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What's the size of the PBGC's deficit?


Guest Blueglass

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Guest Blueglass

I heard a rumor from a coworker that the PBGC has over a billion dollar deficit, is this true, or is he/she way off base? If so, any articles on how they plan on resolving the problem?

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Guest dsyrett

This information is available to the Public and you could probably find the figure by looking around (eg., check the PBGC web site). My recollection is that the figure is between $5 billion and $10 billion as puiblished within the last 6 months. Things may have actually improved since then.

This is a cyclical issue; their position was a surplus of roughly this amount a few years ago.

The culprit is collectively the downturn in the Ecomony, Sept 11, stock market downturn and historically low interest rates.

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Actually, the deficit is worse, but 2003 has been a pretty difficult year for plan terminations.

You can read the PBGC’s 2002 Annual Report here:

http://www.pbgc.gov/publications/annrpt/02annrpt.pdf

In this October 14, 2003 testimony before Congress, http://www.pbgc.gov/news/speeches/testimony_101403.htm

the PBGC described its funded status. The most recent estimate at 08/31/2003 is a deficit of $8.8 billion in the single-employer fund.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • 1 month later...

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Actually, the decline in interest rates created half of it this year. Over 4 billion is because they decreased their interest assumption on the liabilities.

34 billion assets, 45 billion liability in single employer program

I also think they include near-term "probable" terminations in their liabilities. This is a little over 5 billion.

Most of the what is happening can be attributed to a very small handful of steel and airlines companies. But, you can be sure that Congress will tighten funding rules because of it.

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Its more than airline and auto industries. There are many trucking, tire, telecom and transporationmultiemployer plans, that have seen liabilities increase as participating employers are go out of business. Contributions by UPS to the teamsters multi employer plan are increasing because other employers have gone out of business requiring larger contributions by remaining employers. UPS has asked Congress to freed from having to contribute for the employees of liquidated employers in order to remain competitive.

In addition, the employers who participate in the above plans have large retirement heath care obligations. GMs cost alone is estimated as $1200 per car sold. These two long term obligations put US companies at a competative disadvantage with foreign companies and will increase dramically as boomers retire. Many employers will file for Ch 11 bankruptcy to shed these liabilities and pass the pension liabilities along to the PBGC for paying reduced benefits. The PBGC could not handle the bankrupcy of another major airline such as Delta or American which is inevitable if air travel remains depressed for the next 12 months. As the number of plans and participants decline, the remaining plans will be required to pay larger premiums to provide the PBGC guaranteed benefit.

mjb

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Nothing in these numbers has anything to do with multiemployer plans. That is a separate program that has a 261 million deficit (a far cry from 11 billion). This is the first year that the multiemployer program has been in a deficit in 20 years.

When a multiemployer plan goes to the PBGC, the PBGC does not take it over until the assets are zero. The plan continues on with "support" from the PBGC. The PBGC never receives assets from failed multiemployer plans; they only receive premium payments (which are MUCH less than the single employer program). That is different from the single employer system whereby the PBGC receives both assets and liabilities when the company goes under. Also note that the PBGC guarantees for multiemployer plans are many, many multiples smaller (it is only a few dollars per year of service) than the guarantees for single employer plans (which is over 40,000 per year at 65).

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The fact of that the guaranteed benefits are less in a multi employer plan is not the issue- it is the fact that solvent employers like UPS are required to fund benefits for insolvent employers will make the cost of doing business more expensive. Any further liabilites to the PBGC for guaranteed benefits are unwelcome even if they are lower than the liability for single employer plans. The long term financial liabilites of DB retirement benefits and retiree health care are unaffordable for most plan sponsors and the US government as fewer employees support more retirees. The PBGC cannot afford to lose another industry such as airlines or autos to involvency as it did the steel industry.

mjb

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The PBGC cannot afford ...

At its very basic, this is "the taxpayers cannot afford..."

The PBGC is a mandatory insurance program that does not contain the prime elements of insurance: voluntary purchase by the buyer and insurable interest.

(OK, I know that is an oversimplification, but my point stands.)

If this were being designed from scratch, we would have mandatory minimum funding that made the PBGC irrelevant. There is no reason the taxpayers should subsidize/guarantee everyone else's pension plan. The other result is that 99% of the DB plan sponsors view the "premium" as a tax.

I’ll get down off my soapbox now.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • 9 months later...

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I just love sensational news about the leveraged problems of the PBGC.

Interest rates are too low! (Oops, I just told the real story.)

PBGC has no problem when liabilities are valued on traditional assumptions.

The problem is that too many dollars are chasing too few quality capital goods, i.e., we are driving up the cost of investments and driving down the yields, simply because we all want to buy retirement plan assets. Add to this a political environment that needs low interest rates to finance bloated gov't programs.

