncomfortable--early, they would 
have saved the taxpayers a few hundred billion dollars.
    I am not suggesting that there is an exact parallel between 
what's going on with defined benefit plans and the S&L 
industry. However, if Congress and this Committee do not want 
to sit here in a few years doing a bail-out of the PBGC with 
multi-hundreds of billions of dollars, the fastest thing that 
it can do is to avoid making any forbearance or any changes in 
the deficit reduction contribution.
    Telling companies that are already ill, that are already 
underfunded, regardless of what industry they are in, that they 
have another 3 years or whatever to make up their balances--the 
underfunding in their pension plan--is a sure recipe for 
disaster.
    The simple fact is that PBGC, like the FDIC and the FSLIC 
of late lamented memory, is a market distortion. It's a form of 
an insurance that may be incredibly important, and have great 
value, but it has very complex funding rules that allow 
companies, sometimes for the best of reasons, to game the 
system.
    In the S&L industry, they used something called regulatory 
goodwill, regulatory capital, and ended up paying the price. 
Playing around with the wrong funding rules for pensions can 
have the same result.
    In my testimony, I mentioned why I so strongly support the 
Administration's position on coming up with an appropriate 
discount rate, including the use of a yield curve that looks at 
the age of the relative workforce being covered by the pension 
plan.
    Let me suggest, once again, that this affects real workers, 
and the decisions that are made here also affect the taxpayers. 
There are an awful lot of taxpayers who ended up funding S&L 
failures, and the like, who didn't necessarily have to.
    Another matter of key concern is the termination liability. 
I talked to this steel worker, and he said, essentially, 
``Listen. I was told all was well,'' and that was because they 
were using the discount rate.
    The fact was that the termination liability--and this is 
especially true in the case of Bethlehem Steel, U.S. Airways, 
and that sort of thing--proved to be a much more important 
guide to both the taxpayer, in the form of the PBGC, and the 
worker, in the form of the retirees, than did the present 
liability method, the current liability method.
    If Congress is going to take action, a short-term action--
and I applaud you for doing so--to make the 2-year change, as 
with the legislation that's passed here this year, it also 
needs to take short-term action to improve the information that 
workers get about their pension plans. A person should not wake 
up and turn on the radio and discover that his pension had 
declined from roughly $2,500 a month to $1,500, a month, 2 
months after he had retired.
    Similarly--and here we have, in the form of gaming the 
system--it is absolutely essential that Congress take quick 
action to make sure that a company which is facing severe 
financial pressures doesn't go to its work force and say, 
``Gee, rather than giving you a 3 percent pay raise this week, 
we will increase your pension benefits by 5 percent in future 
years,'' only to find that the taxpayers, essentially, are 
going to be on the hook for that. Those two measures should be 
enacted as quickly as possible.
    The United Kingdom is going through a similar problem with 
its form of defined pension plan. It's called a final salary 
thing. And they're discovering precisely how expensive this 
type of reform is. The added costs may put the remainder of 
their final salary plans under. Early action by this Congress 
can make sure that that doesn't happen here. Thank you.
    [The prepared statement of Mr. John follows:]

 Statement of David C. John, Research Fellow, Thomas A. Roe Institute 
  for Economic Policy Studies, The Heritage Foundation, Washington, DC

    I appreciate the opportunity to appear before you today to discuss 
the an appropriate funding rule for America's defined benefit pension 
plans. This is an extremely important subject, and I would like to 
thank Chairman Boehner for scheduling this hearing. Let me begin by 
noting that while I am a Research Fellow in Social Security and 
Financial Institutions at the Heritage Foundation, the views that I 
express in this testimony are my own, and should not be construed as 
representing any official position of the Heritage Foundation. In 
addition, the Heritage Foundation does not endorse or oppose any 
legislation.
    What a difference a year makes. Last year, there was a great deal 
of discussion about the ``dangers'' of 401k retirement plans and other 
types of defined contribution plans. Experts warned, with some 
justification that retirement plans where workers had to invest their 
money faced investment risks. Many of those same experts and 
legislators called for a return of the good old days when employees 
were part of a defined benefit retirement plan. Under those plans, 
rather than having a retirement benefit based on one's investments, a 
worker receives a company paid benefit based on his or her length of 
employment and salary history. In theory, defined benefit plans are 
paid from a separate fund managed by the company or by financial 
professionals chosen by them.
    Those experts implied that these defined benefit plans had little 
or no risk. They were wrong. Since then, a number of companies have 
dropped their defined benefit pension plans as part of a bankruptcy 
proceeding. Most recently, Weirton Steel became the latest company to 
try to dump their pension obligations on the taxpayer. Last week, I was 
a guest on a radio show that originates in the Ohio Valley area, and 
had the opportunity to speak to several steel workers whose pensions 
were going to be affected by Weirton's actions. Their stories were a 
forceful reminder that this is not just a policy issue, it affects real 
people's lives in the most direct way at the time when they are likely 
to be least able to change their circumstances.
    Now Congress is debating legislation that would allow companies 
just a little more time to fund their pension plans. It is also looking 
a ways to change the regulatory framework so that under funded pension 
plans look like they have just a bit more in assets. Companies claim 
that without this help, jobs will be lost and the economy will suffer.
The S&L Crisis: Are We On the Same Track With Pensions?
    Earlier this month, I testified at a Senate Special Committee on 
Aging hearing entitled ``Americas Pensions: The Next S&L Crisis.'' That 
title could not be more to the point. It also brings back some painful 
memories. Back in the early 1980's, I worked as Legislative Director to 
a member of the House Banking Committee, former Rep. Doug Barnard of 
Georgia, as Congress considered legislation dealing with the early 
signs of the S&L crisis.
    At the time, we were told that the industry was essential to 
America's economy, and that even though they were beginning to run 
deficits, all that was needed was a little forbearance. As a result, 
Congress created a regulatory form of capital called ``good will'' 
which allowed S&Ls to count an estimate of their reputations and 
business relationships as part of capital. At first, the gimmick worked 
like a wonder. S&Ls suddenly had not only enough capital to be 
``healthy'' but to expand.
    Of course, the net result was that when the industry finally 
collapsed the expanded S&Ls had lost even more money than they would 
have if they had been allowed to face economic reality several years 
earlier. The cost to America's taxpayers was somewhere around $500 
billion. By showing forbearance, Congress had really just made the 
problem worse and increased the eventual cost. That example could also 
apply to America's pensions.
    The S&L crisis has a direct parallel to what we are discussing 
today. The Senate Finance Committee has approved legislation that 
includes a three year holiday on the Deficit Reduction Contribution, a 
mechanism created in 1987 to require companies with chronically 
underfunded pension plans to increase the assets in those plans. Such a 
move, regardless of the problems faced by a few industries, would 
practically guarantee that we will be sitting here in a few years 
discussing a multi-hundred billion dollar bailout of the PBGC. It would 
be extremely irresponsible, and I would hope that the Administration 
would veto any bill containing such a funding holiday.
    Currently, 12 percent of the labor force is covered by defined 
benefit pension plans, while an additional 7 percent is covered by both 
defined benefit and defined contribution plans. Under a defined benefit 
plan, a worker is promised a retirement benefit based on a percentage 
of salary for each year worked or similar measures. While the worker 
does not have the direct investment risk associated with a 401(k) plan, 
the benefits depend on whether or not the plan is fully funded. The 
risk that it is not fully funded can be as great or greater than the 
risk from stock and bond investments, but it is usually much harder for 
the worker to determine how high that risk is.

A Proper Discount Rate for Defined Benefit Pension Plans.
    A key question is whether the pension plan's level of funding is 
being measured properly. A July 8 proposal by the U.S. Department of 
the Treasury addresses both the proper way to measure pension plan 
funding and ways to make it easier for workers and others to determine 
whether their company's pension plan is at risk. It also proposes ways 
to prevent companies that are in financial trouble from making promises 
to their workers and then making the taxpayers pay for them.
    The Treasury Department's plan is far superior to the discount rate 
provisions in the July 18 version of the Portman-Cardin bill passed by 
the House Ways and Means Committee--H.R.1776, named for the bill's two 
principal sponsors, Representatives Rob Portman (R-OH) and Benjamin L. 
Cardin (D-MD)--and Congress should consider incorporating Treasury's 
proposed reforms into the final bill. As a short term alternative--with 
the full understanding that this is a temporary measure, Congress 
should consider a two year shift to a corporate bond rate, such as that 
contained in HR 3108.

