Utah‘s Senator Orrin Hatch, the top-ranking Republican on the Finance Committee, will introduce legislation on Tuesday that would create a new public retirement plan in which insurance companies pay benefits through annuity contracts.
According to a summary of the bill provided to Reuters, an employer would pay a premium each year to a state-licensed insurer. Employees would then receive fixed income annuity contracts from the insurance company, “thereby building an annuitized pension year-by-year during their working lives” and making pension plan underfunding “not possible.”
Annuities function similarly to defined-benefit plans by paying set amounts in regular installments. The accumulation of annuity contracts would even out interest rate fluctuations, according to Hatch, who would also have life insurance companies competitively bid for them.
There is no official figure for how badly public pension plans are underfunded. Pew Center on the States estimates they are short more than $850 billion in total for future retirees’ benefits.
For years, states short-changed their retirement systems. When state and local revenues plunged during the 2007-09 recession, they cut contributions further. At the same time the financial crisis ravaged the earnings on retirement systems’ investments, which provide more than half of all pension funding.
Pension plan finances have improved in 2013, with states making greater contributions just as the stock market pushed pension assets to record levels. In 2012, pensions in aggregate had enough assets to cover 73 percent of their liabilities.
Still, worries about underfunding persist, primarily because the public workforce is maturing. Meanwhile, some pension reforms face political and legal resistance.
For at least three years, Hatch has sought a uniform solution to the public pension crisis. Like his Republican colleagues, he is concerned the federal government might have to intervene if the problem worsens. Others, including the International Monetary Fund, have said growth in pension spending could drag down the U.S. economy.
Hatch’s legislation would also put employees at small or start-up companies into annuities for retirement, as well as change the federal oversight of 401(k) retirement plans offered by most corporations and of Individual Retirement Accounts.
© 2013 Thomson/Reuters. All rights reserved.