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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)