The Pension Benefit Guaranty Corporation: So far, the PBGC has ‘self-financed’ itself into a $26 billion hole.
Defined-benefit pension plans are very difficult to finance successfully: That is why so many of them, both private and public, are deeply underfunded. It is also why they are a disappearing financial species. General Motors, though it went through a government-directed bankruptcy, still had unfunded pension liabilities of $25 billion at the end of 2011, and has announced that it hopes to eliminate defined-benefit plans for all current salaried employees this year.
That they are “deeply underfunded” means that the liabilities of the pension plans greatly exceed their assets. One subgroup of these plans, the union-sponsored “multi-employer” plan, has liabilities $369 billion greater than its assets, according to a recent estimate by Credit Suisse. The excess liabilities of the 100 largest corporate (“single employer”) plans are estimated at $357 billion by the actuarial firm Milliman.
So here was a “big idea” of a half century ago: Let’s have the government guarantee these pension plans!
Despite the PBGC’s and Fannie’s statements, all market participants and politicians know that the Treasury will always bail out such government-sponsored adventures in financial risk-taking.
This idea was developed in Detroit by Nat Weinberg of the United Auto Workers in 1961 and was pushed for years by Senator Philip Hart of Michigan. It was enacted into statute in 1974 with the creation of the Pension Benefit Guaranty Corporation (PBGC). Politically, it was a brilliant idea, especially if you wanted to negotiate pensions which companies could not afford. Financially, it was a less good idea: The PBGC itself has a negative net worth of $26 billion as of its year-end report on September 30, 2011.
As the PBGC’s annual report says, the law requires that the PBGC “be self-financing.” So far, the PBGC has “self-financed” itself into a $26 billion hole.