Trouble seen for corporate pensions and U.S. agency
Benefits are woefully underfunded, and a watchdog says the federal insurer is at a "high risk" of failure.
WASHINGTON - State and local government pensions aren't the only retirement funds in trouble.
Corporate pensions, too, are woefully underfunded, and the federal agency that insures them against losses is facing a dangerous deficit that taxpayers may end up covering.
One government watchdog agency says the federal insurance program is at "high risk" of failure. Moreover, the Obama administration's proposal to fix this is meeting stiff resistance from the U.S. Chamber of Commerce and other business interests.
The federal Pension Benefit Guaranty Corp. operates two programs that together insure roughly 27,500 corporate defined-benefit pensions, covering 44 million U.S. workers. Defined-benefit plans, popular in the public sector but increasingly rare in the private economy, promise workers fixed monthly retirement income, often equivalent to a final year's salary or an average salary over the last few years of work.
The PBGC insures both single-employer plans offered by, say, a large manufacturer, and multiemployer plans, where many companies in a given industry collectively sponsor retirement plans.
As of Sept. 30, single-employer plans had promised more than $121 billion in benefits to retirees but had assets to pay out only $99.4 billion, leaving a deficit of $21.6 billion. Multiemployer plans held assets valued at $1.6 billion to cover $3 billion in promised benefits, putting them in the red by $1.4 billion.
When a corporation fails, the PBGC takes over its defined-benefit pension plan. The cost of paying the plan's beneficiaries is supposed to be covered by premiums collected from businesses insured under the federal program.
But the 2007-09 recession weakened the system in two ways:
More companies failed and turned over their liabilities to the PBGC. In fiscal 2009 alone, the agency became responsible for an additional 200,000 workers.
Interest rates have been at all-time lows for more than two years, dragging down the rate of return on bonds. Since many corporate pension funds are heavily invested in bonds, rates of return on bonds are used to estimate the value of assets in the plans. The protracted low interest rates have increased the gap between what plans have promised and the value of the plans' investments to cover the promises.
Here's another reason for worry: The PBGC's estimate of "reasonably possible" exposure to failing multiemployer plans soared to $20 billion last year from $326 million in 2009. The same exposure for single-employer plans rose to $170 million in 2010, up only slightly from $168 million a year earlier.
The PBGC says not to worry.
"Because our obligations are paid out over decades, we have more than sufficient funds to pay benefits for the foreseeable future," Joshua Gotbaum, director of the PBGC, said in Senate testimony in December.
However, in a report to Congress in December, the Government Accountability Office designated both PBGC insurance programs as at a "high risk" for failure. The GAO said that even if financial markets rise in value and lift investments made by pension plans, the PBGC is "likely to remain at financial risk" because of a structural issue.
The problem is that the agency lacks authority to raise premiums on its own. Historically, Congress has raised premiums so the PBGC could adequately insure against losses.
In its budget released last month, the Obama administration proposed giving the PBGC authority not only to raise premiums, but also to set them at different rates, depending upon how the agency assessed the risk of any given insured company. That would mirror a decades-old approach that the Federal Deposit Insurance Corp. takes with banks, setting premiums based on what it determines is a bank's risk of failure.
That's important, because current PBGC premiums spread the cost among all participants but effectively allow irresponsible companies to be subsidized by responsible ones.
One key obstacle to the administration's PBGC plan is the U.S. Chamber of Commerce, the powerful and influential lobby for American business, especially with Republicans in Congress. Aliya Wong, the chamber's executive director of retirement policy, said having the government determine which companies were most at risk would be an undue interference in the marketplace.