Time to face the PBGC music

The doubling of the Pension Benefit Guaranty Corp.'s deficit underscores the need for a hard-nosed solution to the chronic financial woes of this government-chartered company if the public is to be spared another massive bailout.

The PBGC, which insures basic pension benefits for about 44 million American workers and retirees in more than 29,000 private-sector defined benefit pension plans, recently announced that the deficit for the fiscal year ended Sept. 30, 2009, was $22 billion, compared with $11.2 billion for fiscal 2008.

That, however, could be just the tip of the iceberg. The PBGC said in its annual management report that 27 large pension plans with total underfunding of $1.64 billion were probable losses that would probably end up on its balance sheet and, more ominously, that its potential exposure to future pension losses from financially weak companies increased to about $168 billion from $47 billion in fiscal 2008.

Vincent K. Snowbarger, PBGC acting director, has conceded how grim the situation had become, while emphasizing the need for a long-term solution that could bring stability to the embattled pension insurance program. For 29 of its 35 years, the agency has operated in the red.

The PBGC is funded by premiums it charges employers whose defined pension benefit plans it insures, and by its investment returns. If a company fails and is no longer able to meet its pension obligations, the agency steps in as trustee and assumes monthly payments to retirees.

Battered by a weakened economy, the PBGC found itself responsible for 144 new private-sector pension plans for the fiscal year ended Sept. 30, compared with 67 plans for the prior year. In addition to these new obligations, the agency found its financial situation weakened by record-low interest rates that actuarially magnify the present value of future benefit obligations.

A grab gag of reform proposals

Fragile as PBGC's condition has become, there seems little chance of a short-term collapse because its long-term liabilities ensure it will have enough cash to pay benefits for years to come. Still, rapidly growing exposure in the midst of a weak economy across so many sectors — from auto to retail to finance — is intensifying the need for fundamental changes to this severely underfunded and overburdened pension protection program.

In recent years, calls for meaningful change in Washington have produced a laundry list of proposed fixes. They included barring companies with underfunded pension plans from increasing pension benefits; encouraging companies to overfund their plans; rethinking the way the PBGC invests its money; and moving more toward established insurance principles as a way of strengthening the agency. Most of the suggested reforms, however, have been geared toward changing the rules that determine how the PBGC sets the risk and premium levels for participating companies. Recalculating premiums to reflect a company's risk is one potentially effective approach, but Congress has been loath to raise the funding formula in the face of opposition from business and labor groups. Indeed, a bill recently introduced in the House would allow employers, given the tough economic times, to reduce their contributions to the pension program. The Preserve Benefits and Jobs Act was introduced Oct. 2 by Earl Pomeroy, D-N.D., and Pat Tiberi, R-Ohio, although in January they were considering modifications to the bill.

The overall problem with these proposals is that they fall far short of permanently fixing a structurally flawed program. What's needed at this stage is not a piecemeal approach but an intelligent and farsighted plan for making the PBGC a self-sustaining and actuarially sound entity with the ability to weather economic storms as well as continuing business and industry failures.

How do we reach that summit? By drawing on the experience 30 years ago of our nation's Social Security system. In the face of escalating concerns over the survivability of the venerable retirement program, the National Commission on Social Security Reform was established in 1981. The 15-member bipartisan commission — headed by Alan Greenspan in one of his first major public roles — examined problems threatening the long-term survival of Social Security, and proposed a strikingly effective set of solutions to ensure the program's ongoing financial integrity.

That kind of rigorous examination by a blue-ribbon panel is urgently needed now for the PBGC. Admittedly, not all commissions are effective and lead to far-reaching reform. But if the National Commission on Social Security Reform is any guide, a thoughtful, analytical approach to a problem as critical as PBGC solvency and the long-term stability of the nation's defined benefit pension system could prove to be an indispensable first step.

The cost of doing nothing

To be sure, the PBGC has endured strong headwinds in the past. In 1992, it shored up its finances and was able to take on $1.4 billion in underfunded pension claims from bankruptcies of Pan American World Airways Inc. and Eastern Airlines Inc. Ten years later, the PBGC saw a $6.9 billion surplus wiped out when it assumed pension obligations for three faltering steel companies: LTV Corp., National Steel Corp. and Bethlehem Steel Corp.

While the agency's obligations have ratcheted up over the past 20 years at the hands of one industry meltdown after another, funding levels by employers who continue to sponsor defined benefit plans have remained immutably flat. If the case for dramatic change needs further emphasis, the economic crisis of the past two years and the agency's exposure to an astonishing $168 billion in future pension losses should leave few doubters.

The issue on the table boils down to this: Do the government and the business sectors have the foresight, courage and good sense to address the metastasizing PBGC problem now, or will they continue to dither until the only option left is a taxpayer bailout rivaling that of American International Group Inc. and other institutions deemed too big to fail?

Thomas J. Healey, a retired partner of Goldman Sachs Group (GS) Inc., currently is a senior fellow at the John F. Kennedy School of Government at Harvard University, Cambridge, Mass. He served as assistant secretary of the treasury for domestic finance from 1983 to 1985 under President Ronald Reagan.