Study Predicts Federal Pension Agency May Become 'Next Big Bailout,' Despite Recent Market Upturn 8/18/2003
From: Pete Sepp or Maureen Tell, 703-683-5700; both of the National Taxpayers Union ALEXANDRIA, Va., Aug. 18 -- As a heated debate looms this fall over White House proposals to reform pensions administered by private corporations, a study released today from the non-partisan National Taxpayers Union Foundation (NTUF) urges policymakers not to overlook the flawed pension insurance administered by a quasi-public agency they created. "The Pension Benefit Guaranty Corporation (PBGC) may be less than 30 years old, but the policy assumptions that created it are already a century behind the times," said NTUF Associate Policy Analyst and study author Alex Pagon. "Americans deserve a pension oversight system that reflects the changing workplace." Congress originally chartered the PBGC in 1974 to ensure that workers would receive a portion of their promised retirement benefits even if their employer went bankrupt or terminated their pension plan. But Pagons well-illustrated examples show that today the agency is on the brink of self-destruction. PBGC's 2003 losses are estimated to exceed its assets by 138 percent ($35 billion vs. $25.43 billion). To address this dire situation, Pagon makes several recommendations: -- Correction of PBGC's Pricing Should Better Reflect Risks. Current insurance premiums ($19 per pension participant, plus a small charge on underfunded plans) don't adequately reflect the differences in risks taken by plan managers. In response, well-run firms are justifiably switching the type of pension they offer to avoid paying for other companies' poor judgment. In spite of recent improvements in asset prices among "pension-heavy" manufacturing firms, taxpayers are still left with the prospect of future bailouts (the government-chartered corporation carries an implicit federal guarantee, and most plans in the Standard & Poor's 500 remain underfunded). -- Conversion to Defined Contribution Plans Could Ease Long-Term Fiscal Pain. Today's worker will change jobs several times during his or her lifetime, making "defined benefit" plans less practical than more portable and flexible "defined contribution" arrangements (like 401 (k) plans). Eliminating the PBGC "risk subsidy" could help to end a market distortion that may be dissuading some employers and employees from making the retirement benefit choice that best suits their individual circumstances. -- Competition Must Be Brought to Pension Insurance. In other areas of insurance (such as home and auto coverage) healthy market-based pricing has increased consumer choice and minimized risks to taxpayers. The modern insurance industry is likewise capable of underwriting pension risks, and freeing the federal government from an outdated, unnecessary obligation. In his study, Pagon acknowledges the pioneering work of James Smalhout, who coined the terms "correction" and "conversion" in his 1996 book, The Uncertain Retirement. Prior to that time, Smalhout served as a senior-level analyst with NTUF on retirement issues. "A resolution of PBGCs conundrum may not be as easy as "A-B-C,'" Pagon concluded. "But remembering the "Three Cs" of correction, conversion, and competition is sure to save tax dollars and give policymakers a valuable economics lesson to boot." NTU Foundation is the research arm of the 350,000-member National Taxpayers Union, a citizen organization founded in 1969 to work for limited government. Note: NTUF Policy Paper 143, The Next Big Bailout? How Underfunded Pensions Put Taxpayers at Risk, is available online at http://www.ntu.org LINK: http://www.ntu.org/taxpayer_issues/ntuf_policy_ papers/ntuf_pp_142.php3 |