U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

91–380 PDF 2004

S. HRG. 108–287

AMERICA’S PENSIONS:

THE NEXT SAVINGS AND LOAN CRISIS?

HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

WASHINGTON, DC

OCTOBER 14, 2003

Serial No. 108–24

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING 

LARRY CRAIG, Idaho, Chairman 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MIKE ENZI, Wyoming 

GORDON SMITH, Oregon 

JAMES M. TALENT, Missouri 

PETER G. FITZGERALD, Illinois 

ORRIN G. HATCH, Utah 

ELIZABETH DOLE, North Carolina 

TED STEVENS, Alaska 

RICK SANTORUM, Pennsylvania 

JOHN B. BREAUX, Louisiana, Ranking 

Member 

HARRY REID, Nevada 

HERB KOHL, Wisconsin 

JAMES M. JEFFORDS, Vermont 

RUSSELL D. FEINGOLD, Wisconsin 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

LUPE WISSEL, Staff Director 

MICHELLE EASTON, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening statement of Senator Larry E. Craig ...................................................... 1

PANEL I 

Barbara Bovbjerg, General Accounting Office, Washington, DC ......................... 2

Steve Kandarian, Executive Director, Pension Benefit Guarantee Corporation, 

Washington, DC ................................................................................................... 47

Mark Warshawsky, Acting Assistant Secretary, Department of the Treasury, 

Washington, DC; accompanied by William Sweetnam, Benefits Tax Counsel, 

Department of the Treasury, Washington, DC .................................................. 70

PANEL II 

Scott Macey, Senior President, Aon Consulting, Somerset, NJ ........................... 96

David John, Research Fellow, Heritage Foundation, Washington, DC .............. 118

Melvin Schmeiser, Steelworker Retiree, Baltimore, MD ...................................... 129

APPENDIX 

Prepared Statement of Senator Debbie Stabenow ................................................ 147

(III) 

(1)

AMERICA’S PENSIONS: THE NEXT SAVINGS 

AND LOAN CRISIS? 

TUESDAY, OCTOBER 14, 2003 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The committee met, pursuant to notice, at 10 a.m., in room SD–

628, Dirksen Senate Office Building, Hon. Larry Craig (chairman 

of the committee) presiding. 

Present: Senators Craig and Carper. 

OPENING STATEMENT OF SENATOR LARRY E. CRAIG, 

CHAIRMAN 

The CHAIRMAN. Good morning, ladies and gentlemen. 

I would like to thank our witnesses for joining us today in our 

quest to strengthen the pension security of America’s workers. 

Today’s hearing title asks the question of whether the defined 

benefits pension system is on a path we have seen before, with 

Government-backed insurance, taxpayer bail out of the savings and 

loan industry. Or is it different? 

In the 1980’s, the Federal Government stepped in to bail out the 

savings and loan industry at a cost of 120 billion taxpayer dollars. 

Of course, the details of pensions and the savings and loan situation differ in many ways, but the result could eventually be the 

same if we do not engage in thoughtful consideration of the issues 

at hand. Clearly, we do not want to repeat the savings and loan 

issue. 

Pension policy requires the Congress to balance three competing 

policy goals: protect taxpayers from having to bail out the Pension 

Benefit Guarantee Corporation, provide sufficient incentives for industry to continue offering defined benefit pensions for their workers, and ensure workers get the pensions they are promised by 

their employers. 

This hearing is convened in the spirit of building the record on 

the future of pension security, an issue that is so important to 

those about to retire and for younger generations. 

With that I am very pleased to welcome these distinguished witnesses to the Senate Special Committee on Aging this morning. We 

appreciate you taking time from your schedule to work with us in 

building this record. 

Our first witnesses on the panel are Barbara Bovbjerg who is the 

Director of Education, Workforce and Income Security at the General Accounting Office. Barbara, welcome. 

2

Steve Kandarian—I do not want to massacre names too badly, 

Steve—Executive Director of the Pension Benefit Guarantee Corporation. Peter Warshawsky, Acting Assistant Secretary of Economics at the Department of Treasury. Steve, you have brought another gentlemen with you, William Sweetnam, from Treasury, who 

make up our first panel today. So again, we thank you for being 

with us. We will move right into your testimony. Barbara, if you 

would please start? 

STATEMENT OF BARBARA BOVBJERG, GENERAL ACCOUNTING 

OFFICE, WASHINGTON, DC 

Ms. BOVBJERG. Thank you, Mr. Chairman. 

I appreciate your inviting me here today to discuss issues associated with ensuring defined benefit pension plans. The Pension Benefit Guarantee Corporation’s single employer program insures benefits of more than 34 million workers and retirees but after accumulating surpluses for several years, last year reported a $3.6 billion deficit with the prospect for several billion more this year. 

You have asked me here today to discuss the implications of this 

financial reversal and what might be done to address it. I will 

speak briefly about three things: the immediate causes of this problem, future prospects for the program, and options for policy 

change. 

My testimony is based on information gathered from the PBGC, 

from interviews with pension experts, and our analysis of several 

individual plans that presented large losses to PBGC. The Controller General has testified earlier about these issues before our 

requesters on the House Education and Workforce Committee, and 

we will report the final results of this work later this month. 

First, the causes. PBGC’s single employer program fell into deficit in response to the termination of several severely underfunded 

pension plans. The sharp decline of the stock market reduced the 

plans asset values. This, together with low interest rates which 

raised plan liability values, dramatically worsened the financial position of many plans during a period when several companies with 

large plans failed. 

The experience of Bethlehem Steel, which represents the largest 

hit ever to PBGC funds, can be illustrative. This chart shows Bethlehem’s assets and liabilities as the vertical bars and the percentage of the plan’s funding as the heavy line. 

As you can see from the position of the line, in 1999 Bethlehem 

reported nearly full funding for its plans. But by 2002, only 3 years 

later, when it terminated its plan assets were less than half the 

value of plan liabilities. This happened in part because over 70 percent of the plan assets were in stock when the markets lost value. 

Yet, as the next chart shows, even though plan assets were falling and estimated liabilities rising, Bethlehem Steel made no contributions to its plans in 2000, 2001, or 2002. This is because plans 

that have exceeded minimum contributions in the past earn funding credits that can offset minimum contributions for the future. 

Bethlehem had built up funding credits such that the company was 

legally permitted to contribute nothing to its plan at precisely the 

time the plan’s funding status was becoming untenable. Minimum 

3

funding rules, which are designed to encourage plan sponsors to 

fully fund their plans, clearly proved ineffective. 

Variable rate premiums are designed to encourage employers to 

fund their plans adequately. But as you will see in this last chart, 

Bethlehem paid only the flat rate premium from 1998 on because 

the plan, by meeting full funding standards through 2000, was exempt from the higher premium payments until 2002, at which time 

the plan was terminated. Pretty clearly, variable rate premiums 

are ineffective when plan funding status changes as quickly as it 

did here. 

Let me move now to the future. Of course, PBGC remains vulnerable to the same conditions that underlay the Bethlehem case. 

While the cyclical economic conditions that worsened plan and 

PBGC finances will eventually improve, it is also important to understand that we are in an environment where employers large and 

small have exited the defined benefit system while newer firms 

have generally chosen other pension vehicles. This has left PBGC 

with a risk pool of employers that is concentrated in sectors of the 

economy like airlines, automobiles, and steel which have become 

economically vulnerable. 

These developments have important and worrisome implications 

for the future and the magnitude of the risk that PBGC insures. 

It is with this larger picture in mind the GAO has placed PBGC’s 

program on the high-risk list. 

Let me now turn to options for change. Several types of reforms 

could be considered and they fall into four categories: strengthening funding rules, modifying program guarantees, restructuring 

premiums, and increasing transparency. There are a variety of options within each category and each has advantages and disadvantages. However, anything that would increase contributions for 

plan sponsors who may themselves be in financial difficulty could 

further weaken the sponsor while at the same time discouraging 

healthier companies from providing DB pensions at all. 

In addressing the challenge to PBGC, it will be important to understand that its long-term financial health is inextricably bound 

to the underlying health of the DB pension system itself. Options 

that serve to revitalize the DB system could stabilize PBGC’s finances, although this could only take place over the long-term. 

More immediately, Congress could consider developing a comprehensive solution to PBGC’s risks that adequately balances employer concerns with improvements to employer accountability for 

funding and reporting. 

GAO is giving this program and its needs special scrutiny in the 

immediate future and will be pleased to help Congress in this endeavor. That concludes my statement, Mr. Chairman, and I would 

be happy to answer questions. 

[The prepared statement of Ms. Bovbjerg follows:]

4


91380.001
5


91380.002
6


91380.003
7


91380.004
8


91380.005
9


91380.006
10


91380.007
11


91380.008
12


91380.009
13


91380.010
14


91380.011
15


91380.012
16


91380.013
17


91380.014
18


91380.015
19


91380.016
20


91380.017
21


91380.018
22


91380.019
23


91380.020
24


91380.021
25


91380.022
26


91380.023
27


91380.024
28


91380.025
29


91380.026
30


91380.027
31


91380.028
32


91380.029
33


91380.030
34


91380.031
35


91380.032
36


91380.033
37


91380.034
38


91380.035
39


91380.036
40


91380.037
41


91380.038
42


91380.039
43


91380.040
44


91380.041
45


91380.042
46


91380.043
47

The CHAIRMAN. Barbara, thank you. Before we question you, we 

will move through all of our panelists. Now let me turn to Steve 

Kandarian, Executive Director of the Pension Benefit Guarantee 

Corporation. Steve, thank you for being here morning. 

STATEMENT OF STEVE KANDARIAN, EXECUTIVE DIRECTOR, 

PENSION BENEFIT GUARANTEE CORPORATION, 

WASHINGTON, DC 

Mr. KANDARIAN. Mr. Chairman, thank you for holding this hearing on the financial health of PBGC and the future of the defined 

benefit system. 

During fiscal year 2002, PBGC single employer insurance pro- gram went from a surplus of $7.7 billion to a deficit of $3.6 billion, 

a loss of $11.3 billion in just one year. Based on our latest 

unaudited financial report, the deficit has grown to $8.8 billion as 

of August 31, 2003. 

The continued deterioration of PBGC’s financial condition is due 

to a number of factors, including a decline in interest rates, additional terminations, and new probable claims. In addition, pension 

underfunding remains at near record levels. At the end of 2000 

total underfunding in single employer pension plans was less than 

$50 billion. Because of declining interest rates and equity values as 

of December 31, 2002, just two years later, underfunding exceeded 

$400 billion, the largest number ever recorded. Even with recent 

rises in equity values we estimate the underfunding still exceeds 

$350 billion. 

