Avoiding another Bailout

March 14, 2011

In recent months, there has been substantial and growing attention to underfunding in state and local government pension plans.  There exists a similar (though smaller) set of financing risks in the employer sponsored pension plans covered by the Pension Benefit Guaranty Corporation (PBGC), the federally chartered corporation established to insure employer-provided pension benefits.  Here, too, public policy corrections are required to address underfunding and to contain the risk of a taxpayer-financed bailout, says Charles Blahous, a research fellow at the Hoover Institution.

  • PBGC's latest annual report shows a net negative financial position for its insurance programs of more than $23 billion, of which roughly $21.6 billion is attributable to the PBGC's single-employer insurance program.
  • PBGC's estimate of its exposure to reasonably possible terminations of such plans is approximately $170 billion.
  • While these figures may appear small relative to the large potential losses in state and local plans, percentage underfunding in employer-provided plans is nearly comparable.

As with state and local pension plans, the choices arising in the employer-provided pension system are relatively simple and stark.  Three options for pension insurance reform are:

  • Empower the PBGC with the tools necessary to fill the shortfall in the national pension insurance system.
  • Eliminate the PBGC and replace it with compulsory private insurance that would charge market rates to participants.
  • Unless and until the federal government requires that the PBGC's financing risks be resolved via the two options above, treat the shortfall for federal budgetary purposes as an obligation facing U.S. taxpayers.

Source: Charles Blahous, "Options for Avoiding a Taxpayer Bailout of the PBGC," Mercatus Center, March 2011.

For text:

http://mercatus.org/sites/default/files/publication/PBGC.Blahous.3.7.11.pdf

 

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