The Pension Benefit Guaranty Corp.'s recently released 2018 annual report brought welcome news that the single-employer termination insurance program posted a $2.4 billion "surplus" as of the end of the fiscal year on Sept. 30. But as we dig beneath the numbers, this is no more reason for celebration than the last several years of "deficit" were cause for the hand-wringing that took place. Given fluctuating interest rates and market conditions, a snapshot will always skew too positively or negatively when measuring an obligation that will stretch for decades.
As the PBGC report noted, more than half of the $13.4 billion improvement from the prior year was thanks to $7.6 billion in favorable credits due to a change in interest factors — which were the result of increases in market interest rates. And, of course, that rise in interest rates was from historically low levels, which created the illusory deficits in the first place.
The problem with using point-in-time assessments for measuring pension obligations — whether for the PBGC or the private-sector plan sponsors that support the system — can be observed by considering the following. Today, 86-year-old Irene Triplett, a resident of North Carolina, is receiving a $73.13 monthly pension from the federal government as the last surviving Civil War dependent beneficiary — 153 years after that war ended. How is that possible? In the 1920s her mother, then a young woman, married an octogenarian Union Army veteran.
Imagine for a moment that the federal government actually were required to fund its pension obligations, as private-sector plan sponsors must do. When the Civil War pension system was established in the 1860s, should the condition of the economy and prevailing interest rates of the day determined the ability of the federal government to pay a beneficiary of that program in 2018? Of course not. Any logical funding obligation would demand recognition that the government would pay benefits over numerous cycles of high and low interest rates and bull and bear markets.
The same is true for the federal government's obligation today to the beneficiaries of terminated defined benefit pension plans inherited by the PBGC. And it is true, as well, for private-sector employer plan sponsors who are legally required to set aside funds to pay promised benefits.
The PBGC's surplus or deficit measured each Sept. 30 would not matter quite so much if we all took the same long view as plan sponsors. It would validate that a snapshot when interest rates are extremely low paints as inaccurate a picture of pension funding gloom as unusually high interest rates may suggest a superficially positive situation.
Fortunately, PBGC's surplus (notwithstanding today's still relatively low interest rates) represents a genuine improvement in the single-employer termination insurance program because the program's surplus is actually significantly understated. That is because, in determining its liabilities, PBGC used discount rates of less than 3% — much lower than the rates applicable to private pension plans under statutory rules. If PBGC used the statutory discount rates, the surplus would be much larger.
All of which is to say that the "deficit" numbers that drive policy decisions about funding rules and PBGC premiums are often based on assumptions that are disengaged from the true long-term outlook for both private-sector pension plans and the government agency that guarantees benefits in those plans.
On the other end of the "good news" spectrum are the PBGC annual report's conclusions about the multiemployer plan termination insurance system. Many of the same factors that account for improvement in the financial picture of the single-employer program are applicable to the multiemployer program as well — from 2017 to 2018 the program's deficit declined to nearly $54 billion from $65 billion. Despite that improvement, there is a 99% chance of insolvency of the multiemployer termination insurance system within eight years (based on PBGC's May 2018 projections report). A bipartisan, bicameral congressional committee has been working for the past year on proposals to help restore the program's fiscal stability.
The recommendations of the special committee are imminent but prospects for action on them are much less clear. But here is where the trajectories of the single-employer and multiemployer programs intersect. As the financial status of the single-employer program continues to improve, Congress could be tempted to cast an eye on that program to help bail out its financially troubled cousin on the multiemployer side. The issue, of course, is that permitting the multiemployer program to use assets from the single-employer program presents real concerns. First, if structured as loans, will they ever be repaid? Second, will moving money from the single-employer program, diminishing its surplus, increase pressure to raise premiums? Third, transferring funds from the single-employer to multiemployer insurance program would very likely accelerate company terminations of defined benefit pension plans given employers' legitimate concern of continued premium increases. This exodus from the pension system is the greatest single threat to PBGC's single-employer program, since many healthy companies that can afford to terminate plans would do so, leaving PBGC with mostly financially struggling companies.
Like virtually every problem policymakers face, the situation grows more severe the longer action is delayed. In a gridlocked Congress, there is a real chance of inaction on this critical issue. Hopefully, the hard work of the special committee will prompt long-overdue remedial efforts.
Once that important task is addressed, Congress and the executive branch should look carefully at both how the PBGC's fiscal condition is determined as well as the measurements that are imposed on plan sponsors. Improving the assumptions upon which hard policy decisions are made will help improve the results of those decisions.