Why an Appropriate Discount Rate Is Important
    The funding of a defined benefit pension plan is measured using a 
``discount rate.'' A plan is assumed to be fully funded if the assets 
that it currently has can be expected to grow at a certain interest 
rate until the resulting level of assets then equals the total amount 
of pension payments that the plan promises to make in the future. For 
example, if a fund will owe $1,000 in 30 years and assumes that its 
assets will earn an average of 5 percent every year after inflation, it 
must have $231 today in order to be fully funded. (Invested at a 5 
percent interest rate, $231 will grow to $1,000 in 30 years.)
    The discount (interest) rate used to measure a plan's funding is 
crucial. If a plan assumes that its assets will grow at 7 percent a 
year instead of 5 percent, it needs only $131 today to be fully funded 
(rather than the $231 it would need if it used a 5 percent rate). On 
the other hand, if a plan uses a discount rate of only 3 percent, then 
it must have $412 on hand today to be fully funded.
    The discount rate has no actual relationship to how much a pension 
plan's investments are earning. While the law requires that plans make 
prudent investments, these investments can change over time and are 
greatly affected by short-term swings in the stock, bond, and property 
markets. The discount rate is intended to measure whether or not the 
plan has sufficient assets to meet its obligations over a long period 
of time; thus, a defined benefit plan uses the rate for long-term 
government or corporate bonds instead of the rate of interest the plan 
is earning on its investments.
    Over the years, Congress has tinkered with the appropriate discount 
rate in order to address specific problems as they arose. From 1987 to 
2002, the law required that defined benefit pension plans use a 
weighted four-year average of the returns of the 30-year U.S. Treasury 
bond rate as their discount rate for determining funding adequacy. 
Under the 1987 law, plans were allowed to use any number between 90 
percent and 110 percent of that rate. The spread between 90 percent and 
110 percent was intended to allow the pension plan a slight amount of 
flexibility in its calculations. In 1994, Congress narrowed this range 
to between 90 percent and 105 percent of that weighted average. This 
discount rate is also used to determine lump-sum benefits for workers 
who want a one-time payment instead of a monthly check.
    However, using this rate presents two problems. First, the Treasury 
Department announced in 2001 that it would stop issuing the 30-year 
Treasury bond. As a result, market prices for these bonds are distorted 
by the realization that they will no longer be issued. Second, interest 
rates in general are at a historic low, reaching levels not seen for 
almost 50 years. While economists expect them to rise gradually, 
pension plans argue that using today's low rate would make pension 
plans look far more underfunded than they actually are. Continued use 
of today's rate would force companies to assign pension plans literally 
billions of dollars that could be used more effectively to build the 
company.
    Recognizing that the old discount rate was too low, in 2002, 
Congress allowed pension plans to use instead a number equal to 120 
percent of the four-year average of the 30-year Treasury bond rate. 
However, this law expires after 2003. Some corporations have proposed 
that Congress substitute a longer-term corporate bond rate for the 30-
year Treasury rate. Since corporate bonds do not have the full faith 
and credit of the United States behind them, they have higher interest 
rates. Using those higher interest rates would sharply reduce the 
amount of money that a pension plan must have on hand in order to avoid 
being underfunded while still protecting the funding status of the 
plan.
    The changes in the discount rate between 1987 and now have had an 
effect. Each, along with other changes in the law including the 
establishment of a 90 percent minimum full funding rate in 1994, have 
addressed specific problems. In most cases, there has been at least a 
temporary improvement. For instance, the 1994 law saw a chronic 
underfunding of these pension plans (in the aggregate) change into a 
significant surplus. However, despite improvements after each change, 
these changes have proven to be temporary until the next change in 
circumstances requires yet another urgent debate.
    Recent circumstances are forcing Congress to yet again examine the 
appropriate discount rate. As will be discussed below, the Treasury 
Department has made a proposal that would significantly improve the 
discount rate. However, simply looking at the discount rate for current 
liabilities may not be enough. For both the affected workers and for 
taxpayers as a whole, it may be even more important to look at the 
termination liability of chronically underfunded pension plans.

How the Treasury Department Proposal Would Affect the Discount Rate
    On July 8, the Treasury Department proposed that a two-stage change 
in the pension plan discount rate be substituted for the current 30-
year Treasury bond rate. For the next two years, the Treasury proposal 
would allow plans to use Congress's choice of either the 20-year or 30-
year corporate bond rate. After that two-year period, companies would 
begin a three-year transition to using a corporate bond interest rate 
determined by the average age of an individual company's workforce.
    Since companies with older workers will begin to pay out pension 
benefits sooner than companies with younger workers, the Treasury 
Department proposal would require companies with older workers to use a 
shorter-term corporate bond rate. Short-term bonds of all types have a 
lower annual interest rate than longer-term bonds do. This lower 
discount rate means that those companies would have to have 
proportionately more assets available to pay pension benefits. 
Companies with younger workers could use a longer corporate bond rate, 
which would allow them to have proportionately less cash and other 
assets available. This is an important reform that should be carefully 
considered.
    The simple fact is that some industries and companies have 
workforces that are older on average than others. Since these companies 
will have to begin paying their workers' pension benefits sooner, the 
health of their pension plans is a significant factor in their ability 
to remain in business. If their pension plans are underfunded and the 
company has to make significant payments to them, that company is at a 
higher risk of bankruptcy than if the same company had a younger 
average workforce. Rather than using a uniform measure for all 
companies, it is much more prudent to use a discount rate that is 
customized to reflect a particular company's workers.
    Using a customized discount rate as proposed by the Treasury 
Department would allow workers and investors to better understand a 
company's overall financial health. The customized discount rate also 
should allow earlier identification of problem companies so that 
changes can be required before they become critical.

Balancing the Interests of Workers, Companies, and Taxpayers
    It is tempting to see the issue of discount rates as affecting only 
the amount that cash-strapped companies will have to divert to their 
pension plans. However, much more is at stake. Changing the discount 
rate to just a single long-term corporate rate might benefit companies 
by lowering the amount that they have to contribute to pension plans, 
but it also might hurt both workers and taxpayers in the long run. 
Workers who want to take a lump-sum pension distribution instead of 
monthly payments would receive less under such a system than they would 
under the current discount rate.
    Lump-sum pension benefits are calculated by determining the total 
amount of pension benefits owed over a lifetime and calculating how 
much money invested today at the discount rate is needed to grow into 
the promised total amount. The higher the discount rate, the lower the 
amount of money that will be necessary to grow into that promised 
benefit, and the lower the lump sum benefit. At the same time, too low 
a discount rate may mean a lump-sum payment that is too high, thus 
further draining the plan of needed assets.
    In determining an appropriate discount rate, Congress must balance 
the needs of both pension plans and retirees wishing to take a lump sum 
benefit. Similarly, if Congress only substitutes a higher uniform 
discount rate for the present one, taxpayers could find themselves 
required to pay higher taxes to make up for Pension Benefit Guarantee 
Corporation (PBGC) deficits. The PBGC is the federal insurance agency 
that takes over insolvent pension plans and pays benefits to retirees. 
Even though the PBGC limits the amount that it pays to each retiree, 
taxpayers can expect Congress to bail out the agency with additional 
tax money if the agency runs major deficits.
    When Congress considers the appropriate discount rate, it must take 
into consideration the risk that an overly generous discount rate will 
result in more underfunded pension plans, and thus that more of those 
plans will be turned over to the PBGC for payment. This is especially 
true if legislation contains a holiday on the Deficit Reduction 
Contribution. This is not just an issue that concerns companies; 
taxpayers have an equal stake in its outcome.

Termination Liability
    As important as the debate over the appropriate discount rate is, 
its use is not sufficient to protect either workers or taxpayers. As 
the PBGC has pointed out, many chronically underfunded plans look 
reasonably healthy until they are terminated. For instance, Bethlehem 
Steel's pension plan reported that it was 84 percent funded under 
current liability rules, but proved to be only 45 percent funded when 
the plan terminated. The US Airways pilots' plan reported that it was 
94 percent funded, but proved to be less than 35 percent funded when it 
was terminated. Most recently, Weirton Steel's pension plan was only 
about 39 percent funded when it terminated. I spoke to one worker with 
over 20 years service who was told by both management and his union 
head that the pension plan was funded. They were not lying, they were 
just using another measure--one that proved to be meaningless when the 
plan went under PBGC control.
    The simple fact is that while there is some value to measuring 
current liabilities, it is not sufficient. Pension accounting is a 
regulatory game that must come closer to reality. It is meaningless to 
the Weirton Steel worker if his plan looks relatively healthy before it 
is terminated. What is important is finding out that his pension will 
be reduced. Similarly, as a taxpayer, I could care less if Bethlehem 
Steel's plan met minimum funding requirement for most of the years 
prior to its end. What does interest me is the $4.3 billion shortfall 
that I or my children may have to help cover.

