Who benefits from Pension Protection Act?

The U.S. faces a pension crisis of epic proportions. Some 30,000 "defined benefit plans" are underfunded to the tune of $450,000,000,000, and a number of financial specialists believe the law Congress passed recently-the Pension Protection Act of 2006--is, at best, a bandage on the problem.

Indeed, many feel strongly that the new law, which requires most pension plans to become fully funded over a seven-year period, is the legislative equivalent of "destroying the village in order to save it." When cash-strapped companies are forced to comply, they almost certainly will abandon or freeze their existing plans, maintains attorney and CPA Jim Lange, author of the book, Retire Secure! Pay Taxes Later: The Key to Making Your Money Last as Long as You Do.

"You, and only you, are now responsible for funding your retirement," he entreats. "You can no longer depend on your employer and it's hardly worth mentioning that Social Security isn't going to get you very far. As corporate icons like GM, Verizon, IBM, Sears, Lockheed Martin, Motorola, Circuit City, and Hewlett Packard declare pension freezes, Americans will need to reevaluate their retirement plans."

The new law is designed to protect not only workers, but the Pension Benefit Guarantee Corporation, the pension provider of last resort that has to step in when companies renege on their promises. The PBGC ultimately is financed by taxpayers. If enough companies fail to fund their pensions, the potential bailout could make the savings and loan debacle look like pocket change, Lange maintains.

The Pension Protection Act is almost 1,000 pages that cover 100 tax revisions. "Not only does this new law force the issue of saving for retirement on the employee--and at a time when statistics show that the American public is not saving adequately-it pulls the psychological rug out from under people who have traditionally relied on the good governance and discipline of the company they work for," Lange laments.

The Act makes it it easier for employers to enroll their employees in the company's 401 (k) plan automatically. The company would set default contribution limits and the employee would have to "opt out" should he or she decide not to participate.

On the plus side, the new law makes permanent incredible income tax saving vehicles that will allow taxpayers to make larger IRA, Roth IRA, Roth 401(k), and other retirement plan contributions. Prior to its signing, some of the contribution limits and other provisions were due to expire in 2010. Since these laws now are permanent, taxpayers can make retirement and estate planning decisions to secure their--and their family's--future confidently.

"Even though most people probably didn't even realize some of these laws were set to expire, their benefits package has likely been affected by the uncertainty." Lange points out. "For instance, many companies have never put the Roth 401(k) and 403(b) plans on their menu of options since they didn't know if they'd have to pull them off again in a few years. Now, employers have an incentive to offer them."

COPYRIGHT 2006 Society for the Advancement of Education
COPYRIGHT 2008 Gale, Cengage Learning