[Senate Hearing 108-287]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-287

                          AMERICA'S PENSIONS:
                   THE NEXT SAVINGS AND LOAN CRISIS?

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                            OCTOBER 14, 2003

                               __________

                           Serial No. 108-24

         Printed for the use of the Special Committee on Aging


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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening statement of Senator Larry E. Craig......................     1

                                Panel I

Barbara Bovbjerg, General Accounting Office, Washington, DC......     2
Steve Kandarian, Executive Director, Pension Benefit Guarantee 
  Corporation, Washington, DC....................................    47
Mark Warshawsky, Acting Assistant Secretary, Department of the 
  Treasury, Washington, DC; accompanied by William Sweetnam, 
  Benefits Tax Counsel, Department of the Treasury, Washington, 
  DC.............................................................    70

                                Panel II

Scott Macey, Senior President, Aon Consulting, Somerset, NJ......    96
David John, Research Fellow, Heritage Foundation, Washington, DC.   118
Melvin Schmeiser, Steelworker Retiree, Baltimore, MD.............   129

                                APPENDIX

Prepared Statement of Senator Debbie Stabenow....................   147

                                 (iii)

  

 
         AMERICA'S PENSIONS: THE NEXT SAVINGS AND LOAN CRISIS?

                              ----------                              --



                       TUESDAY, OCTOBER 14, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-628, Dirksen Senate Office Building, Hon. Larry Craig 
(chairman of the committee) presiding.
    Present: Senators Craig and Carper.

     OPENING STATEMENT OF SENATOR LARRY E. CRAIG, CHAIRMAN

    The Chairman. Good morning, ladies and gentlemen.
    I would like to thank our witnesses for joining us today in 
our quest to strengthen the pension security of America's 
workers.
    Today's hearing title asks the question of whether the 
defined benefits pension system is on a path we have seen 
before, with Government-backed insurance, taxpayer bail out of 
the savings and loan industry. Or is it different?
    In the 1980's, the Federal Government stepped in to bail 
out the savings and loan industry at a cost of 120 billion 
taxpayer dollars. Of course, the details of pensions and the 
savings and loan situation differ in many ways, but the result 
could eventually be the same if we do not engage in thoughtful 
consideration of the issues at hand. Clearly, we do not want to 
repeat the savings and loan issue.
    Pension policy requires the Congress to balance three 
competing policy goals: protect taxpayers from having to bail 
out the Pension Benefit Guarantee Corporation, provide 
sufficient incentives for industry to continue offering defined 
benefit pensions for their workers, and ensure workers get the 
pensions they are promised by their employers.
    This hearing is convened in the spirit of building the 
record on the future of pension security, an issue that is so 
important to those about to retire and for younger generations.
    With that I am very pleased to welcome these distinguished 
witnesses to the Senate Special Committee on Aging this 
morning. We appreciate you taking time from your schedule to 
work with us in building this record.
    Our first witnesses on the panel are Barbara Bovbjerg who 
is the Director of Education, Workforce and Income Security at 
the General Accounting Office. Barbara, welcome.
    Steve Kandarian--I do not want to massacre names too badly, 
Steve--Executive Director of the Pension Benefit Guarantee 
Corporation. Peter Warshawsky, Acting Assistant Secretary of 
Economics at the Department of Treasury. Steve, you have 
brought another gentlemen with you, William Sweetnam, from 
Treasury, who make up our first panel today. So again, we thank 
you for being with us. We will move right into your testimony. 
Barbara, if you would please start?

   STATEMENT OF BARBARA BOVBJERG, GENERAL ACCOUNTING OFFICE, 
                         WASHINGTON, DC

    Ms. Bovbjerg. Thank you, Mr. Chairman.
    I appreciate your inviting me here today to discuss issues 
associated with ensuring defined benefit pension plans. The 
Pension Benefit Guarantee Corporation's single employer program 
insures benefits of more than 34 million workers and retirees 
but after accumulating surpluses for several years, last year 
reported a $3.6 billion deficit with the prospect for several 
billion more this year.
    You have asked me here today to discuss the implications of 
this financial reversal and what might be done to address it. I 
will speak briefly about three things: the immediate causes of 
this problem, future prospects for the program, and options for 
policy change.
    My testimony is based on information gathered from the 
PBGC, from interviews with pension experts, and our analysis of 
several individual plans that presented large losses to PBGC. 
The Controller General has testified earlier about these issues 
before our requesters on the House Education and Workforce 
Committee, and we will report the final results of this work 
later this month.
    First, the causes. PBGC's single employer program fell into 
deficit in response to the termination of several severely 
underfunded pension plans. The sharp decline of the stock 
market reduced the plans asset values. This, together with low 
interest rates which raised plan liability values, dramatically 
worsened the financial position of many plans during a period 
when several companies with large plans failed.
    The experience of Bethlehem Steel, which represents the 
largest hit ever to PBGC funds, can be illustrative. This chart 
shows Bethlehem's assets and liabilities as the vertical bars 
and the percentage of the plan's funding as the heavy line.
    As you can see from the position of the line, in 1999 
Bethlehem reported nearly full funding for its plans. But by 
2002, only 3 years later, when it terminated its plan assets 
were less than half the value of plan liabilities. This 
happened in part because over 70 percent of the plan assets 
were in stock when the markets lost value.
    Yet, as the next chart shows, even though plan assets were 
falling and estimated liabilities rising, Bethlehem Steel made 
no contributions to its plans in 2000, 2001, or 2002. This is 
because plans that have exceeded minimum contributions in the 
past earn funding credits that can offset minimum contributions 
for the future. Bethlehem had built up funding credits such 
that the company was legally permitted to contribute nothing to 
its plan at precisely the time the plan's funding status was 
becoming untenable. Minimum funding rules, which are designed 
to encourage plan sponsors to fully fund their plans, clearly 
proved ineffective.
    Variable rate premiums are designed to encourage employers 
to fund their plans adequately. But as you will see in this 
last chart, Bethlehem paid only the flat rate premium from 1998 
on because the plan, by meeting full funding standards through 
2000, was exempt from the higher premium payments until 2002, 
at which time the plan was terminated. Pretty clearly, variable 
rate premiums are ineffective when plan funding status changes 
as quickly as it did here.
    Let me move now to the future. Of course, PBGC remains 
vulnerable to the same conditions that underlay the Bethlehem 
case. While the cyclical economic conditions that worsened plan 
and PBGC finances will eventually improve, it is also important 
to understand that we are in an environment where employers 
large and small have exited the defined benefit system while 
newer firms have generally chosen other pension vehicles. This 
has left PBGC with a risk pool of employers that is 
concentrated in sectors of the economy like airlines, 
automobiles, and steel which have become economically 
vulnerable.
    These developments have important and worrisome 
implications for the future and the magnitude of the risk that 
PBGC insures. It is with this larger picture in mind the GAO 
has placed PBGC's program on the high-risk list.
    Let me now turn to options for change. Several types of 
reforms could be considered and they fall into four categories: 
strengthening funding rules, modifying program guarantees, 
restructuring premiums, and increasing transparency. There are 
a variety of options within each category and each has 
advantages and disadvantages. However, anything that would 
increase contributions for plan sponsors who may themselves be 
in financial difficulty could further weaken the sponsor while 
at the same time discouraging healthier companies from 
providing DB pensions at all.
    In addressing the challenge to PBGC, it will be important 
to understand that its long-term financial health is 
inextricably bound to the underlying health of the DB pension 
system itself. Options that serve to revitalize the DB system 
could stabilize PBGC's finances, although this could only take 
place over the long-term. More immediately, Congress could 
consider developing a comprehensive solution to PBGC's risks 
that adequately balances employer concerns with improvements to 
employer accountability for funding and reporting.
    GAO is giving this program and its needs special scrutiny 
in the immediate future and will be pleased to help Congress in 
this endeavor. That concludes my statement, Mr. Chairman, and I 
would be happy to answer questions.
    [The prepared statement of Ms. Bovbjerg follows:]

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    The Chairman. Barbara, thank you. Before we question you, 
we will move through all of our panelists. Now let me turn to 
Steve Kandarian, Executive Director of the Pension Benefit 
Guarantee Corporation. Steve, thank you for being here morning.

   STATEMENT OF STEVE KANDARIAN, EXECUTIVE DIRECTOR, PENSION 
         BENEFIT GUARANTEE CORPORATION, WASHINGTON, DC

    Mr. Kandarian. Mr. Chairman, thank you for holding this 
hearing on the financial health of PBGC and the future of the 
defined benefit system.
    During fiscal year 2002, PBGC single employer insurance 
program went from a surplus of $7.7 billion to a deficit of 
$3.6 billion, a loss of $11.3 billion in just one year. Based 
on our latest unaudited financial report, the deficit has grown 
to $8.8 billion as of August 31, 2003.
    The continued deterioration of PBGC's financial condition 
is due to a number of factors, including a decline in interest 
rates, additional terminations, and new probable claims. In 
addition, pension underfunding remains at near record levels. 
At the end of 2000 total underfunding in single employer 
pension plans was less than $50 billion. Because of declining 
interest rates and equity values as of December 31, 2002, just 
two years later, underfunding exceeded $400 billion, the 
largest number ever recorded. Even with recent rises in equity 
values we estimate the underfunding still exceeds $350 billion.
    The title of this hearing asks whether America's pensions 
will become the next savings and loan crisis. At the moment, 
PBGC has sufficient assets in hand to pay benefits for a number 
of years into the future. But our deficit is the largest in 
history and has continued to grow. Some have suggested that 
Congress can afford to address these issues at some future 
point. We believe there are serious structural issues that 
require fundamental reform to the defined benefit system now 
before we reach a crisis point.
    To begin to deal with the problem of pension underfunding, 
the Administration has released an initial set of proposals to 
more accurately measure pension liabilities, improve disclosure 
of pension information to workers and investors, and strengthen 
safeguards against underfunding in troubled plans.
    We also recognize that with the bursting of the stock 
market bubble and return to lower interest rates, companies are 
having to make much larger contributions to their pension 
plans. The House and the Senate Finance Committee have approved 
separate bills that would provide short-term funding relief by 
allowing plan sponsors to discount pension liabilities at a 
higher interest rate, an approach broadly consistent with the 
transitional portion of the administration's proposal over the 
same timeframe.
    However, the Administration strongly opposes any provision 
that would weaken, suspended, or eliminate the deficit 
reduction contribution enacted in 1987 to protect workers in 
underfunded pension plans.
    The DRC requires companies with the worst funded plans to 
pay off their unfunded liabilities over 3 to 7 years, a 
relatively fast schedule designed to get plans funded before 
companies fail and transfer their liabilities to PBGC. A DRC 
waiver would permit financially weak companies with plans at 
the greatest risk of terminating to stop making accelerated 
pension contributions, even though the average funding ratio of 
these plans is less than 60 percent. PBGC estimates that a 3-
year DRC suspension would increase pension underfunding by $40 
billion.
    While the DRC can contribute to funding volatility, any 
modifications should be considered in the context of other 
reforms that strengthen long-term pension funding. Eliminating 
the DRC without an effective substitute increases the risk that 
workers will lose promised benefits and PBGC will suffer 
additional large losses.
    It is also important to put into context the large pension 
contributions that plans are now required to make. Because of 
the unprecedented investment returns of the mid to late 1990's, 
many companies made little or no cash contributions for several 
years. From 1995 to 1999 total pension contributions averaged 
only $26 billion a year in 2002 dollars. In the early 1980's, 
total contributions averaged $63 billion a year in 2002 
dollars. Over the same period, the amount of pension benefits 
insured by PBGC more than doubled in real dollars, even as 
pension contributions were cut by more than half.
    It is not reasonable to base funding expectations on the 
assumption that the stock market gains of the 1990's will 
repeat themselves. The real rate of return in equities from 
1926 through 2002 was 6.9 percent. But from 1983 through 2002 a 
period that ended with nearly 3 years of steep market declines, 
real returns were 9.3 percent, more than a third higher.
    Current funding requirements are not inconsistent with 
contribution levels in periods of more normal equity returns, 
especially given the growth in benefits that has occurred.
    Mr. Chairman, the Administration is working on 
comprehensive reforms that will put pension plans on a 
predictable steady path to better funding. In the meantime, we 
urge Congress not to abandon the deficit reduction contribution 
that requires sponsors of at-risk plans to pay for the promises 
they make.
    Thank you for inviting me to testify. I will be happy to 
answer any questions.
    [The prepared statement of Mr. Kandarian follows:]

