The federal Pension Benefit Guarantee Corporation is broke:
The PBGC has total assets of $90 billion but total liabilities of $152 billion. So its assets are a mere 59% of its liabilities. Put another way, its capital-to-asset ratio is negative 69%.
There are two basic parts of the PBGC—the “single employer†and “multiemployer†programs. The first guarantees the pensions of individual companies, which are managed by the company; the second guarantees union-sponsored pensions involving multiple companies. The PBGC discloses in Footnote 1 of its financial statements that “neither program at present has the resources to fully satisfy PBGC’s long-term obligations.†Not by a long shot.
The multiemployer portion is in worse shape. It has total assets of $1.8 billion and total liabilities of $44 billion. Its assets are 4% of its liabilities, and its capital-to-asset ratio is negative 2,300%. The PBGC tells us this program is likely to run out of money “in as little as five years.†The single-employer program is also deeply insolvent, but less so. It has total assets of $88 billion and total liabilities of $107 billion. Its assets are thus 82% of its liabilities and its capital ratio negative 22%.
and likely to remain so. The only prospect for its continued operation is “borrowing” an ever-increasing amount from the Treasury which it can’t repay as it presently operates.
The great irony of this program is that like so many other federal insurance programs it doesn’t operate like insurance. Insurance programs necessarily charge premiums that are proportional to risk. The risk may be based on you and your circumstances or on the circumstances of people who are superficially like you but however they are calculated they are based on risk. The PBGC doesn’t operate like that; their premiums are regulated.
Back in the Old Days fifty years ago when defined benefit pension plans looked like the vanguard of history the PBGC might have made some sense. Now when the number of people (other than those who work for the government) who participate in defined benefit pension plans is decreasing rapidly the PBGC is a lot more like a welfare program for the rich and moderately well-to-do.
This would be a good project for the new Congress to take on. I don’t see any reason why these groups should get special treatment, other than political ones. Either make these groups pay adequate premiums or do away with the program. Even if they increase premiums they should phase it out and convert to defined contribution plans.
That said, there will be a lot of people who did the work and thought they were getting a pension. They never had the option of contribution plans. Some of those companies have gone bankrupt or severely downsized since they retired. We should honor the commitments made to them.
Steve
Unless something has changed since the one and only time we bought a company with a pension the company is responsible for making the contributions based upon a yearly actuarial audit. It’s not an insurance expense or risk of default based, it’s an employment expense based on statistics and deemed statistical underfunding. The taxpayer steps in when the uber-structure PBGC declares insolvency.
Here’s the strange thing; the hidden card if you will. ERISA was modified by Congress because unions and managements were basically colluding to promise unions benefits the company could not afford, figuring they would lay the risk off on their brethren and taxpayers. (Think United Auto Workers or Steelworkers or airlines). It’s all a political act to hose those without political clout. So be careful, Steve, when you say “we” made promises. The unions made promises to themselves.
Guess how many companies we subsequently bought that had a pension…….
@Guaneri, local government is subject to ERISA requirements for retirement pensions, and from what I can tell that is at least partly based upon assumptions of return on investment set by the public employer. I would be curious if ERISA sets any limits on ROI assumptions, because that would certainly be where the most play would be.
From letters I’ve seen sent to bankruptcy courts by people who’ve lost their pensions, the federal program does not replace lost benefits dollar for dollar. (Not sure, but it looks like the pensioners have a secured interest in their fund to the extent it’s funded, and an unsecured interest in the remainder.)
PD
We used a pension consultant to provide safe harbor and avoid a qualified opinion. I believe publics are ERISA bound as well, which is curious. They are patting themselves on the back for backing their return assumption off to 7.5% from 8. (Note that our assumption bounced around 6.something, and that was in the early aughts.
Are there no honest brokers?
As for secured interests. My understanding is that the funded and perfected portion of the pension is first in line. The balance a general unsecured claim. I have no idea what has happened in practice with unsecured claims. I guess that’s where the PBGC comes in.
local government is subject to ERISA requirements for retirement pensions, and from what I can tell that is at least partly based upon assumptions of return on investment set by the public employer.
True, but you don’t know the good part. Governments are not required to meet the same funding requirements that non-government entities need to meet. Essentially, if you ran a private pension plan with the same set of rules governments use, the people running the plan would go to jail.
Basically, the idea is that governments, unlike private companies & the like, can definitely count on future revenue streams from taxes – the company has to assume it could cease to exist. You can see how well this is working in places like Illinois, Detroit & California.
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And my contact in the biz is of the opinion that most ROI assumptions in plans these days are completely full of shit, propagated by a bunch of clueless motherfuckers of questionable parentage. (Most people aren’t aware of this, but actuarial consultants, for the most part, cuss worse than rappers or sailors.)
Funding is derived from contributions, investment returns and a couple methods not particularly germane. With returns having a practical upper bound the contribution requirements it seems to me cannot be withstood by an economically viable state. Dave is pointing out that benefit cuts remain to be had, which is true. I just don’t think it will happen until too late, and the shit is being distributed from the fan.
“Back in the Old Days fifty years ago when defined benefit pension plans looked like the vanguard of history the PBGC might have made some sense. ”
It doesn’t make sense today, but the PBGC mostly serves legacy industries from that era. IIRC, most of the beneficiaries are from steel, manufacturing and heavy industry.
Also, I don’t think its a welfare program for the rich and moderately well-to-do. Certainly that describes a few, but a lot of people got screwed when the PBGC took over their pensions – it only covered a portion of pension payments, isn’t indexed for inflation and doesn’t cover retiree health care.