An Expected Surprise: The Doubling of the PBGC’s Deficit

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.

7 Responses to “An Expected Surprise: The Doubling of the PBGC’s Deficit”

  • Brian Tschanz says:

    I think the most important step that needs to be taken to help ease this problem is to provide employers more incentives to adequately fund their pensions. The best way to do this would be to ensure better reporting standards so that employees know exactly what the status of their pension fund is. Therefore, employees would be able to put significant pressure on their employers to fund their pensions, and if employers still failed to do this, then they would risk losing their employees to other companies who offered better and safer retirement plans. While this would not solve the problem entirely, I think it would be a very significant first step that would encourage more employers to fund their pension obligations more adequately.

  • Nick T says:

    I think it is important to note that employees are now guaranteed their pension no matter the performance of their company. Before, the PBGC started insuring pension plans, if the company failed the employee would receive little if any of his pension. Now, if their employer continues to prosper, the employer will pay for the pension, but if they fail the PBGC picks up the bill and the individual employee stays whole. If individual employees had a vested interest in ensuring their company was the one who paid their pension, this would alleviate some of the burden on the PBGC. If employees were motivated to see their pension paid by their employers instead of the PBGC, this would put pressure on the employer to adequately fund their pension or face loss of employees.

  • Yushan Yang says:

    I think that the premium should be set by default risk of a plan sponsor. In this way, the sponsor would try to fund its pension plan in order not to be charged at high premium. Another thing important is that once PBGC charges premium based on the funding status of a company, it will pay more attention to how a company calculate its obligation. Since the pension obligation is based on assumptions and there are several ways to calculate it, it leaves a lot of space for a pension sponsor to manipulate the funding status. The PBGC should set up a process to check whether the plan sponsor discloses transparent and fairly represented funding status in order to evaluate the default risk and set the premium.

  • Jeffrey Brown says:

    Yes, I agree completely that Congress should give the PBGC the ability to adjust premiums based on the risk of the plan sponsor. For that matter, they should also be able to adjust premiums on the basis of well the plan sponsor does at immunizing its funding status. In essence, firms that do a better job of asset-liability matching should get a lower premium than those that do not, holding funding levels constant.

  • Jeffrey Brown says:

    I agree that worker’s ought to have some security in their pensions. The pre-ERISA world in which we had episodes like the Studebaker plant shut-down that left thousands of workers without pensions in retirement is not a world to which I would seek to return. However, that does not justify designing the PBGC in such a way that the risk gets transferred to the taxpayer. If the PBGC were permitted to price the insurance in accordance with basic insurance principles, it would go a long way toward reducing the burden on taxpayers AND providing more security to pensioners.

  • Jeffrey Brown says:

    Agreed. I also really like the idea of giving the PBGC a more senior claim on plan sponsor assets in the event of bankruptcy. This would give private sector creditors the incentive to enforce full funding, and would be far more effective at providing incentives for plan sponsors to immunize their plans against asset price movements.

  • Yuan Zhang says:

    In view of the $33.5 billion deficit in an unaudited report to Congress as of March 31, 2009, the midpoint of the fiscal year, the $22 billion deficit is not worth surprising. The present finance situation of PBGC is foreseeable due to the “fundamentally flawed” PBGC.
    One thing I agree with the article is that the government do fund the PBGC to some extent, although the PBGC is “supposed” to be self-financed and “is not officially backed by the full faith and credit of the U.S.Government”. I was wondering why the government not fund the PBGC openly. Since letting the PBGC to finance itself is not feasible, why not the government do more on funding the PBGC?
    On the other hand, reducing the expenditure is as important as increasing the funding. If the PBGC pay more attention on the cost-efficiency and fairness, it would have less liabilities. Some policies had better be publiced to prevent the employers relying too much on the PBGC. Meanwhile, things have their order of priority. More attention should be paid on the employers with severe problems such as large finance deficit or with large number of senior employees.