Headlines from the future

Bloomberg runs a story on an arcane policy entity called the Pension Benefit Guaranty Corporation that I fear will be making news in, oh, about five years:

The pension shortfall among U.S. companies may force the federal agency that insures retirement plans to seek a taxpayer bailout similar to the one during the savings and loan crisis, according to the Cato Institute, a policy research group. The Pension Benefit Guaranty Corp. had a record deficit of $11.2 billion last year after taking over plans for 152 companies, including Bethlehem Steel Corp. and US Airways Group Inc. Without changes to funding and premium rules, that deficit is likely to swell to $18 billion in the next 10 years and may reach more than $50 billion, said Richard A. Ippolito, who wrote the study for Cato, a policy research group, and is a former chief economist for the pension agency. “If exposures create claims that reach catastrophic levels, taxpayers will be called upon to provide a bailout,” Ippolito said.

Here’s the link to Ippolito’s study. From the abstract, this sounds like a classic moral hazard problem:

The Pension Benefit Guaranty Corporation, the federal agency that insures private-sector defined-benefit pension plans, had a surplus of $9.7 billion at the end of 2000 but a deficit of $11.2 billion at the end of 2003. Pension plan underfunding stands at more than $350 billion, which increases the likelihood that more pension plans will go under and taxpayers will eventually be called upon to provide a bailout. The reasons for the PBGC’s financial difficulties can be found in the structure of defined-benefit pension plans and in the way Congress set up the premium rules when it created the program in 1974. First, because the PBGC stands as the ultimate guarantor of companies’ pension liabilities, plan sponsors have an incentive to invest their assets in equities rather than fixed-income securities of the same duration as the liabilities. Second, funding rules allow companies to make gradual contributions to their pension plans in the event of underfunding, which guarantees long-term exposure for the PBGC. Furthermore, when faced with higher contributions, companies have usually appealed to Congress to reduce the underfunding that they need to report, which reduces contribution requirements. Unfortunately, Congress has failed to adequately address the problems of the PBGC. In temporary legislation passed in April 2004, Congress reduced the required contributions companies must make to their defined-benefit pension plans by an estimated $80 billion over two years by changing the formula used to calculate pension liabilities. Congress also provided additional relief of approximately $1.6 billion to steel and airline companies with heavily underfunded pension plans. Rather than place the PBGC on sounder financial footing, those measures will likely worsen the agency’s financial condition.

Read the whole thing.