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The 23B deficit does not include the 8.5B unfunded liability of United Airlines which will mostly be transferred to the PBGC as part of UAs bankruptcy reorganizaton. Congress will have to raise the premiums substantially in 2005 to make up for the fact the the agency was not properly funded when it was created in 1974 with an initial premium of $1 per participant per year.

mjb

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AAIIIIEEEE !!!!

The problem is not

Quote
the agency was not properly funded when it was created in 1974 with an initial premium of $1 per participant per year.

The problem is that the agency was created to insure an uninsurable event.

Yes, Congress will have to come up with a mechanism to take care of this deficit, but "raise the premiums substantially" is not an equitable mechanism (IMHO, not an acceptable mechanism) because it forces the "successful" to subsidize others. It forces plan sponsors to insure the survival of other plan sponsors, which is a ridiculous concept in a free-market economy.

If there is ample reason to "insure" a defined benefit plan, why is there no corresponding "guarantee" to a DC plan participant that his/her account balance will never experience losses?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Saying that the PBGC was created to insure an uninsurable event is tantamount to saying that the US Gov is the guarantor of corporate DB benefits obligations as well as SS benefits. The PBGC is no different than any other govt created insurer (e.g. flood ins)- it must charge adequate premiums to cover the risks which it accepts even if the increase may cause termination of some plans because termination eliminates some liabilities that the PBGC would have to absorb. Increasing premiums will permit better matching of risks with liability which is lacking in todays regulatory environment where the PBGC must take all customers. The problem is no different than requiring mandatory auto ins for all drivers in a state but then preventing ins co from charging an adequate premium to cover losses so as not to discourage people from owning cars - Sooner or later the insurers become insolvent or leave the state forcing an increase in rates.

The structural problem is that the the regulatory model for DB plans assumes that plan sponsors can raise prices to cover the increases in plan contributions required under minimum funding when the stock market drops or liabilities increase while the political process allows sick companies like Pan Am to receive funding waivers continuously in order to buy labor peace while mortgaging all of their assets to banks and other investors to continue operations so that when the collapse arrived the PBGC is left with no unsecured assets to claim for the unfunded pension liabilities it is obligated to pay (3.6B for Bethlehem Steel) . The law should require that plans cannot receive funding waivers in more than two of the previous 15 years without giving the PBGC a secured interest in corporate assets for 80% of the amount of the funding waiver along with other terms similar to those used by commercial lenders.

mjb

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Instead of guessing at what is going on, here is the real data behind the press release:

http://www.pbgc.gov/publications/annrpt/PAR1104.pdf

(Single employer program only:)

"Results of Activities and Trends: The trend of large claims against the pension insurance system continued in FY 2004. This resulted in a net loss in 2004 of $12.067 billion compared to a net loss in 2003 of $7.600 billion. The $4.467 billion increase in the loss was primarily attributable to an increase of $9.330 billion in losses from completed and probable terminations and actuarial adjustments of $1.417 billion due to a one-time change in mortality assumptions. PBGC changed the mortality table to reflect its most current actual experience over the period 1994 thru 2001. This was partially offset by decreases in actuarial charges of $5.791 billion primarily due to an increase in interest rates and increases in premium revenue of $510 million. These actuarial charges are the net of charges and credits from actuarial methods and assumptions, changes in interest rates, and passage of time (due to the shortening of the discount period as the valuation date moves forward in time, the present value of future benefits increases)."

"The Corporation’s losses from completed and probable plan terminations increased from a loss of $5.377 billion in 2003 to a loss of $14.707 billion in 2004. This year the loss was primarily due to plans newly classified as probable as well as the termination of underfunded pension plans. The loss on probables for 2004 was $11.760 billion compared to a credit of $1.115 billion for 2003. The amount of future losses remains unpredictable as PBGC’s loss experience is highly sensitive to losses from large claims."

The following table itemizes the probable exposure by industry:

PROBABLES EXPOSURE BY INDUSTRY (PRINCIPAL CATEGORIES)

(Dollars in millions) FY 2004 FY 2003

Transportation, Communication and Utilities $15,057 $1,290

Manufacturing 630 2,725

Finance, Insurance, and Real Estate 569 31

Wholesale and Retail Trade 219 573

Agriculture, Mining, and Construction 0 237

Services/Other 451 351

Total $16,926 $5,207

United is definitely in their change under transportation of nearly 14 billion.

Note that "probables" are included in the financial results. The change of (16926-5207 = ) 11,719 in "probables" is nearly the entire change in results from 2003 to 2004.

