The troubled U.S. Pension Benefit Guaranty Corporation

 
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The Pension Benefit Guaranty Corporation (PBGC) was created by Congress in 1974 to insure all private-sector pensions against employer bankruptcy and underfunding. By 2006, the PBGC was responsible for insuring pensions for 44 million working and retired Americans.

Like many of the defined contribution plans it was designed to oversee, however, the PBGC is in financial difficulty. Many firms that provide pension plans are in slow-growth “old economy” industries, such as steel and automotive. Others, like airlines, are in poor financial health. As a result of these and other factors, PBGC liabilities are predicted to grow significantly in the coming years.

A 2008 study published in the Journal of Economic Perspectives, “Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation,” examines the factors that have hurt the PBGC and recommends solutions. Overall, the author found that the PBGC failed to properly price insurance, promote adequate funding of pension obligations, and promote sufficient information disclosure to plan participants and investors.

  • Pricing: The PBGC was intended to be a self-funding government agency, but Congress retains the authority to set premiums. Approved rate increases have been inadequate and fail to factor in recipients’ credit worthiness.
  • Funding: Limited penalties exist for firms that underfund and no penalties (such as risk-adjusted premiums) exist for investing pension assets in riskier portfolios.
  • Disclosure: Updates provided to the PBGC by at-risk firms are kept confidential. All other firms have lengthy filing periods — more than two years – rendering plan updates obsolete.

Tags: aging, retirement, Social Security

Last updated: February 28, 2011

 

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Citation: Brown, Jeffrey R. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," The Journal of Economic Perspectives, Winter, 2008, Vol. 22, No. 1,177-198.DOI: 10.1257/jep.22.1.177.