EBRI Issue Brief

PBGC Solvency: Balancing Social and Casualty Insurance Perspectives

May 1, 1992 , 35 pages

by Paul Yakoboski Celia Silverman Jack VanDerhei

Summary

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.