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Who Will Bail Out The Bailer?
Liz Moyer, Forbes.com
October 18, 2005
Delphi's recent bankruptcy filing has put more pressure on Congress to reform a set of pension laws that are putting the federal guaranty program in a fiscal crisis of its own.
The Pension Benefit Guaranty Corp. (PBGC), a 31-year-old insurance fund set up by Congress and paid for by premiums from corporate pension plans, is already technically insolvent and is projected to run out of cash entirely in 16 years unless lawmakers act. It's already $23 billion in the hole, and its deficit is expected to grow to as much as $91 billion in 20 years, according to the Congressional Budget Office.
"We're at a crunch time," said Mike Johnston, a member of the pension practice at Hewitt Associates (nyse: HEW - news - people ), one of the largest benefits consultants for U.S. corporations.
The PBGC is about to release its 2005 financial statements. If its own estimates for this fiscal year are any guide, it won't be good. Premiums paid to the fund should be roughly $1.8 billion, while benefits paid will be more like $3.2 billion. And this was PBGC's best guess as of November last year, before the bankruptcy filings of Northwest Airlines, Delta Air Lines, and Delphi (nyse: DPH - news - people ).
Already there is talk of the need for a savings-and-loan-style bailout for the PBGC. But the House and Senate are trying to forestall a massive taxpayer bite by considering two related bills that would tighten the rules for companies that make contributions to defined benefit plans for employees. First, they'd raise premiums companies pay to the fund, and set stricter rules for below-investment-grade companies paying into the fund.
The Bush Administration has also been keen to reform pension rules, offering its own proposals (reflected in the two bills in Congress). The Administration is proposing that PBGC raise some of its premiums by whatever may be necessary to wipe out projected deficits over time. It also wants to limit the ability of plan sponsors to use credit balances from previous overfunded years to reduce a present year's contribution.
"Nobody wants the taxpayer to have to bail out the PBGC," says Douglas Elliott, president of the Center on Federal Financial Institutions, who estimates such a bailout would cost $92 billion today to prevent the fund from running out of cash in 2021. "But the worry is, if you do the things that would rescue the PBGC--raise premiums and toughen funding rules--you drive companies out of the system."
The PBGC was established in 1974 to protect pensioners from losing benefits if their employer goes bankrupt. As of now, it pays benefits to 44 million people, and its fund protects some $1.5 trillion of pension benefits. One of the flaws with the system is that most of the troubled plans have come from three industries: steel, automotive and airlines.
And it doesn't help that through the years Congress has granted a boatload of loopholes and funding holidays for sponsors, as it did last year in April Fools' Day legislation that changed the formula for calculating liabilities, effectively slashing the levels where many sponsors were required to fund their plans. Airlines and steel companies also got the nod to fund their plans at just 20% of normally required levels.
"Good industries end up paying for bad industries," says Hewitt Associates' Johnston.
The alternative is for companies to flock en masse to the defined contribution market. The 401(k) has certainly gained popularity in the last decade, and such plans are not insured by the PBGC.
But there are plenty of pensions still in force that are government insured, and many of them are underfunded, thanks to the loopholes provided by Congress over the years, especially to help cash-strapped industries. The PBGC calculates that last year, plans insured by it were underfunded by $450 billion.
Congress, which sets the fund's premiums, is expected to act this time before companies have to make the first payment to their plans on April 15, 2006. Fixed premiums--those paid by all plans--will almost certainly increase. The PBGC took in $677 million of flat-rate premiums last year.
But it is the variable-rate premiums that are trickier to assess. Plans are required to kick in $9 per $1,000 of underfunding, but there are plenty of exemptions. Though PBGC picked up $800 million in variable-rate premiums last year, it is estimated that it could have received more like $3 billion had it been able to collect more variable premiums.
And the measures currently making their way through Congress aren't expected to wipe out PBGC's deficits. Best-case calculations have the reforms lowering the costs to taxpayers of any eventual rescue to $49 billion from $92 billion, according to the Center on Federal Financial Institutions.
The debate will at least get the ball moving, Elliott says. "People are worried that this is the next S&L crisis," he says, referring to the rescue of the collapsed thrift industry in the late 1980s and early 1990s. "That tends to change the dynamic."
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