PBGC is a Market Distortion
    PBGC, despite having an important mission, is a creation of 
government and would not exist in the marketplace in its current form. 
Just like the FDIC and the old Federal Savings and Loan Insurance 
Corporation, its protection is not free. Because PBGC is a distortion 
in the market, its politically set insurance premiums and regulatory 
guidelines are open to gaming by corporations and others who want to 
pass part of the cost of their pension plans to the taxpayer. The 
current debate over an appropriate discount rate is another example of 
this.
    This is not to say that the agency does not serve a valuable 
purpose, but to recognize that its presence increases the risk that 
taxpayers will end up paying for the protection it offers. Until PBGC 
is either reformed to include a premium rate that includes a more 
effective measure of risk or changed into an agency that helps to 
arrange properly priced private sector insurance, debates about pension 
funding status are going to reoccur on a regular basis.

Two Other Important Reforms
    The Treasury Department proposal includes two additional reforms 
that would increase the information available to workers and investors 
and lower the potential liability to the PBGC. Even if agreement on the 
discount rate cannot be reached for now, Congress should swiftly 
consider making the following reforms:

1.Improved Information
    All too often, the true status of a defined benefit pension plan is 
unknown to the affected companies' workers and investors. The Treasury 
Department proposal would require pension plans that are underfunded by 
more than $50 million to make a more timely and accurate disclosure of 
their assets, liabilities, and funding ratios. In addition, while 
phasing in the new discount rate changes, all plans would have to make 
an annual disclosure of their pension liabilities using the duration 
matched yield curve. This reform would further improve the ability of 
workers and investors to judge whether a pension plan is properly 
funded.
    Finally, pension plans would have to disclose whether they have 
enough assets available to pay the full amount of benefits that workers 
have already earned. As mentioned above, requiring disclosure of 
``termination basis'' would ensure that if the company files for 
bankruptcy and seeks to terminate its pension plan, workers are not 
suddenly surprised to find that the plan cannot pay the pension 
benefits they have already earned.

2.Reduced Taxpayer Liability
    Companies that are in severe financial trouble often try to keep 
their workers happy by promising them higher pension benefits. 
Similarly, companies in bankruptcy sometimes seek to improve pension 
benefits in return for salary concessions. In both cases, these higher 
pension promises often get passed on to the PBGC, and thus to the 
taxpayers, for payment when the company seeks to terminate its pension 
plan. The proposed reforms would prevent severely underfunded pension 
plans from promising higher pension benefits or allowing lump-sum 
payments unless the company fully pays for those improvements by making 
additional contributions to its pension plan. Similar restrictions 
would apply to companies that file for bankruptcy.

How Not to Improve the Situation.
    The one thing that Congress should not do is to repeat the sad 
experience of the 1980's. Unless there is hard evidence that a company 
will recover its economic health, Congress should not casually extend 
the amount of time that corporations have to fund their pension plans. 
While this may be justified on a case-by-case basis, a general rule is 
likely to just mean that taxpayers will have to pay more to bail out 
the PBGC when it runs out of money.
    And that day is inevitable unless Congress takes a serious look at 
PBGC and the entire retirement situation. This is not a problem where 
individual mini-crises should be considered to be unrelated. PBGC has 
an investment portfolio that includes a sizeable proportion of 
government bonds. It is true that unlike Social Security, which simply 
stores the special issue treasury bonds in its trust fund, PBGC builds 
its portfolio by trading its special issue bonds with the Bureau of the 
Public Debt. However, that portfolio growth gives a false sense of 
assurance.
    When the time comes for PBGC to liquidate its portfolio to pay 
benefits, we may see the ``perfect storm'' where both Social Security 
and Medicare are liquidating their government bond portfolio at the 
same time. Even though PBGC is the smallest of these agencies by a 
large margin, the only way that it will be able to raise the money that 
it needs for benefit payments is to either sell its bond portfolio on 
the open market or to return them for repayment. Neither option looks 
promising at this point. If the government is borrowing massive amounts 
of money, the prices of bonds can be expected to be unstable at best. 
And if Social Security and Medicare are consuming massive amounts of 
government resources, PBGC can expect a place behind them.

Thoughts for the Future.
    As an alternative, Congress should consider a close examination of 
the entire retirement situation ranging from Social Security to private 
pension plans to incentives for people to work. Among steps that could 
be considered are:
    1.  Reform PBGC: PBGC has done a fine job with what it has, but the 
structure is fundamentally flawed. Premiums are inadequate, and are not 
based on any measure of the risk that the employer will turn its 
pension plan over to the agency. Investment strategies are less than 
adequate. Rather than a piecemeal review, Congress should begin now a 
thorough review of the agency .
    2.  Encourage Small Business to Form Retirement Pools: About 50 
percent of the US workforce has no private pension plan. Many of these 
workers are employed by smaller businesses that cannot afford to 
sponsor any sort of retirement plan. Current legislative efforts to 
remedy this situation have centered on reducing the regulatory burden 
that is a major part of the cost of having a pension plan. Instead, 
Congress should consider an alternate approach. Rather than expecting 
every small business to have its own retirement plan, encourage them to 
form pools, perhaps based around associations, chambers of commerce, or 
other affinity group. This would work best with defined contribution 
retirement plans.
    3.  Phase Out Defined Benefit Plans: Sadly, it may be time to 
recognize that in the future workers will have more job mobility than 
they even do now, and that a defined benefit plan may not be in their 
best interests. Congress should consider developing incentives for 
companies to shift their retirement plans to defined contribution 
plans.
    4.  Encourage Workers to Work Longer: In the future, there will be 
fewer younger people to take the jobs of those who retire, and a 
resulting demand for older workers who are willing to stay in the 
workforce--even if it is only on a part-time basis. Congress should 
examine the various workplace rules now to remove regulatory and other 
obstacles
    5.  Reform Social Security: Every day that Congress and the 
Administration delays reforming Social Security, there is one less day 
that the program will have surpluses. The Social Security trustees warn 
that the program will begin to run cash flow deficits within 15 years. 
There is a pool of IOUs known as the trust fund, which can be used to 
help pay benefits until they run out in 2042, but in order to liquidate 
them, Congress will have to come up with about $5 trillion (in today's 
dollars) from general revenue. The last thing that future retirees need 
is to find out that both their company pension plan and Social Security 
are unable to pay all of their promised benefits.
    Thank you for the opportunity to testify. I look forward to your 
questions.
                                 ______
                                 
