Looming pension system crisis

Probably few Americans are familiar with the acronym "PBGC." This is the federal Pension Benefit Guaranty Corp., set up by Congress 30 years ago to provide insurance for defined benefit pension plans.

Today, the PBGC's insurance program is overwhelmed, underpriced and proves a false sense of security to tens of millions of American workers and retirees. Companies are too often offloading their pension commitments to the agency, leaving PBGC with a $23 billion deficit at the end of 2004 after posting an accounting surplus of more than $7 billion in 2001. According to the Congressional Budget Office (CBO), that deficit is likely to grow dramatically over the next 10 years -- by as much as $48 billion -- and the PBGC's single-employer program is slated to run out of cash sometime between 2020 and 2025. That is more than 20 years earlier than the expected Social Security shortfall.

As chairman of the Senate Budget Committee, I believe this serious long-term fiscal problem must be addressed now. While the root of the problem concerns widespread underfunding among defined benefit pension programs and an outdated law permitting it -- an issue the administration and Congress are tackling -- we also must take steps to maintain the PBGC's solvency and protect participants, beneficiaries and investors.

Sounds like an example of "moral hazard." Government promises to "back up" pension plans, employers then underfund, and the risk of pension fund failures increases.

Perhaps the problems here are even worse than those associated with moral hazard:

The PBGC receives no appropriated funds. Claims are paid primarily from the revenue of the premiums from sponsors of covered pension plans. Current annual fixed-rate premiums are set at $19 per participant, well below the value of the PBGC insurance. Rules surrounding fixed and variable premium levels must be updated, taking into account the amount of existing underfunded liabilities.

Government is supplying the insurance. Are you surprised, therefore, to discover the premiums are too low?