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June 05, 2003
Debate Over Pension-Payout Bill

The lump-sum payments that millions of American workers can take from their pension funds when they retire, change jobs, or are laid off would be reduced by as much as one-third under a bill pending in Congress.

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The Boston Globe reported that the bill is part of a sweeping measure, intended to give relief to companies burdened with heavy stock market losses in their pension funds.

If there's a gap between what a company will be obligated to pay retirees in the future and the current investments funding those benefits, the company is now obligated to increase its contributions to close the gap. But with the economy still weak, many companies say they are straining to pay rising contributions.

"'You have low interest rates driving the liabilities up at the same time the poor investment market is driving assets down, so [companies] can go from being overfunded to underfunded in a very short period,'' said Alan Glickstein, a consultant for Watson Wyatt Worldwide in Boston.

The broader legislation, cosponsored by Reps. Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, would overhaul the interest-rate formula, so that:

  • the new rate would be pegged to corporate bond rates, rather than to the 30-year US Treasury bond, which is used currently. Corporate bonds usually carry a higher rate than government securities with the same maturity dates.

  • an increase in rates used to determine lump sums would be phased in, starting in 2006. The new rate would probably be about 1 percentage point higher than it is now, according to the Globe.

But a little-noted side effect of the proposal would reduce payments to employees covered by traditional, defined-benefit (DB) pension plans who opt to take a lump sum when they leave their employers, the newspaper reports. DB plans cover about 23 million American workers, and at least half of them allow them to take a lum-sum option immediately, rather than receive a monthly pension check later.

''We're talking about an act of Congress that could dramatically reduce your pension benefit 10 percent, 20 percent or more,'' said David Certner, director of federal affairs for AARP. ''This is a huge, explosive issue - billions of dollars we're talking about, not just this year but forever.''

Using a higher interest rate in a mathematical formula to estimate future retirement benefits would immediately shrink corporate pension obligations and decrease their required contributions. If the rate is increased permanently in corporate calculations of liabilities, that same rate would also apply to lump-sum calculations.

The bill has the backing of not only corporate America, but also labor unions, according to the Globe.

Critics, however, say corporations are overstating the severity of the problem, noting that many Fortune 500 companies have had growing pension-fund liabilities for years. The health of corporate pension funds waxes and wanes with the market's ups and downs, they argue; many companies took ''contribution holidays'' when stocks were booming.

Higher rates would reduce lump-sum payouts, and if interest rates rose, it would lead to further cuts. According to Watson Wyatt, a one percentage-point rise in rates translates to a reduction in the lump sum of between 8 percent and 37 percent, depending on the employees' age; the younger the worker, the greater the loss.

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