PBGC Is Not Only Underwater, It's Drowning

The PBGC (Pension Benefit Guarantee Corporation), a GSE (government sponsored enterprise), reported a total asset deficit of approximately $22 billion for fiscal 2009. This was almost exactly double the deficit for 2008. The official news release by the PBGC can be read here.

In the annual report to Congress, the PBGC states that the potential additional exposure to future shortfalls and plan failures is now $168 billion. This is an increase of $121 billion from the corresponding figure ($47 billion) at the end of fiscal 2008. The use of the word "future" in the press release implies that this is in addition to the $33 billion already recognized in 2008 and 2009. The total would then be $202 billion.

The following statement is made in the press release:

PBGC is a federal corporation created under ERISA. It currently insures the basic pension benefits of about 44 million American workers and retirees in more than 29,000 private-sector defined benefit pension plans. The Corporation receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by PBGC's investment returns.

As a GSE, the statement that "the Corporation receives no funds from general tax revenues" is both correct and disingenuous. The same statement could have been applied to Fannie (FNM), Freddie (FRE), the FHA and the FDIC, but the government does not let GSEs go belly up. The pension benefits of 44 million private sector workers will not be sacrificed, if only for the votes they represent.

Presumably, higher fees from company pension plans could offset some of the shortfall. However, many of the plans have been closed and new money is not coming in as companies have converted from traditional defined benefit plans to cash balance plans and 401(k) plans as the primary vehicles for funding future retiree incomes. In these new plans, the risk of shortfall is born by the individual employee, not the employer. Therefore, higher fees will not appreciably impact the PBGC shortfalls. The horse is already out of the barn.

A further quote from the PBGC press release:

"Exposure to possible future terminations means that we could face much higher deficits in the future," said Acting Director Vincent K. Snowbarger. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program."

Read this to be a bailout.

The magnitude of the PBGC problem seems to be larger than the potential for the FHA (Federal Housing Authority) that was discussed Friday (here). In that case auditors have estimated that an infusion of $1.6 billion could be needed, although the author has estimated the need could go as high as $75 billion (here).

Let's see, $202 billion for the PBGC, $75 billion for FHA, unestimated amounts for Fannie Mae and Freddie Mac. How much do we have to add up to get "real money"? (Apologies to Everett Dirksen.)

Note: After the initial posting of this article, Phil's Stock World (here) alerted me to a post by Mish on this topic (here) that has some additional analysis.

Comments

[Leftfield:]

Okay, asset bubbles are caused by excessively low interest rates but they're "curing" the last meltdown with ZIRP. To inflate assets again to rescue the institutions that abused it most, last time.
Pension funds, like many investors, have needed higher rates than are safely found under ZIRP. So they chase risk, and become another domino in the TBTF failures.
TARP began a policy of committing to throw good money after bad. The cost of trying to avoid the pain of making needed readjustments to create an environment for sustainable growth is proving endless.

Nov 16 08:25 AM

[User 16123:]

What we have here is a crisis of confidence.

Nov 16 10:17 AM

[John Lounsbury:]

Yes, we do have a crisis of confidence. But if that is the only problem, does that mean our financial process is a confidence game? I am not being facetious; that is a serious question. Most of the time when I contemplate that question, I am disturbed by the possible answers.


On Nov 16 10:17 AM User 16123 wrote:

> What we have here is a crisis of confidence.

Nov 16 10:38 AM

[fotokemist:]

John,

I am a novice at this game (~13 months.) However, I have come to the conclusion that fractional reserve banking requires the entire financial system become a con game, since everybody cannot withdraw their money at the same time.

The con game seems to have spread to all asset classes except physical gold and silver. I watch with horror and disgust as my relatives in their 70s and 80s begin to consume their capital where they could live on the interest payments a few years ago.

Such observations lead me to a loss of confidence not only in our financial system, but our entire political and social system. I pray that leaders with integrity will rise and chart a course through the problems we cannot avoid. Otherwise, I have had a good life and really cannot complain if my remaining years are spent in a failed society.

Nov 16 01:36 PM

[Old Trader:]

I'll hazard a guess, and say the bulk of what's in the PBGC came from the "old line" unionized firms (the automakers, steelmakers, etc..) whose unions constitute a core constituency for the current administration, which makes a "bail out" (to use a "non-technical" term) a certainty.

Nov 16 06:49 PM

[Steven Hansen:]

John, the government is faced with a crisis - it is a crisis of collapse of the funding for social insurance and social programs.

we actually need a caretaker (not activist) government right now to try to get us out of this mess. and this would take a special person to take control - i see nobody who can fill these shoes.

Nov 16 11:26 PM