    Chairman Boehner. Thank you, Mr. John, and let me thank all 
the witnesses for their excellent testimony.
    And let me make it clear for our witnesses, our guests, and 
our Members, it's the intent of this Committee to take a very 
comprehensive look at what needs to be done to strengthen 
defined benefit pension plans, and to try to find that perfect 
balance between making sure that they're properly funded, and 
that we don't unintentionally drive the employers and others 
out of the system, as you have all pointed out.
    Let me ask the big question. In Mr. Krinsky's testimony, he 
says on page 18, ``Today, the PBGC has total assets in excess 
of $25 billion, and it earns money from these investments on 
those assets. And while the PBGC reports liabilities of 
approximately $29 billion, the annuity pension obligations 
underlying those liabilities come due over many decades, during 
which time the PBGC can expect to experience investment gains 
to offset any paper deficit that exists today.''
    And it should be noted that these liability projections by 
the PBGC are based on unrealistic interest rates and mortality 
assumptions, and make the agency's liabilities appear larger 
than they actually are.
    So the first question is, how serious is the crisis that 
we're facing, or is it serious? And Mr. Krinsky, I would let 
you expound upon your written testimony.
    Mr. Krinsky. I will expound only very briefly and add to 
that only briefly. I think there is a difference between the 
S&L crisis and the PBGC crisis, in that PBGC's obligation is to 
pay benefits over decades to people who--this S&L crisis was 
such that people had immediate claim on their bank accounts.
    And therefore, even if I--I mean, I subscribe to what I 
said there--but even if I am wrong to a certain extent--and 
there have to be some further adjustments made--they can be 
made over time, a luxury you never had in the savings and loan 
crisis.
    Chairman Boehner. Well, just to expound upon what you said, 
I mean, we have all heard the term, ``the perfect storm.'' 
Historically low interest rates, a stock market that has been 
off, and an increasing number of retirements. I mean, is the 
picture that's being painted worse than reality? I would ask 
Mr. Iwry to comment.
    Mr. Iwry. Mr. Chairman, I think, first, what we need from 
the PBGC is a completely forthcoming sharing of the assumptions 
and the data, apropos of your comment about Mr. Krinsky's 
point.
    We shouldn't have to speculate, and we shouldn't have to 
debate with PBGC as to what the facts are regarding the 
exposure. Obviously, there are elements of judgment there, as 
to whether particular plans are likely to terminate at some 
point in the future.
    But we should be able to make those judgment calls with the 
facts laid out in front of us, and the assumptions--
    Chairman Boehner. Yes, but you spent 10 years down at 
Treasury, you have dealt with these issues. You have got some 
opinion about whether we're having a crisis or whether we're 
not having a crisis.
    Mr. Iwry. I do. And I think that the situation is, you 
know, is most constructively addressed in terms of what do we 
do about it. I mean, it's a problem. There is no question that 
there is a serious underfunding problem. I think--
    Chairman Boehner. Well, let me rephrase it.
    Mr. Iwry. Yes.
    Chairman Boehner. Let us assume that interest rates rise. 
They really cannot go any lower; they have got nowhere to go 
but up. Let us assume that the stock market continues to 
rebound. If those two things were to occur, do we really have a 
problem? Do we have a crisis or do we have a problem? That is 
what I am trying to--
    Mr. Iwry. I would say that we have a problem, and that is 
it heterogeneous. In some industries, obviously, we have got 
tremendous secular issues. We have got liabilities that were 
completely unanticipated, relative to the capitalization of the 
company--unanticipated at the time that Mr. Gordon and others 
were working on ERISA.
    We have, in most of our plan sponsor universe, though, a 
situation that is not dire. And I think we need to recognize 
that it is--we have got a bimodal issue here. We have got one 
area that is in terrible trouble--certain old-line 
manufacturing industries were well aware of that--and we have 
got most industries that are, in effect, having to subsidize 
the plan benefits in the troubled industries.
    And I think we have just got to deal with it. We have got 
to change the rules. It is clear that things like the funding 
holidays that troubled companies have enjoyed, the fact that 
they haven't had to make accelerated funding contributions over 
the past few years until just before the company went under, 
and the plan was dumped on the PBGC, those things need to be 
addressed.
    Chairman Boehner. The rules--I am about to run myself out 
of time, and I want to get to one other issue--the funding 
rules that were changed in 1994 put these deficit reduction 
contributions into place. And they have really never--they have 
never really been tested until now.
    Do we have anyone on the panel who would have an opinion as 
to whether these rules make sense, or whether it would be 
better described as heart surgery with a meat cleaver? Mr. 
Krinsky?
    Mr. Krinsky. The purpose is good. In practice, the 
volatility is terrible. And I think that there are just a 
number of companies who have funded their pension plans who, by 
the technical nature of this, and the intersecting and 
overlapping liabilities. I mean, I brought a pension report 
along with me on the plane this morning, and I counted four 
different numbers labeled ``liabilities'' in our report.
    It is very complicated. There are seven different kinds of 
contributions that are annual costs by various measures. The 
whole thing needs some simplifying, so people can understand 
what they're doing.
    Ironically, I mean, the best-funded plans that I deal with 
are non-profit organizations without any unrelated business 
income tax, who make large contributions mainly to avoid paying 
the second level of PBGC premium, because they can do it 
without getting penalized by the IRS, and they fund their plans 
very well, and they don't have to, in effect, waste money on 
the PBGC premiums.
    Chairman Boehner. Mr. Gordon?
    Mr. Gordon. In our testimony, we point out the difference 
between theory and practice on the deficit reduction rules. I 
think, in theory, even in theory, there is kind of a disconnect 
between the funding rules that were originally adopted as part 
of ERISA, and these--which you amortize liabilities over a long 
period of time, sort of like paying off a mortgage on a house--
and the deficit reduction rules which take a photograph of your 
status, what was referred to earlier as determination, 
liability over a particular moment of time, as if that was a 
decisive moment in time, for purposes of dealing with a funding 
situation.
    Now, the reason that was done had a lot to do with concerns 
over a looming S&L-type crisis overtaking PBGC, and the fact 
that PBGC was, in the single-employer fund, seriously in the 
red, and so on and so forth.
    But I think that while you can still make a pretty good 
case for having this photograph in time serve as a way to boost 
funding and protect PBGC, it becomes more difficult to make 
that case, or more of a--it creates more practical problems 
when you have a contracting universe of defined benefit plans.
    The more contracts, the more this--these deficit rules have 
a tendency to make it contract more, because employers are not 
going to want to continue to establish or maintain defined 
benefit plans if they are faced with this--what you call--a 
meat cleaver.
    So, I think we have to find some type of new configuration 
for dealing with these rules in the context of a declining 
defined benefit plan universe. That is the new kid on the 
block, that is really what we have to pay attention to, and 
this process was going on and is still going on, regardless of 
what happens in particular industries, because as 
Representative Andrews said, it is part of structural changes 
in the nation's economy.
    Chairman Boehner. Mr. Iwry?
    Mr. Iwry. Mr. Chairman, in response to your question, I 
think that without this deficit reduction contribution 
introduced in 1987 and bolstered in 1984, we would be even 
worse off today, in terms of underfunding, than we are now.
    It isn't working well. It needs to be fixed so that it is 
less volatile, as Mr. Krinsky and others have said. But the 
fundamental technique simply comes down to asking underfunded 
plans to pull their socks up and get better funded. And as you 
said, it's a matter of balancing.
    How quickly do people need to get the funding in there, in 
order to return to a prudent funded status? And that's the kind 
of fine tuning that I think needs to be done in this next 
round.
    Chairman Boehner. Well, I could--if Mr. Andrews will excuse 
me--before I introduce him, let me make it clear to all of you 
that having looked at what has gone on the last 20 years of 
fine-tuning, what we have created is a very complex, very 
difficult system of rules and regulations, to a point where you 
wonder why anybody in the private sector would voluntarily want 
to offer such a plan and deal with the complexity of it.
    I suggest--those are my words, not yours--but I can assure 
you that, as this Committee moves forward, we are going to go 
well beyond fine-tuning. I think it is time for a serious 
review of all the rules and all the regulations around defined 
benefit plans, to take a full review and a more comprehensive 
look at the changes that need to occur, if, in fact, we are 
going to keep these plans in existence, and also meet the 
obligation of having them properly funded to meet the 
retirement security needs of their employees. Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman. I appreciate the 
statements from each of the witnesses.
    I think the Chairman's comments suggest and the witnesses 
suggest that we should conduct this comprehensive review by 
understanding three disparate circumstances that defined 
benefit plans and their sponsors find themselves in.
    The first circumstance is economic distress, like the steel 
industry, where, because the revenue base of the industry is 
eroding, and the number of workers is dropping precipitously, 
that the industry is in grave economic trouble and more likely 
to fail, and more likely to be a significant drain on PBGC 
resources.
    The second circumstance would be normal economic 
circumstances, some profitable companies, some unprofitable 
companies, confronting what the Chairman talked about as the 
perfect storm--that is, external factors dealing with pension 
investments and pension circumstances that are within the realm 
of normal economic problems.
    And then the third situation in which people find 
themselves is the profitable firm, profitable company, that 
finds itself cash flush, and may wish to build on its success 
by advance funding some of its pension obligation.
    So I want to start with that happy circumstance of the 
third firm, of which we have precious few in this economy, but 
I wanted to ask Mr. Krinsky if he would favor a lifting of the 
ceiling that such a company could make as a contribution to its 
defined benefit plan.
    Should we permit companies to make unlimited contributions 
to their DB plans voluntarily, without the excise tax?
    Mr. Krinsky. Unlimited, probably not. My guess, that there 
is something between what exists now and unlimited, having to 
do with years of prior contributions and various--I think it 
requires a comprehensive review.
    Mr. Andrews. Where do you think that point is?
    Mr. Krinsky. I don't think--I don't have that point in--
    Mr. Andrews. Do you think it would be a viable strategy to 
sort of make a swap, to say to these more strong companies 
that, in exchange for being able to shelter more of their 
profit by making a contribution, that they pay a stepped up 
PBGC contribution that is--but they still come out far ahead.
    In other words, the tax savings would dwarf the increased 
PBGC contributions, the way of getting more revenue into PBGC.
    Mr. Krinsky. I find it difficult at this point to come up 
with a specific proposal. I think it is important in the long 
run--and to take a long-run picture--to see that the defined 
benefit system will still be there.
    We have a famous three-legged stool of personal savings--
which, in this economy, is not doing it--and my own favorite 
thing here is that states are taking away lottery money from 
those who can't afford it, but that's another subject entirely.
    Second is the public's--the private sector, which is doing 
defined contribution plans and defined benefit plans. In this 
perfect storm, the defined contribution plans, while very 
attractive as supplements, have not done it.
    And then defined benefit plans are not doing it. The result 
