Government May Next Bailout the Fed Program that is
Supposed to Bail Out Failed Pension Funds
Finance professor, former presidential economic
advisor Jeffrey R. Brown believes troubled Pension Benefit Guaranty
Corp., which steps in when private-sector employers with under-funded
defined-benefit plans go bankrupt, may be next target of a
multi-billion-dollar taxpayer bailout
Oct. 15, 2008 - Another multi-billion-dollar
taxpayer bailout could lie ahead, this time to rescue a cash-strapped
government program that insures pensions of 44 million American workers
and retirees, a University of Illinois finance professor warns.
Jeffrey R. Brown says the troubled Pension Benefit
Guaranty Corp., which steps in when private-sector employers with under
funded defined-benefit plans go bankrupt, was $14 billion short of the
cash it will need to cover pensions based on the latest estimates
released a year ago.
But he predicts the shortfall will soar as a sour
economy shutters more businesses and a plunging stock market carves into
pension fund assets, with a government fix similar to this month’s $700
billion Wall Street bailout as the likely solution.
“Over the next decade, we could easily end up with
another $50 billion to $100 billion or more of taxpayer money needed for
a bailout – in this case the bailout of failed corporate pension plans
that didn’t put adequate money aside,” Brown said.
“One-hundred billion doesn’t seem like as much as
it did a few weeks ago, but it’s still a tremendous amount of money.”
Brown says the epic stock market tumble is a
perfect storm for the already troubled PBGC, which insures workers and
retirees in more than 30,000 defined-benefit pension plans.
The market collapse makes business failures more
likely, and increases the odds that their pension plans will be under
funded because assets are typically heavily invested in stocks, said
Brown, a senior economist with the President’s Council of Economic
Advisors in 2001-2002.
“Those two things together are going to put more
pressure on the PBGC, which is already underfunded,” he said. “And the
PBGC has increased the risk further by heavily investing its own assets
in the stock market. So taxpayers are almost certainly going to find
themselves on the hook for this some day.”
The PBGC, established in 1974 to safeguard
retirement accounts, was struggling long before the economy nosedived,
said Brown, who wrote a paper on the program’s flaws that appeared this
year in the Journal of Economic Perspectives.
He says three fundamental problems have combined to
sink the PBGC in red ink:
● The program lacks incentives that encourage
employers to adequately fund pension plans and may actually discourage
it because companies know they can fall back on the federal safety net.
● Employers pay a flat fee for insurance rather
than adjusted rates based on risk. Brown says the one-price-fits-all
approach encourages risky investments, and means employers who maintain
solid plans ultimately subsidize those that don’t.
● Financial reports that the PBGC provides to
workers and retirees is often lacking and outdated, which Brown says
stifles any clamor for reform.
One long-term solution, he says, is PBGC reform
that would mandate insurance, but require employers to buy policies
through private insurers rather than the government.
“Private insurers would have an incentive to price
the insurance properly, just like auto insurers charge more for a
16-year-old male who’s been driving for a month than a 50-year-old woman
who’s never had an accident,” Brown said.
He says government is reluctant to charge
risk-adjusted rates because its books would reflect hefty balances until
claims catch up with income, a process that could take years with
pension accounts.
“It leads to a crescendo of: ‘Why are you charging
us so much? You’re making a profit, so you should lower your premiums,’
” Brown said. “It’s just very hard to sustain politically.”
While shifting premiums to private insurers would
not eliminate the existing problem, it could greatly reduce additional
losses in the future, said Brown, the director of the Center on Business
and Public Policy in the U. of I. College of Business.
Risk-adjusted premiums would decrease the potential
for funding problems, and using private insurers would spread coverage
around rather than loading it all on the PBGC, he said.
“Even if one of the insurance companies winds up in
financial distress, it’s not like one insurer would be backing every
single pension plan in the U.S.,” Brown said. “So even if the government
still had to step in and take over, the impact is going to be smaller
than if they were insuring everything directly.”
Brown says the PBGC faces no eminent financial
crisis because most pension payouts are still years away. And he says
Congress is unlikely to consider broad reform until a crisis erupts.
In the meantime, he says Congress should tweak
regulations to promote healthy pension funds and acknowledge that the
government will likely have to step in some day and bail out the PBGC.
Brown says the government has no formal obligation
to rescue the PBGC, but predicts politics will ensure a bailout, similar
to the deal that propped up mortgage lending giants Fannie Mae and
Freddie Mac, which also had no formal government backing.
“I just can’t imagine that a congressman is going
to tell constituents their firm failed to adequately fund their pension
and the government failed to make them fund it, but you’re the one who’s
going to bear the cost of those mistakes,” Brown said.
Original report written by Jan Dennis, Business
& Law Editor, News Bureau, University of Illinois at Urbana-Champaign
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Oct. 15, 2008 - Another multi-billion-dollar
taxpayer bailout could lie ahead, this time to rescue a cash-strapped
government program that insures pensions of 44 million American workers
and retirees, a University of Illinois finance professor warns.