The Pension Benefit Guaranty Corporation: Who Will Guarantee This Guarantor?
Monday, June 25, 2012
The law requires that the PBGC ‘be self-financing.’ So far, the PBGC has ‘self-financed’ itself into a $26 billion hole.
Defined-benefit pension plans are very difficult to finance successfully: That is why so many of them, both private and public, are deeply underfunded. It is also why they are a disappearing financial species. General Motors, though it went through a government-directed bankruptcy, still had unfunded pension liabilities of $25 billion at the end of 2011, and has announced that it hopes to eliminate defined-benefit plans for all current salaried employees this year.
That they are “deeply underfunded” means that the liabilities of the pension plans greatly exceed their assets. One subgroup of these plans, the union-sponsored “multi-employer” plan, has liabilities $369 billion greater than its assets, according to a recent estimate by Credit Suisse. The excess liabilities of the 100 largest corporate (“single employer”) plans are estimated at $357 billion by the actuarial firm Milliman.
So here was a “big idea” of a half century ago: Let’s have the government guarantee these pension plans!
Despite the PBGC’s and Fannie’s statements, all market participants and politicians know that the Treasury will always bail out such government-sponsored adventures in financial risk-taking.
This idea was developed in Detroit by Nat Weinberg of the United Auto Workers in 1961 and was pushed for years by Senator Philip Hart of Michigan. It was enacted into statute in 1974 with the creation of the Pension Benefit Guaranty Corporation (PBGC). Politically, it was a brilliant idea, especially if you wanted to negotiate pensions which companies could not afford. Financially, it was a less good idea: The PBGC itself has a negative net worth of $26 billion as of its year-end report on September 30, 2011.
As the PBGC’s annual report says, the law requires that the PBGC “be self-financing.” So far, the PBGC has “self-financed” itself into a $26 billion hole.
The report further notes that the act “provides that the U.S. government is not liable for any obligation or liability incurred by PBGC.” Surely nobody believes that one. It is an exact analogy to Fannie Mae’s statement, one month before it failed in 2008, that “the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.” The government has since shipped $116 billion of the taxpayers’ money to Fannie Mae. But of course, the government did not guarantee Fannie, directly or indirectly!
Despite the PBGC’s and Fannie’s statements, all market participants and politicians know that the Treasury will always bail out such government-sponsored adventures in financial risk-taking. It is simply too politically useful to the government to be able to claim it is not obligated, although in fact it is. Then Congress can continue to set up such off-balance sheet, off-budget risk vehicles to satisfy various political desires. If the government ever did let even one such vehicle fail, their political usefulness would end—so none will ever be allowed to fail. But of course, like Fannie Mae, they are not guaranteed! This situation requires a nuanced, Washington appreciation of the answer to the question, “What is truth?”
General Motors, though it went through a government-directed bankruptcy, still had unfunded pension liabilities of $25 billion at the end of 2011, and has announced that it hopes to eliminate defined-benefit plans for all current salaried employees this year.
To test the government’s purposeful ambiguity on this point, think about whether one could amend the PBGC chartering act to replace the flexible notion that “the U.S. government is not liable for any obligation of the PBGC,” with this: “The U.S. government is prohibited from providing any funds, directly or indirectly, to protect the creditors or beneficiaries of the PBGC.” The latter would be clear and would definitively take the taxpayers off the hook. It would therefore be very unpopular with all those who wish to rely on the taxpayers while claiming they are not, considering they are in a hole $26 billion deep.
The PBGC’s financial risk has two parts: Its guarantee of individual companies’ defined-benefit pension plans, the “Single-Employer Program,” and its guarantee of union-sponsored defined-benefit pension plans involving multiple companies—the “Multi-Employer Program.” The PBGC annual report admits in a carefully written sentence that “neither program at present has the resources to fully satisfy PBGC’s long-term obligations.”
The Single-Employer Program’s deficit is bigger, about $23 billion versus $3 billion, but the downward slope of the Multi-employer Program’s trend line is worse. The accompanying graphs show the ten-year trends for each program. They don’t look hopeful.
When multi-employer pension plans run out of money, the PBGC makes them “loans” so they can keep operating, paying out pensions and administrative costs. This “usually occurs after all contributing employers have withdrawn from the plan.” Since it is “lending” to insolvent entities, as the PBGC says, “these loans are not generally repaid.” They are therefore fully reserved against when made—in short, they are simply payments, not loans. “We expect the number of insolvent multi-employer plans to more than double over the next five years,” the PBGC says.
The economic and demographic trends do not favor the defined-benefit pensions that the U.S. government chose to guarantee when it enacted Nat Weinberg’s idea. The result is the PBGC’s growing deficit problems, which can be expected to continue. A financial way out for the PBGC is not apparent and none is being proposed. Who therefore has the risk? You do, dear taxpayer.
Alex J. Pollock is a resident fellow at the American Enterprise Institute.
FURTHER READING: Alex J. Pollock also writes “Would You Settle Your Claims on Social Security for 80 Cents on the Dollar? (I Would),” “How Much Have House Prices Really Fallen?” and “Fearful Symmetry: Six Decades of Treasury Yields.” Andrew G. Biggs adds “Public Pension Stimulus Nonsense” and “Public Sector Pensions in Nebraska.” Alan D. Viard and Alex Brill contribute “The Big Lie at the Heart of the Highway Bill.”
Image by Darren Wamboldt / Bergman Group