Wall Street Journal : Pension Guarantor's Deficit Widens; Gap More Than Doubles To $23.3 Billion in '04 Amid Troubles at Airlines

John D. McKinnon

Tuesday November 16th 2005; Page A2

The federally chartered company that backstops private pension plans said its long-term deficit more than doubled in 2004, under pressure from failing airline plans.

The Pension Benefit Guaranty Corp. said its long-term deficit expanded to about $23.3 billion in fiscal 2004, from about $11.2 billion in 2003. The agency takes over defined-benefit pension plans when they become insolvent, and by law pays at least a portion of the benefits promised to retirees.

Some experts warned that the problems could grow much worse in coming years, as other companies try to shed their obligations to retirees in order to remain competitive with rivals that have done the same.

In fiscal 2004, which ended Sept. 30, the PBGC took over some 192 pension plans, up from 155 the year before. Analysts said much of the increase in the deficit, however, was due to anticipated losses from just two airlines, US Airways Group Inc. and UAL Corp.'s United Airlines -- each of which has announced their intention to terminate their plans.

The latest PBGC report reflects growing problems with pension plans in many old-line industries, not just airlines but steel and other manufacturing sectors as well. The report likely increases momentum for action in the new Congress to strengthen corporate pension-funding requirements. Possible changes could include raising the premiums PBGC charges companies with less-healthy plans. But the report also raises the odds of an eventual taxpayer bailout that could cost tens of billions of dollars, some experts said.

"They [the PBGC] are thoroughly bankrupt no matter how you look at it," said Douglas Elliott, president of the Center on Federal Financial Institutions , a new nonpartisan Washington think tank; it so far is funded largely by Mr. Elliott himself, a former Wall Street investment banker. "I think the government probably is going to have to sponsor a bailout at some point."

While the PBGC has enough cash from investments and premiums to pay benefits for now, Mr. Elliott estimates that the PBGC eventually could hit a deficit of $100 billion and run out of cash altogether around 2020. That would precipitate a major crisis, because unlike other troubled federal programs for retirees -- notably Social Security, which is funded by a steady stream of payroll taxes -- the PBGC thereafter would be able to pay only pennies on the dollar because of its precarious finances.

The PBGC covers all defined-benefit plans and charges a modest premium -- currently about 1% of sponsoring companies' contributions to their plans each year. The PBGC also gets money from its investments and takes over new assets, along with a lot of new obligations, when it absorbs insolvent plans.

Fixing the PBGC's problems is a tricky task because simply raising premiums across the board is likely to encourage more companies with healthy plans to bail out of the system. And raising premiums on less- healthy companies might simply speed up termination of those plans by their parent employers. It also probably isn't enough to fill the current gap.

Lawmakers also are considering stiffening rules for funding weak plans, while giving strong companies more flexibility to tuck away money in flush times.

But already, Congress has made the problem it faces somewhat more difficult by passing new rules for calculating pension obligations that make many companies' underfunding of their plans look somewhat less dire. Many experts believe it's going to be hard for Congress to force employers to fix the mess. That will further increase pressure for a bailout. On the other hand, a taxpayer bailout could be politically volatile because only about one-fifth of U.S. workers are currently covered by defined-benefit plans, which tend to be relatively generous.

House and Senate Republicans issued statements calling for legislation focused on pushing companies with weak plans to beef them up. The PBGC could also seek to make it more difficult for companies to shed their obligations in bankruptcy. But Rep. George Miller (D., Calif.) said the PBGC could eventually require "an S&L-style taxpayer bailout of the agency."