of that, long term, the baby boom, is your view when you go 
home, I suspect--with great respect--will find the Baby 
Boomers, as they age, pressuring for much more Social Security 
benefits, which is something--
    Mr. Andrews. I'm sure that's going to--let me ask Mr. 
Gordon. In your testimony, you indicated that you are looking 
at the importance of--no one understands how plans that were 
swimming in huge pension surpluses just a few years ago 
suddenly became so monumentally underfunded.
    Would you favor a law that would require employee 
representation on boards of pension funds so that they may have 
a front row seat?
    Mr. Gordon. I'm conflicted about that, and the reason I'm 
conflicted about it is because that may require them to become 
fiduciaries. If they become fiduciaries, that means that they 
have to get bonding and fiduciary insurance. Who is going to 
pay for that?
    Probably going to have to be paid for by the employer, 
which means that their independence of judgment may be--
    Mr. Andrews. Maybe some Sarbanes-Oxley problems here, too.
    Mr. Gordon. Right. And that, by the way, I would like to 
tie that to your previous question about perhaps lifting the 
ceiling on funding. I think that that issue is also intimately 
connected with corporate governance problems, and relates to 
the questions that retirees and workers have about what 
happened to the surpluses.
    The fact of the matter is that these surpluses were used to 
artificially boost the financial statements of the companies.
    Mr. Andrews. Yes.
    Mr. Gordon. And to justify increases in executive 
compensation when, on the basis of pure economic performance by 
those companies, those increases in executive compensation 
would not have been justified.
    Mr. Andrews. A mechanism to make sure there were actual 
surpluses that would--
    Mr. Gordon. Well, not only that there were actual 
surpluses, but that they were not the sole--that the company 
does not anymore have sole ownership, sole dibs on those 
surpluses, that they belong to the plan, and they ultimately 
belong to the participants and beneficiaries beyond a certain 
point that is needed for funding.
    Mr. Andrews. Thank you. I wonder if I could just conclude 
quickly with a question for Mr. John on--in your testimony, you 
tell us one thing we should not do is repeat the sad experience 
of the 1980's, with respect to the S&L problem.
    You say, ``Unless there is hard evidence that a company 
will recover its economic health, Congress should not casually 
extend the amount of time that corporations have to fund their 
pension plans.'' That would suggest an earlier intervention--
    Mr. John. Yes.
    Mr. Andrews [continuing]. For companies that are weak. How 
much earlier, and what tools should PBGC be given it does not 
have now to step in and stop the bleeding?
    Mr. John. Significantly earlier. And perhaps one of the 
easiest ways to do this would be to limit the ability of 
pension plans that are starting to show serious underfunding.
    The law currently has a $50 million level. I would suggest 
that maybe that should be rephrased, in terms of a percentage 
basis, percentage underfunding. And I would use a percentage 
underfunding on a determination basis, because when it comes 
right down to it, if the plan is going to go into PBGC, that's 
what is important, not its current liability status.
    Mr. Andrews. Thank you very much. Mr. Chairman, thank you.
    Mr. Ballenger [presiding]. I guess maybe it is my turn, 
since the Chairman has not come back.
    I would like to ask a question, because I live in an area 
where a whole bunch of textile mills have gone bankrupt, and 
Pillowtex being the one that I would like to ask anybody that 
has got an answer to the question.
    Substantial amounts of money are being paid for assets at 
various and sundry levels of buildings and inventories, and all 
this other stuff that belonged to--I guess the assets belonged 
to the company, even though it's bankrupt--but somebody, after 
the bankruptcy is declared, somebody is paying a whole bunch of 
money back to somebody, and does any of that money ever go to 
the pension that these people, the pension liabilities that 
could be funded, to some extent, with the assets that are being 
sold?
    Am I asking--yes, Mr. John? Fire away.
    Mr. John. Well, the problem that you come into when you go 
into bankruptcy is that, assuming that the pension plan, as 
part of the bankruptcy, has gone to PBGC, PBGC then is a 
general creditor, along with the average stockholders, and 
things like that, which means they get a recovery after all the 
bondholders and various and sundry others. And usually the 
recover is in the nature of maybe 2 percent, or something like 
that. So it's not really very significant.
    If--one of the things that you might want to look at is to 
address the level of PBGC's ability to intervene in a 
bankruptcy proceeding.
    Mr. Ballenger. Would we have to change a whole bunch of 
laws to do that? I am not a lawyer, so I do not really 
understand.
    Mr. John. I'm afraid, yes.
    Mr. Ballenger. Oh, God, that's great. I tell everybody once 
in a while that once upon a time I had a defined benefit plan, 
and then the Federal Government got involved, and so I dropped 
it and it became a defined contribution plan, and I think it 
was the smartest move I ever made in my life.
    But is there anything in any of these plans where you 
project the additional life span that medicine has created? 
Especially Mr. Gordon, you would deal with this probably more 
than anybody else. We are all living longer, which means that 
the liabilities that everybody had planned on are never going 
to cover whatever you projected.
    Mr. Gordon. Yes, that is true. The actuaries have let us 
down again. They were supposed to tell us when we were going to 
die; they got it wrong. Just like they got retiree health costs 
wrong, and everything else.
    I quote the famous line from Machiavelli, ``Put not your 
trust in actuaries.''
    Mr. Ballenger. Mr. Krinsky?
    Mr. Krinsky. I don't know if Mr. Gordon knows it, or the 
Committee knows it, I am an actuary.
    [Laughter.]
    Mr. Krinsky. And the actuarial assumption--to me, the 
serious answer to the question--the actuarial assumptions used 
to calculate liabilities have gradually changed over the--
certainly there have been major differences in the tables that 
we are using now from those when I started working 49 years ago 
in the amount of the longevity that is predicted for 
pensioners. And they always tend to be on the conservative 
side.
    So that, yes, that has been taken into account, it has been 
taken into account gradually. If there are quantum leaps 
because somebody finds a cure for cancer tomorrow, the full 
extent of that has not been taken into account.
    Mr. Ballenger. Right.
    Mr. Krinsky. But assuming that it continues to be a gradual 
progression, as our life expectancy statistics show, those 
things have been taken into account.
    Mr. Ballenger. I think the problem that goes with the 
elderly--and I happen to be one of them--is the fact that the 
longer we live, the more medicines we take, which eats into 
whatever income we might have because of the drugs, and the 
drugs become more and more expensive. So it's kind of an 
unending problem that I don't see any answers to. You cannot do 
this with statistics and stuff.
    Mr. Gordon. One of the things that we could do is to create 
something like a more parallel ERISA regulatory regime for 
health plans than we have for pension plans, which means we 
could give better funding tax breaks to employers for funding 
those plans, have them invested more so they could take care of 
future health costs.
    We don't have a system like that now. And the result is 
what we have seen, that the system is now disintegrating. A lot 
of employers, particularly large employers, can't wait to get 
out of it, or at least to reduce their costs as much as 
possible. And it usually ends up hurting a lot of very 
vulnerable people.
    So, there are things that we could do about it, and then we 
could have a more integrated system between pensions and 
health.
    Mr. Ballenger. Thank you. I think Mr. Tierney?
    Mr. Tierney. Thank you, Mr. Chairman. I want to thank the 
witnesses for their testimony.
    Mr. Gordon, in your testimony you talked a little bit about 
earned pensions. Some people call them legacy costs, or 
whatever, but the earned pensions of people in some of the 
sicker industries, the steel and airlines. And I notice that 
you said it was a topic for another day in your testimony.
    But to bring that day forward to now, can we do something 
about those costs and still, at the same time, maintain our 
current system, moving forward?
    Mr. Gordon. Well, this is a very difficult problem, and I 
am going to try to crudely oversimplify it by saying it seems 
to me the choices between trying to take care of these problems 
in a better way through the PBGC funding regime, which means 
that we will end up ultimately shifting the burden, or 
spreading the burden, among the healthier industries and 
healthier employers and better funded plans, which may have the 
negative result of driving more and more of them out of the 
defined benefit plan universe, or we can stop what amounts to a 
back-door industrialization policy through PBGC, and go after 
it through the front door.
    The front door would be providing some type of direct 
assistance. In my testimony, I specifically mention--I don't 
know about steel, but it certainly seems to me that there are 
certain industries that were having real problems that impact 
on national security.
    I don't understand why we don't at least consider the 
possibility of providing them some form of direct assistance to 
help them with their pension funding problems if it does impact 
on national security. We don't want a bunch of demoralized 
workers dealing with problems of national security, or that 
impact on national security, and worried sick that they are 
never going to get their pensions, or that the pensions that 
they are going to get aren't going to be what they counted on.
    So, I think that there are other ways of handling it, as 
far as that is concerned. And we have done--Congress has done 
that, in connection, for example, with the--even though it's 
controversial--the Coal Health Act, where they particularly did 
things to take care of the coal mine situation, and health plan 
situation there.
    Mr. Tierney. Would you see some people arguing that, in 
essence, the taxpayer is bailing out the company on that, and 
that others might be encouraged, then, to let their work force 
get into that situation so that they, too, could have it 
shifted over to the tax burden?
    Mr. Gordon. Well, it certainly is a difficult call, but we 
are no longer, it seems to me, whether we like it or not, in 
circumstances where--that we used to be IN, and where we have 
these kinds of free market models to play around with at our 
leisure.
    We are now in an economy which is a partial war-time 
economy, and may even grow worse in that regard. And we have to 
take into account those considerations when we're dealing with 
particular industries.
    If they are vital to what we are trying to accomplish, then 
we can't be constrained, it seems to me, by criteria that we 
would like to apply, but which really were applicable to an 
earlier period of time.
    Mr. Tierney. Thank you. And just generally, anybody on the 
panel that wanted to answer opinions as to whether or not the 
defined pension benefit plan is something we want to continue 
to see on into the future, or are we looking at its decline to 
the point where it gets wiped out here. Sure.
    Mr. Krinsky. I think it is very important that they 
continue in the future, that we are--they are getting wiped 
out, to a certain extent, but as I said earlier, I think the 
result of wiping them out, particularly if we return to any 
sort of inflationary economy at any point, which some of us 
have lived through, whereby there is pressure to make up 
benefits for past years at low salaries, as there were when 
these plans started out, the change from career-average plans 
to final-average plans, you can't do that in a defined 
contribution plan.
    So if a defined benefit plan is not there to do that, 
again, the pressure is on Social Security. That's the 
government support, and that becomes a major part of your 
political base, as well, an ever-growing part of your political 
base.
    Ms. Bovbjerg. I would like to take that on a little bit. We 
have done a number of reports on Social Security and pensions, 
together, and I think the concern I have is, you know, I worry 
about PBGC and a shrinking group of plans.
    At the same time, it's not as if we are seeing an increase 
in people who are covered by pensions. As a government, we have 
paid a lot of attention to improving coverage and 
