We found yet another reason why the US retirement crisis will be uglier than many retirees are prepared for…
You see, while retirees were napping last year, Congress and President Barack Obama were quietly stealing from their pension plans by enacting a little-known law called MAP-21.
Hidden in the wording of a new transportation bill, the act allows big companies to slash their contributions to pension funds.
The upshot?
The number of companies defaulting on their pension plans could balloon and bankrupt the Pension Benefit Guarantee Corp. (PBGC) insurance program – leaving retirees out in the cold.
‘That smell of sulfur is what MAP-21 gives off,‘ Jeremy Gold, a pension consultant, told The Fiscal Times. ‘It’s got a smell about it of a deal made with devils.‘
That’s bad news for retirees – or those about to retire – who are counting on a lifetime of payments from a pension plan.
Here’s why…
MAP-21: A Wolf in Sheep’s Clothing
In 2012, the government faced a shortfall between current gas taxes and projected highway spending.
So how to raise the money?
Let corporations cut funding on their pension plans and generate taxes from higher wages. The bill – titled Moving Ahead for Progress in the 21st Century or MAP-21 – lets companies change how they calculate how much they need to fund pension plans.
MAP-21 lets employers put less money in their pension plans by allowing them to value their liabilities – what they have to pay in to fund pensions – using higher interest rates instead of current, low rates.
You see, pension plan liabilities are higher when interest rates are low because returns from bonds and other investments are expected to return less. When rates are high, the returns are expected to be higher and the liabilities are reduced.
Allowing companies to contribute less to their plans raises revenue for the federal government.
The government is assuming MAP-21 will raise $9.5 billion over 10 years because it will get more tax revenues from higher wages of current workers.
Defined Benefit Plans Targeted
MAP-21 is squarely targeted at traditional defined benefit (DB) pension plans. These are plans funded by the companies to provide employees with a source of income after retirement.
But the number of workers with DB pensions has been in steep decline for years. Fewer and fewer workers outside of the government sector have them.
Since the 1990s, DB’s have been replaced by 401(k)s, the employee contribution model that is now the main form of retirement plans.
Only about 18% of full-time private industry workers had a DB pension in 2011-down from 35% in 1990, according to the Bureau of Labor Statistics.
‘Companies want to get away from pensions totally,‘ Steve Pavlick, worker benefit specialist at the law firm McDermott Will & Emory told CNBC. ‘Most companies aren’t offering them anymore to new workers.‘
But pensions are still a key source of income for many current retirees, according to the Pension Rights Center. Only 52% of seniors receive income from financial assets. Half of those receive less than $1,260 a year.
And Social Security payments average a meager $15,179 a year, roughly 40% of retirees pre-retirement income.
Insurance Fund in Danger
Under federal law, DB’s are subject to minimum funding rules designed to make sure that plans have enough money to deliver promised benefits.
If a plan faces a funding shortfall, employers must make contributions to increase the plan’s assets and cover the shortfall.
But 94% of pension plans are currently under funded, according to a new study from Wilshire Consulting.
In fact, DB pension plans for S&P 500 Index companies are under funded by a whopping $342.5 billion, according to Russ Walker, a Wilshire vice president.
That means more and more companies are going to be relying on the PBGC, the government’s pension insurance fund, for assistance.
The PBGC is funded by companies with DB pension plans and steps in when plans go bust. Only problem is, the PBGC may run out of money.
The financial crisis and a slow economy have forced many plans into insolvency. As a result, PBGC’s deficit more than doubled from $11.2 billion in 2008 to $26 billion in 2011.
In fact, PBGC officials said that plans that are insolvent or ‘are likely to become insolvent in the next 10 years‘would likely exhaust the insurance fund within the next 10 to 15 years.
Even though MAP-21 provides for premium increases that will raise about $11.2 billion, it won’t be enough to keep PBGC afloat.
If it goes under, the ensuing retirement crisis will reduce many retirees’ benefits to an extremely small fraction of their original value, the PBGC says.
Now, under MAP-21, companies will be allowed to decrease their contributions even as millions of Baby Boomers hit retirement age.
‘This proves that pensions are pretty much dead,‘ Greg McBride, chief economist at Bankrate.com told CNBC. ‘The change is just another charade to mask the underfunding of pensions.‘
MAP-21 is scheduled to phase out in a few years, but companies are already plotting how to extend it.
‘There’s a lobbying effort to make this type of change permanent,‘ Pavlick said.
If that happens, many retirees will likely face an even tougher struggle to make ends meet in the future.
Don Miller
Contributing Editor, Money Morning
This article first appeared in US Money Morning on 3 July, 2013
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