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Who Will Guarantee This Guarantor? Part Two

Friday, July 20, 2012

The director of the Pension Benefit Guaranty Corporation responds to an article on

Late last month I published a piece on the serious financial problems at the Pension Benefit Guaranty Corporation (PBGC), the government corporation that guarantees private pension plans (see “The Pension Benefit Guaranty Corporation: Who Will Guarantee This Guarantor?”).

The article prompted a thoughtful response from Josh Gotbaum, the director of the PBGC. His response follows, along with my additional comments:

The Pension Benefit Guaranty Corporation, which guarantees the pensions of more than 40 million Americans, has had a financial deficit for over a decade.

PBGC pays pensions when bankrupt companies can’t afford them. Recently, some analysts decided that PBGC itself will become bankrupt and that taxpayers will end up footing the bill. Alex Pollock, a fellow at the American Enterprise Institute, notes accurately that PBGC was intended to be self-financing yet has a $26 billion deficit, and despairs that both the death of traditional pensions and the bankruptcy of PBGC are inevitable. Mr. Pollock writes, “A financial way out for the PBGC is not apparent and none is being proposed.”

As one who’s spent the last two years running PBGC, working both to put its finances in order and to preserve pensions, let me respectfully disagree.

For starters, let’s be clear: A taxpayer bailout is not our agenda. PBGC has never taken a dime from taxpayers and we want to keep it that way.

PBGC funds come from premiums paid by the pension plans we insure (and from recoveries from the plans we take over). However, Congress sets those premiums, not PBGC—and it has set them too low. From time to time, Congress raises the premiums—it did so again last month—but always bows to pressure to keep them low. If Congress keeps this up, Mr. Pollock will be right: PBGC eventually will either get a taxpayer bailout or, if not, go bankrupt.

But that’s a path we can avoid. There is a way out, and the administration proposed it over a year ago: Let PBGC, not Congress, set premiums. Let PBGC do it on a businesslike basis—based on each company’s actual risk. That's the way it’s done by the FDIC, by other government insurance programs, and by virtually every private insurance company on the planet.

Of course, it’s no surprise that businesses pressure Congress to keep premiums artificially low. They’d rather leave the taxpayers holding the bag. And, thus far, the Congress has played along.

Businesses claim that if they had to pay fair premiums, they would drop their plans and couldn’t afford to stay in business. A little arithmetic shows how silly this is: Last year PBGC premiums represented about 3% of all pension costs. (Does anyone think auto insurance is only 3% of the cost of owning a car?) Pension costs themselves are about 3% of average labor costs. Put those together and PBGC premiums represent about one-tenth of one percent of labor costs. Even if they were tripled, the effect on American industry’s costs and competitiveness would be negligible.

So, rather than ignoring our efforts to reform PBGC’s finances, I hope Mr. Pollock will join them. Millions of retirees will thank him. Millions of taxpayers, too. Including me.


Josh Gotbaum, Director
Pension Benefit Guaranty Corporation

I appreciate Mr. Gotbaum’s letter and salute his efforts to increase the revenues of the PBGC. He and I agree on the sharp irony that “self-financing” has created a $26 billion deficit. He is right that PBGC has not so far taken any cash from the taxpayers, but it is still financially dependent on them. No entity would be allowed to continue operating with such a huge deficit net worth if it were not guaranteed by somebody else—in this case, the taxpayers. Of course, this guaranty is “implicit,” just as it was for Fannie Mae and Freddie Mac. We all know that when financial push comes to shove, “implicit” government guarantees turn into explicit taxpayer costs. Mr. Gotbaum and I agree on this risk.

Also, I fully agree with Mr. Gotbaum that PBGC’s premiums should be raised to economically and actuarially sensible levels. As he suggests, this would be politically unpopular, and, in my opinion, it would speed up the inevitable continuing decline of defined-benefit pension plans—but it is a good idea nonetheless.

Deposit insurance may not be a good model for the PBGC to cite. One big federal deposit insurance fund—the Federal Savings and Loan Insurance Corporation (“FSLIC”)—went broke in 1989, as many state deposit insurance programs did historically. FSLIC was meant to be self-financed by insurance premiums, but it cost the taxpayers $150 billion. As a result of that experience, the FDIC is now formally guaranteed by the government, as you can see by checking the FDIC sticker at any bank teller window. It says: “Backed by the full faith and credit of the United States government.” I don’t believe the PBGC wants to ask Congress for that.

Alex J. Pollock is a resident fellow at the American Enterprise Institute.

FURTHER READING: Pollock also writes “The Pension Benefit Guaranty Corporation: Who Will Guarantee This Guarantor?,” “Who Knew When about the LIBOR Problems?,” and “Would You Settle Your Claims on Social Security for 80 Cents on the Dollar? (I Would).” Andrew G. Biggs contributes “Understanding the True Cost of State and Local Pensions” and “Public Sector Pensions: How Well Funded Are They, Really?


Image by Dianna Ingram / Bergman Group

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