Tuesday, October 18, 2005

How Bad Are Things at the PBGC?

The Pension Benefit Guaranty Corporation, which initially gained attention this year when a number of airlines declared bankruptcy, clearly is in financial difficulty itself. The PBGC already has reached technical insolvency, anticipates an almost $1.5 billion net loss (or governmental accounting equivalent) this year and will likely run out of cash within 20 years unless laws are changed. Hoping to avoid an S&L-style debacle, both Congress and the White House have proposed legislation. The Congressional approach is to raise premiums paid into the fund and limit the ability of financially doubtful companies to participate; while the Administration seeks to limit the ability to use one year's overfunding to reduce further contributions while going along with a premium increase.

Loophole elimination, increase use of defined contribution plans and higher premiums will almost certainly be part of any package to solve this problem. The final package had better be effective: retirees will exact a price if their pensions even become risky--much less impaired--while taxpayers will look askance at a 1980s-style PBGC bail-out.


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