On August 17, 2006, the day President George W. Bush signed his pension-reform bill, Rep. Charlie Rangel called it a “Trojan horse that brought the end of the defined benefit pension system.”
We beg to differ with the ranking Democrat on Ways and Means, but his comment seems to be the exact opposite of the truth. This pension-reform legislation might turn out to be just the action that saves pension plans from extinction.
Traditional pension plans have been heading the way of the Dodo, plunging from 112,000 such plans in 1985 to 30,000 in 2004. It’s not that Americans have stopped preparing for retirement; it’s that there has been a migration of assets from traditional plans (which promise a certain fixed monthly benefit, no matter what) to 401(k)-type plans in which assets go up and down with the markets. The first type of plan is heavily regulated, sometimes irrationally so. The second type of plan has some basic safeguards, but is mostly focused on self-government and individual responsibility. There has been a long march of capital from the heavily regulated pension world to the less regulated 401(k) world. There always is.
That’s why simplifying the system provides the best chance for it to survive. As things stood before, there were severe limits on making tax-qualified contributions to plans during the good years. That meant that when the bad years came around (and they always do), markets tanked and companies found their plans underfunded. That’s precisely the worst time for companies to have to find cash to bail-out their plans. The new system allows companies the flexibility and freedom to store up the grain during the “seven” fat years, so that there’s something there during the inevitable “seven” lean years. (See the “Book of Genesis,” chapter 41).
Up until now, employers frequently avoided creating new pension plans, and terminated existing plans because of their obsolete regulatory requirements. They were afraid that being in the traditional pension business, at all, trapped them in a regulatory and legal morass. While regulators worked to achieve their social-justice ends, they unintentionally caused employers to flee traditional pensions.
But the president’s signature has changed all that. First of all, pension reform lets the little guy in on the system. Although airline lobbyists did the heavy lifting on Capitol Hill, entrepreneurs will probably end up benefiting most from the legislation. K Street sets the table, but the little guy ends up catching what falls from it.
A valuable element of reform for entrepreneurs is that it decreases risk and increases reward at the same time. For instance, under the prior arrangement, businesses were punished for putting more assets into the pension system than they had promised. Now they can fund pension plans to a greater level, and then wait to see how investments work out before putting themselves on the hook with a large legal liability. They can give from their abundance, rather from their paucity.
Pensions have been in decline for two decades at least, having been plagued by a mindset that played management off against labor. Pension reform rejects this approach, and places the emphasis on creating an environment friendly to wealth accumulation. Driving businesses out of the pension market, or out of business entirely, does no more good for workers than it does for owners. The fact that the industries most helped by the president’s plan (such as airlines and primary metals) are heavily unionized, and therefore heavily Democratic, doesn’t seem to have gotten a lot of attention this past Labor Day.
– Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom. John Agatston is the founder of John S. Agatston Actuarial Services. He can be reached through www.practicalactuary.com.