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    The Chairman. Steve, thank you very much.
    Now let me turn to--my script says Peter. It is Mark.
    Mr. Warshawsky. It is Mark.
    The Chairman. Thank you, Mark. We have made that correction 
for the record. Mark Warshawsky, Assistant Secretary of 
Economics, at the Department of Treasury is also with us. We 
thank you. From you, Mark, we will turn to William Sweetnam. So 
please proceed.

   STATEMENT OF MARK WARSHAWSKY, ACTING ASSISTANT SECRETARY, 
 DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.; ACCOMPANIED BY 
   WILLIAM SWEETNAM, BENEFITS TAX COUNSEL, DEPARTMENT OF THE 
                    TREASURY, WASHINGTON, DC

    Mr. Warshawsky. Thank you, Mr. Chairman.
    I am pleased to appear before you with PBGC Executive 
Director Steve Kandarian and William Sweetnam, Benefits Tax 
Counsel of the U.S. Treasury, to discuss defined benefit 
pension plans. I will discuss the Administration's current 
proposal and ongoing activities aimed at strengthening the 
long-term health of the defined benefit pension system and 
improving the retirement security of pension participants. Bill 
and I will be happy to answer any questions you may have.
    Despite repeated attempts to enhance the funding rules of 
defined benefit pensions, it seems that, even excluding the 
impact of recent market downturns, conditions have not 
improved. But we believe that, with improvements, the defined 
benefit system will continue to be a viable and important part 
of the American retirement system.
    As you are aware, in July the Administration released its 
proposal to improve the accuracy and transparency of pension 
information. This proposal is designed to secure and strengthen 
Americans' pensions by improving the accuracy of the pension 
liability discount rate, increasing the transparency of pension 
plan information, and strengthening safeguards against pension 
underfunding.
    A predicate step to fixing the pension funding rules is to 
ensure that we accurately measure the pension liabilities on 
which those rules rely. Our most immediate task is to replace 
the 30-year treasury rate used in measuring pension liabilities 
for minimum funding purposes. We propose that the discount 
rates be drawn from a corporate bond yield curve. Use of a 
yield curve helps insure that measured liabilities reflect 
accurately the timing of future expected benefit payments.
    We appreciate that there is important activity in both 
houses of Congress on this issue. In the Senate Finance 
Committee, the Chairman's modification to the Nest Egg Act of 
2003 includes a discounting provision that is quite similar to 
the Administration's proposal. We were happy to see that 
provision included in the bill.
    On the House side, the Administration believes that H.R. 
3108, the Pension Funding Equity Act, is an important first 
step toward providing a permanent replacement of the interest 
rate now used to determine pension liabilities. H.R. 3108's 
proposed discounting method for the next 2 years is broadly 
consistent with the Administration's proposal over the same 
timeframe. We are encouraged by the passage of this bill.
    My written testimony provides a detailed overview of the 
Administration's proposal. One new point I would like to stress 
today is that the Treasury Department has begun active 
development of our own yield curve based on interest rates for 
high-quality zero coupon, call-adjusted corporate bonds of 
varying maturities using a widely accepted methodology. We are 
very pleased with our progress in this regard and do not 
foresee any difficulty in generating the yield curves for use 
in discounting pension plans if the Administration's proposal 
becomes law.
    Currently, both the Senate and the House bills also contain 
calls for comprehensive pension reform. The Administration 
supports and appreciates these provisions and looks forward to 
working with Congress on these important issues. Americans have 
a broadly shared interest in adequate funding of employer-
provided defined benefit plans. At the same time we must be 
sure that our pension rules encourage rather than discourage 
employer participation. We have begun the hard work needed to 
develop pension funding rules that will be less complex, more 
flexible, logically consistent, and will achieve the goal of 
improving the security of defined benefit plans.
    Major areas that require our intention include funding 
targets, the funding path, and the PBGC guarantee and premium 
structure. We will seek to develop better, more meaningful, 
funding targets. This includes current and accurate asset 
measurement and enhanced liability measurement. We will examine 
in particular retirement, lump sum, and mortality assumptions.
    Improvements to funding rules should mitigate volatility by 
providing firms with more consistent contribution requirements 
and increasing flexibility for firms to fund up their plans in 
good times. Specific issues that need to be examined here 
include maximum contribution deductibility, credit balances, 
the volatility caused by the minimum funding back stop or the 
deficit reduction contribution requirement, new benefit 
restrictions for certain underfunded plans whose sponsors are 
financially troubled, and shortening the length of new benefit 
amortization. Other issues include the extent of benefit 
guarantee coverage and the structure of the PBGC premiums.
    As I stated at the outset, the Administration's permanent 
discount rate replacement proposal is designed to strengthen 
Americans' retirement security by producing accurate measure of 
pension liabilities. Accurate measurement is the essential 
first step in ensuring that pension promises made are pension 
promises kept. We believe that the discount rate proposal, 
combined with the other administration proposals, represents a 
strong start toward improving and strengthening defined 
benefits pension system.
    We have committed to developing a further proposal for 
fundamental reform and are working diligently to fulfill that 
commitment. We look forward to sharing the proposal with 
Congress in the near future and to continue to work together 
toward a more secure system.
    Thank you.
    [The prepared statement of Mr. Warshawsky follows:]