participation, and we really haven't gotten very far. The 
number continues to be at about half of American workers who 
are participating in a pension plan at any given time.
    And you look at retirees and sources of retirement income, 
it's about--it's actually a little less--than half of retirees 
who are getting income from pensions. So I worry less about the 
shift than about the aggregate, and what, really, we're 
providing people.
    And we had done some work for Congressman Andrews on 
different generations saving at the same age, and what they 
might get in retirement. And where we came out at the end of 
that report was a lot of concern about what are we going to do 
about Social Security. Social Security is the thing that 
underlies most Americans'--the vast majority of Americans'--
retirement income expectations.
    We need, really, to do something about that very soon, that 
relative to PBGC really is a crisis that we need to address. 
But at the same time, though, we're thinking about a 
comprehensive solution to PBGC and pensions. We really need to 
think about how these things interact.
    So, I guess I would like to second--I know a couple of 
others members of the panel have made some reference to that, 
and I would like to second that, as well.
    Mr. Tierney. Thank you.
    Mr. Iwry. Mr. Tierney, I think that whether defined benefit 
plans survive depends importantly on what the Congress does now 
with the defined benefit issues that are being focused on in 
this hearing, as well as the cash balance issue, and that it is 
not a lost cause, partly because the aging of the baby boomer 
generation gives a greater interest, potentially, in defined 
benefit plans to an important part of the population, or at 
least should provide that kind of interest.
    What is particularly critical, I think, is to promote the 
continuation of employer-funded plans, be they defined benefit 
or defined contribution, not because the money is not 
ultimately coming out of the employee's wages and 
compensation--I think mostly it is--but because for most of the 
population that really needs the help in providing for 
retirement security--moderate income working people--it is 
easier to save if the employer helps, and if the employer 
provides some automatic form of saving. Defined benefit plans 
are great for that.
    Profit-sharing plans, employer contributions to defined 
contribution plans, are also great for that, and a lot simpler 
than defined benefit plans. Each has its advantages, and I 
think we need to promote the aggregate of employer-funded 
retirement plans, as well as employee-funded plans, where 
that's all that we can encourage an employer to provide.
    Chairman Boehner. The Chair recognizes the gentleman from 
Michigan, Mr. Ehlers.
    Mr. Ehlers. Thank you, Mr. Chairman, and I would like to 
pursue some aspects of the question asked by Mr. Tierney, and 
the comments about outliers. And I hope this is not 
duplicative; I had to step out for a short time.
    But let me take, particularly, the airline industry, and 
the problems they are facing now. And I have been told by some 
of them that if they have to meet the letter of the law in the 
current situation, it will drive them into Chapter 11, at a 
minimum.
    And so, all the assurances that long-term this will all 
even out, and things will be OK when the stock market returns, 
interest rates go up, et cetera, doesn't help those industries, 
whether it's steel, airlines, or some others, or many of the 
small companies in my district that are on the verge of 
bankruptcy.
    It is an immediate problem for them. And if it's not solved 
immediately in some fashion, or they don't get some assistance, 
they will go into bankruptcy. And I'm not sure that it helps 
anything, particularly if it's a permanent bankruptcy, it makes 
the problems for the Guaranty Corporation even worse.
    I would appreciate some comments on that. Yes, Mr. Gordon?
    Mr. Gordon. I think the problem is that we should not have 
to twist ERISA's funding and PBGC's rules into a pretzel in 
order to accommodate the airline industry. This doesn't mean 
that the situation should not be addressed. But I don't think 
that we should distort either the general funding principles or 
the deficit reduction principles, or any of those, to deal 
specifically with the airlines.
    Now, I have, in my testimony, presented some type of 
funding waiver proposal with regard to deficit reduction rules 
which may be advantageous to the airlines, but they would have 
to take rather tough steps to curb the future growth of their 
plans. In effect, place themselves in a kind of quasi 
receivership status in order to get this relief.
    Beyond that, it seems to me that it's unclear to me why, 
when Congress considered giving direct assistance to the 
airlines in connection with their insurance problems following 
9/11, why, using that precedent, they can't also consider 
whether or not they could provide some form of direct 
assistance to help them with their funding problems.
    Again, it seems this refers back to an earlier comment I 
made, that if you have an industry which impacts on national 
security, which I think the airlines do, then it seems to me 
that we ought to take measures above and beyond what otherwise 
we would do, under ERISA, to take care of those problems, if we 
can, and there is precedent for doing things like that.
    Mr. Ehlers. Let me assure you, it is not just the airlines, 
and it is not just industries that are related to national 
security problems. It is much more widespread than that. And 
those of us in Congress hear this every weekend, when we go 
back home. So, yes, Mr. Krinsky.
    Mr. Krinsky. I was just going to really say what you just 
said. It is not just the airlines, and I think there needs to 
be some comprehensive approach taken to what the Chairman 
described as the perfect storm, which is the very low interest 
rates, the declining stock market, the particular timing of 
when actuarial valuations are done, and to look at whether some 
set of waivers, or some temporary relief can be given that will 
get us over this hump, assuming that the economy returns 
somewhat to what it had been in the past.
    These are things that, with all due respect to my 
profession, the actuaries could not have predicted would all 
occur at once.
    Mr. Ehlers. Ms. Bovbjerg?
    Ms. Bovbjerg. Thank you. I wanted to express some of my 
reservations about whether a particular--some particular relief 
provided through a pension insurance program would really be 
what was fundamentally going to help these companies.
    And I know that one of the things that we have seen at PBGC 
is that with some of these plans, PBGC gets them anyway, and 
then they are tremendously underfunded. And so, I guess the 
concern I would have about something like that is potentially 
starting with a much deeper hole at PBGC, and perhaps this is a 
broader economic question that we need to address outside of 
this insurance program that is very specific to a particular 
aspect of the company's obligations.
    Mr. Ehlers. And let me just say that there will certainly 
be some instances of that. There will also be other instances 
of companies that will be able to make it, and therefore, will 
not be any drain at all on the PBGC.
    Ms. Bovbjerg. Well, and I wanted to build on something that 
Mr. Gordon said, as well. In talking about some of these issues 
with David Walker, my boss, who used to be head of the PBGC and 
had other pension positions, and also serves on the airline of 
the board that was overseeing the aid to the airlines, and he 
had made the comment that he was very concerned about any kind 
of a broad-based relief, and was suggesting that perhaps you 
could do something like that that would be more targeted.
    Now, this is something that, you know, we have discussed, I 
would say, rather casually. But that is--you know, there are 
other models, and we have been trying to think about that, 
perhaps not on the time table that you would like, and I 
appreciate that, but we are trying to think about those sorts 
of issues.
    Mr. Ehlers. Yes, Mr. Iwry?
    Mr. Iwry. I think that the points made are quite valid. 
There is reason for concern about a long-term distortion of the 
basic funding approach to help particular industry at a 
particular time, and that a more targeted approach than the one 
that the Senate Finance Committee has been taking thus far 
would be well worth considering, that when you go to conference 
with the Senate with a House bill that has relief with respect 
to the 30-year Treasury interest rate, but that does not have a 
3-year waiver of the deficit reduction contribution that would 
apply, I believe, to most major companies in America, not just 
a particular industry or particularly troubled companies, and 
without any extensive conditions attached to it, I think that 
it would be good to question that in conference, and to ask 
whether some kind of improved funding waiver, some kind of more 
targeted, narrower, and more seriously conditioned procedure 
would be appropriate, so that Congress does not end up 
compromising its ability to make fundamental reforms in funding 
in the next phase starting next year, before next year even 
begins.
    And I think the industry does deserve some consideration. 
There is some relief that is necessary. The question is, can it 
be crafted more narrowly to do less collateral damage to our 
whole system?
    Mr. Ehlers. Well, I can assure you, with the Chairman we 
have on this Committee, we will come up with a superb product 
that will be much better than the Senate's. I yield back the 
balance of my time.
    [Laughter.]
    Chairman Boehner. The Chair recognizes the gentlelady from 
Georgia, Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman, and I thank the 
witnesses for being here today. I would like to hear some 
discussion about how you see that having more disclosure of the 
current funding status of a company's pension plan would really 
help to solve the underfunding crisis. Yes?
    Ms. Bovbjerg. I brought that up, so I should probably take 
a shot at it. Really, I acknowledge that is not a solution, all 
by itself. But certainly, it would help. Participants do not 
know very accurately and very clearly what the funding status 
of their plan is. They don't know what benefits would be coming 
to them, if their plan went to--was taken over by PBGC.
    They really have had great difficulty finding out--I think 
back to the U.S. Airways pilots, who were quite surprised to 
discover what their guaranteed benefits were going to be when 
PBGC took their program over.
    We think it would help, we think that, for example, letting 
people know what the termination liability would be, since it 
can be so different from the current liability, would be a 
useful piece of information for actually more people than just 
participants, but certainly it would be helpful to 
participants. And we think that simply having these things out 
in the open does provide something of an incentive to better 
fund.
    Ms. Majette. Well, do you see that as causing--perhaps 
potentially causing shifts in investments that would be made in 
those companies if it looked like things weren't going as well 
as perhaps they would--investors would want to see them go, and 
that might, in turn, cause underfunding to continue if there 
is--if investment--if people decide to change their 
investments, it might sort of perpetuate a situation that is 
already not a good one?
    Ms. Bovbjerg. And I do take your point, but I think that 
investors really deserve as much useful information as a 
company can provide. I think that would be helpful information 
to them, particularly if a plan is starting to have funding 
problems.
    Termination liability can sometimes be quite different, 
because it includes early retirement that would not ordinarily 
occur when the company is a completely going concern, or they 
don't offer shut-down benefits.
    I think with one of the companies we looked at--it was 
Anchor Glass, I believe--they were using age 64 as their normal 
retirement age for current liability. But when they calculated 
termination liability, it was age 58. It makes a big difference 
in cost.
    And if I were an investor, I would want to know those 
things. I might not always know what to do with that 
information, but I would want to know it.
    Ms. Majette. Mr. Krinsky, did you want to weigh in on this?
    Mr. Krinsky. I think you said it in your last sentence. 
Participants--this stuff is so complicated. I mean, I do lots 
of one-on-one things, I pride myself on being able to teach 
pretty well in this area.
    But the definitions of the various kinds of liabilities are 
so complicated. And if you have a good, healthy company, and 
you have a liability in your accounting statement, and the 
notes to your accounting statement, and there are other things 
available, and if you have to publish your termination 
