Concern has been voiced regarding
the financial viability of the Pension Benefit Guaranty
Corporation (PBGC) and whether, as with the savings and
loan episode, a general taxpayer bailout will be
necessary. The focus is on PBGC's net worth deficit of
$2.5 billion in the single-employer fund; an estimated
$31 billion in underfunding within individual insured
plans; and $13 billion which PBGC classifies as a
“serious risk” because of financial problems of
the sponsor company. The overall defined benefit pension
system, however, presently has $1.3 trillion in assets to
cover $900 billion in liabilities. Therefore, while there
is $31 billion in underfunding within individual plans,
there are also sufficient resources available within the
defined benefit system itself—the payers of PBGC
premiums—to cover this underfunding, making a general
taxpayer bailout unnecessary.
The urgency surrounding PBGC's
current financial condition and what, if any, legislative
changes are necessary varies with whether the corporation
is viewed from a pure social insurance or a pure casualty
insurance perspective, or a mix of the two. The social
insurance perspective was the foundation of Title IV of
ERISA, but legislative changes since 1974 have introduced
casualty insurance provisions.
The social insurance perspective
maintains that PBGC should encourage the maintenance of
defined benefit pension plans and function as a transfer
agency in a social insurance system where the insured
cross-subsidize one another in the event that a definable
loss should occur. It argues for the insurance of all
reasonable benefits that a sponsor is willing to provide
for its employees.
The casualty insurance perspective
argues that the PBGC insurance scheme is flawed in its
design and that these flaws are the cause of any existing
deficit problems. The system is not designed on sound
insurance principles even though it is supposed to be an
insurance system protecting participants' pension
benefits. The design creates financial incentives for
undesirable sponsor behavior and allows the opportunity
for underfunding of defined benefit pension plans.
Four proposals have been introduced
to change PBGC's current operation. The proposals, while
maintaining PBGC's social insurance tradition, represent
a further movement toward casualty insurance concepts.
The proposals minimize PBGC's exposure by increasing
recoveries and minimizing claims. The proposals maintain
a social insurance program's objectives by attempting to
alter the behavior of the participating plans and plan
sponsors while maintaining cross subsidies and the
present premium structure.
A balance between social insurance
and casualty insurance principles is most likely to
sustain an overall strong and continuing defined benefit
pension system, providing a continuing base of premium
payers for the PBGC.