STUMP » Articles » A Week of Bad Pension Ideas: Creating a Guaranty Fund for Public Plans » 12 November 2015, 06:06

This idea is definitely dumb.

And has no chance in hell of being implemented.

But hey, I thought the same of Obamacare years ago, and here we are.

Let’s hear the proposers out:

To address these problems while ensuring that pensions are protected for future generations, we propose that Congress establish a public Pension Benefit Guaranty Corporation (PPBGC) and regulate public pensions. An approach to resolving the pension crisis could involve the following:

1. PPBGC would regulate and provide insurance to public pensions. If a public pension plan and its sponsor met specified termination standards, the sponsor would transfer the plan’s assets and liabilities to the PPBGC, which would then pay benefits to the plan’s participants and have a claim against the state or municipality for the plan’s shortfall.

2. PPBGC’s operations and insurance fund would be financed by premiums to be paid by all municipalities and states with defined benefit pension plans. The premiums would be set at a level to ensure the solvency of PPGC, which would not have access to taxpayer dollars. Premium payments, termination liability, and investment earnings would be the agency’s sole financial support.

3. Premium payments would be based on the size of a pension plan and its funding level, motivating public entities to minimize the size of their plans and transition employees to defined contribution plans. The best funded plans would pay the lowest premiums.

4. The new law would provide for public pensions to be guaranteed only to the extent the benefits have already been earned. It would preempt state laws and constitutions providing otherwise. Future benefits not yet earned, including COLAs not yet in effect, could legally be reduced or eliminated in every State.

5. The law would require that public pension plans be funded to a specified level – at least 80 percent – based on defined actuarial assumptions. Failure to reach the specified level of funding would result in higher premiums and – depending on the extent of the underfunding – benefit reductions. A transition period would allow states and municipalities not in compliance on the date of enactment of the law to come into compliance over a specified period of years.

6. The law would require disclosure and reporting both to plan participants and PPBGC to promote the monitoring of regulatory requirements.

For some reason, they keep mentioning Brazil, though there are plenty of other places they could name.

They could also admit that there is no such entity in any other country (as far as I know) and there’s a reason for that. I’ll get to that at the end.

Anyway, there’s a bigger thing they are deliberately not mentioning, and once I do mention it, you’ll see why.

PENSION BENEFIT GUARANTY CORPORATION

A pension guaranty fund already exists, though for private plans: the PBGC.

That’s where they got their snazzy PPBGC initialism from, but they never mention it as their model. If they did, the holes in their “brilliant” plans would come to the fore.

Because the PBGC ain’t no success story.

The PBGC “guarantees” private pension plans, defined benefit ones, that is.

From the Wiki article:

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, the PBGC insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($54,000 a year as of 2011).[ii] The benefits payable to insured retirees who start their benefits at ages other than 65, or who elect survivor coverage, are adjusted to be equivalent in value.

During fiscal year 2010, the PBGC paid $5.6 billion in benefits to participants of failed pension plans. That year, 147 pension plans failed, and the PBGC’s deficit increased 4.5 percent to $23 billion. The PBGC has a total of $102.5 billion in obligations and $79.5 billion in assets.¹

All those numbers are as of 2010, so that’s quite stale. No, I’m not going to update the wiki page — I have done with editing wikipedia forever (which is a different story).

Here’s something else from 2010:

Last November, the federal corporation charged with protecting Americans’ retirement funds issued an ominous public warning: the amount of pensions at risk inside failing companies had more than tripled during the recession.

The Pension Benefit Guaranty Corporation’s announcement signaled it might need tens of billions of new dollars to rescue traditional pensions paid by U.S. firms whose economic collapse left them unable to meet their retirement obligations to workers.

At the same time, however, the federally chartered corporation was receiving some bad news of its own: for the first time it was going to flunk an independent audit of the way it manages its finances.

Okay, but that’s five years ago.

What’s been happening lately.

TOO LITTLE, AND TIMING IS POOR

I would say “too late”, but it’s not quite there yet. But it is poor timing if you want to keep defined benefit plans around.

PBGC premiums are going to be hiked next year:

The new budget deal reached between the US congressional leaders and the White House on Monday proposes a 22% jump in Pension Benefit Guaranty Corporation (PBGC) premiums over the next four years.

