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Greenspan foresees ''diminished appetite'' for the dollar
By Mary Williams Walsh
The New York Times
Tuesday, November 16, 2004
http://www.nytimes.com/2004/11/16/business/16pension.html?
pagewanted=all
The federal agency that insures pension plans said
yesterday that its deficit, already at the highest in
its history, had doubled in its last fiscal year, to
$23.3 billion.
Over a 12-month period, the agency, the Pension
Benefit Guaranty Corp., incurred losses of $12.1
billion, according to the agency's audited annual
report for fiscal 2004. Much of the loss was a result
of pension fund failures in the airline industry.
The agency, created in 1974 to be the federal safety
net when pensions fail, has now lost an average of
$10 billion a year for the last three years, according
to one estimate. The mounting losses come at a
time when the agency is responsible for paying the
pensions for more than one million people covered
by pension plans that failed.
The agency's executive director, Bradley D. Belt,
called on Congress yesterday to address the situation
quickly, "so the problem doesn't spiral out of control."
He said that the Bush administration was preparing
a plan for a comprehensive overhaul of the pension
system, which it would propose early next year.
The Pension Benefit Guaranty Corp. is paid premiums
by companies that offer traditional pension plans. But
it does not have the legal authority to raise those
premiums or take other fundamental steps to bring its
finances back into balance. Such measures would have
to be enacted by Congress.
Congress, however, has not addressed the problems of
America's pension system in a comprehensive way
since the late 1980s, when a number of large steel
companies with traditional pension plans defaulted.
Since then, lawmakers have made some lesser
amendments to the system, but even those have
been made with great difficulty. The issues involved
are complicated, and any true pension reform will be
costly to someone -- either companies, workers, or
the federal government.
Experts warn that waiting will not make the troubles
go away. The system of regulating and insuring
traditional pensions called defined-benefit pensions
is increasingly resembling the system that did the
same for the savings and loan industry two decades
ago.
Congress had difficulty correcting that system's
structural problems as well. As a result, there were
delays and missteps, and the problems had years
to grow and deepen. In the end, the entire system
collapsed in 1989 and Congress had to authorize a
federal bailout that cost about $200 billion.
"The Pension Benefit Guaranty Corp. is living on
borrowed time," said Rep. George Miller, a California
Democrat who has followed the troubles in the
pension system closely. He issued a statement
yesterday saying the possibility of "an S.& L.-style
taxpayer bailout of the agency to the tune of billions
of dollars has increased."
In announcing the pension agency's latest financial
results, Mr. Belt, the executive director, said that it
was not running out of cash. With reserves of $39
billion, he said, it should be able to keep sending
retirees their pension checks "for a number of years,"
even if Congress does nothing.
The problem is that the pensions the agency must
pay retirees are much larger than the reserves, Mr.
Belt said. The pensions owed retirees measure
$62.3 billion in today's dollars.
Unless the agency finds a way to close the gap
between the $39 billion that it has and the $62 billion
that it owes, it will run out of money at some point.
In that case, either retirees will be denied their
benefits, or else Congress will have to appropriate
money for a bailout.
Mr. Belt also noted that the agency's problems were
worsening at a time when the general economic
environment has been improving. He said the agency
now faced $96 billion worth of risk from companies
that are "reasonably possible" to default on their
pension promises. The comparable number a year
ago was just $82 billion.
The pension agency identifies such companies by
looking at their corporate credit ratings, together
with the weakness of their pension funds.
The agency does not identify the companies whose
pension plans it expects to take over. Still, it is clear
that the airline industry was responsible for much of
the agency's loss for the fiscal year.
US Airways' three pension funds are expected to cost
the agency $2.1 billion. And United Airlines, a unit of
UAL, recently announced that it would terminate all
four of its pension plans as part of its efforts to emerge
from bankruptcy. Taking over United's pensions alone
will cost the agency an estimated $6.3 billion, by far
the biggest pension insurance claim ever made by a
single company. Accounting rules require the agency
to book that loss in its fiscal 2004, even though it has
not yet taken over United's plans.
Even before yesterday's announcement, analysts were
warning that the pension agency needed help. Douglas
J. Elliott, president of the Center on Federal Financial
Institutions, said that if Congress took corrective action
quickly, the cost would be small relative to the cost of
a bailout some time in the future. The center is a
nonpartisan research institute that examines the
federal government's various lending and insurance
programs.
Mr. Elliott said that the agency's new numbers brought
its average losses to more than $10 billion a year for
three years.
"This is a trend," he said. "This isn't something where
you can just say, 'Well, that was a bad year, thank
goodness we're over it.' "
In addition, the agency's fiscal 2004 was a year of
general improvement in overall economic and financial
conditions, Mr. Elliott said. Had interest rates not
changed slightly in the agency's favor, its losses would
have been even larger.
Congress is not expected to address the pension
agency's problems in the current lame duck session
because it already has a full workload. But some
members said yesterday that they were concerned
about the strength of the nation's pension system
and hoped to introduce legislation early in 2005.
"This issue has wide-ranging implications on retirees,
employers, workers, taxpayers, and the government,"
said Rep. John A. Boehner, the Ohio Republican who
is the chairman of the House Committee on Education
and the Workforce. Mr. Boehner said in a statement
that he planned to introduce a bill in 2005 that would
address what he called "systemic pension
underfunding problems."
The Education and Workforce Committee has already
held hearings on the problems of the pension system
and possible remedies. Mr. Boehner said that in
addition to making sure companies set aside enough
money for their pensions, the bill would require
companies to disclose clear information about their
pension plans and pay adequate insurance premiums
for their coverage.
In addition to the premiums it collects from companies,
the pension insurance program receives the assets from
the failed pension funds it takes over and invests them.
It does not currently receive money from income tax
receipts.
The insurance premiums have not been increased since
1994 and are thought to be inadequate relative to the
amount of insurance coverage companies receive. United
Airlines, for instance, has paid about $50 million in
insurance premiums over the years, for coverage of its
$6.3 billion claim.
Pension specialists also point out that the premiums do
not have anything to do with the amount of risk companies
bring to the pension insurance program. Companies with
pension plans that do not have adequate funds do pay
higher premiums than companies with strong plans. But
that way of operating does not account for one of the
most important signs of whether the plan will collapse or
not: the company's own health.
A strong company with an unhealthy pension plan poses
nowhere near the risk of a weak company with an
unhealthy pension plan.
Mr. Boehner has suggested finding a way to distinguish
between weak and strong companies, and charge higher
premiums to the companies that pose greater risk.
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