PBGC & Pension Reform

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PBGC & Pension Reform. Douglas J. Elliott President Center On Federal Financial Institutions NASI Annual Conference January 20, 2006. What is PBGC?. Pension Benefit Guaranty Corporation insures credit of private DB pension plans - PowerPoint PPT Presentation

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<ul><li><p>PBGC &amp; Pension ReformDouglas J. ElliottPresidentCenter On Federal Financial InstitutionsNASI Annual ConferenceJanuary 20, 2006</p><p>COFFI (www.coffi.org)</p></li><li><p>What is PBGC?Pension Benefit Guaranty Corporation insures credit of private DB pension plansPBGC picks up pension obligation only if company cant pay and pension trust is underfundedPBGC does not cover everythingCap on participants annual pensionNo early retirement subsidyPhase-in of recent benefit improvements</p><p>COFFI (www.coffi.org)</p></li><li><p>PBGC Provides Social InsurancePBGC is a federal corporationUltimate beneficiaries are 44 million employees and retireesCoverage is mandatoryPremiums bear little relationship to the risk presented by individual plan sponsorsTaxpayer serves as implicit guarantor, although not an explicit one</p><p>COFFI (www.coffi.org)</p></li><li><p>There Are Two ProgramsPBGC runs two distinct programsSingle-employer, with 34 million participantsMultiemployer, with 10 million participantsPBGC provides much less coverage for multiemployer plansAnnual caps are much lowerEmployers share joint &amp; several liabilityWe will focus today on Single-employer</p><p>COFFI (www.coffi.org)</p></li><li><p>PBGC is Deep in Hole FinanciallyPBGC owed $23 billion more than value of its assets in 2005True number could be higher or lowerDiscount rate matters a lotProbable losses have a subjective elementBut, no one appears to believe PBGC is solvent as it stands now</p><p>COFFI (www.coffi.org)</p></li><li><p>Cash Could Run Out by 2022PBGC has plenty of cash and investments to pay claims for many yearsBut, cash should run out years before pensions are fully paid outCOFFI has only publicly available cash flow model for PBGCOur base case estimate is that cash runs out by 2022, under current law</p><p>COFFI (www.coffi.org)</p></li><li><p>Deficits Could Get Much WorseThere is a structural imbalance between premiums and risksMost optimistic academic study found premiums covered half of historical riskCOFFIs base case estimate is that PBGC would need a $92 billion rescue, in 2005 dollars, to cover next 75 years of operation, under current law</p><p>COFFI (www.coffi.org)</p></li><li><p>CBO Study Is More PessimisticCBOs model shows premiums do not nearly cover risk of next 20 yearsPrivate insurer would demand $142 billion to cover existing deficit and expected losses from next 20 years of operationEven without a $64 billion risk factor to reflect private sector nature, insurer would charge $78 billion through 2025</p><p>COFFI (www.coffi.org)</p></li><li><p>Pension Reform Bill Is Likely To PassCore goal is to reduce structural problemsPBGC premiums would be raisedFunding rules would be tightened to reduce size and frequency of future claims on PBGCTransparency would be increased by better, faster, and wider distribution of dataThere is debate on extent to which actual bill meets these objectives</p><p>COFFI (www.coffi.org)</p></li><li><p>Pension Reform is Very HardThe two key goals are in serious conflictAvoidance of taxpayer bailout of PBGCEncouraging firms to keep offering DB plansPBGCs finances cannot be helped without shifting cost and risk back to employersYet, many employers are already uncertain DB plans are worth the costs and risksStriking the balance is hard and subjective</p><p>COFFI (www.coffi.org)</p></li><li><p>COFFI Has Many Reports on PBGCPlease see www.coffi.org, which has many reports on PBGC and pension reform, including a detailed PBGC PrimerThe New York Times highlighted those materials as refreshingly understandable and without a hint of dogma or advocacyWe also run a PBGC Listserv</p><p>COFFI (www.coffi.org)</p></li></ul>