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.