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    The Chairman. Mark, thank you very much. Bill?
    Mr. Sweetnam. They just brought me along to answer 
questions.
    The Chairman. You are the heavy. All right.
    Thank you all very much. Let me ask a couple of questions 
first, before I go to you individually, that you may all wish 
to respond to, and we can just start with you, Barbara, and ask 
you to react to these two broader questions.
    Today's testimony shows that using a higher interest rate 
to value pension funds show improvement in the book value 
without changing their fundamental values. What should the 
Congress consider when determining the most appropriate 
interest rate formula?
    Ms. Bovbjerg. I would be pleased to respond first on that. 
GAO has, in fact, done a report on this. I would like to say if 
there were a perfect solution, we would have recommended it. We 
did not recommend a specific interest rate to use, but we 
looked at a variety of alternatives. We were looking to 
determine how well whether they matched group annuity prices, 
which is really what the rates should do, and how transparent 
these measures were, how subject to manipulation they might be.
    In looking at them, we found that every measure we examined 
had some aspect that was positive, some aspect that was 
negative. What we did also discover is that they are all higher 
than the 30-year treasury rate.
    Pretty clearly, Congress has to do something. The rate 
probably needs to go up. But I think it is important to 
realize, as you say, that raising the rate creates an 
appearance of improving funding in the plans without actually 
doing so, that it will reduce premium revenue to PBGC. It will 
increase risk for PBGC and for the workers and participants in 
these plans.
    Because such a change is not really funding reform, it does 
indeed seem prudent to look at this as a relatively short-term 
action and then taking more time to look at a more 
comprehensive solution to the overall problem.
    The Chairman. Thank you. Steve? Do you wish to comment on 
that?
    Mr. Kandarian. Actually, Treasury is probably more----
    Mr. Warshawsky. I will take that in our question.
    In our considerations, and in review of this issue, we 
looked at many different proposals and many different ideas. In 
fact, I think we pretty much came across all of the things that 
were included in the GAO report back in February.
    What we came up with and proposed is the use of a corporate 
bond yield curve. The motivations we had for that were several. 
We felt that corporate bonds were the appropriate risk because 
a pension after all, is a corporate obligation and therefore 
corporate bonds represent the right risk strata.
    At the same time, we felt it was very important that the 
yield curve be included in that discount rate as an accurate 
representation, best practice of valuing liabilities. In any 
prudent measurement of liabilities by any financial institution 
whether it is a bank or other financial institution, there is a 
reflection of the different interest rates on the different 
maturities of a liability. We felt that was appropriate to be 
included here, as well.
    There certainly are pluses and minuses to any proposal but 
we felt on balance this was the best proposal. Obviously there 
is an immediate need for enactment.
    We also recognize that transition is appropriate and 
therefore we proposed a 2-year transition period to a corporate 
yield curve.
    The Chairman. A comment, Bill?
    Mr. Sweetnam. We had heard a lot about people being 
concerned about manipulation of an interest rate, which I think 
was one of the reasons why 30-year treasury rate was used a 
number of years ago. But this is not the case when we look at 
an overall bond index, and some people have been promoting a 
bond index. The Administration is looking at a yield curve, we 
think that the breadth of the data that is coming in, in order 
to provide that yield curve, really lends itself away from any 
sort of manipulation by people in trying to change the interest 
rate in order to play with funding.
    I think the other thing is that the Administration will be 
putting out, if we go forward with a yield curve proposal, what 
we would do would be we would propose a request for comments on 
how we would develop this yield curve. Now, we have some ideas 
at Treasury on how you would develop a yield curve. But we 
would really want to make that yield curve as transparent as 
possible, so that plan sponsors could understand how the 
Treasury Department was establishing that yield curve.
    So I think that does get at people's concerns with 
manipulation, it really handles those concerns.
    The Chairman. Would you agree with Barbara, that this alone 
should be used only as a short-term measure? That there are 
other--and we will ask questions of those--fundamental reforms 
necessary?
    Mr. Sweetnam. The Administration is currently taking a 
complete review of the funding rules, as Mark had talked about. 
So yes, I think that this is just really one piece in the 
overall strategy of how do you deal with the financial health 
of defined benefit plans.
    The Chairman. Let me go then, I think the second question 
begins to touch on that funding issue. Barbara, you mentioned 
it, that the plans recently taken over by PBGC went from fully 
funded to seriously underfunded in a very short period of time. 
At the same time, the companies sponsoring the plans were going 
bankrupt and likely had little cash to contribute to their 
plans. As a practical matter, to what extent could strengthened 
minimum funding rules have reduced losses to the single 
employer benefit program? Do you wish to respond to that, and 
again, to all of the panelists?
    Ms. Bovbjerg. One thing I would like to start off with is 
the balance between employers who are having difficulties, and 
protecting PBGC. Such employees are having difficulties even 
before they have to put in increased contributions to their 
pension plans. It is easy to sympathize with that concern.
    At the same time, PBGC and the workers and the retirees 
need to be assured that there will be something left from them 
in their pension plan, and need to feel that even companies 
that are having difficulties have made, contributions to their 
pension plan a priority.
    In thinking about this, and Dave Walker wanted to make sure 
that I talked about this a little bit today, we have some 
concern about doing something broadly that would make funding 
appear better or would reduce contributions for most sponsors 
when, in fact, you might consider a more targeted approach, or 
perhaps something that is quite temporary that would involve 
the concept of loan instead of grant, something of that nature. 
I think that the concern about PBGC is not just getting through 
this tough period, but is looking at the long run and how PBGC 
will be ensuring a shrinking group of defined benefit plans.
    The Chairman. That question, Steve?
    Mr. Kandarian. Sure. Mr. Chairman I think that one of the 
big problems in the system is that the funding rules were built 
in and designed in a way to try to get relatively consistent or 
nonvolatile contributions. Essentially companies with these 
kinds of plans were worried that if they were forced to use 
spot values for assets, spot values for their liability 
measurement interest rates, they would have very volatile 
contributions. They wanted to avoid that.
    While we support that goal, the actual mechanisms that were 
put in place did not work. You still have these long funding 
holidays. You still have these very large spikes later on when 
things go against these plans in terms of liability measures 
and asset values.
    So as Barbara mentioned before, Bethlehem Steel's plan 
suggested that on a current liability basis, this measure that 
was put into law in 1987, it was 84 percent funded. Yet when it 
came into the agency it really was only 45 percent funding on a 
termination basis. That results in large losses not only to 
this agency, but also to the workers who were promised those 
benefits.
    USAirways' pilots plan was even worse. It was 94 percent 
funded on a current liability basis. Yet it was only 35 percent 
funded on a termination basis. It was especially impactful in 
that case because the pilots had very large pensions. Our 
guarantee limits set by Congress cover the vast majority of the 
people at 100 percent of all benefits, all accrued vested 
benefits but not the pilots because their benefits are above 
that maximum guarantee. So you saw a great deal of 
consternation on the part of these pilots understandably.
    So the intent was to smooth out this whole system in terms 
of contributions. Those measures really have not worked and 
those are things we are looking at very closely within the 
administration, in terms of our funding reform proposal.
    Mr. Warshawsky. I would add two other items to answer that 
question. First of all, we feel that one way of smoothing the 
volatility of contributions is that corporations should have 
the ability to fund in good times when the contributions are 
easier to be made. That way that provides a cushion for riding 
out more difficult times. That might have helped in some of 
these plan terminations.
    Another consideration to make is that many of these plans 
have had plan sponsors who have had difficulties over a period 
of time, many, many years before they entered bankruptcy. We 
believe that prudent funding is appropriate even in those 
circumstances and benefits promises made should be kept.
    Mr. Sweetnam. I would just want to echo what Mark was 
saying. The important thing to realize is that we have built 
these funding rules over time with a lot of the changes being 
made with regard to let us raise revenues. So if we raise 
revenue in the tax code, we can cut back on some of the funding 
requirements. It has always been sort of this hodgepodge of 
rules. It is really, I think, important for us to step back and 
say where do we really want our funding rules to be going, 
especially in this context of whether we want to continue the 
viability of defined benefit plans. That is something that we 
are working on very hard in the Administration.
    The Chairman. Thank you. I have other questions of you 
individually, but before I get to those, let me turn to one of 
the committee members, my colleague who has just joined us, 
Senator Carper. Would you wish to make any opening comments or 
start a questioning line?
    Senator Carper. Yes, if I could just ask a couple of 
questions that would be great, Mr. Chairman. How are you?
    The Chairman. I am fine.
    Senator Carper. Nice to see you.
    The Chairman. Welcome back.
    Senator Carper. To our witnesses, thanks for joining us 
today.
    I apologize for missing your statements. We have got, as 
you know, a bunch of other hearings going on and we are trying 
to cover all of those bases. So I missed what you had to say. 
If I ask you a couple of questions on things you have already 
addressed, please bear with me.
    The title for today's hearing, as I recall, was something 
to the effect of is this the next savings and loan crisis. Let 
me just ask each of you, is it?
    Mr. Warshawsky. We do not believe that there is an 
immediate crisis. Unlike the savings and loans or financial 
institutions, which have to have basically demand deposits or 
deposits which have to be answered in a very short period of 
time, defined benefit pensions are very long-term promises and 
they are tied in with the employment of workers. So therefore 
there is an attachment to the firm. So this is sort of a long-
term liability.
    At the same time, I think trends in this area have not been 
positive despite all of the attempts of addressing the issue 
with various funding rule changes. We believe that we can right 
the system and provide a more stable and permanent basis for 
defined benefit plans by improving the funding rules going 
forward. So it is certainly a problem right now, and we believe 
that enhancements are required.
    Senator Carper. Anybody else have a view you would like to 
share?
    Mr. Kandarian. Senator, when pension promises are not fully 
funded, there are potentially three different groups that can 
be hurt. At the first level it is workers, who do not get the 
full amount of the pension promise that was bargained for. 
Their benefits, in many cases, are cut back.
    At the second level, it is others in the system, other 
companies that have defined benefit pension plans, oftentimes 
well funded, who pay over time higher premiums to make up for 
those who did not pay for their pension promises.
    At the third level, if Congress could not raise premiums 
high enough, if the system got too underfunded, the taxpayer 
could be called upon to bail out the system. I do not see the 
need for that in the near future, but our hope is that we can 
make fundamental changes to the pension system, to the funding 
rules in particular, to preclude the necessity for that at some 
point down the road.
    Ms. Bovbjerg. If I could just add, Senator, I agree this is 
not an immediate emergency. Certainly, GAO feels that this is 
worthy of such high concern that we put this program on our 
high risk list. I would like to urge this committee, because 
your portfolio is aging overall, to think about this in the 
context of Social Security as well. We are affecting only half, 
unfortunately, of American workers, those who have pensions. 
These workers are addressing risks in their pension plans at 
the same time that we are discussing risks to Social Security 
benefits and what Social Security will look like in the future.
    So with that perspective, I think it would be very 
important to start moving very quickly to stabilize defined 
benefit pensions.
    Senator Carper. Could somebody go back in time and just 
take us back to, I guess, the early 1970's when this 
legislation was originally debated and finally adopted? I want 
to say in 1974. Can you sort of set the table? What was the 
scene like then? Why was Congress and--I guess it was 
