NCPA - National Center for Policy Analysis

The Private-Sector Pension Predicament

December 12, 2011

Recently there has been substantial attention paid to underfunding in state and local government pension plans, a longstanding problem made more urgent by recent troubles in the larger economy.  There has of yet been comparatively less attention given to a similar (though smaller) set of mounting financial risks associated with private-sector worker pensions covered by the Pension Benefit Guaranty Corporation (PBGC).  Yet here, too, public policy corrections are required to address underfunding and avoid another taxpayer-financed bailout, says Charles Blahous, a research fellow at the Hoover Institution.

  • PBGC's latest annual report shows a net deficit of over $23 billion.
  • The PBGC estimates its exposure to reasonably possible plan terminations at approximately $170 billion.
  • The funding gap in the PBGC's finances is not due entirely to the recent economic downturn, as its deficits have amounted to more than $10 billion in each year since 2003.
  • PBGC's multiemployer program is also presenting increased risks: in 2010, "reasonably possible" exposure in multiemployer plans suddenly rose from roughly $300 million to approximately $20 billion.

These pension plans have continued to be chronically underfunded for years, and the result is a significant budget gap that persists and grows as years pass.  This pattern has been allowed to go on for so long because a number of factors have prevented the implementation of corrective measures.

  • Because asset values have traditionally been blended with previous years' levels, the loss of assets has not been realized until a substantial amount of time has passed.
  • Pension funding liabilities have been regularly underestimated as accountants fail to account properly for the number of beneficiaries and the amounts that they will withdraw.
  • Volatility in interest and yield rates complicate accounting efforts to convert dollar amounts into present value.
  • Loopholes in the recent 2006 Pension Protection Act allowed and encouraged underfunding by permitting certain contributions to be double-counted.

The PBGC's gross underfunding and potential for insolvency requires greater independence from government regulation such that the organization can resolve its own shortfalls.  It is imperative that such a policy of autonomy be paired with requirements for greater transparency, as the potential sources of moral hazard in this regard cannot be ignored.

Source: Charles Blahous, "The Private-Sector Pension Predicament," Hoover Institution, December 1, 2011.

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