A bipartisan issue


Robert Reich, labor secretary in the Clinton administration, has weighed in with a column in the American Prospect endorsing George W. Bush's call for pension reform.

With a few snarky comments directed at the president, presumably to keep within his readers' comfort zone, Reich makes the correct point that corporations should fully fund their defined pension plans. Of course, there are disputes about what "fully fund" means, which Reich passes over, as I will. But his larger point is valid. If big corporations crump on these pensions, the Pension Benefit Guaranty Corp. gets stuck with paying them (up to certain amounts). Which means that taxpayers pay them. As Reich points out, "The number of future retirees added to the PBGC's rolls over [the] past three years is more than in [the] previous 27 years combined." If pensions aren't properly funded, we're looking at something like the savings and loan bailout, which cost taxpayers an unnecessary several hundred billion dollars.

Reich does not mention two things that he might have. One is that the House has passed a bipartisan pension reform bill shepherded through by Majority Leader John Boehner when he was chairman of the Education and Workforce Committee. I have no idea whether this addresses the problem fully. I would like to see the critiques of others who know more about the issue.

Second, Reich mentions the argument made by big corporations with big pension liabilities that requiring full funding would discourage companies from offering pension plans. But this is a very weak argument. Few if any companies are starting up new defined-benefit pension plans. Rather, they're offering defined-contribution plans, 401(k)'s and the like, which don't require companies to accumulate reserves to finance pensions promised for many years later but which instead limit corporations' expense to the payout made each year. Reich does not take note of this, though undoubtedly he's very much aware of the trend. In essence, we're dealing with a problem that is going to phase out over time, as companies with old plans either keep their promises on defined-benefit plans or dump them on the PBGC, while companies with new plans have no such obligations to finance future benefits.

Liberals tend to decry this, on the grounds that workers should have the security of defined-benefit plans. But, as Reich's article points out, that security is not at present a 100 percent guarantee. Airline pilots entitled to generous benefits under defined-benefit plans get much lesser amounts when the PBGC takes over the plan. I recently asked a politician with extensive experience in the business and finance world how much capital a company could raise on Wall Street or from hedge funds to set up a manufacturing operation with workers organized by an industrial union and a defined-benefit pension plan. He just laughed. There's no capital to finance such a business model.

I hear some thoughtful liberals attempting to address this problem with a system of portable pensions, which could follow a worker from job to job. But this sounds an awful lot like the (vaguely defined) Social Security individual investment accounts that George W. Bush pushed for last year, which Democrats are proud of having shot down. There's an opening here for thoughtful proposals from liberals and conservatives alike—proposals that may turn out to be not as different as current political rhetoric suggests.