Suppose that every person in Delaware, Hawaii, Idaho, Maine, Montana, New Hampshire, Rhode Island and West Virginia all were covered by the same single insurance program. That’s how many people — approximately 10 million — are covered by the Pension Benefit Guaranty Corporation’s (PBGC) program that insures multiemployer defined benefit plans. But is that program up to the task? A recent analysis by the Congressional Budget Office (CBO) takes a look at its solvency and offers suggestions on improving its solvency.
In “Options to Improve the Financial Condition of the Pension Benefit Guaranty Corporation’s Multiemployer Program” the CBO notes that the program “has drawn increased scrutiny from policymakers in recent years because of the high likelihood that it will not be able to meet all of its insurance obligations, potentially causing participants to lose insured benefits or putting pressure on the government to provide PBGC with greater federal resources.”
The CBO has projected the claims on the PBGC’s multiemployer program, which it says are likely to be “relatively small in the coming decade but are projected to be much larger in the following decade” and has analyzed options for improving the program’s finances.
The crux of the problem, the CBO says, is that “Many multiemployer pension plans have large funding shortfalls,” and notes that in all, those plans have promised nearly $850 billion worth of benefits to participants but have assets worth just under half of that. It says that most plans hope to make up their funding gaps, but that a “small but growing number of multiemployer plans —
which together have $100 billion in liabilities but only $40 billion in assets for about 1 million participants — have reported that they will probably not be able to make up their shortfalls.”
If those plans become insolvent and file claims with the PBGC, the CBO says, they will exceed the PBGC’s ability to cover them.
There’s more to that than just the size of the claims themselves, the CBO explains. The maximum insured amount the PBGC guarantees equals about 60% of the promised benefit in a typical multiemployer plan. However, the PBGC can only pay financial assistance claims from insolvent multiemployer plans to the extent that the premiums and interest it has collected under the multiemployer program will allow. “Because those funds are projected to equal only a small fraction of the looming claims on the program, many beneficiaries in insolvent plans would receive less than their maximum insured benefit,” the report says.
“The rules that govern how pension plans are funded expose PBGC to the risk of large losses — losses that would far exceed the corporation’s ability to absorb them. Most multiemployer plans use risky investment portfolios to fund their benefit liabilities, which makes PBGC vulnerable to the risk that many plans will become significantly underfunded when returns on those investments are low during economic downturns,” warns the CBO.
What to Do?
The report notes that policymakers and others have proposed changes to improve the PBGC’s financial position as well as the multiemployer plans’ health. The CBO’s conclusions regarding these proposals include:
Drilling down to greater specifics, the PBGC says that “Sharply raising premiums, reducing the maximum benefit amount that PBGC guarantees, increasing employers’ contributions to significantly underfunded plans, or requiring better-funded plans to make sure their funding equals the market value of their liabilities and to curtail the riskiness of their investments could improve PBGC’s finances without imposing costs on the federal government.”
The report also argues that if the PBGC could partition troubled multiemployer plans — allowing some of the plan’s liabilities to be transferred to a new PBGC-supported plan — that would help boost the original plan’s solvency.
And the CBO says that if the federal government were to provide the PBGC with $34 billion to cover the shortfall the CBO projects the multiemployer program will face during the next 20 years, it will not only help the PBGC but also will lessen the problems that the plans would face as well. And it adds that the federal government could partially or fully privatize the program, “in which case premiums would be more likely to cover the cost of that insurance and reflect the risk posed by individual plans.”
In “Options to Improve the Financial Condition of the Pension Benefit Guaranty Corporation’s Multiemployer Program” the CBO notes that the program “has drawn increased scrutiny from policymakers in recent years because of the high likelihood that it will not be able to meet all of its insurance obligations, potentially causing participants to lose insured benefits or putting pressure on the government to provide PBGC with greater federal resources.”
The CBO has projected the claims on the PBGC’s multiemployer program, which it says are likely to be “relatively small in the coming decade but are projected to be much larger in the following decade” and has analyzed options for improving the program’s finances.
The crux of the problem, the CBO says, is that “Many multiemployer pension plans have large funding shortfalls,” and notes that in all, those plans have promised nearly $850 billion worth of benefits to participants but have assets worth just under half of that. It says that most plans hope to make up their funding gaps, but that a “small but growing number of multiemployer plans —
which together have $100 billion in liabilities but only $40 billion in assets for about 1 million participants — have reported that they will probably not be able to make up their shortfalls.”
If those plans become insolvent and file claims with the PBGC, the CBO says, they will exceed the PBGC’s ability to cover them.
There’s more to that than just the size of the claims themselves, the CBO explains. The maximum insured amount the PBGC guarantees equals about 60% of the promised benefit in a typical multiemployer plan. However, the PBGC can only pay financial assistance claims from insolvent multiemployer plans to the extent that the premiums and interest it has collected under the multiemployer program will allow. “Because those funds are projected to equal only a small fraction of the looming claims on the program, many beneficiaries in insolvent plans would receive less than their maximum insured benefit,” the report says.
“The rules that govern how pension plans are funded expose PBGC to the risk of large losses — losses that would far exceed the corporation’s ability to absorb them. Most multiemployer plans use risky investment portfolios to fund their benefit liabilities, which makes PBGC vulnerable to the risk that many plans will become significantly underfunded when returns on those investments are low during economic downturns,” warns the CBO.
What to Do?
The report notes that policymakers and others have proposed changes to improve the PBGC’s financial position as well as the multiemployer plans’ health. The CBO’s conclusions regarding these proposals include:
- the PBGC’s ability to pay projected claims could be improved by altering the terms of its insurance or plans’ funding rules;
- providing federal funding to the PBGC would enable it to partition more troubled plans than it can under current law; and
- the federal government could recapitalize the PBGC to allow it to pay all of its claims.
Drilling down to greater specifics, the PBGC says that “Sharply raising premiums, reducing the maximum benefit amount that PBGC guarantees, increasing employers’ contributions to significantly underfunded plans, or requiring better-funded plans to make sure their funding equals the market value of their liabilities and to curtail the riskiness of their investments could improve PBGC’s finances without imposing costs on the federal government.”
The report also argues that if the PBGC could partition troubled multiemployer plans — allowing some of the plan’s liabilities to be transferred to a new PBGC-supported plan — that would help boost the original plan’s solvency.
And the CBO says that if the federal government were to provide the PBGC with $34 billion to cover the shortfall the CBO projects the multiemployer program will face during the next 20 years, it will not only help the PBGC but also will lessen the problems that the plans would face as well. And it adds that the federal government could partially or fully privatize the program, “in which case premiums would be more likely to cover the cost of that insurance and reflect the risk posed by individual plans.”
- Log in to post comments