Bush Signs New US Pensions Legislation

by Mike Godfrey, Tax-News.com, Washington

21 August 2006

President George W. Bush has signed into law the most comprehensive revision to US pension laws in thirty years, designed to ensure companies meet their pension obligations, and to take the strain off the federal pension guarantee system.

The Pension Protection Act 2006, which was approved in a 93-5 Senate vote before the summer recess, attempts to address the estimated $630 billion in underfunding in pension plans covering 45 million American workers and retirees.

Under the bill, companies would be required to fund 100% of their projected pension obligations, an increase from the 90% requirement under current law. Companies that do not meet this obligation will be prohibited from increasing employee benefits and must make accelerated catch-up payments.

These rules are designed to take the strain off the Pension Benefit Guaranty Corporation, the institution which guarantees pension benefits for workers and retirees from covered pension plans, and is funded by contributions from US companies. The system is coming under increasing pressure as more firms underfund their pension plans, raising the possibility of a taxpayer bail-out.

The bill also includes $60 billion in tax breaks that permanently extend pension and savings tax incentives that were part of the 2001 tax bill. This tax package includes increased contribution limits to Individual Retirement Accounts, 401(k) plans and a permanent saver's credit for lower income workers.

In addition, the bill strengthens disclosure to give workers and retirees more information about the status of their pension plan, and restricts 'golden parachute' executive compensation arrangements.

While the legislation is not as far reaching as perhaps the White House would have wanted, President Bush said during the signing ceremony last Thursday that he was nonetheless "really pleased" with the final result.

"Every American has an interest in seeing this system fixed, whether you're a worker at a company with an underfunded pension, or a taxpayer who might get stuck with the bill," Bush stated.

However, he added that:

"The problem of underfunded pensions will not be eliminated overnight."

"This bill establishes sound standards for pension funding, yet, in the end, the primary responsibility rests with employers to fund the pension promises as soon as they can."

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