Global Pensions : Who will pay for past mistakes?

Douglas Elliott

June 2005; Page 14

It is encouraging to see a comprehensive pension reform bill (H.R. 2830) introduced into the US House of Representatives with a strong chance of passage. Pension law today is the classic camel – a horse designed by committee. It is awkward and ungainly and no one really likes it. Worse, the Pension Benefit Guaranty Corporation (PBGC) has already racked up US$23bn in deficits that will eventually fall on the taxpayer if nothing is done. COFFI’s modeling, available at www.coffi.org, shows this problem growing to the point where it would require a $92bn rescue, in today’s dollars, absent legislation. The bad news is that H.R. 2830 shows how hard the problem is. For all of the improvements, our modeling shows that the deficit would still rise to $49bn. The stricter funding rules and higher PBGC premiums eventually produce a balance for future years, but without erasing the substantial legacy costs from past claims and those arising in the next decade or so. It is tempting to blame the political compromises that make H.R. 2830 easier to pass than the original, and much vilified, Administration proposal. However, we find that the original proposal would be likely to reduce the deficit only an additional $4bn, to $45bn. The core problem is that we have lived with a fundamentally flawed pension insurance system for 30 years. There has been a systematic gap between the premiums Congress allows PBGC to charge and the risks imposed by the pension laws passed by Congress. Every academic study has shown this, COFFI’s detailed financial modeling confirms it, and bitter experience demonstrates it. Fixing the ongoing problem over
time is an excellent idea. Now we just have to figure out who is going to pay for the past mistakes. None of the beneficiaries have volunteered -- not the employers,
labor unions, retirees, or customers. Nor do taxpayers seem willing. Realistically, we may need to defer this fight while we focus on fixing the ongoing problems, otherwise
no legislation may pass. But, let us be honest about the legacy costs, because we will need to face them soon.