The title of this hearing asks whether America’s pensions will become the next savings and loan crisis. At the moment, PBGC has 

sufficient assets in hand to pay benefits for a number of years into 

the future. But our deficit is the largest in history and has continued to grow. Some have suggested that Congress can afford to address these issues at some future point. We believe there are serious structural issues that require fundamental reform to the defined benefit system now before we reach a crisis point. 

To begin to deal with the problem of pension underfunding, the 

Administration has released an initial set of proposals to more accurately measure pension liabilities, improve disclosure of pension 

information to workers and investors, and strengthen safeguards 

against underfunding in troubled plans. 

We also recognize that with the bursting of the stock market 

bubble and return to lower interest rates, companies are having to 

make much larger contributions to their pension plans. The House 

and the Senate Finance Committee have approved separate bills 

that would provide short-term funding relief by allowing plan sponsors to discount pension liabilities at a higher interest rate, an approach broadly consistent with the transitional portion of the administration’s proposal over the same timeframe. 

However, the Administration strongly opposes any provision that 

would weaken, suspended, or eliminate the deficit reduction contribution enacted in 1987 to protect workers in underfunded pension plans. 

The DRC requires companies with the worst funded plans to pay 

off their unfunded liabilities over 3 to 7 years, a relatively fast 

schedule designed to get plans funded before companies fail and 

48

transfer their liabilities to PBGC. A DRC waiver would permit financially weak companies with plans at the greatest risk of terminating to stop making accelerated pension contributions, even 

though the average funding ratio of these plans is less than 60 percent. PBGC estimates that a 3-year DRC suspension would increase pension underfunding by $40 billion. 

While the DRC can contribute to funding volatility, any modifications should be considered in the context of other reforms that 

strengthen long-term pension funding. Eliminating the DRC without an effective substitute increases the risk that workers will lose 

promised benefits and PBGC will suffer additional large losses. 

It is also important to put into context the large pension contributions that plans are now required to make. Because of the unprecedented investment returns of the mid to late 1990’s, many 

companies made little or no cash contributions for several years. 

From 1995 to 1999 total pension contributions averaged only $26 

billion a year in 2002 dollars. In the early 1980’s, total contributions averaged $63 billion a year in 2002 dollars. Over the same 

period, the amount of pension benefits insured by PBGC more than 

doubled in real dollars, even as pension contributions were cut by 

more than half. 

It is not reasonable to base funding expectations on the assumption that the stock market gains of the 1990’s will repeat themselves. The real rate of return in equities from 1926 through 2002 

was 6.9 percent. But from 1983 through 2002 a period that ended 

with nearly 3 years of steep market declines, real returns were 9.3 

percent, more than a third higher. 

Current funding requirements are not inconsistent with contribution levels in periods of more normal equity returns, especially 

given the growth in benefits that has occurred. 

Mr. Chairman, the Administration is working on comprehensive 

reforms that will put pension plans on a predictable steady path 

to better funding. In the meantime, we urge Congress not to abandon the deficit reduction contribution that requires sponsors of atrisk plans to pay for the promises they make. 

Thank you for inviting me to testify. I will be happy to answer 

any questions. 

[The prepared statement of Mr. Kandarian follows:]

49


91380.044
50


91380.045
51


91380.046
52


91380.047
53


91380.048
54


91380.049
55


91380.050
56


91380.051
57


91380.052
58


91380.053
59


91380.054
60


91380.055
61


91380.056
62


91380.057
63


91380.058
64


91380.059
65


91380.060
66


91380.061
67


91380.062
68


91380.063
69


91380.064
70

The CHAIRMAN. Steve, thank you very much. 

Now let me turn to—my script says Peter. It is Mark. 

Mr. WARSHAWSKY. It is Mark. 

The CHAIRMAN. Thank you, Mark. We have made that correction 

for the record. Mark Warshawsky, Assistant Secretary of Economics, at the Department of Treasury is also with us. We thank you. 

From you, Mark, we will turn to William Sweetnam. So please proceed. 

STATEMENT OF MARK WARSHAWSKY, ACTING ASSISTANT 

SECRETARY, DEPARTMENT OF THE TREASURY, WASHINGTON, D.C.; ACCOMPANIED BY WILLIAM SWEETNAM, BENEFITS TAX COUNSEL, DEPARTMENT OF THE TREASURY, 

WASHINGTON, DC 

Mr. WARSHAWSKY. Thank you, Mr. Chairman. 

I am pleased to appear before you with PBGC Executive Director 

Steve Kandarian and William Sweetnam, Benefits Tax Counsel of 

the U.S. Treasury, to discuss defined benefit pension plans. I will 

discuss the Administration’s current proposal and ongoing activities aimed at strengthening the long-term health of the defined 

benefit pension system and improving the retirement security of 

pension participants. Bill and I will be happy to answer any questions you may have. 

Despite repeated attempts to enhance the funding rules of defined benefit pensions, it seems that, even excluding the impact of 

recent market downturns, conditions have not improved. But we 

believe that, with improvements, the defined benefit system will 

continue to be a viable and important part of the American retirement system. 

As you are aware, in July the Administration released its proposal to improve the accuracy and transparency of pension information. This proposal is designed to secure and strengthen Americans’ pensions by improving the accuracy of the pension liability 

discount rate, increasing the transparency of pension plan information, and strengthening safeguards against pension underfunding. 

A predicate step to fixing the pension funding rules is to ensure 

that we accurately measure the pension liabilities on which those 

rules rely. Our most immediate task is to replace the 30-year treasury rate used in measuring pension liabilities for minimum funding 

purposes. We propose that the discount rates be drawn from a corporate bond yield curve. Use of a yield curve helps insure that 

measured liabilities reflect accurately the timing of future expected 

benefit payments. 

We appreciate that there is important activity in both houses of 

Congress on this issue. In the Senate Finance Committee, the 

Chairman’s modification to the Nest Egg Act of 2003 includes a discounting provision that is quite similar to the Administration’s proposal. We were happy to see that provision included in the bill. 

On the House side, the Administration believes that H.R. 3108, 

the Pension Funding Equity Act, is an important first step toward 

providing a permanent replacement of the interest rate now used 

to determine pension liabilities. H.R. 3108’s proposed discounting 

method for the next 2 years is broadly consistent with the AdminisVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
71

tration’s proposal over the same timeframe. We are encouraged by 

the passage of this bill. 

My written testimony provides a detailed overview of the Administration’s proposal. One new point I would like to stress today is 

that the Treasury Department has begun active development of our 

own yield curve based on interest rates for high-quality zero 

coupon, call-adjusted corporate bonds of varying maturities using a 

widely accepted methodology. We are very pleased with our 

progress in this regard and do not foresee any difficulty in generating the yield curves for use in discounting pension plans if the 

Administration’s proposal becomes law. 

Currently, both the Senate and the House bills also contain calls 

for comprehensive pension reform. The Administration supports 

and appreciates these provisions and looks forward to working with 

Congress on these important issues. Americans have a broadly 

shared interest in adequate funding of employer-provided defined 

benefit plans. At the same time we must be sure that our pension 

rules encourage rather than discourage employer participation. We 

have begun the hard work needed to develop pension funding rules 

that will be less complex, more flexible, logically consistent, and 

will achieve the goal of improving the security of defined benefit 

plans. 

Major areas that require our intention include funding targets, 

the funding path, and the PBGC guarantee and premium structure. We will seek to develop better, more meaningful, funding targets. This includes current and accurate asset measurement and 

enhanced liability measurement. We will examine in particular retirement, lump sum, and mortality assumptions. 

Improvements to funding rules should mitigate volatility by providing firms with more consistent contribution requirements and 

increasing flexibility for firms to fund up their plans in good times. 

Specific issues that need to be examined here include maximum 

contribution deductibility, credit balances, the volatility caused by 

the minimum funding back stop or the deficit reduction contribution requirement, new benefit restrictions for certain underfunded 

plans whose sponsors are financially troubled, and shortening the 

length of new benefit amortization. Other issues include the extent 

of benefit guarantee coverage and the structure of the PBGC premiums. 

As I stated at the outset, the Administration’s permanent discount rate replacement proposal is designed to strengthen Americans’ retirement security by producing accurate measure of pension 

liabilities. Accurate measurement is the essential first step in ensuring that pension promises made are pension promises kept. We 

believe that the discount rate proposal, combined with the other 

administration proposals, represents a strong start toward improving and strengthening defined benefits pension system. 

We have committed to developing a further proposal for fundamental reform and are working diligently to fulfill that commitment. We look forward to sharing the proposal with Congress in 

the near future and to continue to work together toward a more secure system. 

Thank you. 

[The prepared statement of Mr. Warshawsky follows:]

72


91380.065
73


91380.066
74


91380.067
75


91380.068
76


91380.069
77


91380.070
78


91380.071
79


91380.072
80


91380.073
81


91380.074
82


91380.075
83

The CHAIRMAN. Mark, thank you very much. Bill? 

Mr. SWEETNAM. They just brought me along to answer questions. 

The CHAIRMAN. You are the heavy. All right. 

Thank you all very much. Let me ask a couple of questions first, 

before I go to you individually, that you may all wish to respond 

to, and we can just start with you, Barbara, and ask you to react 

to these two broader questions. 

Today’s testimony shows that using a higher interest rate to 

value pension funds show improvement in the book value without 

changing their fundamental values. What should the Congress consider when determining the most appropriate interest rate formula? 

Ms. BOVBJERG. I would be pleased to respond first on that. GAO 

has, in fact, done a report on this. I would like to say if there were 

a perfect solution, we would have recommended it. We did not recommend a specific interest rate to use, but we looked at a variety 

of alternatives. We were looking to determine how well whether 

they matched group annuity prices, which is really what the rates 

should do, and how transparent these measures were, how subject 

to manipulation they might be. 

In looking at them, we found that every measure we examined 

had some aspect that was positive, some aspect that was negative. 

What we did also discover is that they are all higher than the 30-

year treasury rate. 

Pretty clearly, Congress has to do something. The rate probably 

needs to go up. But I think it is important to realize, as you say, 

that raising the rate creates an appearance of improving funding 

in the plans without actually doing so, that it will reduce premium 

revenue to PBGC. It will increase risk for PBGC and for the workers and participants in these plans. 

Because such a change is not really funding reform, it does indeed seem prudent to look at this as a relatively short-term action 

and then taking more time to look at a more comprehensive solution to the overall problem. 

The CHAIRMAN. Thank you. Steve? Do you wish to comment on 

that? 

Mr. KANDARIAN. Actually, Treasury is probably more—— Mr. WARSHAWSKY. I will take that in our question. 

In our considerations, and in review of this issue, we looked at 

many different proposals and many different ideas. In fact, I think 

we pretty much came across all of the things that were included 

in the GAO report back in February. 

What we came up with and proposed is the use of a corporate 

bond yield curve. The motivations we had for that were several. We 

felt that corporate bonds were the appropriate risk because a pension after all, is a corporate obligation and therefore corporate 

bonds represent the right risk strata. 

