Jobs, Taxes & Benefits

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Pension Promises: Federal Pension-Insurance Agency Faces Huge Deficit

On July 30, 2003, WomenMatter reported that the General Accounting Office labeled the federal agency that insures corporate pension plans, called the Pension Benefit Guaranty Corporation (PBGC), to be at "high risk."

The risk is now a reality. In October 2003, the PBGC reported an $8.8 billion deficit. Some consider this to be an emergency, while others do not. The PBGC website claims that "about 44 million American workers and retirees can rest assured that they have a guaranteed pension for life even if their employer goes out of business or their pension plan runs out of assets." This promise may no longer be substantiated.

Pension crisis?

Those who consider the PBGC deficit to be a crisis explain that U.S. pension liabilities exceed assets by $350 billion. In other words, $350 billion worth of defined - benefit corporate pensions are not securely insured.

The PBGC’s financial instability is the fault of the poor economy. The agency is funded by employer-paid premiums, some of which are invested. Returns on these investments provide an important portion of the PBGC’s revenue. So, a dipping stock market makes the PBGC unstable.

The stock market is to blame for another reason. Three years of losses have hurt corporate pension plans’ investment portfolios, so more corporations are struggling to afford promised pensions.

In addition, bankruptcies in the airline and steel industries have taken their toll on the PBGC. The agency’s director, Steven A. Kandarian, explains that the claims for 2002 were larger than all previous years’ claims combined.

Ok for now?

The spokesperson for the American Benefits Council explains that the PBGC has overreacted. The agency has the money to meet claims for the next several years. Although problems may arise in the future if corporations continue to struggle or go bankrupt, the Council remains hopeful, and is banking on, an economic rebound.

Who would be affected?

If the PBGC were unable to cover its plans, those with corporate defined-benefit pensions would be affected. Defined-benefit pensions are traditional plans that promise workers a specific monthly benefit at retirement. The amount of the benefit is known in advance, usually based on factors such as age, earnings, and years of service. Defined contribution plans and 401(k)s are not covered by such insurance, and therefore would not be affected.

Only about 20% of Americans are covered by defined-benefit pensions, but if the PBGC were to go under, we would all be impacted. Although a last resort, taxpayers are ultimately responsible for the PBGC guarantees. We all share each other’s risk. That is what insurance does.

What is being done?

Since not everyone agrees that this issue needs immediate attention, there is no legislation that restructures the PBGC. There are also basic philosophical differences.

There are several bills in the works that affect pensions in general, such as the Portman-Cardin bill, which changes regulations for pensions. This bill actually drains the federal reserve of tax dollars that may be needed to protect pensions. However, it encourages workers to save for retirement themselves, and makes the statement that we should not rely on government or our employers for help with retirement.

Is this the best system?

In general, companies fund their pension benefits through investment returns. Therefore, pensions are tied to the stock market. So, market losses mean pension losses and market gains mean pension gains. Is this the best system?

The Philadelphia Inquirer reports that 3.3 million workers have lost pension coverage since 2000. This figure includes lost defined-benefit and 401(k) plans by those still working and by those who lost their jobs. Many employers have dropped retirement benefits because of market losses.

Patrick Purcell, the pension issues specialist at the Congressional Research Service, claims that baby-boomers may face a difficult retirement: "neither Social Security nor the private pension system nor personal savings are as strong as one would desire."

To read more on this issue, click here. To discuss jobs, taxes, and benefits with other WomenMatter readers, click here. To contact your representatives and let them know what you think, click here.

Article Posted on: 10/29/2003

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