PBGC & Pension Reform

1. PBGC & Pension Reform Douglas J. Elliott President Center On Federal Financial Institutions August 9, 2006

2. 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)

3. 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)

4. 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)

5. 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)

6. 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)

7. 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)

8. 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)

9. 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)

10. 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)

11. 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)