The federal government insures the private pensions of 43 million Americans—shielding their retirements from the fallout of a bankrupt employer, or a labor union investment portfolio that goes belly up.
Since 1974, the Pension Benefit Guaranty Corporation has secured the incomes of more than 1.5 million retirees. It manages more than $76 billion— a portfolio funded by the premiums paid by thousands of pension plan sponsors.
But the PBGC is stuck hemorrhaging cash and desperately needs to be fixed, even though Congress overhauled its premium structure last summer. It has an accumulated net deficit of $34 billion. Among its structural problems, the agency has been unable to charge sufficiently high premiums that would offset the cost of unfunded pensions from going under.
“Whenever you have public sector backing for private sector risk taking, it’s a recipe for disaster,” said Bradley Belt, the chairman of Palisades Capital Management, who served as the director of the PBGC under President George W. Bush.
The PBGC represents a noble attempt to ensure the middle class dream over a lifetime. Yet like so many of those similar government efforts—including Social Security and Medicare—its finances appear to be on shaky ground.
Internal estimates show there is a 91 percent chance that the PBGC multi-employer insurance fund will be insolvent by 2032, which would hit labor union members whose employers paid into a pension plan. The single-employer side would continue to run deficits, but that part of the PBGC would survive.
The agency could be on the hook for $295 billion from the termination of poorly funded pension plans, according to the Government Accountability Office, which lists the PBGC as one of the “high” risks for federal finances. Just as some state and local governments commit to retirement benefits they cannot afford, some companies face a similar predicament.
“I think, in it’s own way, that the PBGC is too big to fail,” Jeremy Gold, a pension consultant, told The Fiscal Times. “Congress was allowing the PBGC to create loan guarantees that Congress would never have created in their own right.”
Capitol Hill is a major cause of the problems at the PBGC. Unlike private insurance funds that assess the possible risks and then set premium rates, Congress determines premiums for the PBGC.
“Unfortunately, they’ve always been too low,” said Marc Hopkins, a spokesman for the PBGC. “That’s why administrations of both parties have recommended that PBGC be allowed, within limits, to set its own premiums.”
The rates set by Congress have tended to be one-size-fits-all, instead of accounting for the potential risks in each individual plan. It would be akin to all drivers paying the same monthly auto insurance bill, regardless of their records or how safe they are behind the wheel.
In his 2014 budget unveiled last week, President Obama requested that the PBGC board of directors—which includes the secretaries of Treasury, Labor and Commerce—have the authority to set its own premiums.
"Without premium increases PBGC will be faced with requesting a taxpayer bailout or shutting down," said PBGC director Josh Gotbaum said in a statement supporting Obama’s proposal.
What makes that statement shocking is that Congress increased premiums last summer with the MAP-21 transportation bill. The law increased the base rate and a variable rate assessed on funding shortfalls, yet the law also enables companies to contribute less to their actual pensions—possibly exacerbating the problem, said Gold, the industry consultant.
“That smell of sulfur is what MAP-21 gives off,” Gold said. “It’s got a smell about it of a deal made with devils.”
The predicament creates a bind for policymakers.
Increasing premiums might cause companies with healthy pensions to evaluate the new costs and shutter their plans with a lump sum buyout. Pensions have already become an endangered species in the economic landscape—with most employers promising a contribution to a 401k retirement plan instead of an income stream for life.
Sen. Tom Harkin, D-Iowa, plans to introduce a massive reform to the retirement system this year.
Based on a report last summer, the chairman of the Senate Health, Education, Labor and Pensions would establish what he calls “USA Retirement Fund,” a private pension run by investment managers instead of individual employers.
As part of the forthcoming bill, the PBGC could be phased out. Staffers are still considering whether to require pension funds to hold private insurance instead.
“The PBGC has helped millions and millions of people, but that has come at a substantial cost,” a Senate aide said on the condition of anonymity. “The government is good at facilitating markets, but not necessarily at running insurance programs. They get tied up in politics.”
But finding House Republican sponsorship on the measure remains a hurdle. The House is looking at reforms to bolster the multi-employer side of PBGC, with Rep. Phil Roe, R-Tenn., holding hearings last month for the Education and Workforce subcommittee.
As the politicking continues, the PBGC heads toward an uncertain political and financial future.
Boston University professor Zvi Bodie has predicted since 1996 that the agency is trapped in a “doomsday scenario.”
Without adequate premiums, Bodie said the PBGC has instead invested with an eye toward higher returns—just like the pensions it insures. Its current investment guidance has 70 percent of assets in bonds and 30 percent in stocks and non-fixed income instruments.
Bodie fears that another massive stock market downturn will cause pension funds to seek PBGC protection—right at a moment when its own portfolio has been hammered by the same phenomenon.
The professor equates it to an insurance company protecting Florida homes from hurricanes that invests its premiums in beachfront properties.
“Exactly when you need the assets, he said, “they are not going to be there.”