NCPA - National Center for Policy Analysis


March 27, 2008

News that the Pension Benefit Guaranty Corporation will diversify its portfolio to include more equities ought to concern taxpayers, says the Wall Street Journal.  The PBGC is a quasi-government agency -- a "federal corporation" -- created in 1974 to guarantee pension benefits for U.S. workers and retirees.  By the end of last year, the agency had amassed a $14 billion deficit, and the new policy is designed to erase that red ink with higher investment returns.

Charles Millard, the agency's director, says PBGC has some $55 billion to invest under the new strategy:

  • His plan, which deviates from a policy adopted in 2004 that favored duration-matched bonds, will allocate 45 percent to diversified equity investments.
  • Another 10 percent will go toward "alternative investments" that will be split between real-estate and private equity.
  • Last year, equity plays were only 28 percent of PBGC's portfolio.

Some equity exposure makes sense to hedge against longevity risks.  The issue here is whether it's prudent to start making larger bets that could prove costly if the agency guesses wrong.  Millard says the new policy is less risky than the old one because it has a lower standard deviation.

But as Zvi Bodie of Boston University has noted, while more exposure to equities might be less risky over time, the extent of any potential shortfall increases.  The fact remains that the PBGC guarantees pensions of the weakest companies -- those with little incentive to fully fund their plans because they can always be dumped on PBGC.

There's also the problem of the government owning significant portions of the private sector.  At one point a few years back, PBGC had 25 percent of United, 15 percent of Delta and 15 percent of Kaiser Aluminum.  The last thing Americans should want is government owning huge chunks of corporate America, because with ownership eventually comes control, says the Journal.

Source: Editorial, "Uncle Sam Stocks Up," Wall Street Journal, March 26, 2008.

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