The government support of workers’ pensions is broken.

The government program, the Pension Benefit Guaranty Corporation (PBGC), is seriously underfunded, and therefore does not have the capital to take care of workers whose pension plans have been abandoned by bankrupt companies. So far this decade, tens of thousands of workers who have depended on their pensions to provide for their retirement have seen their benefits cut severely, and the concern of the American worker is palpable.

Created by the Employee Retirement Income Security Act of 1974, the PBGC is a federal corporation intended to protect the basic retirement benefits for the American worker. The PBGC receives no funds from general tax revenues and its operations are financed primarily by insurance premiums set by Congress and paid by sponsors of defined benefit plans. Those insurance premiums are based on criteria that attempt to evaluate the risk inherent in each plan. Currently, the PBGC protects over 40 million workers in over 30,000 plans.

In the year ending September 30, 2006, it received approximately $1.5 billion in premium income, had about $350 million in expenses, and by its own estimates was underfunded by approximately $18 billion.

Since 1974, the credit markets have evolved dramatically, to where, today, the free market is likely to be a much more efficient mechanism to protect the workers, and a more economically rational method for determining the proper risk premium a plan should pay. If the government were to mandate that all pension plans had to buy insurance on their deficit from the market, it would obviate the need for the PBGC to serve as the middleman.

In addition to more properly evaluating the risk, the market price, would provide better incentives for corporations to properly fund plans in order to minimize the insurance costs. Well funded plans would pay less for insurance than underfunded plans but overall industry will benefit from a more rational allocation of risk. As the market became more sophisticated, the incentives to the plan would become more developed, and the costs over time would likely be reduced.

This proposal will significantly reduce the functions of the PBGC, but it could remain as a regulatory agency with the mandate to oversee that pension plans obtain adequate insurance coverage.

It might also oversee the development of a private high risk pool of insurance for those companies unable to obtain coverage.

This entry was posted on 11.05.2007 at 4:02 pm and is filed under Uncategorized, Economic Opportunity, Government Reform, Helping Families, Ending Poverty. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response.