The Next Big Bailout?

Now this employee has reached 60 and is facing a different world. Commitments which run a very long time entail a lot of risk.

Wimpy Finance

Defined benefit pension plans should remind us of the character Wimpy in old Popeye cartoons, whose motto was, "I'll gladly pay you Tuesday for a hamburger today."

The defined benefit pension plan says, "I'll gladly pay you 40 years from Tuesday for a hamburger- namely your work- every day until then." What if, when the hamburgers are all eaten and the distant Tuesday finally arrives, the pension plan's assets don't cover the promised payments- and neither do the assets of the PBGC?

Pension Reform in 2006

There are three ways generally discussed to reduce the financial deficit of the PBGC. These are:

1. Raise the insurance premiums paid by all pension plans to the PBGC.

2. Raise them even more for plans which are severely underfunded, companies which are risky, or both.

3. Force companies to put more money into their pension plans more quickly.

Although these methods would raise more money for the PBGC and reduce its risk exposure, they create new problems by making defined benefit pensions more expensive. These prescriptions would thus tend to drive companies away from continuing to offer them, and would put even more pressure on financially weaker companies. Stronger companies, on the other hand, are reluctant to pay for the shortcomings of other firms.

Combinations of these ideas are contained in pending pension reform legislation in Congress. Projections suggest, however, that even with enactment of the reform, movement away from defined benefit plans and the financial problems of the PBGC will continue.

There is a well-understood fourth approach, which is unattractive for many reasons but certainly conceivable:

4. Have a taxpayer bailout, just as there was a taxpayer bailout of FSLIC.

We should do our best to avoid this one, which would mean that the 80% of American employees who do not have defined benefit plan pensions would be forced to pay for the 20% who do.

As we struggle to reform the reform of 32 years ago, the PBGC will continue to be insolvent, and the debates are very much in need of some new brilliant idea.

Alex J. Pollock is a Resident Fellow at the American Enterprise Institute.