In a direct parallel to legislative mistakes that helped to create the savings and loan crisis of the 1980s, the recent Senate bipartisan agreement on H.R. 3108, the Pension Fund Equity Act, places corporate interests above those of the taxpayer. The agreement between Sens. Chuck Grassley (R-IA), Max Baucus (D-MT), Judd Gregg (R-NH), and Edward Kennedy (D-MA) would make it much more likely that billions of dollars of taxpayer money will end up bailing out underfunded corporate pension plans.

Uncontroversial House language

As passed by the House last year, H.R. 3108 was limited to a minor, but important, change in the way that a pension plan's ability to pay future benefits are calculated. A provision that expired at the end of 2003 had required that the plans use up to 120 percent of the weighted average of the thirty-year treasury bond yield to determine if the plan was properly funded. However, the Treasury Department stopped issuing thirty-year bonds several years ago, and the House legislation replaced that index with another keyed to the yield on corporate bonds for a two-year period. During those two years, Congress is supposed to decide if the new measure should be made permanent or replaced by another.

The House language has been endorsed by the Administration as a first step towards their long term proposal of last year. This proposal is by far the most comprehensive approach to the problem of properly valuing defined benefit pension plans[1].

The Senate special interest agreement

The House provision is relatively uncontroversial, and the Senate should drop its agreement and just approve the House-passed language instead. Unfortunately, the Senate agreement adds special interest provisions that allow certain underfunded pension plans to avoid making additional payments in order to fully pay for their pension promises. Instead, they would only have to make 20 percent of the needed additional contribution in 2004, and 40 percent in 2005.

Airline and steel pension plans would automatically qualify for this relief, as would plans run by a railway workers union and some smaller businesses. Companies in other industries could apply to the Secretary of the Treasury for equal relief, and only the worst funded would fail to qualify. Finally, in a spectacular example of Congress picking winners and losers, the Senate agreement rewards Greyhound Lines, Inc., a bus company, for its lobbying skill by declaring that its pension plan is better funded than it actually is. If it is allowed to remain in the bill, this extremely dangerous exception to the rules is likely to be only the first example of Congress fiddling with pension accounting rules for political reasons.

Setting the stage for a taxpayer bailout of PBGC

The taxpayer is likely to pick up the cost for these special interest provisions. Already, the agency that insures this type of pension plan, the Pension Benefit Guarantee Corporation (PBGC), is seriously underfunded. According to numbers released earlier this month, the agency is running a record $11.2 billion deficit. That number could climb to $85.5 billion if all of the pension plans that could "reasonably" be expected to fail did so.

By allowing companies to avoid funding their pension plans' deficits, the Senate agreement makes it likely that taxpayers will have to pick up that liability. The sad fact is that many companies that qualify for the funding holiday will be in just as poor shape in 2006. The delay is likely to end with their plans running even higher funding deficits. And once they turn their even more underfunded plans over to PBGC, that agency will be further down the road to an inevitable taxpayer-funded multi-billion dollar bailout.

PBGC insures the pensions of about 44 million Americans. As its deficits mount, Congress will be faced with the choice to either allow retired workers to lose pensions they have earned or to pump billions of dollars of taxpayer money into PBGC to make up the difference. No one seriously believes that Congress will renege on PBGC's guarantees, and the Senate pension agreement will do nothing more than to increase the amount that taxpayers will have to provide.

To make matters worse, individual workers could also suffer from a PBGC bailout. Already, workers' pensions tend to be reduced when the plan is turned over to PBGC. As part of a congressional bailout, these benefits are likely to be reduced even further.

Repeating mistakes that caused the S&L bailout

Twenty years ago, Congress faced a funding crisis in the savings and loan industry by allowing S&Ls to declare that they had more assets than they actually did. Congress also passed provisions that gave even more undeserved benefits to specific companies that had the lobbying muscle to get that language hidden in bills. Those S&L bills used the same oblique ways of identifying the lucky recipient as the Senate pension agreement.

Even after receiving special treatment, the savings and loan industry began to run massive deficits that resulted in a bailout that cost ordinary taxpayers hundreds of billions of dollars. While a less "generous" Congress would have seen companies fail earlier, the cost to the taxpayer would have been much less.

As the American philosopher George Santayana noted, "Those who cannot remember the past are doomed to repeat it." The Senate pension agreement repeats the mistakes that caused the savings and loan bailout. If Congress approves the Senate pension agreement and President Bush signs it into law, the stage will be set for a massive taxpayer-funded bailout of PBGC that could have cost much less.

David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.