At the same time, we felt it was very important that the yield 

curve be included in that discount rate as an accurate representation, best practice of valuing liabilities. In any prudent measurement of liabilities by any financial institution whether it is a bank 

or other financial institution, there is a reflection of the different 

interest rates on the different maturities of a liability. We felt that 

was appropriate to be included here, as well. 

84

There certainly are pluses and minuses to any proposal but we 

felt on balance this was the best proposal. Obviously there is an 

immediate need for enactment. 

We also recognize that transition is appropriate and therefore we 

proposed a 2-year transition period to a corporate yield curve. 

The CHAIRMAN. A comment, Bill? 

Mr. SWEETNAM. We had heard a lot about people being concerned 

about manipulation of an interest rate, which I think was one of 

the reasons why 30-year treasury rate was used a number of years 

ago. But this is not the case when we look at an overall bond index, 

and some people have been promoting a bond index. The Administration is looking at a yield curve, we think that the breadth of the 

data that is coming in, in order to provide that yield curve, really 

lends itself away from any sort of manipulation by people in trying 

to change the interest rate in order to play with funding. 

I think the other thing is that the Administration will be putting 

out, if we go forward with a yield curve proposal, what we would 

do would be we would propose a request for comments on how we 

would develop this yield curve. Now, we have some ideas at Treasury on how you would develop a yield curve. But we would really 

want to make that yield curve as transparent as possible, so that 

plan sponsors could understand how the Treasury Department was 

establishing that yield curve. 

So I think that does get at people’s concerns with manipulation, 

it really handles those concerns. 

The CHAIRMAN. Would you agree with Barbara, that this alone 

should be used only as a short-term measure? That there are 

other—and we will ask questions of those—fundamental reforms 

necessary? 

Mr. SWEETNAM. The Administration is currently taking a complete review of the funding rules, as Mark had talked about. So 

yes, I think that this is just really one piece in the overall strategy 

of how do you deal with the financial health of defined benefit 

plans. 

The CHAIRMAN. Let me go then, I think the second question begins to touch on that funding issue. Barbara, you mentioned it, 

that the plans recently taken over by PBGC went from fully funded 

to seriously underfunded in a very short period of time. At the 

same time, the companies sponsoring the plans were going bankrupt and likely had little cash to contribute to their plans. As a 

practical matter, to what extent could strengthened minimum 

funding rules have reduced losses to the single employer benefit 

program? Do you wish to respond to that, and again, to all of the 

panelists? 

Ms. BOVBJERG. One thing I would like to start off with is the balance between employers who are having difficulties, and protecting 

PBGC. Such employees are having difficulties even before they 

have to put in increased contributions to their pension plans. It is 

easy to sympathize with that concern. 

At the same time, PBGC and the workers and the retirees need 

to be assured that there will be something left from them in their 

pension plan, and need to feel that even companies that are having 

difficulties have made, contributions to their pension plan a priority. 

85

In thinking about this, and Dave Walker wanted to make sure 

that I talked about this a little bit today, we have some concern 

about doing something broadly that would make funding appear 

better or would reduce contributions for most sponsors when, in 

fact, you might consider a more targeted approach, or perhaps 

something that is quite temporary that would involve the concept 

of loan instead of grant, something of that nature. I think that the 

concern about PBGC is not just getting through this tough period, 

but is looking at the long run and how PBGC will be ensuring a 

shrinking group of defined benefit plans. 

The CHAIRMAN. That question, Steve? 

Mr. KANDARIAN. Sure. Mr. Chairman I think that one of the big 

problems in the system is that the funding rules were built in and 

designed in a way to try to get relatively consistent or nonvolatile 

contributions. Essentially companies with these kinds of plans were 

worried that if they were forced to use spot values for assets, spot 

values for their liability measurement interest rates, they would 

have very volatile contributions. They wanted to avoid that. 

While we support that goal, the actual mechanisms that were 

put in place did not work. You still have these long funding holidays. You still have these very large spikes later on when things 

go against these plans in terms of liability measures and asset values. 

So as Barbara mentioned before, Bethlehem Steel’s plan suggested that on a current liability basis, this measure that was put 

into law in 1987, it was 84 percent funded. Yet when it came into 

the agency it really was only 45 percent funding on a termination 

basis. That results in large losses not only to this agency, but also 

to the workers who were promised those benefits. 

USAirways’ pilots plan was even worse. It was 94 percent funded 

on a current liability basis. Yet it was only 35 percent funded on 

a termination basis. It was especially impactful in that case because the pilots had very large pensions. Our guarantee limits set 

by Congress cover the vast majority of the people at 100 percent 

of all benefits, all accrued vested benefits but not the pilots because 

their benefits are above that maximum guarantee. So you saw a 

great deal of consternation on the part of these pilots understandably. 

So the intent was to smooth out this whole system in terms of 

contributions. Those measures really have not worked and those 

are things we are looking at very closely within the administration, 

in terms of our funding reform proposal. 

Mr. WARSHAWSKY. I would add two other items to answer that 

question. First of all, we feel that one way of smoothing the volatility of contributions is that corporations should have the ability 

to fund in good times when the contributions are easier to be made. 

That way that provides a cushion for riding out more difficult 

times. That might have helped in some of these plan terminations. 

Another consideration to make is that many of these plans have 

had plan sponsors who have had difficulties over a period of time, 

many, many years before they entered bankruptcy. We believe that 

prudent funding is appropriate even in those circumstances and 

benefits promises made should be kept. 

86

Mr. SWEETNAM. I would just want to echo what Mark was saying. The important thing to realize is that we have built these 

funding rules over time with a lot of the changes being made with 

regard to let us raise revenues. So if we raise revenue in the tax 

code, we can cut back on some of the funding requirements. It has 

always been sort of this hodgepodge of rules. It is really, I think, 

important for us to step back and say where do we really want our 

funding rules to be going, especially in this context of whether we 

want to continue the viability of defined benefit plans. That is 

something that we are working on very hard in the Administration. 

The CHAIRMAN. Thank you. I have other questions of you individually, but before I get to those, let me turn to one of the committee 

members, my colleague who has just joined us, Senator Carper. 

Would you wish to make any opening comments or start a questioning line? 

Senator CARPER. Yes, if I could just ask a couple of questions 

that would be great, Mr. Chairman. How are you? 

The CHAIRMAN. I am fine. 

Senator CARPER. Nice to see you. 

The CHAIRMAN. Welcome back. 

Senator CARPER. To our witnesses, thanks for joining us today. 

I apologize for missing your statements. We have got, as you 

know, a bunch of other hearings going on and we are trying to 

cover all of those bases. So I missed what you had to say. If I ask 

you a couple of questions on things you have already addressed, 

please bear with me. 

The title for today’s hearing, as I recall, was something to the effect of is this the next savings and loan crisis. Let me just ask each 

of you, is it? 

Mr. WARSHAWSKY. We do not believe that there is an immediate 

crisis. Unlike the savings and loans or financial institutions, which 

have to have basically demand deposits or deposits which have to 

be answered in a very short period of time, defined benefit pensions 

are very long-term promises and they are tied in with the employment of workers. So therefore there is an attachment to the firm. 

So this is sort of a long-term liability. 

At the same time, I think trends in this area have not been positive despite all of the attempts of addressing the issue with various 

funding rule changes. We believe that we can right the system and 

provide a more stable and permanent basis for defined benefit 

plans by improving the funding rules going forward. So it is certainly a problem right now, and we believe that enhancements are 

required. 

Senator CARPER. Anybody else have a view you would like to 

share? 

Mr. KANDARIAN. Senator, when pension promises are not fully 

funded, there are potentially three different groups that can be 

hurt. At the first level it is workers, who do not get the full amount 

of the pension promise that was bargained for. Their benefits, in 

many cases, are cut back. 

At the second level, it is others in the system, other companies 

that have defined benefit pension plans, oftentimes well funded, 

who pay over time higher premiums to make up for those who did 

not pay for their pension promises. 

87

At the third level, if Congress could not raise premiums high 

enough, if the system got too underfunded, the taxpayer could be 

called upon to bail out the system. I do not see the need for that 

in the near future, but our hope is that we can make fundamental 

changes to the pension system, to the funding rules in particular, 

to preclude the necessity for that at some point down the road. 

Ms. BOVBJERG. If I could just add, Senator, I agree this is not 

an immediate emergency. Certainly, GAO feels that this is worthy 

of such high concern that we put this program on our high risk list. 

I would like to urge this committee, because your portfolio is aging 

overall, to think about this in the context of Social Security as well. 

We are affecting only half, unfortunately, of American workers, 

those who have pensions. These workers are addressing risks in 

their pension plans at the same time that we are discussing risks 

to Social Security benefits and what Social Security will look like 

in the future. 

So with that perspective, I think it would be very important to 

start moving very quickly to stabilize defined benefit pensions. 

Senator CARPER. Could somebody go back in time and just take 

us back to, I guess, the early 1970’s when this legislation was originally debated and finally adopted? I want to say in 1974. Can you 

sort of set the table? What was the scene like then? Why was Congress and—I guess it was President—would it have been Nixon or 

Ford? Ford, I suppose, who felt compelled to act? Take us back in 

time for a moment? 

Mr. SWEETNAM. ERISA, The Employee Retirement Income Security Act of 1974, which is the act that you are talking about, really 

stems from the bankruptcy of the Studebaker Company and the 

fact that the pension promises that were made to their participants 

were not there anymore. There were no assets to back up these 

promises. 

I think what ERISA did, one of the things that ERISA did, was 

it made sure that you had a steady funding stream and required 

for these sorts of general tax qualified plans that companies fund 

the promises that they made. In fact, when I was in private practice, when I looked at a plan document for a plan prior to 1974, 

it was usually about maybe five pages long. Now a plan document 

is about 60 to 80 pages long, and what you do is you see that there 

is a lot of emphasis on how much is in the plan and protecting the 

benefits and the promises that were made to those individuals. 

As time went by, what we have seen is sometimes when we are 

in periods when we want to raise tax revenue, we will cut back on 

some of the funding requirements. Sometimes when we are concerned about the PBGC, what we will do is we will put additional 

requirements on like this deficit reduction contribution that we are 

talking about now, which will sort of increase the amount of money 

that goes into a pension plan. 

So this is what I was saying before, where it is sort of a crazy 

quilt of proposals on proposals that make this rather a difficult 

area to work through. 

Now the actuaries, of course, do not think this is a difficult area, 

but that is what they get paid to do. 

Mr. KANDARIAN. If I could just add to what Bill said. 

88

Senator CARPER. Again, my question, I want you to take me back 

in time. Set the stage, 1974. What was going on? 