President--would it have been Nixon or Ford? Ford, I suppose, 
who felt compelled to act? Take us back in time for a moment?
    Mr. Sweetnam. ERISA, The Employee Retirement Income 
Security Act of 1974, which is the act that you are talking 
about, really stems from the bankruptcy of the Studebaker 
Company and the fact that the pension promises that were made 
to their participants were not there anymore. There were no 
assets to back up these promises.
    I think what ERISA did, one of the things that ERISA did, 
was it made sure that you had a steady funding stream and 
required for these sorts of general tax qualified plans that 
companies fund the promises that they made. In fact, when I was 
in private practice, when I looked at a plan document for a 
plan prior to 1974, it was usually about maybe five pages long. 
Now a plan document is about 60 to 80 pages long, and what you 
do is you see that there is a lot of emphasis on how much is in 
the plan and protecting the benefits and the promises that were 
made to those individuals.
    As time went by, what we have seen is sometimes when we are 
in periods when we want to raise tax revenue, we will cut back 
on some of the funding requirements. Sometimes when we are 
concerned about the PBGC, what we will do is we will put 
additional requirements on like this deficit reduction 
contribution that we are talking about now, which will sort of 
increase the amount of money that goes into a pension plan.
    So this is what I was saying before, where it is sort of a 
crazy quilt of proposals on proposals that make this rather a 
difficult area to work through.
    Now the actuaries, of course, do not think this is a 
difficult area, but that is what they get paid to do.
    Mr. Kandarian. If I could just add to what Bill said.
    Senator Carper. Again, my question, I want you to take me 
back in time. Set the stage, 1974. What was going on?
    Mr. Kandarian. As Bill mentioned, Studebaker went bankrupt 
in 1963. Back in the 1950's, actually, Packard ceased 
operations in 1956 and terminated its pension plan two years 
later in 1958.
    President Kennedy set up a commission in 1962. It went 
dormant after a while when President Johnson came to office. In 
1967, Senator Javits introduced the first iteration of ERISA. 
It took all the way to 1974 to get the bill passed. It was 
controversial at the time, especially with companies.
    But essentially what Congress said in 1974 was these 
pension promises really are part of the wage benefit tradeoff 
that workers bargain for. In essence, it is not, if you will, a 
tip on the way out the door. These are earned benefits and they 
must be advance funded so the money is there for people in 
retirement. The money is earned now, it is given to them later.
    That was the reason for the system of advanced funding. Now 
do you ever get truly to fully advanced funding, in terms of 
the requirements of the law? I would say no, we have not. At 
times, the system has been very well funded, primarily because 
the assets went up in value, or the liabilities went down based 
upon interest rates. But the law never really said you had to 
be all the time 100 percent funded.
    The second thing I would say is that if you think about a 
spectrum of what this agency is, what PBGC is, are we really an 
insurance system? Where you take like risks and you assess for 
risk in the funding rules, you assess for risk in the premium 
rules? Or are you more of a transfer payment agency, if you 
will? Take from those who are doing better or are better off, 
or the rich, and give it to the less well off, the poor? Where 
on this spectrum do you want this system to be?
    I do not think it can be at either extreme end. It is got 
to be someplace else. The question ends up being the policy 
debate is, where on that spectrum are we? Is that the right 
place? I think we have some concerns that the system has 
shifted too much toward the wealth transfer end of things and 
needs to be more risk-based. Those are things we are discussing 
within the Administration and hope to have proposals on later 
in the year.
    Senator Carper. Mr. Chairman, I have a couple of more 
questions, but let us go back to you and then maybe I can ask 
another one or two.
    The Chairman. Let us stay with the theme, I think Senator, 
that you started here. Barbara, let me come back to you.
    We have just seen what happened in relation to the fund and 
Bethlehem and the economy and certain impacts on it. Based on 
your analysis, which industries have companies that are most at 
risk of being taken over by PBGC at this time?
    Ms. Bovbjerg. I have to give credit where credit is due, 
that we get most of this information from PBGC. It is our 
understanding that steel, airlines, and the automobile industry 
are the weak points.
    The Chairman. How well informed are workers about the 
solvency of those particular pension funds?
    Ms. Bovbjerg. Workers generally are not very well-informed. 
These are complicated issues. They are hard to understand. 
Workers do not get very good information. That is why one of 
the elements that GAO feels should be addressed as part of a 
comprehensive reform is transparency.
    You may have seen articles about the USAirways pilots being 
unable to find out what was really going on in their pension 
plan in its last days just before termination. That should not 
happen. People should know the status of their plan, what the 
termination liability might be, and what effect that would have 
on their benefits.
    The Chairman. Steve, in relation to transparency, and that 
is almost always the better way to go, so that everyone 
involved is informed accurately and on a real-time basis, what 
can Congress do in that area to ensure transparency in these 
plans?
    Mr. Kandarian. The Administration's proposal includes some 
improvements in transparency. We would like there to be an 
annual disclosure on a termination basis, as opposed to this 
measure called current liability, where again the pilots 
thought at USAirways their plan was very well funded when it 
was not on a termination basis, that disclosure be made on an 
annual basis that shows the plan's assets and liabilities. That 
would be fairly current data.
    In addition, we have something called Section 4010 
information at the PBGC. That relates to companies that are $50 
million or more underfunded on a termination basis. We collect 
that data. It helps us understand our risks. But by law, we 
cannot disclose it on a company by company basis.
    We would like that information to be made public so that 
not only workers, and retirees would know but also shareholders 
of companies would have access to that information as they 
invest in company stock. Or creditors to companies, vendors who 
are shipping goods to companies would know that.
    The reason we want this kind of information out there in 
the marketplace is because we believe while regulation has a 
place in the system, it is not the only thing to make the 
system stronger. The markets can adjust, but for markets to 
work, there has to be good, accurate, understandable and timely 
information. We think the current system does not provide that.
    The Chairman. Barbara, a moment ago you brought Social 
Security into the discussion a bit, and certainly we are 
obviously very focused on that debate, and discussion are now 
at hand in Congress, looking at reforms of Social Security for 
the out-years and for the younger crowd coming I guess, 
probably not the baby boomers.
    You also mentioned that in the context of this. Let me ask 
this question of you, and then I would broaden it out to the 
others.
    There appears to be the likelihood of some short-term 
action being taken. Is that the approach to go? Is that the way 
to go to handle this problem as we look at the long-term 
structural change necessary in what appears to be competing 
goals? Those are the taxpayer and the question of, if you will, 
bailout, providing sufficient incentives and insuring workers.
    Now putting all of that together, there is some pretty 
hefty competing forces there. Is there a sense of urgency to 
this that requires us to act in the short-term versus short-
term approaches built toward long-term solution?
    Ms. Bovbjerg. I would argue that the most important thing 
is some sort of comprehensive approach because, as you say, 
there are competing interests. Certainly you do not want 
pension contributions to create bankruptcies. At the same time, 
you want employers accountable for funding the promises that 
they have made to workers and retirees. At the same time, PBGC 
is trying to ensure a really changing pool of defined benefit 
plans.
    The number of plans has fallen dramatically in the last 20 
years. The number of participants has gone up slightly. That 
tends to be because there are larger plans left in the system. 
But we have gone from being about 75 percent active workers 
versus 25 percent retirees to much closer to a 50-50 balance. 
There are clearly things that we need to think about for the 
long term for defined benefit pensions and how they relate to 
PBGC.
    At the same time, I know that Congress needs to act on the 
interest rate. I think that is why you see a number of 
proposals that would just go with a new rate for a couple of 
years until something more comprehensive could be tried or 
could be considered.
    I do think that it is important to look at all four of the 
things that we mention in our testimony, on funding rules--and 
I am pleased to hear that Treasury is doing work on that--on 
the premium structure, on the guarantees that PBGC makes, and 
on transparency, which of course is one of the very most 
important pieces.
    The Chairman. Steve, the same question.
    Mr. Kandarian. I think I would just echo Barbara's comments 
about the demographics especially that impact the system. In 
Social Security we talk about numbers of 3.4 workers for every 
one retiree. In this system, it is about one-to-one, one worker 
for one either retiree or terminated vested worker. So you have 
that dynamic that is in play.
    In addition, the number of years spent in retirement has 
gone up dramatically over the last 50 years, up about 17 
percent.
    The Chairman. It will continue.
    Mr. Kandarian. It will continue. As people retire younger, 
although that is going to level off, and live of course longer, 
that puts strains and stresses on the system. Company actuaries 
do account for that, but if a plan gets underfunded you are 
talking about an ever larger set of liabilities that even on 
the same percentage basis results in a lot more dollars of 
underfunding. That puts stresses on those companies and that 
puts stresses on the insurance system.
    The Chairman. Mark, Bill?
    Mr. Warshawsky. Mr. Chairman, I would say that there are 
several considerations in terms of timing. Obviously, the need 
for replacement for the 30-year treasury is an immediate need, 
and that has to be dealt with very quickly.
    At the same time, we felt it was important from the 
Administration's perspective to put a down payment, if you 
will, on some more fundamental reforms and that includes the 
disclosure; it includes the yield curve. At the same time we 
are working very diligently on a comprehensive package that 
would include all the considerations that have been mentioned 
thus far. We feel as if that is something that we hope to share 
with you soon.
    Mr. Sweetnam. The other short-term issue that people have 
been talking about has been the elimination of the deficit 
reduction contribution for 3 years. That is a short-term 
solution that we do not think is a solution at all. The 
Administration opposes eliminating the deficit reduction 
contribution because as we are going forward to try to get 
overall funding reform, it is very difficult to start off 
another $40 billion in the hole in terms of funding. So the 
Administration opposes elimination of the deficit reduction 
contribution.
    The Chairman. Tom.
    Senator Carper. I want to go back in time. I am not lost in 
the 1970's, but I want to go back there again for just a 
minute.
    Barbara, do you pronounce your last name----
    Ms. Bovbjerg. Bovbjerg. It is much easier to say than to 
read.
    Senator Carper. It sure is. Why do you spell it that way?
    Ms. Bovbjerg. It is those Danes.
    Senator Carper. I think you alluded to this but when this 
law was adopted in the early to mid-70's I do not know that we 
had defined contribution plans. If we did, we did not have them 
like we do today. At the time, a lot of people graduated. I was 
just getting out of the Navy then. A lot of people went to work 
and worked for somebody for a long time and they participated 
in a defined benefit plan and eventually they retired, starting 
about right now actually.
    Today, folks just bounce all around. My wife has worked for 
DuPont for 27 years. I have been here with Mr. Craig for 
awhile, and eventually some day my wife, I expect, will have a 
defined contribution pension plan to draw from. Who knows, 
maybe we will, too.
    But our children will not. In all likelihood, our children 
will have a far different kind of pension plan to participate 
in.
    But what I thought I heard you say is that the number of 
plans is way down from where it was at its height and the 
number of participants in those plans is up just a little bit. 
When you look forward over the next several years, how do we 
see it trending in terms of the number of plans continue to 
drop, the number of participants continue to rise? What do you 
see?
    Ms. Bovbjerg. We see that sponsors with defined benefit 
plans, largely small plans, are exiting the system. They are 
not being replaced by new sponsors. New sponsors are offering 
defined contribution plans as a general rule. People do like 
them. They allow portability, they allow choice. But they do 
put the risk of adequate retirement income squarely on the 
participant, on the worker.
    Defined benefit plans reward people who stay, as you say, 
for most of their career in a single plan. What we have seen 
and we have reported on several years ago are different 
