Pensions On Thin Ice : Private Sector Now

Here we go again - government intervention causing the problem and then government coming to the rescue with taxpayer's dollars. Can these people, that we have representing us, be so far out of the common sense loop as to not see or understand what they are doing?

The Private-Sector Pension Predicament
Source: Charles Blahous, "The Private-Sector Pension Predicament," Hoover Institution, December 1, 2011.

Recently there has been substantial attention paid to underfunding in state and local government pension plans, a longstanding problem made more urgent by recent troubles in the larger economy. There has of yet been comparatively less attention given to a similar (though smaller) set of mounting financial risks associated with private-sector worker pensions covered by the Pension Benefit Guaranty Corporation (PBGC).

Yet here, too, public policy corrections are required to address underfunding and avoid another taxpayer-financed bailout, says Charles Blahous, a research fellow at the Hoover Institution.
PBGC's latest annual report shows a net deficit of over $23 billion.

The PBGC estimates its exposure to reasonably possible plan terminations at approximately $170 billion.

The funding gap in the PBGC's finances is not due entirely to the recent economic downturn, as its deficits have amounted to more than $10 billion in each year since 2003. PBGC's multiemployer program is also presenting increased risks: in 2010, "reasonably possible" exposure in multiemployer plans suddenly rose from roughly $300 million to approximately $20 billion.

These pension plans have continued to be chronically underfunded for years, and the result is a significant budget gap that persists and grows as years pass. This pattern has been allowed to go on for so long because a number of factors have prevented the implementation of corrective measures.

Because asset values have traditionally been blended with previous years' levels, the loss of assets has not been realized until a substantial amount of time has passed. Pension funding liabilities have been regularly underestimated as accountants fail to account properly for the number of beneficiaries and the amounts that they will withdraw. Volatility in interest and yield rates complicate accounting efforts to convert dollar amounts into present value.
Loopholes in the recent 2006 Pension Protection Act allowed and encouraged underfunding by permitting certain contributions to be double-counted.

The PBGC's gross underfunding and potential for insolvency requires greater independence from government regulation such that the organization can resolve its own shortfalls. It is imperative that such a policy of autonomy be paired with requirements for greater transparency, as the potential sources of moral hazard in this regard cannot be ignored.