Monday, September 21, 2009

The Pension Benefits Guarantee Corporation

The US Government runs a number of insurance plans. As we debate the issue of adding another, the so called “government option” for health care reform, it is instructive to look at the existing programs. These include FHA, Ginnie Mae, Fannie Mae, Freddie Mac and a number of student loan programs (which incidentally may disappear under legislation that has passed the House and is on its way to the Senate which eliminates all federal aid to students who don’t qualify under a needs based system). Today we will look at the Pension Benefits Guarantee Corporation.

PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector traditional pension plans known as defined benefit plans. If a participating plan terminates, usually through the sponsor’s bankruptcy, without sufficient money to pay all benefits PBGC's insurance program will pay the benefits provided by that plan up to the limits set by law. PBGC financing comes from insurance premiums paid by participating companies which are invested, from the assets taken from defunct pension plans, and from recoveries from the companies formerly responsible for the plans. The PBGC was presumably never supposed to be funded by the American public.

In hearings in 2005 Jim Nussle, Chairman of the House Budget Committee said, “Now in theory, the PBGC was supposed to be completely self-financing…But as we are discovering, and as most of us here know, that is not what is happening.” That year there was a $23 billion shortfall. Later in the hearing Chairman Nussle said, “To make matters worse, the Center on Federal Financial Institutions, which tracks pensions, tells us that on the current path, all PBGC assets will be exhausted, completely gone, by 2021, just 15 years from now.” We appear to be ahead of schedule. As it turns out, the PBGC has continuously operated in deficit every year since 2002. Through the second quarter of 2009 the unaudited deficit is $33.5 billion.(2) PBGC estimates that in just the auto sector alone underfunding of defined benefit plans is $77 billion. At the end of fiscal year 2008 audited financial statements showed total assets of $61,648,000,000. If we combine the $33.5 billion loss and just the unfunded auto liabilities the liabilities total over $95 billion. So the PBGC, a self funding government provided and managed insurance plan has a net deficit of over $30 billion, in other words it is bankrupt. Again from Chairman Nussle’s opening remarks in 2005, “So where does that leave us? Well, under the current scenario, if and when PBGC’s assets fall short, the choice is really one of two right now. Either for pension holders to lose the promised retirement benefits or for the taxpayers to get slapped with the bill for failed private pension plans.” So once again American taxpayers, many of whom have limited entitlements and no defined benefits, will be asked to pay the bill. The PBGC was in theory going to pay for itself, just as in theory the public option for health care will “pay for itself in future savings.”

And by the way, the PBGC was recently given wider investment authority and made its first investments in the stock market in the second quarter of last year setting up a Federal Government agency making investments in private sector companies. As a result of those investments PBGC experienced a 23% loss in its assets for the fiscal year ending September 30, 2008.(3) It is also interesting to note that the former head of PBGC, Charles Millard, is currently under investigation for improprieties for directing funds for favors involving, among others, Goldman Sachs.(4) This happened as a result of the fund’s recently granted ability to invest in publicly traded equities.

So here we have another unfunded liability, created by an entitlement in the form of a guaranteed benefits plan, under-insured by a government-run insurance program placing the responsibility for payment squarely on the shoulders of the American taxpayer.

Next issue: the housing insurance programs, all bankrupt or tottering on the edge, which the government has started since FDR created the Federal Housing Administration during the Depression.


1 comment:

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