Posted by Jeffrey Brown on Nov 17, 2009
Filed Under (Retirement Policy, U.S. Fiscal Policy)
Last Friday, the Pension Benefit Guaranty Corporation (PBGC) announced that its deficit had doubled over the past year. The PBGC is the government agency that insures defined benefit (DB) pension plans in the U.S. While this doubling of the deficit was widely reported in the press, the only thing surprising about this announcement was that anyone was surprised by it.
Since the PBGC was created through the passage of ERISA in 1974, the basic design of the program has been fundamentally flawed. As I have discussed in several papers, the PBGC fails to price this insurance properly, fails to provide adequate incentives for funding, and fails to provide adequate information to market participants. As a result, DB plan sponsors have the incentive – and the legal right – to fund their pensions in a manner that imposes large future obligations on U.S. taxpayers. (And as for the PBGC experts out there who will quickly point out that the PBGC is not funded by taxpayer dollars, I ask you only one question – given our experience of the past 15 months in which the U.S. government has not only bailed out government sponsored enterprises such as Fannie and Freddie, but also private sector companies such as G.M., do you really think Congress will let millions of pensioners lose their benefits when the PBGC runs out of money?)
Given that the program’s finances have been underwater for years, and given that numerous academics, think-tanks, and government policy experts such as the GAO and the CBO have all pointed out that the PBGC is on an unsustainable course, the latest numbers simply confirm what we already intuitively know – the PBGC’s finances are deteriorating rapidly.
Here are the facts as of September 30, 2009:
- The PBGC had only $68.7 billion in assets to cover an estimated $89.8 billion in liabilities.
- The PBGC “acquired” responsibility for an additional 144 plans during the year.
- 27 large plans – with liabilities of over $1.6 billion are now listed as “probably losses” on the PBGC’s balance sheet
- The PBGC notes that “potential exposure to future pension losses from financially weak companies” is approximately $168 billion.
I do, of course, realize that it is difficult to get people exercised about this issue. Even $168 billion, let alone $22 billion, no longer seems like a big number coming in a year after trillions have been spent on stimulus plans and TARP-like programs. Nor does it seem large relative to the tens of trillions in unfunded liabilities facing Social Security or Medicare. But $168 billion is still real money – even in Washington.
What needs to change? One useful first step would be to give the PBGC the authority to charge market-based premiums for the insurance it provides. It is true that this might hasten the decline of DB plans in some sectors. But I would submit that if making firms pay the true cost of their pensions means that they no longer find it attractive to offer them, then perhaps the efficient outcome is for them to end the plans before they dig the fiscal hole any deeper.