liability and it's a great, big number, it's going to be--your 
point is well taken.
    There are some people who will be scared by it. Whether it 
will do a lot of damage or not, I don't know. It is expensive 
to calculate and publish each one of these things, and to 
explain one of these things. You have to get people to do it. 
It's a balance, as to how much you give.
    And I can guarantee you that I don't think it would make 
very much difference in the behavior in most participants in 
most plans--only the most sophisticated participants would 
really understand these subtle differences.
    Ms. Majette. And I guess my other concern with regard to 
that would be that--to make sure that people are able to 
compare apples to apples and oranges to oranges.
    And I suspect that, even though you are setting out 
guidelines or parameters for this information to be calculated 
and then disseminated, it wouldn't necessarily be done in a way 
that people could make the kinds of comparisons to say, well, 
this is equal to this, or this is the same situation in one 
company or industry versus another company or industry.
    And so I would want to see, if we are going to have that 
kind of disclosure, that everybody is on a level playing field, 
and everybody is required to produce it in the same way and use 
the same basic information to make those calculations.
    And I guess, you know, age 59 retirement for one industry 
and 64 for another, that may not be the same, given the nature 
of the industry. If you say that air traffic controllers would 
retire earlier if they start earlier, because that is the 
nature of that work, versus another industry that people may 
work much longer because of the nature of that work.
    And I think that is just a concern that I have about that 
whole issue, whether it is going to be even-handed.
    Ms. Bovbjerg. And whether--and I can understand whether you 
ask everyone to do this, or some subset of industries, maybe 
depending on their plan funding status, or something like that.
    Ms. Majette. Yes.
    Ms. Bovbjerg. Yes, I can understand your concern about 
that.
    Ms. Majette. And also, with respect to Mr. Gordon's comment 
about the vital industries, and how that vitality would shift 
over time, depending on if we are in a war-time economy or a 
quasi-war-time economy, or a non-war-time economy, and how all 
that would play out, in terms of making those people--having 
people be able to have information to make those long-term 
evaluations and how they should proceed.
    Ms. Bovbjerg. I don't know--
    Mr. John. May I also respond, Ms. Majette? I think that 
it's very hard to make a case here that we should not have some 
improved disclosure. It can be done in a manner that is 
uniform, according to uniform rules, even though, in fact, the 
differences between industries and between particular plans are 
important differences, and those ought to be reflected in the 
assessment of the risk facing that particular plan and the 
employees in it.
    I think Mr. Krinsky makes a valid point in noting that 
there are situations where a company is perfectly strong, 
financially, and there, what's at stake, in terms of the actual 
percentage funding in that plan is a lot less than what's at 
stake with a weak company.
    If a company is strong, and stays so for the long term, it 
can validly fund, in a gradual way, over time. I think, 
therefore, that there is a reasonable middle ground here 
whereby companies that are in circumstances where it becomes 
more relevant to know what termination liability is would have 
to disclose on that basis. At least that set of companies.
    And I think that is why Mr. Miller has proposed a greater 
disclosure along these lines with various co-sponsors, and why 
the Administration has proposed this kind of termination 
liability disclosure, whether it's limited to a more targeted 
group or not.
    Ms. Majette. I agree that there should be more disclosure, 
but not to the extent that it is unduly burdensome on those who 
are required to make their disclosure.
    Mr. Gordon. Ms. Majette, if I may just weigh in briefly, 
there may be responsibilities now for disclosure under ERISA, 
under the fiduciary principles. Courts have held that if there 
are circumstances that--regarding the operation or the benefit 
plan that would be adverse to the participants, or turn out to 
be adverse to the participants, that a fiduciary has an 
affirmative obligation to disclose those circumstances to the 
participants.
    So, you may have litigation, regardless of what kind of 
rules you are thinking about that would deal with this point, 
and I would suppose that it would be useful to see whether or 
not that kind of potentially counter-productive and after-the-
fact litigation could be headed off by having some type of 
uniform reporting requirements.
    Chairman Boehner. The gentlelady's time has expired.
    Ms. Majette. Thank you.
    Chairman Boehner. The Chair recognizes the gentleman from 
New York, Mr. Owens.
    Mr. Owens. Yes. Mr. John, I was particularly interested in 
some references you made to the savings and loan scandal.
    Mr. John. Yes.
    Mr. Owens. I am old enough to have lived through that here 
in Congress, and I remember it. There are a lot of people who 
benefit greatly from forgetting it. And even now, it is one of 
the best-kept secrets in history, in terms of exactly how much 
money the taxpayers of this nation paid to cover the savings 
and loan debacle.
    For my edification, and also for the record, could you just 
tell me how much--to what degree this parallels the savings and 
loan situation, in terms of the responsibility of the Federal 
Government to bail out, how much of this is going to be our 
responsibility, and how much will be the responsibility of the 
private industry?
    Mr. John. Well, I think it is going to depend on when the 
problem happens. The S&L crisis didn't occur overnight, it took 
better than 8 years between the time that Congress first passed 
legislation that basically took it easy on the S&Ls, as far as 
their capital and other requirements, and the time that the 
industry went into serious crisis.
    A similar thing is true with PBGC, and--
    Mr. Owens. Are we into that kind of cycle right now?
    Mr. John. Oh, I think--
    Mr. Owens. We call this ``The Pension Underfunding Crisis: 
How Effective Have Reforms Been,'' so we are in the crisis 
already, you would say?
    Mr. John. Oh, I think we are in the crisis, but I think we 
are in the early stages of the crisis. And if Congress had 
acted early in the stages, if Congress had acted in 1981, 1982 
or so, to really seriously deal with the S&L crisis, there 
would have been problems, and there would have been some S&Ls 
that were fine, upstanding corporate citizens that would have 
gone down. But it wouldn't have been the generalized problem 
that it ended up being.
    This was a case where Congress saw a problem and made it 
much worse, aided by the economy and various and sundry other 
things. Similarly, with PBGC. PBGC is somewhat different in 
that it doesn't receive an appropriation from Congress. But the 
simple fact is that if PBGC goes into a series of financial 
difficulties--and it very well could, for a variety of 
reasons--then essentially, you're going to be up here having to 
deal with that question.
    One of the problems with PBGC is the fact that somewhere 
around 61 percent of its assets are in government bonds. Now, 
no one is suggesting that those bonds would not be repaid on 
schedule, or anything along that line. But the future problems 
that PBGC will hit will come up at roughly the same time as the 
Social Security Administration starts to spend more than it 
takes in about 15 years from now, Medicare starts to have that 
problem a few years earlier than that, and then we come up with 
PBGC.
    Now, there are government bonds in all of those cases, but 
you're going to have three significant programs that are lining 
up at the Federal treasury, looking for additional money.
    Mr. Owens. You said that Congress appropriated the money 
for the S&Ls. Congress did not appropriate money for the S&Ls, 
they appropriated to bail out and back-up those that went 
bankrupt.
    Mr. John. They did. And most of the--like the Federal 
Savings and Loan Insurance Corporation--was funded by premiums 
up until the time that it ran into serious problems.
    It also had a draw on the treasury, which PBGC does not 
have at this point, and they used that draw on the treasury 
first, before--
    Mr. Owens. So you would say that this crisis has about 15 
years before it reaches its climax?
    Mr. John. I would say 15 years on the outside. I would 
suggest more along the lines of six to eight. And this is 
especially true if we continue to see people moving from one 
job throughout their career into a number of jobs throughout 
their career.
    The sad fact is that the defined benefit pension plan has a 
lot of very positive features, but it doesn't work very well 
when people move from job to job to job.
    Mr. Owens. So, if Congress is to learn from the S&L 
experience, you would say we should be taking some definitive 
action now, in order to avoid having a calamity 15 years from 
now?
    Mr. John. Absolutely, yes.
    Mr. Owens. Would anybody else care to comment on that? 
Actuary?
    Mr. Krinsky. Well, I don't think, Congressman, that you 
were in the room earlier when I indicated what I thought were 
the differences, in that the PBGC's obligations to pay pension 
benefits out over a lifetime, or a very long time, while the 
S&L was liable to their depositors on demand.
    So that I think we have--my--I would respond that this is 
something that needs continuous looking at, but I don't put it 
in the same category as crisis, that throughout its history, 
PBGC has had calculated deficits, but that compared to their 
assets, they are not overwhelming.
    The second thing is--and Mr. Gordon, I'm sure, will 
remember, as well--that in the creation of the PBGC, these 
issues were discussed as possibilities. It would be interesting 
to look at old hearings in the creation in 1974 of these 
issues.
    This is not an unanticipated situation, in that the PBGC, 
the pay-outs of the PBGC, again, from an actuarial point of 
view, are not risk-related, the same way--you can do life 
insurance, or how long a person will live. You don't have those 
kind of statistics on when companies are going to go out of 
business, or--and they are not--and they fluctuate with 
volatility, as to the economic situation.
    So that it's very different, and this was an anticipated 
problem, in setting up the PBGC in the first place.
    Mr. Owens. My time is up, but I think you wanted--would Mr. 
Chairman allow him to make a comment? Did you have your hand 
up?
    Mr. Gordon. Yes.
    Mr. Owens. Yes?
    Mr. Gordon. Let me relate an example from the not-too-
distant past, which gives rise to deep apprehension on my part, 
so that comparing it to the S&L situation or not is one thing, 
but here is a concrete example which, if it was multiplied, 
could lead to the kind of PBGC meltdown that we are all trying 
to avoid.
    Many of you may remember the Chrysler bail-out of a number 
of years ago. It was put to the Congress by Mr. Iacocca that, 
absent that bail-out, Chrysler would terminate. After looking 
at all the numbers, Congress concluded that it was less 
expensive to bail out Chrysler than to bail out PBGC.
    Now, if we have a number of situations like that taking 
place, we're going to have an inordinate stress on PBGC. And 
whether it is roughly equivalent at any particular point in 
time to the S&L crisis or not can be argued by the academics. 
But in the meantime, the practical problems that will be faced 
will be enormous.
    I think that steps ought to be taken now to earthquake-
proof PBGC. Don't wait for the earthquake to happen, don't try 
to predict whether it's going to happen. Take the steps now to 
try to earthquake-proof it.
    Chairman Boehner. The gentleman's time has expired. And as 
you probably could tell, we have several votes on the House 
floor. Let me thank, once again, all of our witnesses for your 
excellent testimony and your help.
    The Congress of the United States does, in fact, have a 
responsibility to act. We have been looking at this and dealing 
with this over the last several years. We have had a number of 
hearings, and I do think that we have a responsibility to do 
our job.
    And that means taking a serious look at the issues in these 
defined benefit plans--and in the entire pension system, for 
that matter--to make sure that it is viable for the 21st 
century, that it works for employers who voluntarily offer 
these programs, and that it works to ensure the retirement 
security of American working families.
    So again, thank you all. This hearing is adjourned.
    [Whereupon, at 12:15 p.m., the Committee was adjourned.]
    [Additional material submitted for the record follows:]

