Federal pension insurer faces $350 billion shortfall, study says

Amount of bailout needed likened to S&L scandal

August 25, 2004|By BLOOMBERG NEWS

WASHINGTON - A $350 billion pension shortfall among U.S. companies may force the federal agency that insures retirement plans to seek a taxpayer bailout similar to the one during the savings and loan crisis, the Cato Institute, a conservative policy research group, said yesterday as it released a study on the issue.

The Pension Benefit Guaranty Corp. had a record deficit of $11.2 billion last year after taking over plans for 152 companies, including Bethlehem Steel Corp. and US Airways Group Inc.

Without changes to funding and premium rules, the federal agency's deficit is likely to swell to $18 billion in the next 10 years, and may reach more than $50 billion, said Richard A. Ippolito, a former PBGC chief economist who wrote the study for Cato, a Libertarian think tank.

"If exposures create claims that reach catastrophic levels, taxpayers will be called upon to provide a bailout," Ippolito said in the study.

Stock price declines and low interest rates have eroded the value of pension plans.

Groups such as the Pension Rights Center, a workers' advocacy group in Washington, have dismissed the likelihood of a bailout, saying the federal agency is well-financed over the long term.

The collapse of savings and loans in the 1980s and early 1990s cost taxpayers about $124 billion and the thrift industry another $29 billion, according to the Federal Deposit Insurance Corp.

The PBGC said in June that the total shortfall among U.S. companies with under-financed pension plans narrowed last year to $279 billion from $306 billion in 2002.

The agency's data comes from 1,050 company pension plans that are under-financed by at least $50 million. The companies used about $642 billion in assets to cover $920 billion in plan liabilities last year, the PBGC said.

Spokesman Jeffrey Speicher said the PBGC had no comment on the study.

United Airlines' parent, UAL Corp., said last week that it probably will terminate and replace all its pension plans. United, the second-biggest U.S. air carrier, plans to skip about $575 million in pension contributions this year to help it come out of bankruptcy without a government-backed loan.

The PBGC is financed by insurance premiums collected from employers that sponsor defined-benefit plans, returns on investments and the assets of pension plans that it takes over.

The agency was created by Congress in 1974 to guarantee pension benefits, and is run by a board that includes the secretaries of labor, treasury and commerce.

Since its creation, the airline and steel industries have accounted for more than 70 percent of the claims against the program while representing less than 5 percent of insured participants, the PBGC said.

Ippolito said PBGC should establish a private insurance program that sets premiums based on the risk that companies add to the program.

Such reforms would increase revenue to the PBGC and reduce under-financing, Ippolito said.

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