Mr. KANDARIAN. As Bill mentioned, Studebaker went bankrupt 

in 1963. Back in the 1950’s, actually, Packard ceased operations in 

1956 and terminated its pension plan two years later in 1958. 

President Kennedy set up a commission in 1962. It went dormant after a while when President Johnson came to office. In 1967, 

Senator Javits introduced the first iteration of ERISA. It took all 

the way to 1974 to get the bill passed. It was controversial at the 

time, especially with companies. 

But essentially what Congress said in 1974 was these pension 

promises really are part of the wage benefit tradeoff that workers 

bargain for. In essence, it is not, if you will, a tip on the way out 

the door. These are earned benefits and they must be advance 

funded so the money is there for people in retirement. The money 

is earned now, it is given to them later. 

That was the reason for the system of advanced funding. Now do 

you ever get truly to fully advanced funding, in terms of the requirements of the law? I would say no, we have not. At times, the 

system has been very well funded, primarily because the assets 

went up in value, or the liabilities went down based upon interest 

rates. But the law never really said you had to be all the time 100 

percent funded. 

The second thing I would say is that if you think about a spectrum of what this agency is, what PBGC is, are we really an insurance system? Where you take like risks and you assess for risk in 

the funding rules, you assess for risk in the premium rules? Or are 

you more of a transfer payment agency, if you will? Take from 

those who are doing better or are better off, or the rich, and give 

it to the less well off, the poor? Where on this spectrum do you 

want this system to be? 

I do not think it can be at either extreme end. It is got to be 

someplace else. The question ends up being the policy debate is, 

where on that spectrum are we? Is that the right place? I think we 

have some concerns that the system has shifted too much toward 

the wealth transfer end of things and needs to be more risk-based. 

Those are things we are discussing within the Administration and 

hope to have proposals on later in the year. 

Senator CARPER. Mr. Chairman, I have a couple of more questions, but let us go back to you and then maybe I can ask another 

one or two. 

The CHAIRMAN. Let us stay with the theme, I think Senator, that 

you started here. Barbara, let me come back to you. 

We have just seen what happened in relation to the fund and 

Bethlehem and the economy and certain impacts on it. Based on 

your analysis, which industries have companies that are most at 

risk of being taken over by PBGC at this time? 

Ms. BOVBJERG. I have to give credit where credit is due, that we 

get most of this information from PBGC. It is our understanding 

that steel, airlines, and the automobile industry are the weak 

points. 

The CHAIRMAN. How well informed are workers about the solvency of those particular pension funds? 

89

Ms. BOVBJERG. Workers generally are not very well-informed. 

These are complicated issues. They are hard to understand. Workers do not get very good information. That is why one of the elements that GAO feels should be addressed as part of a comprehensive reform is transparency. 

You may have seen articles about the USAirways pilots being unable to find out what was really going on in their pension plan in 

its last days just before termination. That should not happen. People should know the status of their plan, what the termination liability might be, and what effect that would have on their benefits. 

The CHAIRMAN. Steve, in relation to transparency, and that is almost always the better way to go, so that everyone involved is informed accurately and on a real-time basis, what can Congress do 

in that area to ensure transparency in these plans? 

Mr. KANDARIAN. The Administration’s proposal includes some improvements in transparency. We would like there to be an annual 

disclosure on a termination basis, as opposed to this measure called 

current liability, where again the pilots thought at USAirways 

their plan was very well funded when it was not on a termination 

basis, that disclosure be made on an annual basis that shows the 

plan’s assets and liabilities. That would be fairly current data. 

In addition, we have something called Section 4010 information 

at the PBGC. That relates to companies that are $50 million or 

more underfunded on a termination basis. We collect that data. It 

helps us understand our risks. But by law, we cannot disclose it 

on a company by company basis. 

We would like that information to be made public so that not 

only workers, and retirees would know but also shareholders of 

companies would have access to that information as they invest in 

company stock. Or creditors to companies, vendors who are shipping goods to companies would know that. 

The reason we want this kind of information out there in the 

marketplace is because we believe while regulation has a place in 

the system, it is not the only thing to make the system stronger. 

The markets can adjust, but for markets to work, there has to be 

good, accurate, understandable and timely information. We think 

the current system does not provide that. 

The CHAIRMAN. Barbara, a moment ago you brought Social Security into the discussion a bit, and certainly we are obviously very 

focused on that debate, and discussion are now at hand in Congress, looking at reforms of Social Security for the out-years and 

for the younger crowd coming I guess, probably not the baby 

boomers. 

You also mentioned that in the context of this. Let me ask this 

question of you, and then I would broaden it out to the others. 

There appears to be the likelihood of some short-term action 

being taken. Is that the approach to go? Is that the way to go to 

handle this problem as we look at the long-term structural change 

necessary in what appears to be competing goals? Those are the 

taxpayer and the question of, if you will, bailout, providing sufficient incentives and insuring workers. 

Now putting all of that together, there is some pretty hefty competing forces there. Is there a sense of urgency to this that requires 

90

us to act in the short-term versus short-term approaches built toward long-term solution? 

Ms. BOVBJERG. I would argue that the most important thing is 

some sort of comprehensive approach because, as you say, there are 

competing interests. Certainly you do not want pension contributions to create bankruptcies. At the same time, you want employers 

accountable for funding the promises that they have made to workers and retirees. At the same time, PBGC is trying to ensure a 

really changing pool of defined benefit plans. 

The number of plans has fallen dramatically in the last 20 years. 

The number of participants has gone up slightly. That tends to be 

because there are larger plans left in the system. But we have gone 

from being about 75 percent active workers versus 25 percent retirees to much closer to a 50–50 balance. There are clearly things that 

we need to think about for the long term for defined benefit pensions and how they relate to PBGC. 

At the same time, I know that Congress needs to act on the interest rate. I think that is why you see a number of proposals that 

would just go with a new rate for a couple of years until something 

more comprehensive could be tried or could be considered. 

I do think that it is important to look at all four of the things 

that we mention in our testimony, on funding rules—and I am 

pleased to hear that Treasury is doing work on that—on the premium structure, on the guarantees that PBGC makes, and on 

transparency, which of course is one of the very most important 

pieces. 

The CHAIRMAN. Steve, the same question. 

Mr. KANDARIAN. I think I would just echo Barbara’s comments 

about the demographics especially that impact the system. In Social Security we talk about numbers of 3.4 workers for every one 

retiree. In this system, it is about one-to-one, one worker for one 

either retiree or terminated vested worker. So you have that dynamic that is in play. 

In addition, the number of years spent in retirement has gone up 

dramatically over the last 50 years, up about 17 percent. 

The CHAIRMAN. It will continue. 

Mr. KANDARIAN. It will continue. As people retire younger, although that is going to level off, and live of course longer, that puts 

strains and stresses on the system. Company actuaries do account 

for that, but if a plan gets underfunded you are talking about an 

ever larger set of liabilities that even on the same percentage basis 

results in a lot more dollars of underfunding. That puts stresses on 

those companies and that puts stresses on the insurance system. 

The CHAIRMAN. Mark, Bill? 

Mr. WARSHAWSKY. Mr. Chairman, I would say that there are several considerations in terms of timing. Obviously, the need for replacement for the 30-year treasury is an immediate need, and that 

has to be dealt with very quickly. 

At the same time, we felt it was important from the Administration’s perspective to put a down payment, if you will, on some more 

fundamental reforms and that includes the disclosure; it includes 

the yield curve. At the same time we are working very diligently 

on a comprehensive package that would include all the considerVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00094 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
91

ations that have been mentioned thus far. We feel as if that is 

something that we hope to share with you soon. 

Mr. SWEETNAM. The other short-term issue that people have 

been talking about has been the elimination of the deficit reduction 

contribution for 3 years. That is a short-term solution that we do 

not think is a solution at all. The Administration opposes eliminating the deficit reduction contribution because as we are going 

forward to try to get overall funding reform, it is very difficult to 

start off another $40 billion in the hole in terms of funding. So the 

Administration opposes elimination of the deficit reduction contribution. 

The CHAIRMAN. Tom. 

Senator CARPER. I want to go back in time. I am not lost in the 

1970’s, but I want to go back there again for just a minute. 

Barbara, do you pronounce your last name——

Ms. BOVBJERG. Bovbjerg. It is much easier to say than to read. 

Senator CARPER. It sure is. Why do you spell it that way? 

Ms. BOVBJERG. It is those Danes. 

Senator CARPER. I think you alluded to this but when this law 

was adopted in the early to mid–70’s I do not know that we had 

defined contribution plans. If we did, we did not have them like we 

do today. At the time, a lot of people graduated. I was just getting 

out of the Navy then. A lot of people went to work and worked for 

somebody for a long time and they participated in a defined benefit 

plan and eventually they retired, starting about right now actually. 

Today, folks just bounce all around. My wife has worked for DuPont for 27 years. I have been here with Mr. Craig for awhile, and 

eventually some day my wife, I expect, will have a defined contribution pension plan to draw from. Who knows, maybe we will, 

too. 

But our children will not. In all likelihood, our children will have 

a far different kind of pension plan to participate in. 

But what I thought I heard you say is that the number of plans 

is way down from where it was at its height and the number of 

participants in those plans is up just a little bit. When you look forward over the next several years, how do we see it trending in 

terms of the number of plans continue to drop, the number of participants continue to rise? What do you see? 

Ms. BOVBJERG. We see that sponsors with defined benefit plans, 

largely small plans, are exiting the system. They are not being replaced by new sponsors. New sponsors are offering defined contribution plans as a general rule. People do like them. They allow 

portability, they allow choice. But they do put the risk of adequate 

retirement income squarely on the participant, on the worker. 

Defined benefit plans reward people who stay, as you say, for 

most of their career in a single plan. What we have seen and we 

have reported on several years ago are different approaches to defined benefit plans, called hybrid plans. I know you have heard of 

cash balance plans that try to continue the defined benefit guarantee but have a more portable and a more accessible kind of benefit, where people can understand their benefit better or they may 

be able to take it with them when they leave the company. 

Certainly, such innovation in defined benefit plans helps. It permits sponsors to feel that they are addressing the needs of their 

92

workers and it does provide something for people who are leaving. 

But at the same time, the secular trend is clear, we are going toward defined contribution. 

It is something that is worth thinking about as we think about 

Social Security too, about how different sources of income may complement or mirror each other. We did a report a couple of years ago 

on the linkage between Social Security and pensions and the relevance of that linkage to Social Security reform. So I am pleased 

to see that this committee is thinking about these things together. 

I think that is very important. 

Senator CARPER. What triggers a takeover by the PBGC? 

