WASHINGTON — State and local government pensions aren't the only ones in trouble.
Corporate pensions, too, are woefully underfunded, and the federal agency that insures them against losses faces a dangerous deficit that taxpayers may end up covering.
One government watchdog agency says the federal insurance funds are at "high risk" of failure. Moreover, the Obama administration's proposal to fix this is meeting stiff resistance from the U.S. Chamber of Commerce and other business interests.
The little-known federal Pension Benefit Guaranty Corp. insures roughly 27,500 corporate defined-benefit pensions, covering 44 million U.S. workers. These plans, popular in the public sector but increasingly rare in the private economy, promise workers fixed monthly retirement income, often equivalent to a final year's salary or an average salary over the last few years of work.
Never miss a local story.
The PBGC insures both single-employer plans offered by, say, a large manufacturer, and multi-employer plans, where many companies in a given industry collectively sponsor retirement plans. As of Sept. 30, single-employer plans insured by the PBGC collectively had a deficit of $21.6 billion, and multi-employer plans were in the red by about $1.4 billion.
Single-employer plans had promised more than $121 billion in benefits, but only had assets to pay out $99.4 billion. Multi-employer plans held assets valued at $1.6 billion to cover $3 billion in promised benefits.
When a corporation fails, the PBGC takes over its defined-benefit pension plan. The cost of paying the plan's beneficiaries is supposed to be covered by premiums collected from businesses insured under the federal program.
Two things during the recent economic slump weakened that system, however.
More companies failed and turned over their liabilities to the PBGC; in fiscal 2009 alone, the agency became responsible for another 200,000 workers.
And interest rates have been at all-time lows for more than two years, dragging down the rate of return on bonds.
Since many corporate pensions are heavily invested in bonds, rates of return on bonds are used to estimate the value of assets in the plans. The protracted low interest rates have increased the gap between what plans have promised and the value of the plans' investments.
Here's another reason for worry: The PBGC's estimate of "reasonably possible" exposure to failing multi-employer plans soared from $326 million in 2009 to $20 billion in 2010. The same exposure for single-employer plans rose to $170 million in 2010, up only slightly from $168 million a year earlier.
The PBGC says not to worry.
"Because our obligations are paid out over decades, we have more than sufficient funds to pay benefits for the foreseeable future," Joshua Gotbaum, director of the PBGC, insisted in Senate testimony on Dec. 1.
However, in a hard-hitting report to Congress the same day, the Government Accountability Office designated both PBGC insurance programs as at a "high risk" for failure. The GAO said that even if financial markets rise in value and lift investments made by pension plans, the PBGC is "likely to remain at financial risk" because of structural issues.
PBGC lacks authority to raise premiums on its own. Historically, Congress has raised premiums so the PBGC can adequately insure against losses.
In its budget released last month, the Obama administration proposed giving the PBGC authority not only to raise premiums, but to set them at different rates, depending upon how it assessed the risk of any given insured company. That would mirror a decades-old approach that the Federal Deposit Insurance Corp. takes with banks, setting premiums based on what it determines is a bank's risk of failure.
One key obstacle is the U.S. Chamber of Commerce, the powerful lobby for American business.
"We oppose it," said Aliya Wong, the Chamber's executive director of retirement policy. She said that having the government determine which companies are most at risk would be an undue interference in the marketplace.
The Chamber isn't opposed to higher premiums, Wong said, just to having government determine the creditworthiness of companies.