A FEDERAL GUARANTEE IS SURE TO GO BROKE / THE WALL STREET JOURNAL OP EDITORIAL

Opinion

A Federal Guarantee Is Sure to Go Broke

Initially a union idea, the 40-year-old Pension Benefit Guaranty Corp. has a mission impossible.

By Alex J. Pollock 
             
Nov. 30, 2014 5:39 p.m. ET

Nat Weinberg, for many years the chief economist of the United Automobile Workers, invented the idea of government insurance of private pensions in 1961. If we are going to negotiate for bigger pensions, which the auto companies may not be able to pay, he reasoned, let’s get the government to guarantee them. His idea resulted in the creation of the U.S. government’s Pension Benefit Guaranty Corp. in 1974. Viewed from the UAW’s interests, this was a brilliant political strategy.

How is the PBGC insurance program doing on its 40th anniversary? Well, it is dead broke. Its net worth is negative $62 billion as of the end of September. That is even more broke than it was a year ago, when its net worth was negative $36 billion.

So, inspired by Weinberg, who left the UAW in 1974 and died in 1985, the U.S. government is the owner of a deeply insolvent insurance company. A private insurance company with this financial condition would have been closed down long ago. Is the taxpayer on the hook for the $62 billion deficit? The PBGC’s annual report earnestly assures that “the U.S. Government is not liable for any obligation or liability incurred by PBGC.” Of course not! Just like it wasn’t for mortgage-finance giants Fannie Mae and Freddie Mac .
     
We are further assured on its website that “PBGC receives no taxpayer dollars and never has.”

Not yet. But it could not exist for one minute as an independent company, without leaning on the U.S. Treasury’s credit.

The PBGC has total assets of $90 billion but total liabilities of $152 billion. So its assets are a mere 59% of its liabilities. Put another way, its capital-to-asset ratio is negative 69%.

There are two basic parts of the PBGC—the “single employer” and “multiemployer” programs. The first guarantees the pensions of individual companies, which are managed by the company; the second guarantees union-sponsored pensions involving multiple companies. The PBGC discloses in Footnote 1 of its financial statements that “neither program at present has the resources to fully satisfy PBGC’s long-term obligations.” Not by a long shot.

The multiemployer portion is in worse shape. It has total assets of $1.8 billion and total liabilities of $44 billion. Its assets are 4% of its liabilities, and its capital-to-asset ratio is negative 2,300%. The PBGC tells us this program is likely to run out of money “in as little as five years.” The single-employer program is also deeply insolvent, but less so. It has total assets of $88 billion and total liabilities of $107 billion. Its assets are thus 82% of its liabilities and its capital ratio negative 22%.

One of the PBGC’s problems is a conflicting double mission. It has to try—so far without success—to run a financially sound insurance company, but it is also designed to promote, or in its own words, “to encourage the continuation and maintenance of private-sector defined benefit plans.”

Experience has demonstrated that these plans are extremely risky financial commitments. But when you exist to encourage them, the tendency is to undercharge for the risk, supposing that you know even what the risk is. Such risk includes future increases in the longevity of pensioners, or of low interest rates, or both. This undercharging is inevitable since the insurance premiums are set by Congress and reflect political rather than economic imperatives.

Another government venture with a conflicting double mission, in this case to promote mortgages while guaranteeing deposits in savings and loans, was the old Federal Home Loan Bank Board (abolished in 1989). When its Federal Savings and Loan Insurance Corp. went under during the S&L crisis of the 1980s, it cost taxpayers $150 billion.

Why does the government have such a pathetic record at guaranteeing other people’s debts? It isn’t that Washington wasn’t warned. “My son, if you have become surety for your neighbor, have given your pledge for a stranger, you are snared in the utterance of your lips,” reads Proverbs 6: 1-2. Or in the case of the PBGC, snared in the utterance of the Congress of 40 years ago.


Mr. Pollock, a resident fellow at the American Enterprise Institute, was president and CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.