Tag Archives: Pension Benefit Guaranty Corporation

Paving over pension liabilities, again

Public sector pensions are subject to a variety of accounting and actuarial manipulations. A lot of the reason for the lack of funding discipline, I’ve argued, is in part due to the mal-incentives in the public sector to fully fund employee pensions. Discount rate assumptions, asset smoothing, and altering amortization schedules are three of the most common kinds of maneuvers used to make pension payments easier on the sponsor. Short-sighted politicians don’t always want to pay the full bill when they can use revenues for other things. The problem with these tactics is they can also lead to underfunding, basically kicking the can down the road.

Private sector plans are not immune to government-sanctioned accounting subterfuges. Last week’s Wall Street Journal reported on just one such technique.

President Obama recently signed a $10.8 billion transportation bill that also included a provision to allow companies to continue “pension smoothing” for 10 more months. The result is to lower the companies’ contribution to employee pension plans. It’s also a federal revenue device. Since pension payments are tax-deductible these companies will have slightly higher tax bills this year. Those taxes go to help fund federal transportation per the recently signed legislation.

A little bit less is put into private-sector pension plans and a little bit more is put into the government’s coffers.

The WSJ notes that the top 100 private pension plans could see their $44 billion required pension contribution reduced by 30 percent, adding an estimated $2.3 billion deficit to private pension plans. It’s poor discipline considering the variable condition of a lot of private plans which are backed by the Pension Benefit Guaranty Corporation (PBGC).

My colleague Jason Fichtner and I drew attention to these subtle accounting dodges triggered by last year’s transportation bill. In “Paving over Pension Liabilities,” we call out discount rate manipulation used by corporations and encouraged by Congress that basically has the same effect: redirecting a portion of the companies’ reduced pension payments to the federal government in order to finance transportation spending. The small reduction in corporate plans’ discount rate translates into an extra $8.8 billion for the federal government over 10 years.

The AFL-CIO isn’t worried about these gimmicks. They argue that pension smoothing makes life easier for the sponsor, and thus makes offering a defined benefit plan, “less daunting.” But such, “politically-opportunistic accounting,” (a term defined by economist Odd Stalebrink) is basically a means of covering up reality, like only paying a portion of your credit card bill or mortgage. Do it long enough and you’ll eventually forget how much those shopping sprees and your house actually cost.

Union Pensions: Next Stop on the Bailout Train?

Senator Bob Casey (D-PA) has a proposal in the works. The “Create Jobs and Save Benefits Act” will bail out private sector union pension plans. The idea is to allow the Pension Benefit Guaranty Corporation, the federal guarantor of private sector pensions, to take over the pension liabilities of companies and dedicate tax dollars to paying them off.

The PBGC was established in 1974 to protect workers from the loss of their pensions. It was supposed to be self-financing through a combination of insurance premiums paid by plan sponsors and returns on pension investments. The PBGC itself is currently insolvent.

The plan being discussed would rescue multi-employer plans jointly run by companies and unions. Moody’s estimates such plans face long-term deficits of $165 billion. Senator Casey’s proposal would cover the most troubled plans including the Teamsters Central State fund.

A pension bailout would be unprecedented. And it opens the door for the bailout of state and local government pension plans, with unfunded liabilities estimated at $3 trillion. When will states begin to run out of assets to meet their obligations? Joshua Rauh estimates Illinois will be the first to run of out pension fund assets in 2018, followed by Indiana, Connecticut and New Jersey in 2019. And that’s assuming an 8% return on investments and 3% revenue growth. In other words, it could be sooner.

Is the Pension Benefit Guaranty Corporation the Next Bailout?

Created in 1974 by Congress, the Pension Benefit Guaranty Corportion (PBGC) is a government agency that protects private sector pensions for workers in financially failing companies. According to The Center for Public Integrity,the PBGC is itself in need of rescue. In addition to having insufficient money to bail out private pensions, the Office of Inspector General gives the PBGC an “F” in an audit of its internal financial controls.

The agency cannot confirm investment revenue figures reported by the independent contractors hired to lend securities on its behalf. The result is the PBGC often gives erroneous information to Congress. Though the agency is self-financing through insurance premiums paid by the companies that operate defined benefit plans, the PBGC is in deficit for $21.9 billion. At the same time the PBGC’s potential obligations to cover pensions in faltering companies tripled last year to $168 billion. It’s an ongoing problem. In 2006 the agency had a deficit of $23 billion. As GMU finance professor Anthony Sanders notes, the PBGC is a model that cannot be sustained. Another reminder that the ultimate guarantor of government guarantees is the taxpayer.