NU Online News Service, Sept. 15, 2003, 5:31 p.m. EDT – The federal government might have to bail out the Pension Benefit Guaranty Corp. insurance program for single-employer defined benefit pensions unless Congress finds a way to reform the defined benefit pension system, according to PBGC Executive Director Steven Kandarian.

Kandarian, whose agency insures defined benefit pension plans, spoke at a pension reform hearing organized by a subcommittee of the U.S. Senate Governmental Affairs Committee.

PBGC-backed, single-employer plans now have $350 billion less than they need to fund the pension benefits that they have promised plan participants, Kandarian told the subcommittee, according to a written version of his remarks.

The current level of underfunding compares with underfunding of just $50 billion in December 2000, Kandarian said.

The PBGC itself has swung to a $5.7 billion deficit in its single-employer pension insurance program at the end of July, from a surplus of $7.7 billion at the end of fiscal year 2001, Kandarian said.

“In the worst case,” Kandarian said, “PBGC’s deficit could grow so large that the size of the premium increase necessary to close the gap would be unacceptable to responsible premium payers. If this were to occur, Congress could call upon U.S. taxpayers to pick up the cost of underfunded pension plans through a federal bailout of PBGC. In essence, all taxpayers would shoulder the burden of paying benefits to the 20% of private-sector workers who still enjoy the security of a defined benefit plan.”

The defined benefit pension system is suffering from a drop in interest rates and stock returns, but it also faces the rapid aging of the pool of defined benefit plan participants as well as weaknesses in pension funding rules, Kandarian said.

Funding rules now let an employer stop contributing to a plan when the plan has 90% of the assets it needs to fund “current liability,” Kandarian said.

“The definition of current liability is a creature of past legislative compromises and has no obvious relationship to the amount of money needed to pay all benefit liabilities if the plan terminates,” Kandarian said. “As a result, employers can stop making contributions before a plan is sufficiently funded to protect participants, premium payers and taxpayers.”

But Kandarian acknowledged that curing the underfunding problem will be difficult.

“We must not create any new disincentives for companies to maintain their pension plans,” Kandarian said. “Pension insurance creates moral hazard, tempting management and labor at financially troubled companies to make promises that they cannot or will not fund. The cost of wage increases is immediate, while the cost of pension increases can be deferred for up to 30 years and shutdown benefits may never be prefunded. In exchange for smaller wage increases today, companies often offer more generous pension benefits tomorrow, knowing that if the company fails the plan will be handed over to the PBGC.”

If weak employers continue to rely on the PBGC to back unrealistic benefits promises, “financially strong companies may exit the defined benefit system, leaving only those companies that pose the greatest risk of claims,” Kandarian warned.

Links to the text of Kandarian’s testimony and the remarks of other hearing speakers are on the Web at http://govt-aff.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID=112