The 144-page bill, which must be approved by the House and the Senate, would raise premiums for single-employer corporate pension plans to $68 per person for 2017, $73 for 2018, and $78 for 2019, and then re-indexed for inflation.

The PBGC also announced Monday it had increased the flat-rate premium to $64 per person for 2016.

“The new bill’s new round of premium rate increases sends a signal to defined benefit (DB) plan sponsors,” Bob Collie, Russell Investments’ chief research strategist, told CIO. “It’s becoming more difficult and more expensive for plan sponsors to keep a DB plan.”
…..
However, Collie also warned continued increases in premiums could put PBGC in a worse economic position.

As more and more plan sponsors turn to PRT and freezing their plans, there would be fewer plans actually paying the PBGC premiums.

“It’s a vicious cycle,” Collie said. “It could do more harm to the PBGC revenue base than good.”

Thing is, the PBGC premiums were too low for a very long time. I have no idea if the 22% boost would be adequate to cover their liabilities. Does the PBGC know?

That piece above was before the bill was passed and signed.

Here it is after:

Why this sudden PBGC premium hike? “They’re counting it as a general revenue increase for purpose of budget scorekeeping,” says Fildes, noting that the premiums can’t be used for anything other than to pay benefits if needed. If a company fails, its defined benefit plan is taken over and the PBGC pays a monthly pension (up to a maximum of $60,136 a year for a 65-year-old retiring this year).

Ironically, the PBGC just issued its Fiscal Year 2014 Projections Report, saying that the PBGC’s financial condition continues to be likely to improve and concludes that it is highly unlikely to run out of funds in the next 10 years.

Because we all know that 10 years is an appropriate planning horizon for lifelong pensions.

Here is the history of the PBGC premiums, by the way:

The truth is that the promises embedded in defined benefit pensions, whether the promise is made by a private or governmental employer, in reality are very expensive right now, due to macroeconomic elements (low interest rates) as well as demographic ones (increasing longevity past retirement age).

When the promises in insurance become more expensive, the premiums go up.

But they’ve kept them down for a long time.

Pretending that something costs less than it really does can cause loads of problems. And it’s not like the cost can be easily hidden.

Yes, there has been a shift to defined contribution plans:

Yes, there are bad aspects of this shift in that many people have inadequate retirement income because they build up inadequate retirement savings. When the employer had to salt away 10 – 15% of your pay to fund the pension becomes 5%, it is no surprise that you’re going to have less.

(Max out your match, btw, if you’re in a 401(k) plan. I do.)

But with private DB plans, you can also have an inadequate retirement if your plan failed. And they have failed:

Can you imagine the size of the bubbles for public pension plans?

THIS TIME IS DIFFERENT!

Yes, let’s create a PPBGC where there is no legislation hanging over the sponsors (ERISA for private plans), where “required” contributions aren’t required, and where politicians run it all.

I’m sure that will turn out better than the PBGC.

As I said, this concept is going nowhere. It’s like the various “let’s bail out Illinois pensions!” ideas that get floated from time to time. There was the “superbond” proposal for Puerto Rico, and I don’t know what’s up with that right now.

There’s so many things that are unworkable — that there would be one set of predetermined actuarial valuation assumptions (for discount rate, sure, but everything else? Salary scale? Retirement age? Disability rate? Mortality?).

That the plans would be required to be at least 80% funded (oh, it is to laugh…and no this doesn’t even rise to the level of my Hall of Shame. The whole thing is idiotic.)

Someone at the Actuarial Outpost commented that this is a backdoor attempt at a bailout. It’s not even a good try, though.

When people are already aware of the gaping holes of Medicare and Social Security promises that will not get filled…

When a firm that consults on defined benefit plans closes its own plan….

When people are aware that public employees are often paid some very nice salaries and benefits well before they retire (and that they are also in some of the worst-funded pensions)….

….how likely do you think anybody is going to sign on for this unworkable idea?

Good luck with that cunning plan., Baldrick.

That scene is from a Blackadder episode where the cunning plan for Blackadder’s brokeness is for him to become a highwayman.

Hey, maybe the public plans could try that one out.