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PBGC & Pension Reform. Douglas J. Elliott President Center On Federal Financial Institutions August 9, 2006. What is PBGC?. Pension Benefit Guaranty Corporation insures credit of private DB pension plans

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Pbgc pension reform

PBGC & Pension Reform

Douglas J. Elliott


Center On Federal Financial Institutions

August 9, 2006

What is pbgc
What is PBGC?

  • Pension Benefit Guaranty Corporation insures credit of private DB pension plans

  • PBGC picks up pension obligation only if company can’t pay and pension trust is underfunded

  • PBGC does not cover everything

    • Cap on participant’s annual pension

    • No early retirement subsidy

    • Phase-in of recent benefit improvements

COFFI (www.coffi.org)

There are two programs
There Are Two Programs

  • PBGC runs two distinct programs

    • Single-employer, with 34 million participants

    • Multiemployer, with 10 million participants

  • PBGC provides much less coverage for multiemployer plans

    • Annual caps are much lower

    • Employers share joint & several liability

  • I will focus today on Single-employer

COFFI (www.coffi.org)

Pbgc is deep in hole financially
PBGC is Deep in Hole Financially

  • PBGC owed $23 billion more than value of its assets in 2005

  • “True” number could be higher or lower

    • Discount rate matters a lot

    • “Probable losses” have a subjective element

  • But, no one appears to believe PBGC is solvent as it stands now

COFFI (www.coffi.org)

Cash could run out by 2022
Cash Could Run Out by 2022

  • PBGC has plenty of cash and investments to pay claims for many years

  • But, cash should run out years before pensions are fully paid out

  • COFFI has only publicly available cash flow model for PBGC

  • Our base case estimate is that cash runs out by 2022, under current law

COFFI (www.coffi.org)

Deficits could get much worse
Deficits Could Get Much Worse

  • There is a structural imbalance between premiums and risks

  • Most optimistic academic study found premiums covered half of historical risk

  • COFFI’s base case estimate is that PBGC would need a $92 billion rescue, in 2005 dollars, to cover next 75 years of operation, under current law

COFFI (www.coffi.org)

Cbo study is more pessimistic
CBO Study Is More Pessimistic

  • CBO’s model shows premiums do not nearly cover risk of next 20 years

  • Private insurer would demand $142 billion to cover existing deficit and expected losses from next 20 years of operation

  • Even without a $64 billion risk factor to reflect private sector nature, insurer would charge $78 billion through 2025

COFFI (www.coffi.org)

Congress just passed pension reform
Congress Just Passed Pension Reform

  • Core goal is to reduce structural problems

    • Funding rules would be tightened to reduce size and frequency of future claims on PBGC

    • Benefit increases would sometimes be disallowed

    • PBGC variable premiums would be increased

  • There is debate on extent to which actual bill met these objectives, due to various compromises, multi-year transition periods, and special provisions for particular industries

COFFI (www.coffi.org)

Pension reform is very hard
Pension Reform is Very Hard

  • The two key goals are in serious conflict

    • Avoidance of taxpayer bailout of PBGC

    • Encouraging firms to keep offering DB plans

  • PBGC’s finances cannot be helped without shifting cost and risk back to employers

  • Yet, many employers are already uncertain DB plans are worth the costs and risks

  • Striking the balance is hard and subjective

COFFI (www.coffi.org)

Bill is unlikely to restore pbgc solvency
Bill Is Unlikely To Restore PBGC Solvency

  • COFFI analysis of earlier bills suggested base case need for $92 billion bailout would be reduced to $40-50 billion

  • I now believe that a better estimate would be $60 billion

  • In any event, only extremely favorable financial market conditions would eliminate deficit, even with this new law

COFFI (www.coffi.org)

Coffi has 23 reports on pbgc
COFFI Has 23 Reports on PBGC

  • Please see www.coffi.org

  • The New York Times highlighted those materials as “refreshingly understandable” and “without a hint of dogma or advocacy”

  • We also run a PBGC Listserv

COFFI (www.coffi.org)