NCPA - National Center for Policy Analysis

Private Pensions, Public Guarantees

June 25, 2003

The Pension Benefit Guaranty Corp. (PBGC) is another one of those quasi-government agencies with an implicit claim on tax dollars. The PBGC insures the defined benefit pensions of 44 million people. It is bleeding red ink, although its declining finances have not reached a crisis, according to the Wall Street Journal.

The PBGC is funded by premiums paid by covered companies and is supposed to ensure that workers will receive benefits from their pension plan if their employer goes bankrupt.

Pension liabilities are long-term and fixed, but pension plans are heavily invested in stocks, which are volatile in the short run. As a result:

  • Where the PBGC had a surplus of $7.7 billion one year ago, today its deficit is $5.4 billion.
  • Companies have been either opting out of the system or have decided not to start defined-benefit pensions (opting instead for 401(k)s and other defined-contribution plans).
  • The underfunded pensions of bankrupt steel, airline and retail companies have ended up with the PBGC, increasing its liabilities -- but its income from insurance premiums declined last year to the lowest since 1991.
  • Total company underfunding of pension plans is now more than $300 billion.

The PBGC is an example of "moral hazard." In insuring private pension plans, the agency is writing an implied taxpayer guarantee. Benefits of insured plans can be increased as long as a plan is at least 60 percent funded. Troubled companies increase pension benefits instead of wages because the cost of a wage increase is immediate, while the cost of benefits can be deferred for 30 years and ultimately passed on to the PBGC.

Thus, if healthy companies leave the PBGC, and it is left with only bankrupt pension plans, taxpayers will end up footing the bill.

Source: Editorial, "A Pension 'Guaranty,'" Wall Street Journal, June 25, 2003.

For WSJ text (requires subscription),,SB105650038150991900,00.html


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