Saving our savings

Last month marked the first action by this Congress to deal with a problem that will demand more and more legislative attention in coming years.

The problem: the upcoming retirement of the enormous baby boom generation. The action: a bill, passed by Congress and signed into law by President Bush on Aug. 17, that reforms the rules governing private pensions.

What prompted the bill is the habit among U.S. corporations of not fully funding their "defined-benefit" pension plans. Over the last few decades, many companies made lavish promises for these pension schemes-which offer a regular monthly payout over a pensioner's lifetime-and now find that they cannot fund the pensions and remain competitive.

The result is $450 billion in unfunded pension liabilities, which the new law aims to reduce by requiring companies that have these programs (except for struggling airlines) to fully fund them by 2015. The federal Pension Benefit Guaranty Corp. insures defined-benefit pensions, but it faces a shortfall of its own. Analysts worry that if too many companies declare bankruptcy to shed costly pensions, taxpayers will have to bail out the agency.

Congress also used last month's bill to address the more widespread "defined-contribution" plans, such as the 401(k). These plans do not boast a guaranteed monthly income for retirees, but they have the virtue of not forcing companies that offer them into bankruptcy. For employees of 401(k) companies, enrollment will now be automatic. Employees who do not want to participate will have to opt out.

The hope is that this will encourage 401(k) participation and raise the historically low savings rate of boomers as they approach old age.

The bill passed overwhelmingly in both the House and the Senate, but among pension reforms, private plans are by far the easiest hurdle to clear. Standing much higher, with greater costs and more aggressive political constituencies, are public-employee pensions, Social Security, and the mother of all unfunded retirement behemoths-Medicare.