Funding
Pension Reform Unlikely to Restore
PBGC Solvency, Financial Model Shows
Proposed pension reform legislation alone is unlikely to restore the solvency of the Pension Benefit Guaranty Corporation, according to the Washington, D.C.-based Center on Federal Financial Institution's revised and expanded cash flow model of the agency's finances released June 20.
"Without legislation, COFFI's base case shows PBGC needing an eventual rescue costing $92 billion, in today's dollars, considerably higher than the existing $23.3 billion deficit," according to a COFFI news release.
H.R. 2830 and the original administration proposal both appear likely to bring the rescue requirement down to $45 billion to $50 billion, in the base case, COFFI said. Although all models of the long-term future are subject to error, the analysis suggests only extraordinarily favorable circumstances would completely eliminate the deficit, even under the proposed legislation.
On June 15 before the Senate Budget Committee, PBGC Executive Director Bradley D. Belt said the reconciliation instructions associated with the concurrent budget resolution for fiscal 2006 regarding PBGC premium increases are insufficient to fill the hole the agency is in, "let alone the future hole" (115 PBD, 6/16/05; 32 BPR 1351, 6/21/05). Belt was responding to a question from Committee Chairman Judd Gregg (R-N.H.) as to how the budget reconciliation instructions would impact PBGC.
The Senate approved April 28 a $2.6 trillion budget resolution (H. Con. Res. 95) that protects $70 billion in tax cuts under the reconciliation process and includes just under $35 billion in mandatory program savings (83 PBD, 5/2/05; 32 BPR 991, 5/3/05). The resolution was passed earlier by the House. The resolution calls for $6.6 billion in savings from PBGC, including some premium increases. Senate Budget Committee Chairman Judd Gregg (R-N.H.) said at the time that the savings were structured to "energize policy," progressing down a road of resolving the $25 billion to $30 billion in PBGC contingent liabilities.
Core Problem
The core problem is a long-standing structural gap between the level of premiums PBGC is allowed by Congress to charge and the level of risk placed on PBGC by the pension laws passed by Congress, COFFI said.
The pension reform proposals on the table now should eventually eliminate this imbalance going forward, partly through premium increases, but mostly by imposing stricter pension funding requirements on plan sponsors, it said. However, the medium-term appears to have such high losses "baked in" that PBGC's legacy costs should be expected to mount considerably from today's $23.3 billion deficit, it added.
If the numbers are alarming, they should be compared to preliminary results recently released from a Congressional Budget Office study, COFFI said. CBO concluded that, without legislation, PBGC's economic deficit would grow to $73 billion after the next decade of claims and $91 billion after 20 years.
This compares to the COFFI model's prediction of $51 billion after a decade and $63 billion after 20 years, assuming both new claims and new premiums ceased at those points in time, the COFFI said. These figures would be lowered by new legislation, but the COFFI analysis demonstrates the improbability of fully restoring solvency.
Variable Premium Rates
It may be tempting to dismiss the findings of COFFI's model by focusing on the administration's proposal that PBGC's board be allowed to set variable premium rates at whatever level is necessary to restore solvency over time, COFFI said. Unfortunately, there are strong limits to how much can be raised through variable premiums, since these revenues depend on the level of pension underfunding in the system, it added.
The great bulk of underfunding is at plans sponsored by quite creditworthy companies, who could choose to contribute enough to eliminate their underfunding if the variable premium becomes an appreciable cost, COFFI said. PBGC's finances likely would not benefit much from this sharp increase in systemwide funding levels, since the contributions would be coming from healthy companies that represent the least risk, it said.
The remaining weak companies that might have trouble funding more than the minimum do not have the collective financial resources to bear the full burden of paying for PBGC's legacy deficits, without themselves being driven into bankruptcy, COFFI said.
Unlike variable premiums, fixed premiums could probably bring in sufficient revenue if they were raised dramatically, but no such legislative proposal has been offered, COFFI said. While the administration has proposed raising the fixed premium from $19 per participant to $30 per participant, its not nearly enough. "The cost increase is less than companies spend on free coffee," COFFI's Douglas Elliot told BNA June 21.
COFFI said it does not endorse or oppose any specific legislative proposal. It concentrates on providing policymakers and the public with analysis of the likely effects of possible reforms, it said.
http://pubs.bna.com/ip/BNA/pbd.nsf/is/a0b0z5x5x0