approaches to defined benefit plans, called hybrid plans. I 
know you have heard of cash balance plans that try to continue 
the defined benefit guarantee but have a more portable and a 
more accessible kind of benefit, where people can understand 
their benefit better or they may be able to take it with them 
when they leave the company.
    Certainly, such innovation in defined benefit plans helps. 
It permits sponsors to feel that they are addressing the needs 
of their workers and it does provide something for people who 
are leaving. But at the same time, the secular trend is clear, 
we are going toward defined contribution.
    It is something that is worth thinking about as we think 
about Social Security too, about how different sources of 
income may complement or mirror each other. We did a report a 
couple of years ago on the linkage between Social Security and 
pensions and the relevance of that linkage to Social Security 
reform. So I am pleased to see that this committee is thinking 
about these things together. I think that is very important.
    Senator Carper. What triggers a takeover by the PBGC?
    Mr. Kandarian. A plan terminates based upon a couple of 
different factors. One might be that a company is in bankruptcy 
and cannot get out of bankruptcy, in essence would have to 
liquidate unless it sheds one or more of its pension plans. An 
example was USAirways. It would essentially have to liquidate 
the company, sell off the planes, go out of business unless it 
shed at least one of the pension plans--in this case it was the 
pilots' plan--because they could not make their numbers work in 
their business plan to pay back the loans they needed to get 
out of bankruptcy with those liabilities hanging over their 
head.
    Senator Carper. This reminds me of the old joke about the 
planes about to crash, there are five people on the plane, four 
parachutes. Remember that story? The pilots came out without 
the parachute.
    Mr. Kandarian. Right.
    Other cases are when companies actually liquidate. For 
example, Bethlehem Steel sold off all its assets and went out 
of business. The acquirer of those assets did not take on the 
pension plan. The buyer of those assets paid roughly $1.5 
billion for all of the assets net of the assumed liabilities. 
The pension plan was more than $4 billion underfunded. So the 
number simply would not have worked. You could not pay $1.5 
billion and take on $4.3 billion of liabilities on top of that 
if you thought the economic value of those assets was only $1.5 
billion.
    So the plan sits there at this company that is dissolving, 
and therefore comes to us. Sometimes companies do what is 
called a distressed termination. They put the plan to PBGC, if 
they meet the rules in the law. Sometimes we call the plan in 
from PBGC. We take the action first if we feel there is an 
unreasonable likelihood of increased liabilities to the 
corporation. That was the case in Bethlehem Steel, as more 
liabilities were being triggered every day, and no money was 
going into the plan. So it can happen either way.
    But a company cannot simply say it is no longer convenient 
to have this plan, I will be a more competitive company if I 
shed these liabilities compared to my competitors. The have to 
show that they would not be able to stay in business 
essentially if they kept the plan.
    Senator Carper. Do plans that are taken over from the PBGC 
ever emerge from that oversight or is that it?
    Mr. Kandarian. No, essentially, once they come to us they 
stay with us. There was a minor exception in terms of numbers. 
LTV shed its plans the first time it went bankrupt in 1986. It 
then became more obvious that it could have afforded the plans. 
The agency went to court and argued the case all the way to the 
U.S. Supreme Court and restored those plans because we felt LTV 
had not really met the test of saying we could not stay in 
business with the plans. But other than that, the answer is no.
    Senator Carper. If you go back since 1974 to any times when 
our economy has trended down and we have been in recession, we 
had a real sharp recession in about 1982. We had a milder 
recession followed by jobless recovery in 1990 and 1991. Did we 
see the kind of takeovers by pension plans at that time that we 
are seeing now?
    Mr. Kandarian. The last time the agency saw a number of 
large terminations was the period following the 1990 and 1991 
economic slowdown. At that point in time, there were some steel 
plans like there were this time, but it was more the airlines. 
Eastern Airlines, Pan-American came in to us. Those were the 
two largest underfunded plans. They came in at $600 million and 
$800 million underfunded.
    This time around, Bethlehem Steel's underfunding was in 
excess of $4 billion. What you can see is that the size of 
these pension promises is growing decade to decade. The level 
of premiums that this agency receives has been essentially flat 
for a long period of time. So the funded status, the funded 
ratio if you will, of these plans has not changed much. They 
come into us typically 50 percent funded. Well, 50 percent of 
an ever bigger number becomes more and more exposure and you 
have flat premiums for this insurance system, and all of a 
sudden the numbers do not work.
    Senator Carper. Have we seen, either in the 1980's or the 
1990's, a period of time when companies were able to--you know, 
the pension funds were flush, maybe the value of the assets in 
those funds had risen or appreciated considerably, and 
companies were able to take from the pension funds back to the 
company some of the value, some of the assets of those funds? 
Have we seen that occur?
    Mr. Sweetnam. During the mid-80's, there was a way that you 
could do a termination re-establishment of a plan. You 
terminate the plan, take some of the excess assets, and you re-
established a new plan. Congress stopped that and put a tax on 
reversions.
    So right now if a company terminated a plan and took the 
assets out, the company, would be subject to a very high tax 
not only income taxes on that reversion, but a very high excise 
tax on that conversion.
    Senator Carper. So that occurred about 15 years or so ago?
    Mr. Sweetnam. Yes.
    Senator Carper. That has not been a contributing factor?
    Mr. Kandarian. I think it was 1986. It happened at a time 
when there were large leveraged buyouts and the plan excess 
assets were being used to finance these buyouts and Congress 
moved against that. As Bill mentioned, there is a 50 percent 
excise tax if you take it out now in most cases, other than 
bankruptcy. The one exception, I believe, is for health care 
for the same workers as have these pension promises if the plan 
is sufficiently well funded.
    Mr. Sweetnam. Some have stated though that by putting this 
excise tax, this very high excise tax on reversions, that it 
really says to a company you better not overfund your plan 
because once those assets are in there is no way that you are 
going to be able to get them out.
    Senator Carper. Finally, just real succinctly if you would 
for me, what can be done administratively to address this 
crisis? I think you have already said that. I would like to 
hear it again, just succinctly. What can be done, should be 
done legislatively, to help in this cause? Somebody just tell 
me about the 30-year treasury bond? What would you do with 
respect to 30-year treasury rates?
    Mr. Warshawsky. As we see it, most of the solutions are 
legislative. With regard to your question with regard to the 
30-year treasury rate, there is an immediate need for replacing 
that. The Administration has put forward a proposal for over a 
2-year period for a transition to a corporate bond yield curve, 
which we feel is the most accurate and relevant measurement to 
be used.
    Senator Carper. What maturity?
    Mr. Warshawsky. A corporate bond yield curve reflects all 
maturities.
    Senator Carper. To how long?
    Mr. Warshawsky. Most yield curves are computed up to 30 
years. We might be able to even go a little bit beyond that.
    Senator Carper. How quickly do we need to act on this 
point?
    Mr. Warshawsky. With regard to replacement of the discount 
rate, there is an immediate need because the prior stopgap 
expires at the end of this year. So that is an immediate need.
    Senator Carper, I want to just answer one of your prior 
questions in terms of the choice between defined benefit and 
define contribution plans.
    In different circumstances they are appropriate for 
different types of workers and they each have relative 
strengths and weaknesses. With regard to defined benefit plans, 
one strength which it does have is it offers an employee a life 
annuity as a payment option, and that is very advantageous to 
insure against the risk of outliving one's assets.
    Senator Carper. Again, just real succinctly, what can be 
done administratively? Two, what should we do legislatively? 
You have mentioned one thing that sounds like a do right now 
kind of deal.
    Mr. Sweetnam. One of the administrative things that is 
occurring now is that some plans are coming in to the IRS and 
asking for funding waivers. But really all that is doing is 
sort of postponing current funding contributions and pushing 
them out to the future. There really is not a lot that we can 
do administratively to fix this problem. I think that it really 
is something that is requiring legislative action.
    Mr. Kandarian. I agree with that. Administratively, PBGC 
can do certain things. If we feel there was an unreasonable 
increase in long-run loss facing the agency, we can move first 
and terminate a pension plan before the liabilities grow even 
larger for the insurance system. We have taken steps such as 
that in the last few years. But most of the fix really is 
legislative.
    Ms. Bovbjerg. I agree, it is practically all legislative. 
There may be some things that can be done administratively with 
regard to better informing participants, but those would be 
relatively small.
    Senator Carper. Other than the 30-year treasury fix, is 
there anything else we need to do this year?
    Ms. Bovbjerg. No.
    Senator Carper. Mr. Chairman, the committee of jurisdiction 
for the kind of near-term fix that is being discussed here, who 
would have jurisdiction over that? Is that finance?
    The Chairman. Finance.
    Senator Carper. Beyond that, some of the changes that have 
been suggested?
    The Chairman. There are a variety of proposals out there 
now, and the Administration is coming up with one. The House 
has a version. Senator Grassley has one, Senator Gregg has 
another.
    Mr. Sweetnam. It is also part of the jurisdiction of the 
HELP Committee, too.
    The Chairman. Yes, that is correct.
    Senator Carper. Mr. Chairman, thanks. You have been very 
generous. To our witnesses, thank you.
    The Chairman. Let me ask the last question because it falls 
directly into what Tom was saying as to short-term, long-term.
    Mark, Bill, critics of the yield curve say that it is an 
untested concept and that it will result in pension plans 
moving their investments out of the equity market. How do you 
respond to that?
    Mr. Warshawsky. It is not an untested concept. One of the 
corporate bond yield curves that we became aware of was 
developed by Salomon Brothers, now Citibank. That was in 
response to a request from the SEC in 1994, in terms of better 
implementation of the financial accounting requirements for 
pension plans.
    The yield curve has been around since 1994 and has good 
properties and could be a candidate for a yield curve. We are 
working at Treasury on another approach as well.
    The yield curve itself is a very familiar concept. If you 
look at any standard financial textbook, finance textbook, you 
will find the yield curve. There is no question about it.
    So I think that with regard to the untested concept 
argument, we do not find that has any validity.
    The Chairman. What is the risk that the yield curve 
approach would create more volatility in funding and greater 
uncertainty for plan sponsors?
    Mr. Sweetnam. First off, the current rules have a lot of 
volatility in funding. That is one of the reasons that people 
are very worried about the deficit reduction contribution.
    What we are looking at is to require more accuracy in the 
measurement of the liability. Our second step is to relook at 
the contribution rules. The funny thing is that you are always 
going to have this volatility in your funding requirements. The 
question is how much risk do you want to take? Some people 
could take hedging strategies in their asset mix, so that they 
do not have that volatility, or they could lessen that 
volatility. So that there are ways that a corporation can look 
and reduce some of that volatility.
    The fact right now that these smoothing techniques, really 
you are just smoothing the inputs into the contribution, into 
determining the contribution. You still have volatility.
    What we plan to do in our funding proposal is really look 
at the outputs to see whether there is a way that we can reduce 
the volatility there in the outputs rather than reduce--have 
this smoothing in the inputs.
    The Chairman. Barbara, Steve, Mark and Bill, thank you all 
very much for being with us today and testifying. I think it is 
extremely valuable that we build a record on this, that we lift 
the level of visibility of the issue to the Congress and 
hopefully this will help urge us along to do some short-term 
and what is obvious here today and has been obvious for 
sometime, long-term structural fixes in the situation. Thank 
you all.
    Let me now invite our second and last panel up to the 
table, if you would please.
    To all of you again, thank you very much. Let me introduce 
our second panel. Scott Macey, Senior Vice President of Aon 
Consulting who is testifying here on behalf of industry. David 
John, Research Fellow at the Heritage Foundation. Melvin 
Schmeiser, a retired steelworker from Baltimore, MD, whose 
pension was recently placed in receivership by the Pension 
Benefit Guarantee Corporation.
    Scott, we will start with you. Please proceed.