Mr. KANDARIAN. A plan terminates based upon a couple of different factors. One might be that a company is in bankruptcy and 

cannot get out of bankruptcy, in essence would have to liquidate 

unless it sheds one or more of its pension plans. An example was 

USAirways. It would essentially have to liquidate the company, sell 

off the planes, go out of business unless it shed at least one of the 

pension plans—in this case it was the pilots’ plan—because they 

could not make their numbers work in their business plan to pay 

back the loans they needed to get out of bankruptcy with those liabilities hanging over their head. 

Senator CARPER. This reminds me of the old joke about the 

planes about to crash, there are five people on the plane, four parachutes. Remember that story? The pilots came out without the 

parachute. 

Mr. KANDARIAN. Right. 

Other cases are when companies actually liquidate. For example, 

Bethlehem Steel sold off all its assets and went out of business. 

The acquirer of those assets did not take on the pension plan. The 

buyer of those assets paid roughly $1.5 billion for all of the assets 

net of the assumed liabilities. The pension plan was more than $4 

billion underfunded. So the number simply would not have worked. 

You could not pay $1.5 billion and take on $4.3 billion of liabilities 

on top of that if you thought the economic value of those assets was 

only $1.5 billion. 

So the plan sits there at this company that is dissolving, and 

therefore comes to us. Sometimes companies do what is called a 

distressed termination. They put the plan to PBGC, if they meet 

the rules in the law. Sometimes we call the plan in from PBGC. 

We take the action first if we feel there is an unreasonable likelihood of increased liabilities to the corporation. That was the case 

in Bethlehem Steel, as more liabilities were being triggered every 

day, and no money was going into the plan. So it can happen either 

way. 

But a company cannot simply say it is no longer convenient to 

have this plan, I will be a more competitive company if I shed 

these liabilities compared to my competitors. The have to show that 

they would not be able to stay in business essentially if they kept 

the plan. 

Senator CARPER. Do plans that are taken over from the PBGC 

ever emerge from that oversight or is that it? 

Mr. KANDARIAN. No, essentially, once they come to us they stay 

with us. There was a minor exception in terms of numbers. LTV 

shed its plans the first time it went bankrupt in 1986. It then beVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
93

came more obvious that it could have afforded the plans. The agency went to court and argued the case all the way to the U.S. Supreme Court and restored those plans because we felt LTV had not 

really met the test of saying we could not stay in business with the 

plans. But other than that, the answer is no. 

Senator CARPER. If you go back since 1974 to any times when our 

economy has trended down and we have been in recession, we had 

a real sharp recession in about 1982. We had a milder recession followed by jobless recovery in 1990 and 1991. Did we see the kind 

of takeovers by pension plans at that time that we are seeing now? 

Mr. KANDARIAN. The last time the agency saw a number of large 

terminations was the period following the 1990 and 1991 economic 

slowdown. At that point in time, there were some steel plans like 

there were this time, but it was more the airlines. Eastern Airlines, 

Pan-American came in to us. Those were the two largest underfunded plans. They came in at $600 million and $800 million underfunded. 

This time around, Bethlehem Steel’s underfunding was in excess of $4 billion. What you can see is that the size of these pension 

promises is growing decade to decade. The level of premiums that 

this agency receives has been essentially flat for a long period of 

time. So the funded status, the funded ratio if you will, of these 

plans has not changed much. They come into us typically 50 percent funded. Well, 50 percent of an ever bigger number becomes 

more and more exposure and you have flat premiums for this insurance system, and all of a sudden the numbers do not work. 

Senator CARPER. Have we seen, either in the 1980’s or the 

1990’s, a period of time when companies were able to—you know, 

the pension funds were flush, maybe the value of the assets in 

those funds had risen or appreciated considerably, and companies 

were able to take from the pension funds back to the company 

some of the value, some of the assets of those funds? Have we seen 

that occur? 

Mr. SWEETNAM. During the mid–80’s, there was a way that you 

could do a termination re-establishment of a plan. You terminate 

the plan, take some of the excess assets, and you re-established a 

new plan. Congress stopped that and put a tax on reversions. 

So right now if a company terminated a plan and took the assets 

out, the company, would be subject to a very high tax not only income taxes on that reversion, but a very high excise tax on that 

conversion. 

Senator CARPER. So that occurred about 15 years or so ago? 

Mr. SWEETNAM. Yes. 

Senator CARPER. That has not been a contributing factor? 

Mr. KANDARIAN. I think it was 1986. It happened at a time when 

there were large leveraged buyouts and the plan excess assets were 

being used to finance these buyouts and Congress moved against 

that. As Bill mentioned, there is a 50 percent excise tax if you take 

it out now in most cases, other than bankruptcy. The one exception, I believe, is for health care for the same workers as have 

these pension promises if the plan is sufficiently well funded. 

Mr. SWEETNAM. Some have stated though that by putting this excise tax, this very high excise tax on reversions, that it really says 

to a company you better not overfund your plan because once those 

94

assets are in there is no way that you are going to be able to get 

them out. 

Senator CARPER. Finally, just real succinctly if you would for me, 

what can be done administratively to address this crisis? I think 

you have already said that. I would like to hear it again, just succinctly. What can be done, should be done legislatively, to help in 

this cause? Somebody just tell me about the 30-year treasury bond? 

What would you do with respect to 30-year treasury rates? 

Mr. WARSHAWSKY. As we see it, most of the solutions are legislative. With regard to your question with regard to the 30-year treasury rate, there is an immediate need for replacing that. The Administration has put forward a proposal for over a 2-year period for 

a transition to a corporate bond yield curve, which we feel is the 

most accurate and relevant measurement to be used. 

Senator CARPER. What maturity? 

Mr. WARSHAWSKY. A corporate bond yield curve reflects all maturities. 

Senator CARPER. To how long? 

Mr. WARSHAWSKY. Most yield curves are computed up to 30 

years. We might be able to even go a little bit beyond that. 

Senator CARPER. How quickly do we need to act on this point? 

Mr. WARSHAWSKY. With regard to replacement of the discount 

rate, there is an immediate need because the prior stopgap expires 

at the end of this year. So that is an immediate need. 

Senator Carper, I want to just answer one of your prior questions 

in terms of the choice between defined benefit and define contribution plans. 

In different circumstances they are appropriate for different 

types of workers and they each have relative strengths and weaknesses. With regard to defined benefit plans, one strength which it 

does have is it offers an employee a life annuity as a payment option, and that is very advantageous to insure against the risk of 

outliving one’s assets. 

Senator CARPER. Again, just real succinctly, what can be done 

administratively? Two, what should we do legislatively? You have 

mentioned one thing that sounds like a do right now kind of deal. 

Mr. SWEETNAM. One of the administrative things that is occurring now is that some plans are coming in to the IRS and asking 

for funding waivers. But really all that is doing is sort of postponing current funding contributions and pushing them out to the 

future. There really is not a lot that we can do administratively to 

fix this problem. I think that it really is something that is requiring legislative action. 

Mr. KANDARIAN. I agree with that. Administratively, PBGC can 

do certain things. If we feel there was an unreasonable increase in 

long-run loss facing the agency, we can move first and terminate 

a pension plan before the liabilities grow even larger for the insurance system. We have taken steps such as that in the last few 

years. But most of the fix really is legislative. 

Ms. BOVBJERG. I agree, it is practically all legislative. There may 

be some things that can be done administratively with regard to 

better informing participants, but those would be relatively small. 

Senator CARPER. Other than the 30-year treasury fix, is there 

anything else we need to do this year? 

95

Ms. BOVBJERG. No. 

Senator CARPER. Mr. Chairman, the committee of jurisdiction for 

the kind of near-term fix that is being discussed here, who would 

have jurisdiction over that? Is that finance? 

The CHAIRMAN. Finance. 

Senator CARPER. Beyond that, some of the changes that have 

been suggested? 

The CHAIRMAN. There are a variety of proposals out there now, 

and the Administration is coming up with one. The House has a 

version. Senator Grassley has one, Senator Gregg has another. 

Mr. SWEETNAM. It is also part of the jurisdiction of the HELP 

Committee, too. 

The CHAIRMAN. Yes, that is correct. 

Senator CARPER. Mr. Chairman, thanks. You have been very generous. To our witnesses, thank you. 

The CHAIRMAN. Let me ask the last question because it falls directly into what Tom was saying as to short-term, long-term. 

Mark, Bill, critics of the yield curve say that it is an untested 

concept and that it will result in pension plans moving their investments out of the equity market. How do you respond to that? 

Mr. WARSHAWSKY. It is not an untested concept. One of the corporate bond yield curves that we became aware of was developed 

by Salomon Brothers, now Citibank. That was in response to a request from the SEC in 1994, in terms of better implementation of 

the financial accounting requirements for pension plans. 

The yield curve has been around since 1994 and has good properties and could be a candidate for a yield curve. We are working 

at Treasury on another approach as well. 

The yield curve itself is a very familiar concept. If you look at 

any standard financial textbook, finance textbook, you will find the 

yield curve. There is no question about it. 

So I think that with regard to the untested concept argument, we 

do not find that has any validity. 

The CHAIRMAN. What is the risk that the yield curve approach 

would create more volatility in funding and greater uncertainty for 

plan sponsors? 

Mr. SWEETNAM. First off, the current rules have a lot of volatility 

in funding. That is one of the reasons that people are very worried 

about the deficit reduction contribution. 

What we are looking at is to require more accuracy in the measurement of the liability. Our second step is to relook at the contribution rules. The funny thing is that you are always going to 

have this volatility in your funding requirements. The question is 

how much risk do you want to take? Some people could take hedging strategies in their asset mix, so that they do not have that volatility, or they could lessen that volatility. So that there are ways 

that a corporation can look and reduce some of that volatility. 

The fact right now that these smoothing techniques, really you 

are just smoothing the inputs into the contribution, into determining the contribution. You still have volatility. 

What we plan to do in our funding proposal is really look at the 

outputs to see whether there is a way that we can reduce the volatility there in the outputs rather than reduce—have this smoothing 

in the inputs. 

96

The CHAIRMAN. Barbara, Steve, Mark and Bill, thank you all 

very much for being with us today and testifying. I think it is extremely valuable that we build a record on this, that we lift the 

level of visibility of the issue to the Congress and hopefully this 

will help urge us along to do some short-term and what is obvious 

here today and has been obvious for sometime, long-term structural 

fixes in the situation. Thank you all. 

Let me now invite our second and last panel up to the table, if 

you would please. 

To all of you again, thank you very much. Let me introduce our 

second panel. Scott Macey, Senior Vice President of Aon Consulting 

who is testifying here on behalf of industry. David John, Research 

Fellow at the Heritage Foundation. Melvin Schmeiser, a retired 

steelworker from Baltimore, MD, whose pension was recently 

placed in receivership by the Pension Benefit Guarantee Corporation. 

Scott, we will start with you. Please proceed. 

