GAO: Underfunded Corporate Pensions 'Severe and Widespread'

Massive failures of defined-benefit pension plans, shortfalls in pensions for state employees and the debts plaguing the federal Pension Benefit Guaranty Corp. are sparking worries about the security of retirement benefits.

Troubled United Airlines recently received court approval to dump four pension plans, with a shortfall of $9.8 billion, onto the PBGC. The PBGC, a government-sponsored insurance agency of sorts, is funded by premiums paid by companies, and it is now facing a $23.3 billion deficit of its own.

The Government Accountability Office (GAO), the congressional watchdog agency, stated in a new report that underfunding of pension plans grew from $39 billion in 2000 to more than $450 billion by September 2004, the Associated Press reported.

The GAO found that the government's own rules are part of the problem because they allow companies to use a system of credits to avoid paying annual pension dues. Reporting for plan funding is also “inadequate, misleading and opaque,” the GAO report says. For example, the rules give retirement plans too much flexibility in how they report assets and liabilities, which can mask financial problems.

The GAO report said that more than half of the 29,000 private pension plans insured by PBGC were underfunded, and a quarter of the plans were less than 90 percent funded, according to Bloomberg.

PBGC Executive Director Bradley Belt said, “The GAO report confirms what we have been saying all along: The rules must be changed to ensure that companies keep the pension promises they have made to their workers.”

The PBGC guarantees payments of benefits to the 44 million U.S. workers and retirees who participate in private pension plans. If the PBGC bails out a troubled pension plan, retirees may see a reduction in benefits under law. For example, writes columnist Kathy Kristof of the Los Angeles Times, an individual who applies for retirement benefits in 2005 for a plan that was terminated in 1990 would be subject to the 1990 maximum benefit payout of $1,909.09 per month ($22,909.08 per year) for a 65-year-old rather than the 2005 maximum of $3,801.14 per month ($45,613.68 per year).

Some state pension plans are also in trouble. Orin Kramer, chair of the $70 billion New Jersey pension fund, told The Financial Times that state pension funds are facing a shortfall of several hundred billion dollars and are in far worse shape than corporate pension funds. He estimated the shortfall for New Jersey alone was more than $30 billion. The entire pension system is jeopardized if no action is taken, he said.

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