The Pension mess is just beginning

Its not exactly news anymore that the government insurance plan for private pension plans is in trouble or at least, not adequately funded. I have known for years, and I am far from the only one, that the tiny amount the agency collects as insurance premiums is inadequate for a major collapse of a pension plan and certainly inadequate for more than one. In that sense it is somewhat simliar to that all time debacle of debacle's, the S&L scandal and subsequent gov't bailout of the savings and loan industry as well as the former FSLIC (now part of the FDIC).

Part of the problem with the agency, known as the PBGC (Pension Benefit Guaranty Corporation) is that the agency collects far too little in insurance premiums from the corporations and companies whose pension it covers. Kind of sounds like the S&L crisis there too eh? Past efforts to reform it have been met by challenges from big businesses (no real shocker there). I suspect this time, Congress will have no problem increasing the premiums those companies pay, but the damage has already been done. Also, the sure to be intense lobbying by big business interests may not prevent an increase, but may keep it lower than it needs to be to fix the problems. But the premiums charged are by no means the only problem involved here.

Companies have several accounting loopholes they can and often do use, such as credits given to them that are allowed in lieu of actual contributions. The stock market and interest rates also have played a part here. Pension plans have used both the stock and bond markets for investments, neither of which has been as good in the past five years or so as they were the years prior to that time. These pension plans assumed a certain rate of return based on the return from previous years. Consequently, the years that markets did not do so well meant that pension plans were underfunded in those years. In those years many companies were either unwilling or unable to contribute enough to cover the shortfall. That is one weakness of the current rules- companies are allowed to run shortfalls apparently without penalty. Once a company is in trouble, perhaps on the verge of bankruptcy or going under, no one can really expect them to risk the whole company to make their pension contribution required to keep their pension plan properly funded. United Airlines is by far the largest company to default on their pension plan. The participants of that pension plan will still get a pension, but its only guaranteed to limits imposed by the PBGC. Those covered often do not get their full pension, even though they were promised it by the comapny when they were hired. The PBGC only provides a certain level of benefits, regardless of what the original pension program provided as a benefit. In this case, some benefits is better than no benefit but tell that to the people who lose a good chunk of the pension income that they have been counting on receiving as part of their retirement.

When you add this to the uncertainty future of Social Security, retirement benefits are not as certain for retirees as we would like them to be. Because of all of these pension plan problems, many companies are either ending their pension plans, closing them to new members or converting to either 401k's or the less risky defined contribution plan. 401k's are better in some ways for companies because they are not required to contribute to them and employees have to contribute to them for them to exist (which makes them less attractive to lower income workers who may not have the income to spare to contribute). A defined contribution plan is a pension plan where the particular company promises to contribute a certain amount or even a percentage of money each year, but they do not promise a definite dollar benefit to workers. In such a plan, if the plan's investments yield a less than expected return, the company would not have a shortfall to make up since they are guaranteeing their contribution, not what they pay out as a benefit. Larger companies with the older defined benefit plan have found themselves forced to make large contributions to make up shortfalls when the plans investments yield less than expected. For large companies such as GM, this shortfall can be in the billions of dollars and accumulates over time. If the shortfall happens when the economy is softer (often meaning that company is making less money at the time), it is even harder for the company to contribute enough to prevent a shortfall. During recessions this problem is even worse since investment earnings are lower as well as the profits of the company.

Going forward, you will see more and more companies bail out of the more risky defined benefit plan and go with the less risky defined contribution plan and 401k plans. Defined contribution plans can still have shortfalls but they often are less severe than defined benefit plans.

In the meantime, Congress needs to do the following:
1.) Raise premiums that companies with pension pay to the PBGC, perhaps charging more for companies on the riskier defined benefit plans.
2.) Make the rules more strict on what is considered a pension contribution, meaning much fewer credits in lieu of actual contributions. Limits on how much a pension can be underfunded would also be a good idea, with perhaps an option that the PBGC can suspend that for a company in trouble that would have a hard time meeting obligations in that short term. Such a thing would have to be used very rarely, but if it allows a company to get back on its feet again it might be better than that company going under and dumping it all on the PBGC.

Now that United has basically dumped its pension plan on the PBGC during the bankruptcy process, look for other airlines to follow suit to allow them to compete with United. In other words, this problem will get worse before it gets better. Ulitmately, you and I the taxpayer will have to pay to fix the problem, as usual.

Counting the liablities from United's pension bailout, the PBGC is already over $20 billion in the red, a number that certainly will go up. Even with increased premiums, Congress will have to appropriate money to bail the agency out. In this case, you can't blame the agency but rather the system of lax rules that allowed this to happen.