This earlier post noted the growing concern in the business community that the Pension Benefit Guaranty Corporation — the quasi-governmental insurer of private company pensions — is facing a string of large company bankruptcies and pension defaults that could lead to another multibillion-dollar taxpayer bailout similar to the Savings and Loan bailout of the late 1980’s.
Now it appears that the growing private pension problem is being noticed at the highest levels of government. This article from today’s NY Times reports that officials in the Bush administration are close to unveiling a rescue plan for the PBGC.
The PBGC is a government-owned insurance company that Congress created in 1974 after a string of corporate bankruptcies left retirees without pensions. The PBGC’s mission is to provide a limited guarantee of private defined-pension plans, which are pensions that provide retired workers with a set amount each month based on wages and years worked. If a pension plan terminates without adequate resources to meet its obligations to its retired workers, then the PBGC guarantees up to $45,614 annually for employees who retire at age 65.
To finance its activities, the PBGC collects annual premiums from employers with defined-benefit plans that are required to participate in the program. Last year, the premiums totaled about a billion dollars. The PGBC also receives funds from terminated pension plans that it is forced to take over.
With five U.S. airlines already wallowing in bankruptcy court, the PGBC is under an incredible load of financial pressure. Yesterday, the US Airways Group, Inc. bankruptcy court approved the turnover of three employee pension plans to the PBGC at a cost of a cool $2.3 billion. Likewise, last week, the PBGC took over the UAL Corp. (the parent of United Airlines) pilots’ pension plan in UAL’s pending chapter 11 case. The takeover is likely to cost the PBGC at least another $1.25 billion. With these kinds of growing liabilities, a taxpayer-funded bailout of the agency is inevitable unless an overhaul of the pension-insurance system is approved quickly.
The Bush administration will probably propose to prop up the pension guaranty fund with increased premiums for all participating companies, including higher fees for businesses that are on the brink of bankruptcy. However, that latter proposal shows how misguided this type of “reform” can be. Charging higher premiums to companies that are already at heightened risk of bankruptcy will actually make it harder for the companies to avoid bankruptcy. Thus, that proposal could well place PGBC fund at higher risk rather than making it more secure.
Moreover, passing any reform through Congress will not be a cakewalk. Business groups and labor unions — recognizing that a federal bailout is likely under the currently broken system — are already raising concerns about how far the changes should go. Employee groups and unions contend that imposing higher premiums or stiffer rules could prompt some companies to freeze or eliminate the lucrative but uneconomic current pension plans. Labor unions simply prefer an immediate government bailout, as they see the writing on the wall. Last year, the PGBC had a deficit of $23.3 billion, which was double the prior year’s decifit. So, we are clearly dealing with an agency here that is is bleeding badly.
And the projections are not rosy, either. The Center on Federal Financial Institutions (a Washington think tank) estimates that the PBGC will run out of cash and rack up a $78 billion deficit within the next 16 years.
As with Social Security, there will be political voices who contend that the PGBC’s current problems are not all that bad and that the reforms are just part of the Bush Administration’s pro-business and anti-labor bias. However, you can take this to the bank — the first loss on a problem such as this is the least expensive one. If we put off dealing with the problem, the cost of the bailout will increase substantially.