With a Pension Shortfall, Companies Want to Kick in Even Less

Just a decade ago pension plans were flush. Today there is a $400 billion shortfall and companies want to do what? That's right — cut their pension contributions.

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Not so long ago corporate pension plans were flush. Today, they are massively underfunded. And now, despite rising profits and soaring cash stockpiles, corporations are urging Congress to let them cut their level of contributions. They are rallying behind an obscure provision in a Senate highway bill that would potentially lower combined pension contributions by billions of dollars a year. What’s wrong with this picture?

For starters, as recently as 1999 the private pension system had surplus assets of $250 billion. This was largely the result of a long bull market, which generated outsized investment gains. Predictably, the piles of money sitting in overfunded pension plans proved irresistible and the funds were raided in a variety of ways.

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In Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers, author Ellen Schultz argues that in at least some cases CEOs raided pension surpluses to fatten their own paychecks. She asserts that the surpluses were stripped away through mergers and restructurings, and during the shift from defined benefits to defined contribution plans.

Bad as that is, the real crime may be that many companies—fully understanding the unusual nature of their investment returns in the 1990s—did not plan for leaner years by setting aside the surplus. They treated the gains as an irreversible one-time bonus. That’s a key point because at the heart of today’s push to cut contributions is the market reversal, which has been a nightmare for pension managers.

As we all know, stocks have been dead money for a dozen years, leaving companies to either contribute more capital or have a pension shortfall. Making matters worse, low interest rates have changed the pension funding calculus. Lower rates require more contributions because in this environment interest-bearing investments return so little. In this way, low rates have been a tremendous burden on pension plans, which in total have a shortfall of nearly $400 billion. GE, for example, said in its annual report that its 2011 pension expenses rose by $7.4 billion.

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The argument for cutting contributions is that rates won’t stay this low forever; companies should be allowed some slack. Over the long term, things will even out. Companies could use the cash they don’t have to put into pensions to hire or otherwise invest for growth and help stir the economy. Meanwhile, because pension contributions are tax-deductible, smaller contributions would boost tax revenue. Politicians like that part. A lot.

The problem is that smaller contributions to an already underfunded pension system would significantly weaken the retirement security of millions of Americans. American Airlines filed for bankruptcy in November, and with underfunded pension obligations, the company has said it may need to cut benefits to retirees. That’s what happens to pensioners at companies that cut pension contributions but aren’t able to hang around for things to even out in the long run.