STATEMENT OF SCOTT MACEY, SENIOR VICE PRESIDENT, AON 

CONSULTING, SOMERSET, NJ 

Mr. MACEY. Mr. Chairman, thank you for the opportunity to appear before the committee today. As mentioned, my name is Scott 

Macey. I am Senior Vice President of Aon Consulting and I am the 

former chairman of the ERISA Industry Committee and remain on 

its board. I am serving today as a spokesperson for six prominent 

business organizations that represent a broad cross-section of 

American business. 

These organizations come before you with a single voice to emphasize the need to preserve our Nation’s voluntary employer-sponsored defined benefit system. 

Our defined benefit system stands at a crossroads and I think 

that has been indicated by the prior witnesses this morning. Congress confronts a fundamental choice whether to continue down the 

current road of a somewhat inflexible funding and regulatory regime that is often illogical and imposes untenable burdens or 

whether to chart a new path toward a vibrant and growing defined 

benefit system. 

Defined benefit plans and the employers that voluntary sponsor 

them confront unprecedented burdens. Some are caused by temporary economic conditions but others are caused by arcane, obsolete, and excessive Government regulation. A case in point is the 

requirement that pension funding and related obligations be calculated using the defunct 30-year treasury securities rate that artificially inflates plan liabilities and required contributions. 

This defunct interest rate and the uncertainty as to what will replace it is layered on top of counterproductive and inflexible funding rules, widespread exposure to unwarranted litigation, an environment that is hostile to the type of adaptation that is necessary 

if defined benefit plans are to survive in the 21st century, and a 

difficult market and interest rate environment. 

Action to strengthen the defined benefit system should be taken 

now, beginning with Congress promptly replacing the obsolete 30-

year treasury rate. We have heard the Government support of reVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
97

placing that with a 30-year corporate rate this morning and we 

agree with that aspect of their testimony. 

The result of using the 30-year treasury rate is that pension liabilities are inflated and employers are required to make excessive 

contributions and PBGC variable-rate premiums. Perhaps more 

than any other factor, these inflated and uncertain financial obligations imposed on employers have contributed to the spate of recent 

plan freezes and terminations. We urge the Senate to act now and 

join the House in passing legislation adopting a corporate bond rate 

replacement for the defunct 30-year treasury rate. Senator Gregg 

has introduced a bill, S. 1550, to do just that. 

Unfortunately, the Treasury Department has also suggested another element ultimately moving to a formula based on a spot rate 

yield curve. Such a yield curve concept would mark a major change 

to a volatile and complicated regime under which the interest rates 

used would be based on immediate spot rates and vary with the demographics of plan participants. 

A yield curve, however, would add only a veneer of accuracy 

while imposing complexity, volatility, and unpredictability to pension funding. We believe that a yield curve would have an adverse 

impact on the health of the defined benefit system and certainly 

should be rejected without a great deal of further study. 

I would like to take a few moments just to address a couple of 

other issues. The PBGC is supported by plan sponsors and provides 

critical backup benefit security enjoyed by millions of plan participants. While the PBGC’s current deficit situation should be evaluated and monitored, as it is, we believe that the long-term financial 

position of the agency is strong. The current deficit is not a threat 

to the PBGC’s viability and it would be a mistake to act precipitously at this time. 

Indeed, the PBGC has operated at a deficit position most of the 

time throughout its long history. Today the agency has over $25 

billion in assets and by its own statements can pay benefits for 

many years into the future. 

One rare source of vitality in recent years within our defined 

benefit system has been hybrid pension plans. Hybrid plans respond to changing work patterns and workforce demographics and 

include the many features in defined benefit plans that make these 

plans popular with employees. 

Pending at the relevant Federal regulatory agencies are several 

projects to provide much needed guidance on hybrid pension plans 

and issues related to them. However, some in Congress, and the 

House has already done this, have attempted to use the current appropriations process to deny funding for these regulatory projects. 

Any such efforts to foreclose agency guidance that might arise in 

the Senate should be rejected as harmful to the retirement system 

and the retirement security of millions of Americans. 

The policy decisions that Congress makes in the near future 

could tip the balance one way or the other toward a vibrant retirement system that continues to offer employers and employees 

choices between defined benefit and defined contribution plans or 

toward a more narrow system in which defined contribution plans 

are the only retirement vehicle available to most workers. 

98

We stand ready to work with Congress and the Administration 

to find solutions to strengthen and preserve our defined benefit 

pension system and protect American workers. Most critically 

today, we urge Congress to act now to adopt the suggested corporate rate interest proposal and to also act to protect and encourage hybrid pension plans. 

We appreciate the opportunity to testify. Obviously we would be 

happy to respond to any questions. 

[The prepared statement of Mr. Macey follows:]

99


91380.076
100


91380.077
101


91380.078
102


91380.079
103


91380.080
104


91380.081
105


91380.082
106


91380.083
107


91380.084
108


91380.085
109


91380.086
110


91380.087
111


91380.088
112


91380.089
113


91380.090
114


91380.091
115


91380.092
116


91380.093
117


91380.094
118

The CHAIRMAN. Scott, thank you for very much. Now let us turn 

to David John, Research Fellow at the Heritage Foundation. David, 

welcome before the committee. 

STATEMENT OF DAVID JOHN, RESEARCH FELLOW, HERITAGE 

FOUNDATION, WASHINGTON, DC 

Mr. JOHN. Thank you, Mr. Chairman, and thank you for the opportunity to testify. I am David John. I am testifying, frankly, on 

my own behalf. I am a Research Fellow with the Heritage Foundation specializing in retirement issues, Social Security and similar 

financial problems at the moment. 

What a difference a year makes. Last year about this time, a little bit earlier in the year, the debate was about the risks of defined 

contribution plans. If you listened to various of the legislators, 

staffers, and others, the problems at Enron, WorldCom, and various and sundry other made it sound like anyone who supported a 

defined contribution plan clearly did not understand what was in 

the best interest of workers. 

Now we are seeing that while it is very true that defined contribution plans do have an investment risk, there is at least an 

equal risk in a defined benefit plan, and we are starting to see now 

some of a costs and some of the problems that we will face in the 

future. 

Your title, the next S&L crisis, is perhaps a little bit too apt than 

it should be. About 25 years ago I worked for a Congressman from 

Georgia by the name of Doug Barnard who retired, I guess, about 

1992 to or so. At the time we were looking on legislation dealing 

with the S&L industry. The S&L industry, we were told, was absolutely essential to American housing and that it was going through 

some temporary problems but these would be dealt with if Congress would just come up with a little bit of forbearance. What 

Congress came up with was something called goodwill and the regulatory capital. 

The net result worked very well for the short run. S&Ls that had 

looked like they were about to collapse suddenly ended up with 

enough assets so that they could actually expand. 

Unfortunately, what we were seeing was not a temporary phenomenon but a complete change in the industry and once everything came home, the industry collapsed. This was not the activity 

of a few S&L crooks, although that was popular to say at the time. 

This was a fundamental change in economic reality. Because Congress had not acted earlier, because Congress had shown, in this 

case, a little bit too much forbearance, the net cost to the taxpayer 

was on the order $500 billion. 

Now we look at the whole question of the defined benefit pension 

plan. Once again we have an industry that is undergoing a fundamental change. Once again this industry is coming up and asking 

for shifts in the way that their requirements are calculated. 

Through a deficit reduction contribution or the elimination of the 

deficit reduction contribution, they are asking for yet a little bit 

more forbearance. If Congress does not keep the long-term interests 

of the taxpayer in mind, Congress may find itself with yet another 

major funding crisis. 

119

This comes to a question of what to do and what not to do. The 

discount rate has already been discussed rather extensively. We 

are very concerned that if Congress simply shifts from the current 

30-year treasury rate to a corporate yield curve without doing the 

yield curve as suggested by Treasury, that we are going to find in 

the long run a situation where the industry is going to be coming 

back again and again, and we will see—probably not in the short 

run but in the next few years—some form of a bailout provision. 

We are also seeing the need for enhanced disclosure. As has already been said in the earlier panel, workers do not know what 

their futures hold. In a defined contribution plan you get a benefit 

statement that you can look at and you know how much money you 

have. 

Frankly, listening to some of my colleagues at Heritage, who 

tend to come to me and ask if their future has to do with uttering 

the phrase do you want to supersize that on a regular basis from 

looking at some of their investments, they are readily aware of 

what is going on. Under a defined benefit plan, workers do not 

have that opportunity and I think that is a very serious question. 

Equally, there is a serious problem which is addressed by the 

Treasury proposal which would restrict the opportunity of pension 

plans to offer new and enhanced benefits without having the means 

to pay for them. 

Now, I am going to stop there but just let me quickly mention 

that, as Barbara Bovbjerg already said, what we are discussing 

today, both in defined benefit and defined contribution plan, affects 

only about 50 percent of the workforce. If this is not addressed in 

a comprehensive approach that also looks at Social Security, we are 

going to be missing the real responsibility that we have not only 

to ourselves and to people who are slightly older to us, because also 

to our children who are going to have to pay for our mistakes. 

Thank you. 

[The prepared statement of Mr. John follows:]

120


91380.095
121


91380.096
122


91380.097
123


91380.098
124


91380.099
125


91380.100
126


91380.101
127


91380.102
128


91380.103
129

The CHAIRMAN. David, thank you very much. 

Talking about understanding and transparency, and the knowledge of how to deal with it if you are on the receiving, or if you 

are on the losing end, of a plan that is in trouble, let me turn to 

Melvin Schmeiser, a retired steelworker from Baltimore who I understand found himself in that kind of situation. Melvin, please 

proceed with your testimony. 

STATEMENT OF MELVIN SCHMEISER, STEELWORKER 

RETIREE, BALTIMORE, MD 

Mr. SCHMEISER. Good morning, Mr. Chairman and members of 

the Senate Special Committee on Aging. My name is Melvin 

Schmeiser. I am 56 years old and a retiree of the Bethlehem Steel 

Corporation after 35.5 years of service. My full testimony has part 

of my work history and a description of some of the hazards of 

working in the steel mill. 

I was married in 1981 to my wonderful wife Alice and also found 

out there was a lot more overtime available if I volunteered for 

shift work. As a turn millwright, you could be assigned jobs anywhere in the coke oven area. It seemed in the winter is when you 

would be sent on top of the coal bridge cranes at 2 a.m. and the 

tears from the wind would freeze on your cheeks. In the summer, 

you would be sent on top of the ovens. You would have to wear 

wooden clogs strapped to your safety shoes so they would not catch 

on fire. You had to wear a respirator to protect your lungs from the 

thick yellow smoke. Sometimes you were sweating so bad you could 

see the bubbles coming out of the mask. This is where the money 

was. 

This was also about the time when I started to think about retirement. Under the contract there were two ways to determine 

how much pension an hourly employee would receive. Option one, 

years of service multiplied by a dollar amount. This was OK if you 

worked 40 hours a week or missed some time due to layoffs or sickness. 

