Borrowing from the Future: Our Federal Treasury Runs Out of Cash

If you knew someone who was withdrawing money from her retirement accounts in order to pay back debt, how would you describe her financial situation?

Well, that’s pretty much what’s happening with our federal finances, since the government has begun to dip into pension funds in order to avoid exceeding the $8.184 trillion debt limit. Treasury Secretary John W. Snow wrote a letter to Congress warning them of the situation.

Congress plans to increase the debt limit in mid-March, but until then, the treasury must borrow from the Government Securities Investment Fund, a part of the federal retirement system.

This isn’t the first time it’s happened, and in the past, the retirement fund has been paid back in full plus interest.

While Congress knows that raising the debt limit is not the solution to this serious financial problem, it is a common quick fix. After the next increase, the debt limit will have grown by $3 trillion since President Bush took office.

More pension problems

The days of retiring with a company pension seem to be long gone, with the few companies that offer pensions often going bankrupt in the process.

The recent bankruptcies of Delta Airlines Inc. and Northwest Airlines Corp. are prime examples. And when companies terminate their pension plans it adds billions to the deficit of the federal agency that insures private pension plans, the Pension Benefit Guaranty Corporation (PBGC).

What’s the PBGC?

The Pension Benefit Guaranty Corporation covers retirement pensions that companies can no longer afford to pay to employees. The agency is considered "high risk" by the General Accounting Office because of its record deficit of about $30 billion.

But some say the estimated PBGC deficit is inflated. The American Benefits Council, an organization that represents corporations, says that the PBGC should be using higher interest rates when estimating liabilities. According to an American Benefits Council report released September 23, 2005, the PBGC interest rate assumptions are "unnaturally low," and using a higher interest rate could lower the estimated deficit to $14.3 billion or even $4.6 billion.

The Center on Federal Financial Institutions, a non-partisan public policy organization that focuses on the federal government’s lending and insurance activities, holds a different point of view. The Center’s president, Doug Elliot, says that the exact amount of the current deficit matters little if the PBGC is going to lose between $60 - $120 billion over the next 20 years, as a recent Congressional Budget Office report suggests.

These numbers have lawmakers scrambling.

Legislation

In the Senate, Republican and Democratic lawmakers cooperated to create a bill that would ease the strain on the PBGC (the taxpayers) and encourage companies to invest more in their pensions.

Finance Committee Chairman Charles E. Grassley of Iowa (R) and Michael B. Enzi of Wyoming (R) worked with Max Baucus of Montana (D) and Edward M. Kennedy of Massachusetts (D) to create a bill that passed in the Senate.

The legislation would require companies to fund their plans 100 percent instead of taking money out of pension funds and "smoothing" it over. "Smoothing" is a term critics use to refer to an accounting technique that hides the true amount in the pension funds.

The Senate bill would require companies to be measured according to the quality and safety of their bonds, or bond ratings. Companies with low bond ratings would be required to put more money into their pension funds and companies in bankruptcy would not be allowed to increase their retirement benefits.

Further, the bill requires companies to pay a higher insurance premium to the PBGC. The rate would be $30 per year per participant, up from $19. Lawmakers hope that this extra revenue will loosen the budget and prevent drastic cuts.

Problem with conference committee

The spirit of bipartisanship faded when Democrats and Republicans battled over the committee that would work out the differences between the House and Senate versions of the bill, called a conference committee.

Although Republicans have the power to stack the numbers in their favor, in this case 12 senators - seven Republicans and five Democrats - the minority can refuse to participate and therefore block negotiations.

Senate Minority Leader Harry Reid (Nev.) insisted that another Democrat be included, and Majority Leader Bill Frist (Tenn.) counter-offered a group of fifteen conferees, with nine Republicans and six Democrats.

At the time of this posting, they had not yet come to an agreement.

Broader context

The disappearance of pensions will require this generation of workers to save and plan for their retirement, and they will not be able to live off of retirement insurance policies like Social Security.

Requiring individuals to take care of their needs in this way is part of the Bush administration philosophy. From this point of view, a market-based social security system and health care system are the way to go. During the week of February 13, 2006, President Bush traveled the country promoting his health savings accounts, which would require families to buy catastrophic health care coverage and then put money away in a separate savings account for health care costs.

Democrats argue that most families can’t afford this plan, but the Bush administration and many Republicans believe that it will empower families to shop for their own health care plans and so drive down health care costs.

What is the government’s role in helping people to retire and have access to health care? Should retirement and health insurance be tied to the market, which may drive down prices? How do you feel about borrowing from the federal retirement program to pay the bills? What about raising the debt limit?

Your input matters

Your representatives in Congress DO care what you think. Especially now -- 2006 is an election year and many representatives will be looking to reconnect with their constituents. Let your congressmen and women know what you think! Give your senators a piece of your mind! To find your reps, click here.

About WomenMatter

WomenMatter is a place to discuss life issues with other women. We don’t want to wedge women apart, but rather bring them together to dialogue. To participate in our blog, click here.

WomenMatter is the place where we can take one issue at a time, match what we do about it every day of our lives to the facts of the bigger system that we all live in and recognize that every idea for making it better has tradeoffs.

WomenMatter is dedicated to empowering women to participate in the political process. To do this we have invested in the most in-depth NONPARTISAN information, because we trust each woman to make up her own mind.

• We track nine issues every week and update this website several times a week.
• We launch after school GirlsMatter Clubs in middle and high schools to grow the next generation of politically aware women through a full curriculum and startup kit on girlsmatter.com.
• We do continuous research to make sure that we are meeting the needs of women across the country of all ages, races, incomes, preferences, and religions.

We offer all our services free of charge without memberships or subscriptions. To help us maintain this work - not just in election years but as a continuing part of women’s lives - please make a tax deductible donation , click here.

Article Posted on: 2/19/2006