Pension Protection

Introduction

The financial crash of 2006 had a dramatic impact on the pensions and retirement of a good amount of the world’s population. As a result Pension Protection legislation has been passed around the world so that the investments and work for so many may not be lost on the whim of a failed trade. Such changes have altered the makeup, structure, and applications of pensions, and have the opportunity to safeguard retirements in ways that will create less burden on social support systems. 

The Need for Protection

Pensions once represented a type of fiscal security that was very trustworthy. However, the changing ways pensions have been managed, leverage, supported and exploited within the market has led to the need for protections. At the onset of the Great Recession, the nature of today’s retirement system left older households exposed to the collapse in the equity and housing and induced many to plan for retirement. Instead, more late-career workers experienced job loss than in previous recessions, often with long jobless spells, encouraging record numbers of early Social Security retirement claims and disability applications. (Munnell and Rutledge)

This has profound effects on the quality of life of the older generation, who are less flexible in the job market than younger people. Liteary work, The Tunnel, clearly demonstrates this. As such, “workers who lost a job can expect lower earnings and more instability, and potentially poorer health. Even households that avoided job loss will have less money available for spending in retirement due to low interest rates and reduced home values” (Munnell and Rutledge). While these devastating changes have reinforced the need to support Social Security, the Pension Protection act was passed to take this need one step further. 

When the Pension Protection Act of 2006 was passed it represented a great move forward for the security of pensions was made. The bill was a move against discrimination, and an attempt to level the playing field of who and how pensions work.  Important to this accomplishment is “In addition, one of the most important provisions of the PPA makes permanent many of the 401(k) and other retirement plan improvements of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)” (Thompson). This legislation works with others to strengthen financial security, and encourage long-term investment in job placement with:

• Fundamental changes to the philosophy underlying minimum funding standards

• Deficit reduction as the basis for a new funding methodology

• Higher limits for what an employer can deduct for contributions to its pension plan

• New protections for automatic enrollment

• Permanence for the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 affecting 401(k) and other retirement plans

• New opportunities for creative plan design

• A new nondiscrimination safe harbor. (Thompson)

New rules were also incorporated in 2008 to give individuals greater freedom concerning how they invest. These changes entail:

• Contribute as much as $5,000 a year to Individual Retirement Accounts (IRAs) and $15,500 a year to 401(k) plans. These limits, once temporary, have become permanent and will be indexed for inflation.

• Increase their savings as they near retirement. Catch-up contributions for those age 50 and older have been set at $5,000 a year (indexed for inflation) for 401(k) plans and $1,000 a year for IRAs.

• Roll over money directly from 401(k) and other qualified retirement plans directly to a Roth IRA—subject to taxes—providing that one's adjusted gross income is no more than $100,000 whether single or married and filing jointly. The rule is effective in 2008.

• Make use of a 529 college savings plan, knowing that its tax-exempt status has been made permanent.

• Continue to use the now-permanent Retirement Savings Tax Credit, which is available to low- and middle-income taxpayers who contribute to a qualified retirement savings plan. The maximum credit is 50 percent of contributions up to $2,000, which would provide a tax credit of $1,000.

• Take advantage of a new rule which allows a nonspouse beneficiary to roll over an inherited IRA into his or her own IRA. Taxes will not be due until money is withdrawn. The new rule will apply to domestic partners.

• Ask the IRS to split their tax refunds into as many as three different bank or investment accounts. (Union Plus)

While the economic crash may have limited the resources that older generations have to invest, the Pension Protect act has made moves to secure the pensions of future generations. Understanding the impact of technology, the act has made room for financial advice from a computer-generated pension plan as long as;

1) uses generally accepted investment theories based on historical returns;

2) takes into account the participant’s age, retirement age and risk tolerance;

3) uses objective criteria to create investment portfolios;

4) is not biased in favor of the adviser or its affiliates; and

5) appropriately weights investment options. (Thompson)

The various changes made in the Pension Protection Act reflect a greater appreciation for financial security for the population which supports the economy. This understanding has grown out of the challenges of the Great and offers a chance to strengthen the social support system of the collaborative global economy. The reforms to the Pension Protection Act in 2008 further emphasize:

• Pension plans have seven years to become 100 percent funded. Previously, they did not have to add money if they were 90 percent funded. Plans will be allowed to gradually move up to the 100 percent level by 2011.

• Companies that dump their plans on the PBGC and then emerge from bankruptcy must pay a penalty—$1,250 per participant—for up to three years. The law raises the limit on the amount of money companies can put into plans during good times to help keep the plans solvent during lean times.

• To encourage companies to fully fund their plans, they will be allowed to take increased tax deductions for their contributions.

• Plans that are less than 80 percent funded will not be allowed to provide any new or enhanced benefits.

• Hybrid "cash balance" plans, a blend of defined-benefit and savings plans, will be protected from claims of age discrimination by older workers who argue that hybrids reduce their pensions because they have fewer years until retirement than younger workers.

• Starting in 2008, participants in hybrid plans must be vested after three years.

• The law prohibits the "wear-away" of a worker's previously earned benefits, which can occur when a defined-benefit plan is converted to a hybrid cash balance plan. (Union Plus)

Part of the motivation for this change is the need to support an aging population, who make up a good portion of the global population. Research emphasizes, “recessions lead to decreasing mortality in the short run, due primarily to better nursing home staffing. But over the long run, late-career displacement and higher unemployment rates in one’s 50s are both associated with higher mortality rates decades later” (Munnell and Rutledge). The value of the aging population to culture does not end when their employment does, and the Pension Protection Act seeks to ensure that this period can be maximized and enjoyed after a long career building up investments. 

Conclusion

The lessons learned from the Great Recession, as depicted in the literary work Grapes of Wrath, may not appear to be flush to the degree necessary to ensure such a crash will not happen again. This is the nature of the boom and bust model of competitive capitalism. However, the value of consistent investment in the end works for the benefit of the entire community, and the Pension Protection Act was created to help smooth retirements and social stability. Hopefully, the younger generations learn from the experience of the Great Recession and make moves to ensure their investments are secure as the market teeters back and forth.

Notes

1: Retrieved from:

http://www.publications.parliament.uk/pa/cm200506/cmselect/cmworpen/1008/6032205.htm

Works Cited

Munnell, Alicia H., and Matthew S. Rutledge. “The Effects of the Great Recession on the Retirement Security of Older Workers.” [Working Paper]. The National Poverty Center, 2013. Retrieved from: http://npc.umich.edu/publications/u/2013-03-npc-working-paper.pdf

Thompson. “The Pension Protection Act of 2006: Essential Insights.” Thompson.com, 2007. Retrieved from: http://www.thompson.com/images/thompson/reports/hr042007_pension.pdf

Union Plus. “The Pension Protection Act: New rules for retirement plans.” Unionplus.org, 2010. Retrieved from: http://retirement.unionplus.org/money-for-retirement/pension-protection-act.html