Pension system would benefit from competition

A House labor subcommittee has taken the first steps toward reforming the way private companies handle pensions.

The issue has come increasingly to the fore in the wake of defaults in the troubled airline industry. United Airlines is scheduled to default on about $10 billion in pension obligations, of which $6.6 billion is scheduled to be picked up by the Pension Benefit Guaranty Corporation (PBGC).

The organization was created by Congress in 1974 to guarantee pension benefits in covered plans or take over failed pension plans. It is funded by levies called premiums on companies with pension plans, but could put taxpayers on the hook in the event of a “perfect storm.”

The problem, as Secretary of Labor Elaine Chao said, is that the PBGC is facing a current deficit of $23.3 billion, and is aware of at least $450 million in corporate underfunding of pension plans that could go bad some day.

The administration is pushing a proposal similar to one passed out of committee by House Education and the Workforce Committee chairman John Boehner, R-Ohio. Both seek to fund the PBGC better by raising the premium companies pay from $19 to $30 per employee, with the administration plan phasing in the higher rate more quickly.

Both plans would require companies whose pension plans are not fully funded to become fully funded within seven years. Both would restrict the ability of companies that contribute more than the required amount to pension plans in a given year to use it as credits against future contributions, with the administration bill a bit more restrictive. Both would require plans to provide more detailed information to workers and regulators. Both would forbid retaining “golden parachutes” for top executives if a company’s pension plan goes into default.

The most important difference is that the administration plan includes authority for the PGBC to assess increased “risk premiums” from companies whose financial status is shaky.

Either of these proposals would place the PBGC on a somewhat sounder financial footing, but neither addresses the fundamental “moral hazard” problem the agency itself presents. When a federal agency — ultimately backed by taxpayers — promises to step in when a plan fails, the incentive to manage a plan soundly is reduced, as we saw during the S&L crisis of the 1980s.

The best approach would be to convert the Pension Benefit Guaranty Corporation into an honest-to-goodness private insurance plan for pensions — and permit competitive firms to operate. Such an entity would be able to charge variable rates depending on the risk factors in different businesses, which would provide quite tangible incentives to fund managers to shape up.

The House is not likely to consider what will seem such a radical step to some any time soon. Passing either the administration or the Boehner plan, however, will only postpone funding crises. Eventually the private solution will have to be considered. The alternative is to have taxpayers bail out the PBGC.