The risk that the nation’s pension insurance system will become untenable continues to climb, threatening dire future choices between widespread worker benefit losses and a taxpayer-financed bailout. Last November it was revealed that the deficit in the PBGC pension insurance system (the shortfall of its assets relative to its projected liabilities) had reached $26 billion, and that the cost of “reasonably possible” terminations of insured pension plans had jumped to a sobering $250 billion. PBGC’s net deficit is now the highest in its history. As policy makers confront this situation, they must take care not to repeat past policy mistakes that are virtually certain to lead to future disaster.
Employer-provided pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), a federally-chartered corporation. Pension sponsors pay premiums for this insurance. If a pension plan terminates, often because of a sponsor’s bankruptcy, the PBGC takes over both the benefit obligations (up to a statutory cap) and the assets of the plan. Federal law determines the premiums that sponsors must pay, how they measure their pension assets and liabilities, and the funding contributions they must make. If a plan terminates while underfunded, the finances of the insurance system take a hit and workers (those promised benefits in excess of the cap) can lose pension benefits.
The PBGC insurance system has been in serious and worsening financial condition for several years. Its deficit spiked in 2009 after the financial markets plunged, but it faced significant problems well before then. In each of the last nine years, PBGC’s liabilities have been measured as being at least 15 percent larger than its assets, and usually much more.