PBGC

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
  cant pay and pension trust is underfunded
• PBGC does not cover everything
• Cap on participants annual pension
• No early retirement subsidy
• Phase-in of recent benefit improvements

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

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

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

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
• COFFIs 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

7
CBO Study Is More Pessimistic

• CBOs 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

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

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
• PBGCs 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

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

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