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The Honolulu Advertiser
Posted on: Wednesday, October 15, 2003

Pension guarantee agency sees crisis ahead

By Kathy M. Kristof
Los Angeles Times

The troubled government agency that stands behind U.S. corporate pension plans is suffering mounting losses and could be forced to seek a taxpayer bailout, the agency's director said yesterday.

Likening the situation to the savings and loan crisis of the 1980s, the director of the Pension Benefit Guaranty Corp. told Congress that without structural changes the system would collapse.

The agency, which insures retirement plans for 44 million American workers and retirees, is running a record deficit of $8.8 billion — a dramatic jump from the $5.7 billion shortfall it forecast earlier this year.

The prime culprit: a series of major bankruptcies, mainly involving airlines and steel companies, that required the PBGC to step in and assume the costs of funding the pensions for the companies' employees.

"Pension claims against the PBGC for 2002 alone were greater than the total claims for all previous years combined," Steven A. Kandarian, executive director of the PBGC, told the Senate Special Committee on Aging.

The testimony chronicled the problems that have beset the U.S. defined-benefit pension system, including company-funded pension plans that promise workers a set level of benefits during retirement.

Three years of stock market losses have devastated corporate pension plans' investment portfolios as falling interest rates and rising life expectancies have played havoc with efforts to match shrinking pension assets to expected benefit payouts.

Those factors have pushed pension funding to a crisis point, experts say, with the PBGC estimating that corporate America's pension liabilities exceed its assets by about $350 billion.

The pension agency is funded through premiums paid by employers. If business failures continue at their recent pace, Kandarian said, the premiums charged to those plans could prove prohibitive, and drive them out of the system. At that point, the only answer would be for Congress to call on taxpayers to make up the shortfall, just as they did when the savings and loan industry couldn't cover the losses of failing thrifts.

Some industry experts countered that Kandarian's assessment was far too dire. The recent stock market recovery and rising interest rates have helped boost pension funding levels in 2003, and Congress is weighing rules that could ease pension funding further, said Jan Jacobsen, director of retirement policy at the American Benefits Council, which represents the nation's largest employers.

"The PBGC has enough money for years and years into the future," Jacobsen added.

Indeed, today's pension situation is better likened to the Social Security crisis, said Norman Stein, a pension expert at the University of Alabama.

The PBGC has enough money to cover claims for several years, Stein said. "But if we don't address this problem now, we are going to saddle future generations with a huge burden."