     STATEMENT OF SCOTT MACEY, SENIOR VICE PRESIDENT, AON 
                    CONSULTING, SOMERSET, NJ

    Mr. Macey. Mr. Chairman, thank you for the opportunity to 
appear before the committee today. As mentioned, my name is 
Scott Macey. I am Senior Vice President of Aon Consulting and I 
am the former chairman of the ERISA Industry Committee and 
remain on its board. I am serving today as a spokesperson for 
six prominent business organizations that represent a broad 
cross-section of American business.
    These organizations come before you with a single voice to 
emphasize the need to preserve our Nation's voluntary employer-
sponsored defined benefit system.
    Our defined benefit system stands at a crossroads and I 
think that has been indicated by the prior witnesses this 
morning. Congress confronts a fundamental choice whether to 
continue down the current road of a somewhat inflexible funding 
and regulatory regime that is often illogical and imposes 
untenable burdens or whether to chart a new path toward a 
vibrant and growing defined benefit system.
    Defined benefit plans and the employers that voluntary 
sponsor them confront unprecedented burdens. Some are caused by 
temporary economic conditions but others are caused by arcane, 
obsolete, and excessive Government regulation. A case in point 
is the requirement that pension funding and related obligations 
be calculated using the defunct 30-year treasury securities 
rate that artificially inflates plan liabilities and required 
contributions.
    This defunct interest rate and the uncertainty as to what 
will replace it is layered on top of counterproductive and 
inflexible funding rules, widespread exposure to unwarranted 
litigation, an environment that is hostile to the type of 
adaptation that is necessary if defined benefit plans are to 
survive in the 21st century, and a difficult market and 
interest rate environment.
    Action to strengthen the defined benefit system should be 
taken now, beginning with Congress promptly replacing the 
obsolete 30-year treasury rate. We have heard the Government 
support of replacing that with a 30-year corporate rate this 
morning and we agree with that aspect of their testimony.
    The result of using the 30-year treasury rate is that 
pension liabilities are inflated and employers are required to 
make excessive contributions and PBGC variable-rate premiums. 
Perhaps more than any other factor, these inflated and 
uncertain financial obligations imposed on employers have 
contributed to the spate of recent plan freezes and 
terminations. We urge the Senate to act now and join the House 
in passing legislation adopting a corporate bond rate 
replacement for the defunct 30-year treasury rate. Senator 
Gregg has introduced a bill, S. 1550, to do just that.
    Unfortunately, the Treasury Department has also suggested 
another element ultimately moving to a formula based on a spot 
rate yield curve. Such a yield curve concept would mark a major 
change to a volatile and complicated regime under which the 
interest rates used would be based on immediate spot rates and 
vary with the demographics of plan participants.
    A yield curve, however, would add only a veneer of accuracy 
while imposing complexity, volatility, and unpredictability to 
pension funding. We believe that a yield curve would have an 
adverse impact on the health of the defined benefit system and 
certainly should be rejected without a great deal of further 
study.
    I would like to take a few moments just to address a couple 
of other issues. The PBGC is supported by plan sponsors and 
provides critical backup benefit security enjoyed by millions 
of plan participants. While the PBGC's current deficit 
situation should be evaluated and monitored, as it is, we 
believe that the long-term financial position of the agency is 
strong. The current deficit is not a threat to the PBGC's 
viability and it would be a mistake to act precipitously at 
this time.
    Indeed, the PBGC has operated at a deficit position most of 
the time throughout its long history. Today the agency has over 
$25 billion in assets and by its own statements can pay 
benefits for many years into the future.
    One rare source of vitality in recent years within our 
defined benefit system has been hybrid pension plans. Hybrid 
plans respond to changing work patterns and workforce 
demographics and include the many features in defined benefit 
plans that make these plans popular with employees.
    Pending at the relevant Federal regulatory agencies are 
several projects to provide much needed guidance on hybrid 
pension plans and issues related to them. However, some in 
Congress, and the House has already done this, have attempted 
to use the current appropriations process to deny funding for 
these regulatory projects. Any such efforts to foreclose agency 
guidance that might arise in the Senate should be rejected as 
harmful to the retirement system and the retirement security of 
millions of Americans.
    The policy decisions that Congress makes in the near future 
could tip the balance one way or the other toward a vibrant 
retirement system that continues to offer employers and 
employees choices between defined benefit and defined 
contribution plans or toward a more narrow system in which 
defined contribution plans are the only retirement vehicle 
available to most workers.
    We stand ready to work with Congress and the Administration 
to find solutions to strengthen and preserve our defined 
benefit pension system and protect American workers. Most 
critically today, we urge Congress to act now to adopt the 
suggested corporate rate interest proposal and to also act to 
protect and encourage hybrid pension plans.
    We appreciate the opportunity to testify. Obviously we 
would be happy to respond to any questions.
    [The prepared statement of Mr. Macey follows:]

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    The Chairman. Scott, thank you for very much. Now let us 
turn to David John, Research Fellow at the Heritage Foundation. 
David, welcome before the committee.

STATEMENT OF DAVID JOHN, RESEARCH FELLOW, HERITAGE FOUNDATION, 
                         WASHINGTON, DC

    Mr. John. Thank you, Mr. Chairman, and thank you for the 
opportunity to testify. I am David John. I am testifying, 
frankly, on my own behalf. I am a Research Fellow with the 
Heritage Foundation specializing in retirement issues, Social 
Security and similar financial problems at the moment.
    What a difference a year makes. Last year about this time, 
a little bit earlier in the year, the debate was about the 
risks of defined contribution plans. If you listened to various 
of the legislators, staffers, and others, the problems at 
Enron, WorldCom, and various and sundry other made it sound 
like anyone who supported a defined contribution plan clearly 
did not understand what was in the best interest of workers.
    Now we are seeing that while it is very true that defined 
contribution plans do have an investment risk, there is at 
least an equal risk in a defined benefit plan, and we are 
starting to see now some of a costs and some of the problems 
that we will face in the future.
    Your title, the next S&L crisis, is perhaps a little bit 
too apt than it should be. About 25 years ago I worked for a 
Congressman from Georgia by the name of Doug Barnard who 
retired, I guess, about 1992 to or so. At the time we were 
looking on legislation dealing with the S&L industry. The S&L 
industry, we were told, was absolutely essential to American 
housing and that it was going through some temporary problems 
but these would be dealt with if Congress would just come up 
with a little bit of forbearance. What Congress came up with 
was something called goodwill and the regulatory capital.
    The net result worked very well for the short run. S&Ls 
that had looked like they were about to collapse suddenly ended 
up with enough assets so that they could actually expand.
    Unfortunately, what we were seeing was not a temporary 
phenomenon but a complete change in the industry and once 
everything came home, the industry collapsed. This was not the 
activity of a few S&L crooks, although that was popular to say 
at the time. This was a fundamental change in economic reality. 
Because Congress had not acted earlier, because Congress had 
shown, in this case, a little bit too much forbearance, the net 
cost to the taxpayer was on the order $500 billion.
    Now we look at the whole question of the defined benefit 
pension plan. Once again we have an industry that is undergoing 
a fundamental change. Once again this industry is coming up and 
asking for shifts in the way that their requirements are 
calculated. Through a deficit reduction contribution or the 
elimination of the deficit reduction contribution, they are 
asking for yet a little bit more forbearance. If Congress does 
not keep the long-term interests of the taxpayer in mind, 
Congress may find itself with yet another major funding crisis.
    This comes to a question of what to do and what not to do. 
The discount rate has already been discussed rather 
extensively. We are very concerned that if Congress simply 
shifts from the current 30-year treasury rate to a corporate 
yield curve without doing the yield curve as suggested by 
Treasury, that we are going to find in the long run a situation 
where the industry is going to be coming back again and again, 
and we will see--probably not in the short run but in the next 
few years--some form of a bailout provision.
    We are also seeing the need for enhanced disclosure. As has 
already been said in the earlier panel, workers do not know 
what their futures hold. In a defined contribution plan you get 
a benefit statement that you can look at and you know how much 
money you have.
    Frankly, listening to some of my colleagues at Heritage, 
who tend to come to me and ask if their future has to do with 
uttering the phrase do you want to supersize that on a regular 
basis from looking at some of their investments, they are 
readily aware of what is going on. Under a defined benefit 
plan, workers do not have that opportunity and I think that is 
a very serious question.
    Equally, there is a serious problem which is addressed by 
the Treasury proposal which would restrict the opportunity of 
pension plans to offer new and enhanced benefits without having 
the means to pay for them.
    Now, I am going to stop there but just let me quickly 
mention that, as Barbara Bovbjerg already said, what we are 
discussing today, both in defined benefit and defined 
contribution plan, affects only about 50 percent of the 
workforce. If this is not addressed in a comprehensive approach 
that also looks at Social Security, we are going to be missing 
the real responsibility that we have not only to ourselves and 
to people who are slightly older to us, because also to our 
children who are going to have to pay for our mistakes.
    Thank you.
    [The prepared statement of Mr. John follows:]

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    The Chairman. David, thank you very much.
    Talking about understanding and transparency, and the 
knowledge of how to deal with it if you are on the receiving, 
or if you are on the losing end, of a plan that is in trouble, 
let me turn to Melvin Schmeiser, a retired steelworker from 
Baltimore who I understand found himself in that kind of 
situation. Melvin, please proceed with your testimony.

