Reforming pension reform

摘要

America faces a retirement crisis. The first step in pension reform is properly valuing liabilities — and that's something the Pension Funding Equity Act of 2004 utterly fails to do. In April 10 of last year, President George W. Bush signed the Pension Funding Equity Act to give U.S. companies some "relief" from burdensome pension contributions and, as the act's summary stated, "protect the retirement benefits of millions of American workers and help ensure that their pension benefits will be there when they retire." The relief came in the form of a higher permissible discount rate, the critical number that companies use to value their pension liabilities — that is, the present value of their future pension obligations. Under the applicable formula a higher discount rate results in lower liabilities. A rule of thumb is that for every 50-basis-point increase in the discount rate, the present value of pension liabilities decreases by 6 to 7.5 percent (assuming those liabilities have a 12-to-15-year average duration). The pension act should allow companies to reduce their pension contributions by more than $80 billion over 2004 and 2005 combined.