Option two, years of service times a percentage of the amount of 

money you made over a 60 consecutive month period during the 

last 10 years of service. If you can stay healthy, not miss any time 

on the job, and a fair amount of overtime was available you could 

greatly enhance your retirement pension. 

In 1989, the coke ovens were shut down and I was back on the 

street again. After several weeks I was able to use my plant seniority to bump back into various labor and mechanical pools. In 1991, 

jobs were opened up in several mechanical departments and I bid 

into the cold sheet mill. 

When I arrived, I was told I would not like it there because it 

was hot in the summer, cold in the winter, and greasy. Compared 

to some of the places I had worked in the past, this was like an 

office job. You could actually see from one end of the building to 

the other with just a few wisps of steam. It was turn work, but 

plenty of overtime. 

About 1993, there was talk of a new state-of-the-art cold rolling 

mill that Bethlehem wanted to build. It would only need about half 

the employees of the current facility if job combinations were instituted. If the new mill was to be built at Sparrow’s Point, the union 

130

would have to make concessions. The union agreed to job combinations if the company would offer the displaced employees a $400 a 

month bonus upon retirement. The mill was built at Sparrow’s 

Point. 

My wife and I decided with the $400 a month increase in my 

pension until I reached age 62, and working all of the overtime I 

could physically handle, we should be able to live comfortably the 

rest of our lives. I had worked a fair amount of overtime in the 

past to pay our house off, and car loans early. We had a plan to 

work for a good retirement and be worry free in our old age. 

I worked shift work most of my 35 years at the Point. It was 

hard on both of us. My wife referred to herself as a Bethlehem 

Steel widow at family functions that she had to attend alone. 

Years ago we started some IRAs and I had a 401(k) plan. There 

were no matching contributions from the company. We also had 

some certificates of deposit and money in regular bank accounts. 

Bethlehem offered free retirement classes on company property 

with outside experts on investments and Social Security. I attended 

the two night 2 hour classes and we decided that we were financially secure. I also started going over the retirement and medical 

benefits books we received after every new contract. 

In 2000, retirement meetings were held on company time where 

Bethlehem representatives gave pension estimates and answered 

questions. There was a union representative at the meetings. They 

assured us that if things got bad for the company, the company 

could not get its hands on the pension fund and that there were 

hundreds of millions of dollars in the fund. He said the sky would 

have to fall for the fund to be depleted. Even if it did, the Federal 

Government would pay you 85 percent of your pension if you were 

55.5 years old. So I retired February 28, 2001. 

Well, the sky did fall. The company filed for Chapter 11 bankruptcy protection and later was sold to International Steel Group. 

Bethlehem Steel was forced into bankruptcy because of the broader 

crisis affecting the steel industry brought on by a flood of dumped 

foreign steel which caused domestic prices to collapse. The new 

company, ISG, would not be responsible for Bethlehem’s legacy 

cost, which included pensions, life insurance, and health care for 

the retirees. 

On December 18, 2002 the Pension Benefit Guarantee Corporation took over the pension fund. So my $2,450 regular monthly pension plus the $400 a month bonus will be reduced to less than 

$1,700 a month. While I am disappointed by how much my pension 

is being reduced, I realize that without ERISA I would have no 

pension left at all. 

My medical insurance, which was costing me $165 a month for 

both my wife and I will now cost $1,028 a month. Fortunately, I 

can use the health insurance tax credit which will cover 65 percent 

of my payments. My out-of-pocket payments will be reduced to 

$357.80 a month unless the rates increase. 

This, I hope, will last until I am 65 and I hope Medicare will still 

be available. I hope prescription drug coverage will also be a part 

of Medicare by then. Finally, I hope that Social Security will be 

available when I am 62. 

Thank you. 

131

[The prepared statement of Mr. Schmeiser follows:]


91380.104
132


91380.105
133


91380.106
134


91380.107
135


91380.108
136


91380.109
137


91380.110
138


91380.111
139

The CHAIRMAN. Melvin, thank you for that very clear testimony. 

While obviously you in your life have been a very hard-working 

person, you have also been a thinking person the way it sounds as 

it relates to you and your wife’s future and your retirement plans. 

Scott, let me come to you for some questions and to David, and 

back to you, Melvin. 

Scott, in your testimony you say that action to strengthen the defined benefit system must be taken now in the form of a replacement interest rate for the 30-year treasury bond. How does reducing the cash put into pension funds, many of them at risk, 

strengthen the defined benefit system? 

Mr. MACEY. Before I answer that, Mr. Chairman, I just wanted 

to say after listening to Mr. Schmeiser’s story, he had a much 

tougher job than I have ever had and probably about one of your 

years in your career was worth about four or five of what I do. So 

I commend you for seeing through a very tough job. 

First, I think most obviously if companies are required to put in 

cash into plans that do not reflect the true and reasonable measure 

of the liabilities of the plans, they are just not going to support the 

system. So No. 1, the most obvious way that using an accurate or 

a better measure of interest rates and better measure of determining what pension liabilities and plan contributions should be 

encourages defined benefit plan sponsors to stay in the system. So 

that certainly would help to strengthen the system. 

We are looking at a situation now where yes, there is some 

underfunding in a number of pension plans. Some have significant 

underfunding. But we are looking at them as they come out of the 

trough of a difficult economic cycle coupled with very low interest 

rates in measuring the liabilities. It is almost, between the economic cycle, the loss of market value in plan assets from three or 

so years ago, and the very low interest rates, the perfect storm for 

measuring liabilities. 

So what we are saying in a number of different ways and respects is, No. 1, let us not act precipitously to impose new burdens 

on employers as they come out of the economic cycle. No. 2, the corporate bond rate is certainly a more accurate measure than a 

defunct U.S. Treasury rate that is at the lowest, the Treasury rates 

are at their lowest point in over 50 years. So our measure of it, we 

think, strengthens the defined benefit system. 

What we need to do overall is take action beyond the corporate 

bond rate replacement. I think there seems to be very little debate 

over moving from a Treasury rate to a corporate bond rate. The debate seems to be should other things be tacked onto it. Perhaps 

they should and perhaps they should not, but not enough study 

and evaluation about the impact of some of the other suggestions 

coming from the administrative agencies that are responsible for 

overseeing ERISA and pension plans has been done. 

What we do have is, at least on one item, common agreement. 

That is let us act now to replace the defunct 30-year treasury rate 

with a reasonable high-grade mix of corporate bond rates that is 

very transparent and not subject to manipulation. 

Some of the other steps that could be taken to strengthen the 

system is to finalize these regulations regarding hybrid plans at 

Treasury. I think several of the witnesses have mentioned that hyVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00143 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
140

brid pension plans are—in addition to myself and the organizations 

I represent—are one of the positive steps in defined benefit plans. 

Unless we make the system more flexible so that employers and 

employees together—and many unions have agreed to support hybrid pension plans—unless they can work together to come up with 

new and innovative plan designs, I think we are going to see continued plan freezes and plan terminations to the detriment of the 

retirement system and the retirement security of millions of Americans. 

The CHAIRMAN. Scott, what are industries now doing to increase 

transparency and disclosure of pension fund solvency to workers, 

especially for the at-risk plans? Is there any movement internally 

to do that? Or are we going to have to force it? 

Mr. MACEY. Mr. Chairman, I guess industries are looking at providing and wish to provide relevant, meaningful, accurate, and 

timely information to all of the different constituencies that may be 

interested in that. One is the Government, another is employees, 

and another are shareholders. Now the same information may not 

be relevant to all of those different constituencies. 

What industry does not want to do is use inaccurate measures 

of supposed plan transparency information and provide that to participants. Several of the measures that the Government witnesses 

mentioned, specifically I believe Mr. Kandarian, was No. 1, provide 

plan termination information to participants. 

We believe that that would be detrimental to the average plan 

participant because plan termination information is, in our minds, 

not an accurate measure of a long-term plan obligation. The pension plans are long-term obligations settled over many years. The 

typical earning the benefit and distribution timeframe is 40, 50 or 

60 years. What the termination liability reflects is what is the 

value of all of that at a specific moment in time based upon specific 

asset values at that time, which may be at the trough of an economic cycle, and also the interest rates at that time. 

We believe that plan termination type of information is not the 

type of information that would be helpful in a typical situation to 

the average plan participant. 

The other suggestion that Mr. Kandarian mentioned was providing this so-called 4010 information, and that is the provision in 

ERISA that requires companies that have $50 million worth of aggregate underfunding in all of their pension plans to file a report 

with the PBGC. By law that report is not disclosed to the public. 

If information is to be disclosed to the public, then it should be relevant and meaningful information. A company with $49 million 

worth of underfunding in a relatively small plan would not have to 

file that report. But a company with $50 million worth of underfunding but billions and billions and billions of dollars in multiple 

plans would have to file that report. 

So until at least the statute is corrected to provide a more meaningful measure of when a plan or a company truly has a significant 

unfunded liability, we do not think it would be appropriate to disclose to the public at all. 

The CHAIRMAN. Last question of you, Scott. Your testimony 

states the Administration’s yield curve proposal is too volatile. 

What do you mean by that? 

141

Mr. MACEY. Well, it is a spot rate proposal that looks at rates 

over a short period of time. It is subject to change rather dramatically over relatively short periods of time. I think the absolute biggest problem that we have with the yield curve concept is we disagree wholeheartedly with the statement that it is a well-tried concept. It may be well-tried in some other avenues unrelated to pensions, but it is absolutely untried with respect to pensions. The Administration itself, in the testimony today and elsewhere in testifying before other committees before Congress, has indicated that 

a lot of work still needs to be done to answer a lot of specific questions about how the yield curve concept would be constructed and 

applied to pension plans. No one has determined what the impact 

of using a yield curve concept would be on pension plans. 

My own feeling, having worked in the industry for 30 years now, 

is that we need to look at a lot of issues. How would companies respond to a yield curve concept if it is ultimately adopted? How 

should the yield curve be constructed and applied? What type of 

smoothing techniques should be developed to avoid the volatility? 

For a very minor incremental aspect of accuracy, which can be 

challenged but let us grant that there is some minor aspect of increase in accuracy, what we are adding is we are charting waters 

in a totally unknown environment. Not one person from the pension industry has come forward and said we believe a yield curve 

concept make sense. That right there causes me great cause for 

concern. 

Second, the yield curve concept is—no one has tested whether it 

would change employment patterns? Would industries with older 

workers freeze their plans because of the increases in contributions? Why are we using a yield curve when pension funding is 

generally a long-term concept anyway? It seems to me that all of 

these issues that have been raised by the Administration, assuming that they deserve legitimate or deserve significant review, 

should be reviewed in detail before Congress puts any proposal or 

adopts any proposal in its legislation to fix the anomaly of the 30-

year treasury rate now. 

