It hasn’t reached the scale of the savings and loan mess, but the picture is far from rosy. PBGC will report this week that the condition of the nation’s most troubled pension plans has worsened dramatically. The gap between the benefits employers have promised and the amount that will be on hand to pay them has hit a whopping $40 billion . Yet no one seems in any hurry to fix what ails the government’s pension insurer. Its problems are long term–and long-term problems barely register on Washington’s political monitors. “You can’t do anything here unless there’s a crisis,” says a congressional pension expert. Instead, PBGC is likely to decay slowly until Congress and the administration find an expensive mess on their hands.
The state of PBGC’s health may have more impact on your tax bill than on your retirement income. After all, the vast majority of the 95,000 federally insured pension plans are solid, and PBGC still has the cash to step in and pay retirees when one plan goes broke. (It does not insure profit-sharing, savings and other plans that do not promise a specific benefit; it also does not guarantee benefits beyond a basic pension.) But companies like CF&I Steel Corp. of Pueblo, Colo., which has stopped putting money into an underfunded plan with 7,500 retirees, are lining up to drop their obligations in PBGC’s lap. If they do, the insurance premiums it collects for each pension-plan member won’t cover the benefits it must pay. The Treasury is not legally on the hook, but that will make little difference if angry retirees storm Capitol Hill. Without reforms, says Joseph Delfico of the General Accounting Office, “there’s a probability the federal government will be involved with direct revenues” in the long run.
Just how bad is the problem? Last year a GAO team set out to answer that question–and gave up in despair. “To a considerable degree, the financial shape the PBGC reports for themselves is what they want to report,” contends Paul Jackson, a former executive of the Wyatt Co., a pension consultant. Some critics claim that PBGC chief Lockhart is crying wolf. Administrative failures weaken his case; from 1988 to 1990 PBGC computers couldn’t even determine whether companies were submitting the correct premiums, a mistake that cost it an estimated $20 million.
But PBGC’s potential losses are massive. The most immediate danger comes from LTV Corp., a steelmaker and defense contractor that has spent five years reorganizing in bankruptcy court. PBGC could be on the line for a $3 billion shortfall in three LTV pension plans. In September a federal judge rejected the agency’s argument that it has first claim on LTV’s assets, which means it may collect little or nothing from LTV to help pay retirees. But the agency’s request for Congress to override the court ruling has gone nowhere: bankers object to giving PBGC first claim on bankrupt companies’ assets, and the Bush administration has not pushed the matter.
PBGC argues that the decision will encourage troubled companies to use bankruptcy court to lay their pension problems on Uncle Sam. Last Wednesday one did: four subsidiaries of Jesup Group, which makes plastics for bus seats and acrylic sheet for bank-teller windows, filed for bankruptcy reorganization in South Bend, Ind. Jesup, which has a $130 million hole in its pension plan, stopped adding money last summer. “My guess is that’s really what they’re after, to dump their pension liability,” says Charles Armstrong, general counsel of the United Rubber Workers. Some 4,000 retirees are still drawing benefits, but if the pension fund runs dry next year, as expected, PBGC must step in.
A host of other huge funds have serious shortfalls. Chrysler Corp’s six retirement plans, for example, hold less than two thirds of the $8.7 billion they need to pay future benefits; the company promises to make up the gap, but until it does–after the turn of the century–PBGC is potentially liable for about $3.3 billion. Bethlehem Steel’s plans are short $1.3 billion and General Motors’ $7.2 billion. None of this matters so long as the firms survive and keep putting money into the pension funds. But more underfunding means bigger losses for PBGC if a company goes under.
Many of these problems are due to the labor-management bargain that created PBGC in 1974. PBGC doesn’t operate like a normal insurance company. Premiums, which are set by Congress, are only vaguely related to the risk that a plan will run out of money; the thousands of well-funded pension plans pay higher premiums than their odds of failure justify in order to keep rates down for a small number, mainly at unionized manufacturers and airlines, which are short of funds. “The program is set up to take money from some people and redistribute it to others,” says Kathleen Utgoff, the agency’s former head.
In fact, while government insures pensions, it barely regulates them. Employers are largely free to adjust the numbers. In 1990, for example, General Motors determined that its pension investments would earn an average of 11 percent a year over the long term; in 1989, it had projected an average return of only about 10 percent. Such changes in pension assumptions reduced GM’s 1990 loss by $290 million–without improving the pension plans’ actual condition. Worse, the law lets a company like Chrysler boost pensions even if its plans lack the funds to pay the benefits it had promised previously. That gives management a low-cost way to keep workers happy–and increases the PBGC’s risks.
Identifying the problems is easy. But after the collapse of the savings and loan insurance fund and the looming insolvency of the bank insurance fund, the last thing Washington wants to hear about is another ill-fated federal insurance program. Politically, that reluctance is understandable. I the end it may also prove expensive.