STATEMENT OF MELVIN SCHMEISER, STEELWORKER RETIREE, BALTIMORE, 
                               MD

    Mr. Schmeiser. Good morning, Mr. Chairman and members of 
the Senate Special Committee on Aging. My name is Melvin 
Schmeiser. I am 56 years old and a retiree of the Bethlehem 
Steel Corporation after 35.5 years of service. My full 
testimony has part of my work history and a description of some 
of the hazards of working in the steel mill.
    I was married in 1981 to my wonderful wife Alice and also 
found out there was a lot more overtime available if I 
volunteered for shift work. As a turn millwright, you could be 
assigned jobs anywhere in the coke oven area. It seemed in the 
winter is when you would be sent on top of the coal bridge 
cranes at 2 a.m. and the tears from the wind would freeze on 
your cheeks. In the summer, you would be sent on top of the 
ovens. You would have to wear wooden clogs strapped to your 
safety shoes so they would not catch on fire. You had to wear a 
respirator to protect your lungs from the thick yellow smoke. 
Sometimes you were sweating so bad you could see the bubbles 
coming out of the mask. This is where the money was.
    This was also about the time when I started to think about 
retirement. Under the contract there were two ways to determine 
how much pension an hourly employee would receive. Option one, 
years of service multiplied by a dollar amount. This was OK if 
you worked 40 hours a week or missed some time due to layoffs 
or sickness.
    Option two, years of service times a percentage of the 
amount of money you made over a 60 consecutive month period 
during the last 10 years of service. If you can stay healthy, 
not miss any time on the job, and a fair amount of overtime was 
available you could greatly enhance your retirement pension.
    In 1989, the coke ovens were shut down and I was back on 
the street again. After several weeks I was able to use my 
plant seniority to bump back into various labor and mechanical 
pools. In 1991, jobs were opened up in several mechanical 
departments and I bid into the cold sheet mill.
    When I arrived, I was told I would not like it there 
because it was hot in the summer, cold in the winter, and 
greasy. Compared to some of the places I had worked in the 
past, this was like an office job. You could actually see from 
one end of the building to the other with just a few wisps of 
steam. It was turn work, but plenty of overtime.
    About 1993, there was talk of a new state-of-the-art cold 
rolling mill that Bethlehem wanted to build. It would only need 
about half the employees of the current facility if job 
combinations were instituted. If the new mill was to be built 
at Sparrow's Point, the union would have to make concessions. 
The union agreed to job combinations if the company would offer 
the displaced employees a $400 a month bonus upon retirement. 
The mill was built at Sparrow's Point.
    My wife and I decided with the $400 a month increase in my 
pension until I reached age 62, and working all of the overtime 
I could physically handle, we should be able to live 
comfortably the rest of our lives. I had worked a fair amount 
of overtime in the past to pay our house off, and car loans 
early. We had a plan to work for a good retirement and be worry 
free in our old age.
    I worked shift work most of my 35 years at the Point. It 
was hard on both of us. My wife referred to herself as a 
Bethlehem Steel widow at family functions that she had to 
attend alone.
    Years ago we started some IRAs and I had a 401(k) plan. 
There were no matching contributions from the company. We also 
had some certificates of deposit and money in regular bank 
accounts.
    Bethlehem offered free retirement classes on company 
property with outside experts on investments and Social 
Security. I attended the two night 2 hour classes and we 
decided that we were financially secure. I also started going 
over the retirement and medical benefits books we received 
after every new contract.
    In 2000, retirement meetings were held on company time 
where Bethlehem representatives gave pension estimates and 
answered questions. There was a union representative at the 
meetings. They assured us that if things got bad for the 
company, the company could not get its hands on the pension 
fund and that there were hundreds of millions of dollars in the 
fund. He said the sky would have to fall for the fund to be 
depleted. Even if it did, the Federal Government would pay you 
85 percent of your pension if you were 55.5 years old. So I 
retired February 28, 2001.
    Well, the sky did fall. The company filed for Chapter 11 
bankruptcy protection and later was sold to International Steel 
Group. Bethlehem Steel was forced into bankruptcy because of 
the broader crisis affecting the steel industry brought on by a 
flood of dumped foreign steel which caused domestic prices to 
collapse. The new company, ISG, would not be responsible for 
Bethlehem's legacy cost, which included pensions, life 
insurance, and health care for the retirees.
    On December 18, 2002 the Pension Benefit Guarantee 
Corporation took over the pension fund. So my $2,450 regular 
monthly pension plus the $400 a month bonus will be reduced to 
less than $1,700 a month. While I am disappointed by how much 
my pension is being reduced, I realize that without ERISA I 
would have no pension left at all.
    My medical insurance, which was costing me $165 a month for 
both my wife and I will now cost $1,028 a month. Fortunately, I 
can use the health insurance tax credit which will cover 65 
percent of my payments. My out-of-pocket payments will be 
reduced to $357.80 a month unless the rates increase.
    This, I hope, will last until I am 65 and I hope Medicare 
will still be available. I hope prescription drug coverage will 
also be a part of Medicare by then. Finally, I hope that Social 
Security will be available when I am 62.
    Thank you.
    [The prepared statement of Mr. Schmeiser follows:]

