The Other Pension Crisis: Employer-Sponsored Plans

by Veronique de Rugy

Several times in the past few weeks, I have written about the substantial underfunding in state and local governments’ pension plans. The best estimates say that the underfunding amounts to roughly $3 trillion in present value, creating an unsustainable situation. The risk for taxpayers is huge, since many state actors and activists deny the problem even exists and are unwilling to talk about reform options, which means that when state pension plans start running out of money (in the best-case scenario, as soon as 2017), states are likely to turn to the federal government for a bailout.

Unfortunately, this pension crisis isn’t the only one looming. In this paper, “The ‘Other’ Pension Crisis,” Charles Blahous explains that employer-sponsored pension plans covered by the Pension Benefit Guaranty Corporation (PBGC), the federally chartered corporation established to insure employer-provided pension benefits, feature similar financing risks. The federal government’s implicit and explicit guarantees amplify the moral hazard problems that operate within almost all defined-benefit pension plans in the U.S (including Social Security): the incentives for sponsors to hide their plan’s true funding status and to shift the risks of its underfunding to others.

Blahous provides this list of reasons for the systemic pension underfunding:

1. Inaccurate measurements of plan assets
2. Inaccurate measurements of plan liabilities
3. Inadequate funding targets
4. Unfunded benefit increases
5. Loopholes and special preferences
6. Inadequate premiums
7. Limitations upon the national pension insurer
8. Moral hazard and political economy factors
9. Periodic contribution relief
10. Inadequate disclosure
11. Barriers to funding up during good times

The analogy with the state-pension crisis is chilling. Even if employer-sponsored plans have smaller unfunded liabilities than states’ pension plans, it is still bad news for taxpayers, because if corrections aren’t made quickly, they may ultimately be asked by Congress to foot that bill.

Actually, I find this story even more depressing than state pensions or Social Security, because, in theory, private pensions should know better, and they really don’t. Of course, I should know better than to expect private actors to behave appropriately when the temptation to take short cuts exists: I’ve written about it before, here.

So, in this case, how much money are we talking about? Blahous writes:

While the inadequacy of funding information provided to the PBGC renders impossible a precise estimate of all underfunding in such plans, reasonable estimates are in the hundreds of billions of dollars. PBGC’s latest annual report shows a net negative financial position for its insurance programs of more than $23 billion, of which roughly $21.6 billion is attributable to the PBGC’s single-employer insurance program. PBGC’s estimate of its exposure to reasonably possible terminations of such plans is approximately $170 billion. While these figures may appear small relative to the large potential losses in state and local plans, percentage underfunding in employer-provided plans is nearly comparable.

The whole paper is here.