In mid-August, President George W. Bush signed a sweeping pension law to shore up the creaking U.S. corporate pension system and pressed Congress to act quickly to overhaul the Social Security retirement system. The Pension Protection Act of 2006 will usher in the most significant changes to U.S. retirement laws in three decades, affecting workers of every age, from about-to-retire employees to graduates on their first job.

A key aim of the legislation, which closes loopholes in the pension system, is to give the 44 million active and retired workers who have earned a traditional pension a greater chance of actually receiving all of it when they retire.

Yet while the primary goal of America's new Pension Protection Act is to secure the health of traditional worker pension programs, "the 'fix' appears likely to hasten their slow decline," The Christian Science Monitor recently reported.

It's not that the traditional pension is dead. Millions of workers will still receive monthly benefit checks from their former employers for decades to come. Indeed, the new law promises to help ensure that fewer of those plans end up going bust and slashing benefits.

Barely half of American workers are covered by any form of workplace retirement plan, and the law does little to entice more employers to offer traditional pensions.

The new law forces companies with financially ailing pensions to contribute higher premiums to the federal insurance program that, when pension plans fail, pays workers a portion of what they were due. In an Aug. 14 research paper, Credit Suisse analyst David Zion estimated that companies in Standard & Poor's 500 index would collectively have to contribute $47 billion to their pension plans if the new rules were in effect this year, versus the $30 billion they are likely to pay under the current rules.

One concern among experts is that the changes may have the unintended effect of pushing companies to freeze or drop pensions, should interest rates rise enough, rather than bear the additional cost of fully funding them and paying those higher federal insurance premiums. If anything, the new measures add new reasons for employers to do what they are already doing: Opting for 401(k)-style benefits that shift the retirement burden onto workers.

Some retirement analysts say that is a troubling trend. As of last year, more than 40 million U.S. workers and retirees in the private sector were covered by pension plans that promise a defined retirement benefit — such as a monthly payout based on one's final salary and years' of service. That is more participants than such plans had in 1985. Yet the number of such pension programs has plunged over the same two decades. Employers now operate fewer than 40,000 plans, down from more than 100,000 in 1985, according the Pension Benefit Guaranty Corp. (PBGC), the federal agency created to insure such plans against failure.

"This legislation represents the symbolic end of the corporate defined-benefit era," Robert Pozen, chairman of MFS Investment Management of Boston, told The Boston Globe (via The Seattle Post-Intelligencer).

Analysts predict that the changes will thus open the floodgates for companies to shift workers from traditional pension plans with defined monthly benefits to individual savings plans such as 401(k) accounts and solidify other popular investment vehicles, such as 529 college savings plans, which may prove less generous for workers but more predictable for plan sponsors.

Indeed, in addition to shoring up the traditional pension system, the new law seeks to address newer forms of retirement plans offered in the private sector. During the past 20 years, many companies have shifted away from traditional pension plans, which offer defined benefits, and toward savings plans such as the 401(k), into which employers make set, or defined, contributions.

For individual investors and workers, the law is noteworthy for its tax provisions encouraging them to save more, in effect replacing the guarantees lost under old pension systems, recently noted The Boston Globe.

• First, the bill guarantees that gains from so-called 529 plan college savings accounts will remain exempt from federal taxes, a provision that had been set to expire in 2010. About 9 million children are enrolled in these plans, with assets of $92 billion.

• Second, the law raises the tax-free amounts that workers can contribute to Individual Retirement Accounts. Currently workers can contribute up to $15,000 a year to their 401(k) plans, but these limits were scheduled to fall in 2010. The bill locks in continued increases in the maximum amounts.

• Third, the law will make it easier for companies to enroll workers into 401(k) savings plans automatically, rather than the current system, which leaves the option with the worker to opt out. The measure is aimed at significantly raising the 401(k) plan participation rate among workers from its current level of 66 percent of eligible employees to 92 percent, according to an estimate from the Investment Company Institute, which represents mutual funds.

Basically, this additional intention of the Pension Protection Act of 2006 is aimed at spurring workers — particularly young workers — to save for themselves, to save earlier and to save more often.

Initially, opting in to a 401 (k) plan has taken effort on employees' behalf. Auto enrollment, now under the new law, uses "the human tendency toward procrastination, inertia or avoidance to the employees' advantage," The New York Times recently said. For example, study after study show auto enrollment leads to higher rates of participation.

Fidelity, which manages about a quarter of all corporate retirement programs, estimates that of its 12,000 plans, only 195 (about 1.6 percent) offer automatic enrollment. So it should come as little surprise that 1 in 5 Americans nearing retirement don't have a retirement fund, NYT noted. "Those who do, do not have much."

The trend away from traditional pensions and toward such plans as 401 (k)s reflects changes not only in the health of particular industries but changes in the way companies use benefits to compete for workers, according to The Christian Science Monitor. "First it was steel, then airlines, where global competition or deregulation shook the financial health of giant companies. Many of their pension plans were terminated in bankruptcy proceedings." Workers used to trust their employers with funding their future retirement adequately. The new law will likely place the burden of funding on workers.

For further details on how the new law is set to impact workers of all ages (and it will), visit the sources below.

Sources

Reform erodes the future of US pensions
by Mark Trumbull
The Christian Science Monitor, Aug. 18, 2006

Generations Will Feel Pension Act Differently
by Kathleen Day
The Washington Post, Aug. 20, 2006

On Making Enrollment in a 401(k) Automatic
by Damon Darlin
The New York Times, Aug. 19, 2006

Law overhauls pension, savings rules
by Ross Kerber
The Boston Globe (via The Seattle Post-Intelligencer), August 19, 2006

Pensions are going, going . . .
by Tami Luhby
Newsday, Aug. 20, 2006

Bush signs measure aimed at shoring up US pensions
by Jeremy Pelofsky
Reuters, Aug. 17, 2006