So we oppose including that in the legislation for these reasons. 

We do suggest that the Government establish a commission to 

study the issue. I know that some people do not feel that is an appropriate approach in certain other areas of Government, to establish a commission. But quite frankly, a commission of interested 

and informed parties, who have a significant interest in the health 

and vitality of the defined benefit system, including people from 

Government, the investment community, participants and unions, 

and the employer community, and expert actuaries and others on 

that commission. Then we can respond to the yield curve concept 

and Congress could act in a more appropriate and responsible fashion. 

The CHAIRMAN. Scott, thank you. 

David, I am going to go immediately to you with a similar kind 

of question. Scott has talked about some of the problems they see 

in it. Critics are suggesting, and you did mention one, that it would 

discriminate against older workers. Discuss, if you would with us 

your view of the yield curve and some of its positives versus negatives? 

142

Mr. JOHN. I think the question really has to be answered in 

terms of what you think discrimination is. To me the biggest form 

of discrimination against an older worker that we see is in the current system where you can work for 35 for 40 years, you can retire 

with a set promise of what your benefits are going to be, and you 

can wake up one morning and discover that your life has been completely turned upside down and that what you had been led to believe does not exist. 

A yield curve is a new and different form of looking at pension 

financing. It has not been implemented, as far as I know, in any 

pensions at this point. However, the simple fact is that this is not 

just a matter of dealing with numbers on a page. This is dealing 

with lives. This is dealing with the ability to live a comfortable and 

reasonably secure retirement. 

If a plan is frozen, and the Government’s proposal does provide 

for freezing plan participation if plans are underfunded by a certain level, may actually prove to be a good thing. In most of the 

studies of current problems with defined benefit pension plans, the 

experts say that you can pick out the companies that are going to 

turn their pensions to the PBGC long in advance because their 

bonds are a junk bond rate for significant period of time. 

If that is the case, and if it is possible to identify these plans 

early, as it is, and if it is possible to use a yield curve to add additional information to that, and it is further possible to prevent 

them from becoming at some point further underfunded; i.e., that 

the retirees who depend on them are going to been in even worse 

shape than they are nos, or the taxpayers who are going to have 

to pick up some of those promises will end up paying more, then 

I think that is actually a small price to pay. 

The CHAIRMAN. The Administration has proposed improved disclosure rules for the workers. Will the benefits exceed the cost of 

these additional rules? 

Mr. JOHN. Yes, I think they will. The costs are not going to be 

insubstantial. As one who is at the Heritage Foundation, we would 

never think lightly of anything that would increase regulatory cost. 

What is a very serious problem however is to have workers who 

are 20 or 30 years in their careers with a particular company and 

to wake up one day and discover, as I said before, that their lives 

had been turned upside down. 

Now one of the things that I think is interesting is there is always a discussion about what information is meaningful. 

The CHAIRMAN. We just heard Scott walk through several 

iterations of what is meaningful to whom. I would appreciate your 

version of that. 

Mr. JOHN. Meaningful is in the eye of the recipient when it 

comes down to it. It may well be that plan termination basis is not 

the best and most accurate method to give to a worker. At the 

same time, it raises a certain level of questions that need to be answered. It would be possible to provide workers with information 

on their defined benefit pension plans that actually does answer 

their questions. I do not know that plan termination is necessarily 

one of them, but I do believe that they need to have some idea as 

to how far their pension is underfunded. 

143

If it is significantly underfunded, well frankly, they should know 

that they are at decent risk. Now the $50 million level is something I also happened to agree 

with Scott on. That is an absolutely arbitrary level and as inflation 

goes, it is going to be less and less meaningful. It would be far better to change that into some form of a percentage underfunded 

rate. Something that a pension plan, if they are say 20 percent underfunded then these additional disclosures would be triggered. 

But one way or the other, again this is not just a matter of numbers and words on a page. This is people’s lives. It is also a matter 

that if these promises are not kept, then either people like Mr. 

Schmeiser are going to pay for it directly or essentially, as legislators, you are going to find yourself with additional demands on the 

Federal treasury to help bail it out. Neither is exactly fair to be uninformed about. 

The CHAIRMAN. David, your testimony states that defined benefit 

plans may not be in the best interests of workers. This idea seems 

to be in conflict with Scott’s testimony pointing to the possibility 

of vibrant and growing defined benefit systems. 

What do you know that Scott does not know? Scott, you can do 

a follow-up. 

Mr. JOHN. This should be fun. 

When I was doing my economic studies, we talked about a curve 

which—this was one of my favorite semi-nonsensical terms. It was 

increasing at a decreasing rate. What we are seeing with defined 

benefit pension plans is, as has already been said, we are having 

fewer and fewer plan sponsors even though the number of participants is increasing slightly. 

A defined benefit plan makes a great deal of sense for a model 

of employment that fits, say my father, who was a professor and 

in his post-World War II career held a grand total of two jobs once 

he got out of graduate school. 

If you listen to the criteria that Mr. Schmeiser mentioned, for instance in particular the one the last 60 months of employment is 

a determination of your pension plan, it does not work if an average worker—and I am thinking in particular of younger workers. 

I have got a 17-year-old daughter who is about to go off to college. 

The studies show that she, on average, can expect to have something like 10 or maybe even 12 different employers. So by the time 

she reaches her last 60 months, that may be the only 60 months 

issues that she is with that particular employer. 

As we see increasing movement in the workforce, as we see an 

increasing demand for older workers to remain in the workforce 

simply because there are not enough young people to replace them 

as time goes on, I think we are going to see the whole pension 

structure shift. It does not make much sense in a multiemployer, 

serial employer actually, system to have a defined benefit pension 

plan. A defined contribution plan is much more advantageous because you can take your assets with you from one place to another. 

Similarly, I do not know that in the future, and this may even 

be at the time that I retire, that we are going to see older workers 

who retire and totally stop working. It may well be because we 

have a certain level, hopefully, of expertise and needed skills that 

we will come back and work on a part-time basis. So our retireVerDate 0ct 09 2002 10:20 Feb 02, 2004 Jkt 000000 PO 00000 Frm 00147 Fmt 6633 Sfmt 6633 C:\DOCS\91380.TXT SAGING1 PsN: JOYCE
144

ment would be a mixture of earnings, pension plans, Social Security, assuming that gets fixed, and various other methods. 

The CHAIRMAN. Five words are less, Scott. Our time is short and 

I do want to get to Mr. Schmeiser. 

Mr. MACEY. Absolutely. 

I think historically the best experience for retirement security is 

probably a mixture of defined benefit and defined contribution 

plans where there is somewhat of a shared responsibility between 

the company and the individual. But certainly, defined benefit 

plans offer individual workers the benefit guaranties subject to obviously some situations like Mr. Schmeiser’s where a part of the 

benefit is lost. The employer assumes the total investment risk and 

there are lifetime annuities provided by the plan. 

Now you have mentioned final pay-type plans and workers moving from one company to another do not fit the model of a typical 

DB plan. But that is why employers have innovated in recent years 

with defined benefit plans such as cash balance plans and pension 

equity plans that provide for greater portability. Certainly, transparency is enhanced because then the employee knows exactly 

what their account balance is at any time under a cash balance 

plan. 

The GAO witness, I am not going to attempt to pronounce her 

last name, she mentioned that innovation in pension plan design 

is an important aspect of the health and vitality of the pension system. I think that we in industry believe wholeheartedly in that and 

have been attempting to respond favorably with innovative plan designs that are responsive to the needs of the business and balance 

the interests and concerns of employees. 

I would mention just again that we hope that the Government 

can issue its guidance that we have been waiting for for a long 

time to make sure that we can continue to sponsor and develop 

these plans. 

The CHAIRMAN. Gentlemen, thank you. 

Mr. Schmeiser, you did everything right, it appears, in planning 

your retirement. You saved for retirement in an IRA, you funded 

a 401(k) retirement account, you worked very hard to build the 

value of your pension retirement, you paid off your home mortgage. 

Given your experience, what would you advise young people 

thinking about planning for their retirement in the context of what 

you have just heard? 

Mr. SCHMEISER. Well, I think it would be very advantageous to 

start putting money away for your retirement as early as possible, 

and to diversify where you did put your money just in case one 

area did not do so well. 

The CHAIRMAN. Based on what you have just heard, but more importantly what you have just experienced, if you had had additional information, a greater understanding of the pension plan of 

Bethlehem, that it might be in trouble, or that certain aspects of 

it were not creating the kind of solvency that would produce the 

payment of pension that you were anticipating prior to or in advance of your notification, would that have been a benefit to you? 

How would you have handled it? Have you thought that one 

through? 

145

Mr. SCHMEISER. It certainly would have been a benefit. I would 

still be working. I would not have retired. 

The CHAIRMAN. You would have made different kinds of decisions 

about your not only working but your retirement plans? 

Mr. SCHMEISER. Yes, sir. 

The CHAIRMAN. In other words, information would have been extremely valuable to you in your planning? 

Mr. SCHMEISER. It certainly would have been. 

The CHAIRMAN. Thank you. 

Gentleman, thank you all very much for your testimony. I hope 

we have built some valuable record today. We appreciate it. 

The committee will stand adjourned. 

[Whereupon, at 11:53 a.m., the committee was adjourned.] 

(147)

A P P E N D I X 

PREPARED STATEMENT OF DEBBIE STABENOW

Chairman Craig, thank you for convening a hearing on this difficult issue. I also 

want to thank all the witnesses for being here and helping us build a legislative 

record. Protecting the retirement income of American workers should be a priority 

of this Administration. 

Too many Americans watched their retirement incomes shrink as the stock market dropped dramatically over the past two years. Hard working Americans who 

carefully planned for retirement are now facing—through no fault of their own—less 

than secure futures. 

In addition to the slumping stock market, our lethargic economy has resulted in 

many manufacturing companies closing their doors or filing bankruptcy, leaving the 

Pension Benefit Guarantee Corporation to take over these companies’ pension plans. 

My great state of Michigan—with its proud manufacturing tradition—has been especially hard hit during this economic downturn. To date, the PBGC is trustee for 

over 200 pension plans from companies formerly headquartered in Michigan. 

The Pension Benefit Guarantee Corporation was created by Congress in 1974 to 

help insure retirees pension benefits. With the escalating obligations facing the 

PBGC, its own standing has been deemed ‘‘high risk’’ by the General Accounting Office. Congress is currently considering several proposals that will provide assistance 

to companies struggling to meet their pension obligations. It should go without saying that these proposals must also work to protect the retirement security of American workers as well as avoiding a bailout of the PBGC by taxpayers. Moreover, any 

changes to pension laws sanctioned by Congress must be more than simply accounting sleight-of-hand tricks like those used recently by private corporations. 

Again, thank you Chairman Craig for convening this hearing. I look forward to 

hearing from our witnesses.

Æ