Reforming the Pension Bailout Fund

September 08, 1992

While savings and loan associations were going into the tank, while several large insurers were sliding toward bankruptcy from massive losses, the federal Pension Benefit Guaranty Corp. insisted it was in no danger of asking for a taxpayer bailout. But now, the agency that ensures the pensions of 40 million Americans warns that it, too, will need a major rescue within 10 years unless Congress enacts reforms to stem the mounting, but largely hidden, insolvencies of major retirement plans.

The PBGC faces a potential deficit exceeding $40 billion if it continues on the present course. It argues that it will be less painful and cheaper to fix the system now than allowing it to sink into the quicksand of another S&L crisis. About 20 percent of the nation's private pension plans are on shaky financial legs, covering 5 million workers, and the agency's losses are projected to approach $20 billion within the decade, executive director James B. Lockhart warns.

Instead of raising rates to make up the snowballing shortage, the agency wants to tighten funding requirements for chronically deficient plans, improve its creditor position when firms go bankrupt and limit PBGC liability when underfunded plans increase benefits. The program is not in a cash flow bind; rather, it isn't collecting enough premiums and interest to meet future claims.

Hiking premium rates again (they were raised in 1987 and last year, and are 19 times the 1974 level) would drive out the healthy companies in the voluntary system, terminate pension plans for their employees and dump the ailing plans on the backs of taxpayers, Mr. Lockhart argues. Reforms would curb abuses and force plans to maintain the integrity of their funds. Under current law, employers can be in legal compliance even though their pension plans have deficits of $1 billion or more.

Financial analysts may quarrel with the excessively grim scenario forecast by PBGC officials; employers with underfunded plans and the bankruptcy bar will surely object to the reforms. A companion plan to change PBGC accounting rules has become a partisan issue with budget implications. But the other three reforms can only help to secure the pension system's safety net.

Repeated warnings of multi-billion-dollar government deficits and the murky uncertainties about the economy have dulled the public will to demand needed changes in the system. But few things are as important to a retired person who has worked a lifetime, whose earning career is finished, who has been promised a pension. That is why the PBGC was established, and it is important for the agency to remain financially sound to continue that essential function.

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