NCPA - National Center for Policy Analysis

(IM)MORAL HAZARD

May 12, 2005

The Pension Benefit Guaranty Corp. is headed for a spectacular bankruptcy following United Airlines' decision to terminate its retirement plan and leave the $6.6 billion burden to the PBGC. That's why the agency was created: to bail out private pension plans that can't make good on their obligations, says Investor's Business Daily (IBD).

US Airways also is in bankruptcy, and it too has dumped $3 billion in retiree obligations on the PBGC. Delta threatens to drop its plan as well. A host of steel companies have already done so. Could General Motors and other automakers be next?

PBGC's deterioration under the onslaught of collapsing private retirement plans is alarming, says IBD:

  • Last year it ran $23 billion in the red, nearly double its loss of a year earlier. This year, the deficit will likely be even worse.
  • Just five years ago, PBGC ran a surplus, but 9-11, a recession and bad decision-making by corporate investment managers undercut all that.
  • Today, private pension funds owe some $450 billion more to their retirees than they can pay.

There is a lesson here and it pertains to Social Security reform, says IBD. With $13 trillion in unfunded liabilities, Social Security's problems dwarf PBGC's. Yet, it's pretty much the same deal: Workers have been promised everything, but there's not enough money to pay for it all.

Workers whose retirement plans are taken over by the PBGC see retirement benefits slashed by as much as 50 percent. The same thing will happen to today's workers in Social Security, says IBD.

Letting workers invest Social Security taxes in private accounts -- ones they actually own, with real money in them -- would guarantee they don't end up like the unfortunate employees of United, says IBD.

Source: Editorial, "(Im)moral Hazard," Investor's Business Daily, May 12, 2005.

 

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