OPINION:
More bailouts are on the horizon. Even though taxpayers will shell out at least $250 billion to cover losses from Fannie Mae and Freddie Mac, there’s another, much less known federally chartered corporation that’s racking up the red ink - currently $23 billion worth. The Pension Benefit Guaranty Corp. (PBGC) could be the next to fall.
Established in 1974, PBGC insures the traditional pensions of more than 44 million American employees. It collects premiums from defined-benefit retirement plans, and when private-sector companies that offer the plans go belly-up, PBGC assumes the pension obligation. With the economy faltering, more companies have sought the protection of bankruptcy, and pressure on PBGC mounts. The gift retailer Harry & David recently exited Chapter 11 bankruptcy organization after a judge agreed that it could obtain a distressed termination of its $45 million pension plan. That was good news for Harry & David stockholders and employees. It’s not so good for the rest of us when such claims begin to pile up.
Before Harry & David, PBGC picked up the tab for failed Alabama Aircraft, Circuit City and Lehman Brothers, among others. As General Motors and Chrysler continue to stay in the red, their pension plans potentially can add $42 billion to PBGC’s burdens. Absorbing the problems of others is the reason for PBGC’s existence, but the availability of this gold-plated insurance package presents a moral hazard. It encourages employers to offer more lavish pension plans, whether or not the company can afford them, secure in the knowledge that the PBGC will ultimately meet the obligations.
Internal mismanagement at PBGC increases the danger. A recent Government Accountability Office (GAO) report identified weak internal procedures, including - critically - the PBGC’s investment strategy. Since 1990, the agency has swung five times between conservative and aggressive approaches. These changes have resulted in transaction costs of $74.8 million since 2008 alone. The GAO report condemned this as “an undisciplined approach to investing.”
When putting money away for retirement, the key to success is discipline and adherence to a long-term plan, goals that the PBGC, charged with protecting the pension funds of tens of millions Americans, has woefully failed to meet. It even has been lax with security. An unencrypted thumb drive was dropped on a commuter train in Cleveland, exposing sensitive personal data of 1,300 Americans.
The PBGC has the cash to meet its short-term obligations, so it poses no immediate threat. That means the opportunity for reform is now. The agency is running a deficit this year; waiting to address serious structural flaws will only make the problems harder to solve down the road. PBGC does not have the explicit backing of the full faith and credit of the U.S. government, but then again, neither did Fannie or Freddie. The PBGC needs to stay independent and self-funded and not expect taxpayers to give it a handout. We’ve been down that road before, and all it got us was trillions of dollars in debt and a stalled economy.
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