THE PENSION Benefit Guaranty Corp. is an obscure federal entity with an important job: When companies go bankrupt, the PBGC takes over what’s left of their pension funds and makes sure that employees get their hard-earned retirement benefits (within certain limits). At the moment, the PBGC insures defined-benefits plans for 44 million Americans and administers pensions for about 1.5 million. Unfortunately, the PBGC suffers from chronic financial troubles, so much so that the Government Accountability Office has kept the PBGC on its list of “high-risk” federal programs since 2003. At the end of fiscal 2010, the agency’s liabilities exceeded its assets by $23 billion.
Now comes the Obama administration with a proposal to fix the PBGC’s finances by changing the way it charges businesses for pension insurance. Under current law, Congress sets the level of premiums, now about $65 per covered employee per year, an amount that does not vary according to the financial condition of the sponsoring employer. The administration’s bill would give the PBGC authority to set premiums on its own and charge less creditworthy firms more than sounder ones, on the grounds that the former pose more risk to the PBGC than the latter. The president’s budget estimates that his plan would raise $16 billion for the PBGC over the next 10 years.
The administration argues that this is more fair than the current system, noting that risk-based pricing is already the norm in other federal insurance programs such as deposit insurance for banks. Employer groups disagree, arguing that there is no comparison between deposit insurance, which pays out all at once, and pension insurance, which pays out over a longer term. Giving Congress’s rate-setting authority to PBGC officials will make it too easy for the agency to jack up premiums, employers argue, which in turn will only encourage employers to freeze or drop defined-benefit plans.
No doubt it’s true that the administration’s proposal is far from a cure for everything that ails the PBGC. The agency’s structural woes include a lack of clear and consistent governance, a perennially ineffectual investment strategy and, most of all, the seemingly inevitable disappearance of defined-benefit plans from the American workplace. The PBGC insured only half as many plans in fiscal 2010 as it did in fiscal 1995.
Still, in this case, we see little alternative. Without more money, the PBGC will be at risk of collapse the next time a large company with an underfunded pension fund goes bankrupt. And taxpayers could get stuck with the cost of bailing it out. At the very least, premium reform could buy time for more fundamental changes.
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