1. PBGC & Pension Reform Douglas J. Elliott President Center On Federal Financial Institutions NASI Annual Conference January 20, 2006

2. COFFI (www.coffi.org)2 What is PBGC? Pension Benefit Guaranty Corporation insures credit of private DB pension plans PBGC picks up pension obligation only if company can’t pay and pension trust is underfunded PBGC does not cover everything –Cap on participant’s annual pension –No early retirement subsidy –Phase-in of recent benefit improvements

3. COFFI (www.coffi.org)3 PBGC Provides Social Insurance PBGC is a federal corporation Ultimate beneficiaries are 44 million employees and retirees Coverage is mandatory Premiums bear little relationship to the risk presented by individual plan sponsors Taxpayer serves as implicit guarantor, although not an explicit one

4. COFFI (www.coffi.org)4 There Are Two Programs PBGC runs two distinct programs –Single-employer, with 34 million participants –Multiemployer, with 10 million participants PBGC provides much less coverage for multiemployer plans –Annual caps are much lower –Employers share joint & several liability We will focus today on Single-employer

5. COFFI (www.coffi.org)5 PBGC is Deep in Hole Financially PBGC owed $23 billion more than value of its assets in 2005 “True” number could be higher or lower –Discount rate matters a lot –“Probable losses” have a subjective element But, no one appears to believe PBGC is solvent as it stands now

6. COFFI (www.coffi.org)6 Cash Could Run Out by 2022 PBGC has plenty of cash and investments to pay claims for many years But, cash should run out years before pensions are fully paid out COFFI has only publicly available cash flow model for PBGC Our base case estimate is that cash runs out by 2022, under current law

7. COFFI (www.coffi.org)7 Deficits Could Get Much Worse There is a structural imbalance between premiums and risks Most optimistic academic study found premiums covered half of historical risk COFFI’s base case estimate is that PBGC would need a $92 billion rescue, in 2005 dollars, to cover next 75 years of operation, under current law

8. COFFI (www.coffi.org)8 CBO Study Is More Pessimistic CBO’s model shows premiums do not nearly cover risk of next 20 years Private insurer would demand $142 billion to cover existing deficit and expected losses from next 20 years of operation Even without a $64 billion risk factor to reflect private sector nature, insurer would charge $78 billion through 2025

9. COFFI (www.coffi.org)9 Pension Reform Bill Is Likely To Pass Core goal is to reduce structural problems 1.PBGC premiums would be raised 2.Funding rules would be tightened to reduce size and frequency of future claims on PBGC 3.Transparency would be increased by better, faster, and wider distribution of data There is debate on extent to which actual bill meets these objectives

10. COFFI (www.coffi.org)10 Pension Reform is Very Hard The two key goals are in serious conflict –Avoidance of taxpayer bailout of PBGC –Encouraging firms to keep offering DB plans PBGC’s finances cannot be helped without shifting cost and risk back to employers Yet, many employers are already uncertain DB plans are worth the costs and risks Striking the balance is hard and subjective

11. COFFI (www.coffi.org)11 COFFI Has Many Reports on PBGC Please see www.coffi.org, which has many reports on PBGC and pension reform, including a detailed PBGC Primerwww.coffi.org The New York Times highlighted those materials as “refreshingly understandable” and “without a hint of dogma or advocacy” We also run a PBGC Listserv