PBGC & Pension Reform
Douglas J. Elliott
President
Center On Federal Financial Institutions
August 9, 2006
What is PBGC?
• Pension Benefit Guaranty Corporation
insures credit of private DB pension plans
• PBGC picks up pension obligation only if
company can’t pay and pension trust is
underfunded
• PBGC does not cover everything
– Cap on participant’s annual pension
– No early retirement subsidy
– Phase-in of recent benefit improvements
COFFI (www.coffi.org)
2
There Are Two Programs
• PBGC runs two distinct programs
– Single-employer, with 34 million participants
– Multiemployer, with 10 million participants
• PBGC provides much less coverage for
multiemployer plans
– Annual caps are much lower
– Employers share joint & several liability
• I will focus today on Single-employer
COFFI (www.coffi.org)
3
PBGC is Deep in Hole Financially
• PBGC owed $23 billion more than value of
its assets in 2005
• “True” number could be higher or lower
– Discount rate matters a lot
– “Probable losses” have a subjective element
• But, no one appears to believe PBGC is
solvent as it stands now
COFFI (www.coffi.org)
4
Cash Could Run Out by 2022
• PBGC has plenty of cash and investments
to pay claims for many years
• But, cash should run out years before
pensions are fully paid out
• COFFI has only publicly available cash
flow model for PBGC
• Our base case estimate is that cash runs
out by 2022, under current law
COFFI (www.coffi.org)
5
Deficits Could Get Much Worse
• There is a structural imbalance between
premiums and risks
• Most optimistic academic study found
premiums covered half of historical risk
• COFFI’s base case estimate is that PBGC
would need a $92 billion rescue, in 2005
dollars, to cover next 75 years of
operation, under current law
COFFI (www.coffi.org)
6
CBO Study Is More Pessimistic
• CBO’s model shows premiums do not
nearly cover risk of next 20 years
• Private insurer would demand $142 billion
to cover existing deficit and expected
losses from next 20 years of operation
• Even without a $64 billion risk factor to
reflect private sector nature, insurer would
charge $78 billion through 2025
COFFI (www.coffi.org)
7
Congress Just Passed Pension Reform
•
Core goal is to reduce structural problems
–
–
–
•
Funding rules would be tightened to reduce size
and frequency of future claims on PBGC
Benefit increases would sometimes be disallowed
PBGC variable premiums would be increased
There is debate on extent to which actual bill
met these objectives, due to various
compromises, multi-year transition periods,
and special provisions for particular industries
COFFI (www.coffi.org)
8
Pension Reform is Very Hard
• The two key goals are in serious conflict
– Avoidance of taxpayer bailout of PBGC
– Encouraging firms to keep offering DB plans
• PBGC’s finances cannot be helped without
shifting cost and risk back to employers
• Yet, many employers are already uncertain
DB plans are worth the costs and risks
• Striking the balance is hard and subjective
COFFI (www.coffi.org)
9
Bill Is Unlikely To Restore PBGC
Solvency
• COFFI analysis of earlier bills suggested
base case need for $92 billion bailout
would be reduced to $40-50 billion
• I now believe that a better estimate would
be $60 billion
• In any event, only extremely favorable
financial market conditions would eliminate
deficit, even with this new law
COFFI (www.coffi.org)
10
COFFI Has 23 Reports on PBGC
• Please see www.coffi.org
• The New York Times highlighted those
materials as “refreshingly understandable”
and “without a hint of dogma or advocacy”
• We also run a PBGC Listserv
COFFI (www.coffi.org)
11