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There will be additional airline bankruptcies in the next two years in the $Bs as well as a tire company or two. According to todays NY Times the PBGC has 39B in assets but owes 62B in pension benefits for a 37% underfunding. Any idea on how to close the gap other than by a taxpayer bailout?

mjb

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My personal opinion is that there should be an immediate bailout from general tax revenues for any liabilities that the PBGC took on for steel and airline industries. Those industries continually got exceptions from funding requirements all the way back to law changes in the 1980s (we might as well through Greyhound in there, too). I put the onus on Congress for their underfunding (every time funding standards were tightened, they got a pass), and Congress should step up and bail their situation out as a result. The rest of the PBGC could continue on as planned with that move. This is not a bailout of PBGC, but rather owning up to the pork that was handed out in prior legislation.

As was previously stated, valuing liabilities at the worst-case scenario for early retirement subsidies and an interest rate just over 3% causes a lot of this underfunding calculation. If interest rates increase (and the PBGC, in turn, changes their assumptions), a LOT of that underfunding goes away.

And, by the way, I have since confirmed that United (6.4) and US Air (2.2) are included in the figure. The remaining 5.7 in transportation most likely includes Delta, because other transportation situations don't add up to that (unless there are other United and US Air plans I am not including).

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Changing the interst rate will not make the problem go away because all of the 4 remaining legacy airlines will eventually have to declare bankruptcy and shed all their DB obligations in order to become competitive. Increasing interest rates on PBGC assets will not offset the increase in assumed pension liabilites of bankrupt employers who have no assets that can be seized to pay guaranteed pension benefits. After the airlines will be the telecom carriers who are incurring increasing losses in their traditional phone business with mostly unionized employees which is not offset by increases in wireless business. Congress is not going to stick taxpayers with a multi B bill when it can increase the premiums on corporations who are reducing their benefit obligations to older employees through cash balance plans (IBM, Xerox) in order to increase profits for investors.

mjb

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The problem is no different than requiring mandatory auto ins for all drivers in a state but then preventing ins co from charging an adequate premium to cover losses so as not to discourage people from owning cars - Sooner or later the insurers become insolvent or leave the state forcing an increase in rates. 

That analogy is very thin. Mandatory car insurance is to protect the "other guy". You are not required to insure your own car or own potential losses, but to insure against causing harm/damage to someone else. The government does not issue the insurance, but requires the driver/car owner to purchase a minimum level from the insurer of his/her choosing. Many will purchase more than the minimum, exercising an cost/benefit decision.

This is significantly different from PBGC insurance:

(1) There is no private market. You cannot buy coverage greater than the minimum. That by itself should be an enormous clue that no insurer would consider this an “insurable event". I'm curious, does anyone think it is an insurable event?

(2) Insuring against a pension plan termination is tantamount to insuring the viability of the plan sponsor, and perhaps its industry or geographic region. No insurer would take such a risk, so why is it important that the government manufacture that fantasy?

(3) Technically, the PBGC structure is such that other plan sponsors are paying the premiums/tax, at least until a bailout. What interest do other companies have in insuring your pension plan? Perhaps the opposite of a tontine, it can become a death spiral.

(4) A well-funded pension plan, dutifully paying its premiums each year, is contributing to the revenue side of the PBGC but never really contributes any potential liability. Thus, it is a tax.

(5) A small pension plan, with a substantial owner, may never contribute any significant liability to the PBGC, even if the company and the plan become insolvent. Also a tax. A dirty little secret that regulators do not like to discuss.

(6) There is a general public interest at large (rather than only other plan sponsors) that plans/sponsors are able to meet their promise. Thus, the existence of IRC 412.

The public interest in pension promises gives rise to pre-funding, trusts, deductions, etc. In other words, ERISA. However, that public interest has been unnecessarily and unwisely extended to minutiae, for example the amortization period of gains and losses. A better view is to require the pre-funding to be sufficient at all times to pay for the promised benefit. If the money is not there in the trust, then it is immediately due. (If you can't pay for it, don't promise it. If you can't pay for it, don't expect others to bail you out.) Beyond that, there is no need of IRC oversight of minimum funding. This instantly makes irrelevant the IRC structure that has encouraged underfunding. For example, a plan amendment to provide a one-time COLA to existing retirees is funded over 30 years, thus allowing the sponsor to pay for the benefit improvement well beyond the expected lifetime of all recipients.

It is a very short step to recognize that since the trust already contains the funds necessary to secure the promise (perhaps the minimum is 110% or 120% or other amount), then the PBGC has no reason to exist. If a company or industry wants additional protection, then they have the choice of enlarging the funding cushion in the trust or creating their own insurance pool. Neither requires taxpayer bailout.

PBGC existence diverts funds from more useful purposes, one of which might even be enlarging the funding cushion.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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