With the Pension Benefit Guaranty Corp. deficit growing to record levels and projections of continued deteriorating financial conditions, the question is: Can the PBGC be saved without increasing its premiums further, reducing the benefits it insures, resorting to a taxpayer bailout or some combination of all three?
Raising premiums, including through a proposed credit-risk-based approach, would in theory strengthen PBGC finances, but given the competitive pressures companies face in operating their businesses, and funding employee benefits in a low interest-rate environment, would likely drive more sponsors away from the defined benefit system, accelerating a trend of closing and freezing plans. This would further weaken the PBGC by removing sponsors of viable corporate plans that provide necessary premium income to the agency while exposing it to little risk of failure.
Reducing benefits would require congressional action, and would provoke resistance from an administration backed politically by unions and from Democratic members of Congress, labor groups and possibly even some Republicans in Congress seeking to broaden the party's political base.
A taxpayer bailout also would face opposition in Congress because of the government's enormous deficits, especially as the PBGC was set up to be self-sustaining. Some would see it as unfair to seek a bailout of PBGC pension benefits from taxpayers, millions of whom don't have any pension coverage let alone the right to pension insurance backing from the PBGC.
The deteriorating financial condition makes it imperative the administration and Congress address the future of the PBGC and the necessity of looking beyond the structure set up at its creation by the Employee Retirement Income Security Act of 1974.
In its latest annual report released Nov. 17, the PBGC acknowledged it is on the verge of insolvency in regard to its program backstopping multiemployer plans.
The PBGC's combined deficit from its single-employer and multiemployer programs reached a record level at the close of its fiscal year ended Sept. 30, rising 73.3% to $61.7 billion from $35.6 billion as Sept. 30, 2013.
Its multiemployer program deficit rose to $42.4 billion from $8.3 billion, offsetting by a large margin an improvement in the single-employer program, whose deficit fell to $19.3 billion from $27.4 billion.
The PBGC's fiscal year 2013 Projections Report for its multiemployer program shows that its “risk of insolvency rises over time, exceeding 50% in 2022 and reaching 90% by 2025.
“When the program becomes insolvent, PBGC will be unable to provide financial assistance to pay guaranteed benefits in insolvent plans,” its annual report stated.
That issue confronts a changing Congress and a coming new director at the PBGC in the new year.
With the changes in the leadership of the Senate and the new director of the PBGC, the time has come for the Congress and the administration to decide what can be done to shore up the PBGC finances, especially in the short term in the multiemployer program.
The PBGC has only two sources of income. One source is insurance premiums paid by employers that sponsor defined benefit plans or employers that participate in multiemployer plans. The other source is investment returns on assets of terminated plans the PBGC has taken over.
In the 2014 fiscal year, for the single-employer program that income totaled $3.8 billion in premiums and $6.4 billion in investment return. Multiemployer program income was only $75 million in premiums and $122 million in returns. That multiemployer program income in no way comes close to closing any liability exposure of the PBGC.
While the single-employer program is on better footing, the PBGC's finances would have been in worse shape if the federal government had not bailed out General Motors Corp. and Chrysler LLC — and indirectly, their underfunded pension plans — when they filed for bankruptcy protection in 2009 and thereby keeping them from calling on the PBGC to cover their pensions.
The administration and Congress must soon address this generally dire financial situation.
In the short term, the new director should take the lead, retaining multiemployer plan funding rules created by the 2006 Pension Protection Act that are set to expire at the end of the year. In addition, the new director should call for a restructuring of the PBGC board.
Neither move threatens employers that sponsor pension plans or employees who participate in them. In fact, these groups should welcome such changes.
Leadership at the PBGC will be critical in helping to shape the agenda for legislation and other policymaking. Since its creation, the PBGC has operated with little leadership at its board level. The board, made up of the secretaries of the departments of labor, treasury and commerce, has met rarely during its 40 years of existence. Some years it has not met at all. The secretaries apparently have generally believed other administrative and policymaking priorities demand more attention. The new director should call for an expansion of the PBGC board to provide better leadership to the management of the agency.
The PBGC's “financial future is uncertain because of long-term challenges related to PBGC's governance and funding structure,” Gene L. Dodaro, U.S. comptroller general, said in testimony March 12 before the Senate Committee on Homeland Security and Governmental Affairs. Further, the Government Accountability Office designated the PBGC a “high risk” in terms of its financial condition.
Action must soon be taken to resolve the PBGC's financial problems. The longer the PBGC waits, the more it risks a collapse that would leave employers and employees in a crisis with a sudden loss of coverage. Such a loss would likely lead Congress to find a hasty solution, which is unlikely to measure up as exhibited by its lack of action to address the situation so far.
Given that many financial experts warned the PBGC was unworkable when the idea was first proposed — because companies and unions could agree to high pension benefits knowing the PBGC would be stuck with the bill if the companies ran into trouble — the best course would be for the PBGC to plan for its eventual closing.
Congress should freeze the PBGC's coverage to those plans it already has taken over and no more. Taking action now would allow time for employers and participants to develop alternative approaches to covering benefits, such as through creative annuity programs to support benefits, and the taxpayers would not be saddled with another ongoing rising obligation.
However, the most likely fix is a muddled compromise that sees the PBGC limping along. n
