The Crying Game Over Pensions

Call it the Pension Panic of '93.

In recent months, a steady drumbeat of congressional hearings and Clinton Administration declarations has raised the specter of a federally guaranteed private pension system on the verge of financial crisis. Politicians have grabbed headlines by proclaiming that the federal insurance fund managed by the Pension Benefit Guaranty Corp. is $2.7 billion in the red and that the private pension plans the PBGC insures are underfunded to the tune of $51 billion. Some experts even suggest it's another thrift crisis in the making.

The alarmist rhetoric is fomenting a predictable response. Representative J.J. Pickle (D-Tex.), an influential member of the House Ways & Means Committee, has introduced legislation to shore up the PBGC. And on Mar. 22, when Labor Secretary Robert B. Reich appointed former Internal Revenue Service official Martin Slate as PBGC executive director, Reich called "pension protection" a top Administration priority.

Yet a close look at the numbers suggests that while there is room for concern, there is simply no crisis. The "defined benefit" pension plans, in which employers put aside money that's paid to retirees monthly, are actually getting stronger. About $1.3 trillion in assets back $900 billion in liabilities for the 41 million workers and retirees protected by the PBGC. Some 85% of the 67,000 plans insured are now fully funded, up from 45% in 1981. And the PBGC itself has enjoyed a positive cash flow for years (chart), and that's expected to continue. "It's not the sucking black hole that the S&Ls became," says Kathleen Utgoff, a former agency chief.

So why are so many prominent people raising such a fuss? There are several reasons: serious problems in a few industries, the arcane conventions of pension accounting, and, of course, politics.

MEDIA BAIT. The brouhaha is a carryover from the Bush years. James B. Lockhart III, Bush's PBGC chief, wanted to turn it into a private insurer. That, he argued, was the only way to eliminate the PBGC's increasing deficits. Lockhart found allies on Capitol Hill. "Creating a crisis situation has been a shrewd way to focus on this agenda," says Dallas L. Salisbury, president of the Employee Benefit Research Institute, which is financed by employers.

To be sure, the PBGC does have some problems. In 1991 and 1992, the agency's paper "deficit"--the extent to which its liabilities exceeded its $6.3 billion in assets--more than doubled, to $2.5 billion, when it took over the failed plans of Pan American World Airways Inc. and Eastern Air Lines Inc. Last year, the deficit increased by 7%, to $2.7 billion. But most of the agency's woes come from the airline, auto, steel, and tire industries. One-third of the underfunding belongs to four companies: Bethlehem Steel, General Motors, Chrysler, and LTV.

For the PBGC to crumble, however, would require an extraordinary set of dire developments that, given the current economic upturn, seem highly unlikely. "If you fear for the future of General Motors or Chrysler, then you should fear for unfunded pensions," says Donald C. Snyder, an executive with the General Accounting Office.

It is just such extreme assumptions that the worrywarts use to make their case. For instance, when they calculate the PBGC's deficit, they assume that all of the pension money owed to retirees in plans the PBGC has taken over has to be paid immediately in a lump sum. In fact, pension payments would be paid monthly for as long as 40 years.

Lockhart and his supporters point to estimates of huge future liabilities: perhaps $40 billion in claims, according to the Office of Management & Budget. The OMB, though, relies on a dubious model that assumes a company is bankrupt whenever liabilities exceed assets.

With such dramatic numbers, it's easy to draw comparisons with the thrift rescue. But the savings and loan disaster stemmed from bad real estate deals and much fraud. Pension funds, in contrast, are far more conservatively invested, and few plan failures have been attributed to fraud.

A fair amount of the debate over numbers stems from very real questions about the PBGC's ability to figure out where it stands financially. The GAO has complained for years that the PBGC's record-keeping is so unreliable that the GAO can't complete an audit. While the PBGC has made strides in updating systems, "nobody can effectively monitor PBGC's financial condition without reliable financial statements," according to Joseph F. Delfico, another GAO official.

DEADBEATS. Clearly, some reforms at the PBGC are in order. Often, companies themselves exacerbate the situation. Money-losing corporations sometimes promise their employees generous benefits in lieu of wage hikes or simply scrimp on pension contributions figuring at worst that other employers--via the PBGC--ultimately will have to pick up the tab. Pickle's legislation would tighten minimum funding requirements and prevent companies from increasing benefits unless their plans are at least 90% funded.

As a last resort, some advocate raising premiums. But that could undermine the system. Since the PBGC was launched in 1974, average annual premiums per worker have increased from $1 to $19. Still, the top annual payout is $29,000 per retiree, even for those who would have qualified for higher benefits had the plan remained solvent. Further premium hikes could accelerate the rate at which healthy employers cancel defined-benefit plans in favor of defined-contribution plans such as 401(k)s, which are largely funded from employee paychecks. The PBGC would then end up covering mainly weak employers and thus imperil its ability to provide a safety net.

Sorting out these thorny issues will fall to Slate, who takes over Mar. 29. He must decide whether the PBGC should be part of the social safety net or more like a private company. A former IRS division director who's knowledgeable on pension issues, Slate may be just the person to straighten out the PBGC and calm the Chicken Littles screaming that the sky's falling on yet another government guarantee program.