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    The Chairman. Melvin, thank you for that very clear 
testimony. While obviously you in your life have been a very 
hard-working person, you have also been a thinking person the 
way it sounds as it relates to you and your wife's future and 
your retirement plans.
    Scott, let me come to you for some questions and to David, 
and back to you, Melvin.
    Scott, in your testimony you say that action to strengthen 
the defined benefit system must be taken now in the form of a 
replacement interest rate for the 30-year treasury bond. How 
does reducing the cash put into pension funds, many of them at 
risk, strengthen the defined benefit system?
    Mr. Macey. Before I answer that, Mr. Chairman, I just 
wanted to say after listening to Mr. Schmeiser's story, he had 
a much tougher job than I have ever had and probably about one 
of your years in your career was worth about four or five of 
what I do. So I commend you for seeing through a very tough 
job.
    First, I think most obviously if companies are required to 
put in cash into plans that do not reflect the true and 
reasonable measure of the liabilities of the plans, they are 
just not going to support the system. So No. 1, the most 
obvious way that using an accurate or a better measure of 
interest rates and better measure of determining what pension 
liabilities and plan contributions should be encourages defined 
benefit plan sponsors to stay in the system. So that certainly 
would help to strengthen the system.
    We are looking at a situation now where yes, there is some 
underfunding in a number of pension plans. Some have 
significant underfunding. But we are looking at them as they 
come out of the trough of a difficult economic cycle coupled 
with very low interest rates in measuring the liabilities. It 
is almost, between the economic cycle, the loss of market value 
in plan assets from three or so years ago, and the very low 
interest rates, the perfect storm for measuring liabilities.
    So what we are saying in a number of different ways and 
respects is, No. 1, let us not act precipitously to impose new 
burdens on employers as they come out of the economic cycle. 
No. 2, the corporate bond rate is certainly a more accurate 
measure than a defunct U.S. Treasury rate that is at the 
lowest, the Treasury rates are at their lowest point in over 50 
years. So our measure of it, we think, strengthens the defined 
benefit system.
    What we need to do overall is take action beyond the 
corporate bond rate replacement. I think there seems to be very 
little debate over moving from a Treasury rate to a corporate 
bond rate. The debate seems to be should other things be tacked 
onto it. Perhaps they should and perhaps they should not, but 
not enough study and evaluation about the impact of some of the 
other suggestions coming from the administrative agencies that 
are responsible for overseeing ERISA and pension plans has been 
done.
    What we do have is, at least on one item, common agreement. 
That is let us act now to replace the defunct 30-year treasury 
rate with a reasonable high-grade mix of corporate bond rates 
that is very transparent and not subject to manipulation.
    Some of the other steps that could be taken to strengthen 
the system is to finalize these regulations regarding hybrid 
plans at Treasury. I think several of the witnesses have 
mentioned that hybrid pension plans are--in addition to myself 
and the organizations I represent--are one of the positive 
steps in defined benefit plans. Unless we make the system more 
flexible so that employers and employees together--and many 
unions have agreed to support hybrid pension plans--unless they 
can work together to come up with new and innovative plan 
designs, I think we are going to see continued plan freezes and 
plan terminations to the detriment of the retirement system and 
the retirement security of millions of Americans.
    The Chairman. Scott, what are industries now doing to 
increase transparency and disclosure of pension fund solvency 
to workers, especially for the at-risk plans? Is there any 
movement internally to do that? Or are we going to have to 
force it?
    Mr. Macey. Mr. Chairman, I guess industries are looking at 
providing and wish to provide relevant, meaningful, accurate, 
and timely information to all of the different constituencies 
that may be interested in that. One is the Government, another 
is employees, and another are shareholders. Now the same 
information may not be relevant to all of those different 
constituencies.
    What industry does not want to do is use inaccurate 
measures of supposed plan transparency information and provide 
that to participants. Several of the measures that the 
Government witnesses mentioned, specifically I believe Mr. 
Kandarian, was No. 1, provide plan termination information to 
participants.
    We believe that that would be detrimental to the average 
plan participant because plan termination information is, in 
our minds, not an accurate measure of a long-term plan 
obligation. The pension plans are long-term obligations settled 
over many years. The typical earning the benefit and 
distribution timeframe is 40, 50 or 60 years. What the 
termination liability reflects is what is the value of all of 
that at a specific moment in time based upon specific asset 
values at that time, which may be at the trough of an economic 
cycle, and also the interest rates at that time.
    We believe that plan termination type of information is not 
the type of information that would be helpful in a typical 
situation to the average plan participant.
    The other suggestion that Mr. Kandarian mentioned was 
providing this so-called 4010 information, and that is the 
provision in ERISA that requires companies that have $50 
million worth of aggregate underfunding in all of their pension 
plans to file a report with the PBGC. By law that report is not 
disclosed to the public.
    If information is to be disclosed to the public, then it 
should be relevant and meaningful information. A company with 
$49 million worth of underfunding in a relatively small plan 
would not have to file that report. But a company with $50 
million worth of underfunding but billions and billions and 
billions of dollars in multiple plans would have to file that 
report.
    So until at least the statute is corrected to provide a 
more meaningful measure of when a plan or a company truly has a 
significant unfunded liability, we do not think it would be 
appropriate to disclose to the public at all.
    The Chairman. Last question of you, Scott. Your testimony 
states the Administration's yield curve proposal is too 
volatile. What do you mean by that?
    Mr. Macey. Well, it is a spot rate proposal that looks at 
rates over a short period of time. It is subject to change 
rather dramatically over relatively short periods of time. I 
think the absolute biggest problem that we have with the yield 
curve concept is we disagree wholeheartedly with the statement 
that it is a well-tried concept. It may be well-tried in some 
other avenues unrelated to pensions, but it is absolutely 
untried with respect to pensions. The Administration itself, in 
the testimony today and elsewhere in testifying before other 
committees before Congress, has indicated that a lot of work 
still needs to be done to answer a lot of specific questions 
about how the yield curve concept would be constructed and 
applied to pension plans. No one has determined what the impact 
of using a yield curve concept would be on pension plans.
    My own feeling, having worked in the industry for 30 years 
now, is that we need to look at a lot of issues. How would 
companies respond to a yield curve concept if it is ultimately 
adopted? How should the yield curve be constructed and applied? 
What type of smoothing techniques should be developed to avoid 
the volatility?
    For a very minor incremental aspect of accuracy, which can 
be challenged but let us grant that there is some minor aspect 
of increase in accuracy, what we are adding is we are charting 
waters in a totally unknown environment. Not one person from 
the pension industry has come forward and said we believe a 
yield curve concept make sense. That right there causes me 
great cause for concern.
    Second, the yield curve concept is--no one has tested 
whether it would change employment patterns? Would industries 
with older workers freeze their plans because of the increases 
in contributions? Why are we using a yield curve when pension 
funding is generally a long-term concept anyway? It seems to me 
that all of these issues that have been raised by the 
Administration, assuming that they deserve legitimate or 
deserve significant review, should be reviewed in detail before 
Congress puts any proposal or adopts any proposal in its 
legislation to fix the anomaly of the 30-year treasury rate 
now.
    So we oppose including that in the legislation for these 
reasons. We do suggest that the Government establish a 
commission to study the issue. I know that some people do not 
feel that is an appropriate approach in certain other areas of 
Government, to establish a commission. But quite frankly, a 
commission of interested and informed parties, who have a 
significant interest in the health and vitality of the defined 
benefit system, including people from Government, the 
investment community, participants and unions, and the employer 
community, and expert actuaries and others on that commission. 
Then we can respond to the yield curve concept and Congress 
could act in a more appropriate and responsible fashion.
    The Chairman. Scott, thank you.
    David, I am going to go immediately to you with a similar 
kind of question. Scott has talked about some of the problems 
they see in it. Critics are suggesting, and you did mention 
one, that it would discriminate against older workers. Discuss, 
if you would with us your view of the yield curve and some of 
its positives versus negatives?
    Mr. John. I think the question really has to be answered in 
terms of what you think discrimination is. To me the biggest 
form of discrimination against an older worker that we see is 
in the current system where you can work for 35 for 40 years, 
you can retire with a set promise of what your benefits are 
going to be, and you can wake up one morning and discover that 
your life has been completely turned upside down and that what 
you had been led to believe does not exist.
    A yield curve is a new and different form of looking at 
pension financing. It has not been implemented, as far as I 
know, in any pensions at this point. However, the simple fact 
is that this is not just a matter of dealing with numbers on a 
page. This is dealing with lives. This is dealing with the 
ability to live a comfortable and reasonably secure retirement.
    If a plan is frozen, and the Government's proposal does 
provide for freezing plan participation if plans are 
underfunded by a certain level, may actually prove to be a good 
thing. In most of the studies of current problems with defined 
benefit pension plans, the experts say that you can pick out 
the companies that are going to turn their pensions to the PBGC 
long in advance because their bonds are a junk bond rate for 
significant period of time.
    If that is the case, and if it is possible to identify 
these plans early, as it is, and if it is possible to use a 
yield curve to add additional information to that, and it is 
further possible to prevent them from becoming at some point 
further underfunded; i.e., that the retirees who depend on them 
are going to been in even worse shape than they are nos, or the 
taxpayers who are going to have to pick up some of those 
promises will end up paying more, then I think that is actually 
a small price to pay.
    The Chairman. The Administration has proposed improved 
disclosure rules for the workers. Will the benefits exceed the 
cost of these additional rules?
    Mr. John. Yes, I think they will. The costs are not going 
to be insubstantial. As one who is at the Heritage Foundation, 
we would never think lightly of anything that would increase 
regulatory cost.
    What is a very serious problem however is to have workers 
who are 20 or 30 years in their careers with a particular 
company and to wake up one day and discover, as I said before, 
that their lives had been turned upside down.
    Now one of the things that I think is interesting is there 
is always a discussion about what information is meaningful.
    The Chairman. We just heard Scott walk through several 
iterations of what is meaningful to whom. I would appreciate 
your version of that.
    Mr. John. Meaningful is in the eye of the recipient when it 
comes down to it. It may well be that plan termination basis is 
not the best and most accurate method to give to a worker. At 
the same time, it raises a certain level of questions that need 
to be answered. It would be possible to provide workers with 
information on their defined benefit pension plans that 
actually does answer their questions. I do not know that plan 
termination is necessarily one of them, but I do believe that 
they need to have some idea as to how far their pension is 
underfunded.
    If it is significantly underfunded, well frankly, they 
should know that they are at decent risk.
    Now the $50 million level is something I also happened to 
agree with Scott on. That is an absolutely arbitrary level and 
as inflation goes, it is going to be less and less meaningful. 
It would be far better to change that into some form of a 
percentage underfunded rate. Something that a pension plan, if 
they are say 20 percent underfunded then these additional 
disclosures would be triggered.
    But one way or the other, again this is not just a matter 
of numbers and words on a page. This is people's lives. It is 
also a matter that if these promises are not kept, then either 
people like Mr. Schmeiser are going to pay for it directly or 
essentially, as legislators, you are going to find yourself 
with additional demands on the Federal treasury to help bail it 
out. Neither is exactly fair to be uninformed about.
    The Chairman. David, your testimony states that defined 
benefit plans may not be in the best interests of workers. This 
idea seems to be in conflict with Scott's testimony pointing to 
the possibility of vibrant and growing defined benefit systems.
    What do you know that Scott does not know? Scott, you can 
do a follow-up.
    Mr. John. This should be fun.
    When I was doing my economic studies, we talked about a 
curve which--this was one of my favorite semi-nonsensical 
terms. It was increasing at a decreasing rate. What we are 
seeing with defined benefit pension plans is, as has already 
been said, we are having fewer and fewer plan sponsors even 
though the number of participants is increasing slightly.
    A defined benefit plan makes a great deal of sense for a 
model of employment that fits, say my father, who was a 
professor and in his post-World War II career held a grand 
total of two jobs once he got out of graduate school.
    If you listen to the criteria that Mr. Schmeiser mentioned, 
for instance in particular the one the last 60 months of 
employment is a determination of your pension plan, it does not 
work if an average worker--and I am thinking in particular of 
younger workers. I have got a 17-year-old daughter who is about 
to go off to college. The studies show that she, on average, 
can expect to have something like 10 or maybe even 12 different 
employers. So by the time she reaches her last 60 months, that 
may be the only 60 months issues that she is with that 
particular employer.
    As we see increasing movement in the workforce, as we see 
an increasing demand for older workers to remain in the 
workforce simply because there are not enough young people to 
replace them as time goes on, I think we are going to see the 
whole pension structure shift. It does not make much sense in a 
multiemployer, serial employer actually, system to have a 
defined benefit pension plan. A defined contribution plan is 
much more advantageous because you can take your assets with 
you from one place to another.
    Similarly, I do not know that in the future, and this may 
even be at the time that I retire, that we are going to see 
older workers who retire and totally stop working. It may well 
be because we have a certain level, hopefully, of expertise and 
needed skills that we will come back and work on a part-time 
basis. So our retirement would be a mixture of earnings, 
pension plans, Social Security, assuming that gets fixed, and 
various other methods.
    The Chairman. Five words are less, Scott. Our time is short 
and I do want to get to Mr. Schmeiser.
    Mr. Macey. Absolutely.
    I think historically the best experience for retirement 
security is probably a mixture of defined benefit and defined 
contribution plans where there is somewhat of a shared 
responsibility between the company and the individual. But 
certainly, defined benefit plans offer individual workers the 
benefit guaranties subject to obviously some situations like 
Mr. Schmeiser's where a part of the benefit is lost. The 
employer assumes the total investment risk and there are 
lifetime annuities provided by the plan.
    Now you have mentioned final pay-type plans and workers 
moving from one company to another do not fit the model of a 
typical DB plan. But that is why employers have innovated in 
recent years with defined benefit plans such as cash balance 
plans and pension equity plans that provide for greater 
portability. Certainly, transparency is enhanced because then 
the employee knows exactly what their account balance is at any 
time under a cash balance plan.
    The GAO witness, I am not going to attempt to pronounce her 
last name, she mentioned that innovation in pension plan design 
is an important aspect of the health and vitality of the 
pension system. I think that we in industry believe 
wholeheartedly in that and have been attempting to respond 
favorably with innovative plan designs that are responsive to 
the needs of the business and balance the interests and 
concerns of employees.
    I would mention just again that we hope that the Government 
can issue its guidance that we have been waiting for for a long 
time to make sure that we can continue to sponsor and develop 
these plans.
    The Chairman. Gentlemen, thank you.
    Mr. Schmeiser, you did everything right, it appears, in 
planning your retirement. You saved for retirement in an IRA, 
you funded a 401(k) retirement account, you worked very hard to 
build the value of your pension retirement, you paid off your 
home mortgage.
    Given your experience, what would you advise young people 
thinking about planning for their retirement in the context of 
what you have just heard?
    Mr. Schmeiser. Well, I think it would be very advantageous 
to start putting money away for your retirement as early as 
possible, and to diversify where you did put your money just in 
case one area did not do so well.
    The Chairman. Based on what you have just heard, but more 
importantly what you have just experienced, if you had had 
additional information, a greater understanding of the pension 
plan of Bethlehem, that it might be in trouble, or that certain 
aspects of it were not creating the kind of solvency that would 
produce the payment of pension that you were anticipating prior 
to or in advance of your notification, would that have been a 
benefit to you? How would you have handled it? Have you thought 
that one through?
    Mr. Schmeiser. It certainly would have been a benefit. I 
would still be working. I would not have retired.
    The Chairman. You would have made different kinds of 
decisions about your not only working but your retirement 
plans?
    Mr. Schmeiser. Yes, sir.
    The Chairman. In other words, information would have been 
extremely valuable to you in your planning?
    Mr. Schmeiser. It certainly would have been.
    The Chairman. Thank you.
    Gentleman, thank you all very much for your testimony. I 
hope we have built some valuable record today. We appreciate 
it.
    The committee will stand adjourned.
    [Whereupon, at 11:53 a.m., the committee was adjourned.]


                            A P P E N D I X

                              ----------                              


                 Prepared Statement of Debbie Stabenow

    Chairman Craig, thank you for convening a hearing on this 
difficult issue. I also want to thank all the witnesses for 
being here and helping us build a legislative record. 
Protecting the retirement income of American workers should be 
a priority of this Administration.
    Too many Americans watched their retirement incomes shrink 
as the stock market dropped dramatically over the past two 
years. Hard working Americans who carefully planned for 
retirement are now facing--through no fault of their own--less 
than secure futures.
    In addition to the slumping stock market, our lethargic 
economy has resulted in many manufacturing companies closing 
their doors or filing bankruptcy, leaving the Pension Benefit 
Guarantee Corporation to take over these companies' pension 
plans. My great state of Michigan--with its proud manufacturing 
tradition--has been especially hard hit during this economic 
downturn. To date, the PBGC is trustee for over 200 pension 
plans from companies formerly headquartered in Michigan.
    The Pension Benefit Guarantee Corporation was created by 
Congress in 1974 to help insure retirees pension benefits. With 
the escalating obligations facing the PBGC, its own standing 
has been deemed ``high risk'' by the General Accounting Office. 
Congress is currently considering several proposals that will 
provide assistance to companies struggling to meet their 
pension obligations. It should go without saying that these 
proposals must also work to protect the retirement security of 
American workers as well as avoiding a bailout of the PBGC by 
taxpayers. Moreover, any changes to pension laws sanctioned by 
Congress must be more than simply accounting sleight-of-hand 
tricks like those used recently by private corporations.
    Again, thank you Chairman Craig for convening this hearing. 
I look forward to hearing from our witnesses.

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