U.S. House of Representatives, Committee on Education and the Workforce

Ghilarducci presented the following testimony before the US House Committee on Education and the Workforce on June 15, 2005. Read her full testimony here.

“I am also honored by the invitation; and I hope that my research and my observations will help your deliberations. I evaluate all pension reform by answers to four questions.

The first one is, did this bill encourage better funding?

Believe it or not, most pension funds are well funded and behave properly. I painstakingly developed a data set of 670 firms of over 18 years and linked them with firm profitability data and other kinds of data. I found that the vast majority of firms contribute more when their funds earns high returns and they contribute less when their funds aren't doing so well. And that is good news. It is what ERISA intended.

The bad news is that the limit on the funding ratios didn't matter very much. So that, though it is reasonable to raise the funded ration to 150 percent, I don't have high hopes it will significantly improve the plan funding. Most plans were not limited by that lower ratio. But prohibiting the use of credit balances for underfunded plans that this bill proposes may discourage well-funded plans from accumulating them, making bad times worse for good DB sponsors. We need to encourage pro cyclical accumulations.

Now freezing benefit accruals at plans that are 60 percent funded does make sense, but I have serious problems with the limits on benefits increasing for plans that are funded at 80 percent.

One of the reasons that the PBGC stopped publishing the ``iffy fifty'' list which publicized underfunded plans that many plans weren't iffy at all, even if they were below the 90 percent funding ratio. But some were iffy, so I do support making those 4010 forms public. It is absolutely crucial.

Now classifying companies by their funding ratios and not their ability to pay could let profitable companies purposely underfund the plan so they would have an excuse to renege on benefits. That would supersede the intended ERISA, and it would supersede any notions of fairness because workers paid for their promised benefits through, indirectly or directly, by taking less compensation in wages or other places. Real pension protections stops, it does not encourage, this reneging.

Now everyone knows, I guess on this panel as well, that prohibiting lump sums could improve plan funding. Findings from behavioral economics and common sense show that they don't result in real pensions and they bleed pension funds dry. But this plan--actually, this bill actually encourages lump sum payouts because they make them cheaper.

The second question I ask, is this bill fair to workers and retirees?

Well, the lump sum provisions aren't fair. The bill raises the valuation rates to reflect what only high-income investors can attain. It lowers the lump sum by 27 percent in retirees who invest in only safe money market funds.

Further, the bill lessens protection and shifts most of the costs of funding failures to workers who had no role in the decisions that caused the failures. Shut-down benefits make plant closings humane. But it is very important for all of us to realize that workers pay for those shut-down benefits through lower wages, deferred wages. Even more unfair is that this bill denies shut-down benefits to workers but doesn't touch manager severance pay and executive buyouts. Eliminating shut-down benefits often just makes the deal more profitable to another buyer. I saw that happen in my area with the steel companies.

This bill isn't fair because it also allows workers' accrued benefits to be cut when the fund hits that arbitrary 80 percent of funding ratio, though manager and salary benefits are only cut when they reach a lower ratio.

Now, the United Airlines' decision was unfair. The PBGC bypassed the labor management negotiations, which could have saved benefits, and cut their own deals to terminate the plan. This bill does not encourage that from happening again.

Third question, does this bill encourage firms to stay in the DB system?

I fear not. Besides being unfair and not improving the funding, and it could chase companies from the DB system. The premium cost hikes are over and above what is needed.

The advice portions tacked on the bill bias the bill towards 401(k) plans and that is especially glaring because there is no provision in this bill for the cash balance provisions.

DBs are important to the economy and will be as the labor force gets older. They reduce training costs, and they reduce turnover costs. Older women workers are much less likely to retire at 65 if they have a DB plan. We need those older workers.

But this bill could raise the costs of uncertainty. The yield curve, as already been mentioned, causes increasing uncertainty. PBGC defaults and a surprise hike in premiums also cause uncertainty. They may overwhelm these benefits I just mentioned and employers would leave the system.

Does the bill help distressed companies maintain their plans?

It doesn't do much to not prevent companies from trying to figure out ways to not terminate it. In fact, without provisions to slow down those terminations, it could lead to a race to the bottom.

In sum, how could you all protect real pensions?

We need meaningful rules to structure cash balance plans.

We need to raise premiums in a nonpunitive fashion and think out a way for PBGC to have a reassurance plan. That is the fatal flaw in the PBGC. It was only meant to take care of situations where a company went bankrupt, not whole industries going through restructuring and failure.

We should help troubled companies stay in the system. You did that with the airline bill.

You should slow down terminations.

And I say just prohibit lump sum payouts. They are not fair.