 Statement of Hon. Charlie Norwood, a Representative in Congress from 
                          the State of Georgia

    Thank you Mr. Chairman for holding today's hearing and this series 
of hearings on the pension crisis. I am very much looking forward to 
the testimony of our witnesses and I sure do appreciate their time and 
expertise in reviewing future solutions to this crisis.
    In our last hearing we learned about the poor financial health of 
the Pension Benefit Guaranty Corporation (PBGC). For the past 20 years, 
we have taken steps to reform ERISA and prevent pension underfunding. 
Despite our efforts, the PBGC is staring down an $8.8 billion deficit. 
The PBGC is responsible for guaranteeing payment of basic pension 
benefits for 44 million American workers and retirees participating in 
some 30,0000 private sector defined benefit pension plans. Over the 
past year, the PBGC has assumed the obligations of paying out basic 
pension benefits for several large pension plans, and the agency's 
surplus has quickly evaporated.
    What's very disturbing is that roughly 89 percent of pension plans 
are considered underfunded due to a number of factors including low 
interest rates.
    What is it going to take to get things back on track? What is it 
going to take to make sure hard working Americans are not left 
penniless in their retirement? How do we prevent taxpayers from getting 
stuck with another S & L type bailout situation?
    Today, I look forward to hearing our witness' thoughts on how the 
reforms of the past 20 years have helped and perhaps also handcuffed 
the defined benefits plans. How have these reforms effected the 
underfunding crisis? What can we do moving forward to ensure retirement 
security for hardworking families?
    We have certainly taken some big steps in the right direction to 
protect pension plans since the Enron crisis.
    I am a strong supporter of the Pension Security Act, H.R. 1000, 
which would give workers unprecedented new retirement security 
protections that would have helped protect thousands of Enron and 
WorldCom employees who lost their savings during their companies' 
collapses if the bill had been law.
    Mr. Chairman, I was pleased to support the recent passage of your 
bill, H.R. 3108, the Pension Funding Equity Act of 2003. This bill will 
provide a short-term, two-year pension funding fix while we in Congress 
work to address the pension crisis and develop permanent solutions to 
these pension underfunding problems.
    Thank you Mr. Chairman and I yield back.

                                 
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