The PBGC: A Broke Insurance Company Sponsored by Your Government
Imagine an insurance company with assets of $88 billion, but liabilities of $164 billion. It has a huge deficit: a net worth of a negative $76 billion, and a capital-to-obligations ratio of minus 46%.
Would any insurance commissioner allow it to remain open and to keep taking premiums from the public to "insure" losses it manifestly cannot pay? Of course not. Would any rational customer buy an insurance policy from it, when the company cannot hope to honor its commitments? Nope.
But! There is such an insurance company, open and in business, and taking in new premiums for obligations it will not be able to pay. Needless to say, it is a government insurance company, since no private entity could continue in business in such pathetic financial shape. It is the Pension Benefit Guaranty Corporation (PBGC), a corporation wholly owned by the U.S. government, operating on an obviously failed model. Its board of directors comprises the Secretary of Labor, the Secretary of the Treasury, and the Secretary of Commerce: quite a distinguished board for such egregious results.
There are two financially separate parts of the PBGC: the "Single-Employer Program," which insures the defined benefit pension plans of individual companies; and the "Multiemployer Program" which insures union-sponsored plans with multiple companies making pension contributions. The Single-Employer program has a large deficit, with assets of $86 billion, liabilities of $110 billion, and a net worth of negative $24 billion. That is bad enough.
But now imagine an insurance company with assets of $2 billion and liabilities of $54 billion. That is a truly remarkable relationship. Its net worth is negative $52 billion or 26 times its assets. That is the PBGC's Multiemployer program, which, as no one can doubt, is well on the way to hitting the wall.
The PBGC can continue to exist for only two reasons: because the government forces pension plans to buy insurance from it, and because its political supporters entertain the abiding hope that Congress will somehow or another give it a lot of other people's money to cover its unpayable obligations.
Congress should not do this, and so far, it has shown no inclination to announce a taxpayer bailout. But the real, simultaneous financial and political crunch will be when the disastrous Multiemployer program runs out of cash while still being oversupplied with obligations. While this moment is readily foreseeable, it has not yet arrived and is estimated by the PBGC to be a number of years away.
There are no easy answers, but Congress took a sensible and meaningful step with the Kline-Miller Multiemployer Pension Reform Act of 2014. A reasonable attempt to make necessary adjustments under this act, by the deeply insolvent Central States Pension Fund, was recently thwarted by the U.S. Treasury Department. We will devote a separate article to addressing this particular problem.
The PBGC is a legacy of the Employment Retirement Income Security Act of 1974 (ERISA). This put into statue an idea created by the special projects department of the United Auto Workers union in 1961: let's get the government to guarantee our pensions. The idea was politically brilliant but, financially, less brilliant.
According to the law, the PBGC was not supposed to be able to get itself into its current insolvent status. As each PBGC Annual Report always informs us, "ERISA requires that PBGC programs be self-financing." But they aren't-not by a long shot. Not by $76 billion. What does the requirement by law to be self-financing mean when you aren't and have no hopes to be so?
We find another important statutory idea in the next Annual Report sentence: "ERISA provides that the U.S. Government is not liable for any obligation or liability incurred by PBGC." To repeat: Not liable. Of course, they said the same thing in statute about Fannie Mae and Freddie Mac. They made Fannie and Freddie put that in bold face type on every memorandum offering their debt for sale. But they bailed out Fannie and Freddie anyway.
As it has turned out, the Fannie and Freddie bailout has provided a positive investment return to the taxpayers (of about 7% per year). But any bailout money put into the PBGC will be simply gone. It would not be an investment, but purely a transfer payment.
That reflects the fact that Fannie and Freddie, when their operations were not warped by politically-mandated excess risk, had a business model capable of making profits. This profit potential is not shared by the PBGC. Its fundamental model is to promote defined benefit pensions, not to rationally insure them (assuming that is even possible, which it may not be).
Defined benefit pension plans in all their manifestations-- private and public, corporate, union, municipal, state and federal-- have proved beyond doubt to be an extremely risky financial invention. The idea that the government guarantees them encouraged the negotiation of pensions unaffordable to the sponsors in the first place, and the underfunding of pension obligations later. Such costly moral hazards are entailed in the very existence of the PBGC. Theoretically, the PBGC might have, had Congress allowed it, charged vastly higher premiums. But this would have been against its assigned mission to encourage defined benefit pensions.
You can understand how in 1974 this was felt to be an attractive political idea. But it creates an irresolvable conflict for the PBGC: it is supposed at the same time to promote the use and survival of defined benefit pension programs, while it is also supposed to run a self-financing, sound insurance company. Obviously, it has utterly failed at being a sound insurer. Arguably, by creating incentives to adopt unaffordable pensions, it also failed at promoting defined benefit pension plans, and has instead accelerated their ongoing decline.
Pollock's Law of Finance states that loans which cannot be paid, will not be paid. The same is true of insurance company obligations which cannot be paid. The slow moving, but inexorable financial drama of the PBGC continues.
