Risks to government pension insurer worse than thought, research finds

Sep 25, 2013 by Phil Ciciora

A study co-written by a University of Illinois pension policy expert warns that the financial risks facing the government-sponsored corporation that insures all private-sector pension plans in the U.S. are much greater than commonly thought.

University of Illinois finance professor Jeffrey R. Brown says that the Pension Benefit Guaranty Corp. is facing a very large financial shortfall and ultimately may need to be bailed out by taxpayers.

"Our in-depth review of the PBGC's models indicates that they are likely to underestimate how bad things can get when the economy is weak," said Brown, the William G. Karnes Professor of Finance and the director of the Center for Business and Public Policy in the U. of I. College of Business. "The implication is that the financial risks facing the system are much greater than widely believed."

Brown co-wrote the paper with Douglas J. Elliott, Tracy Gordon and Ross Hammond, all of The Brookings Institution. The team of researchers conducted an independent review of the Pension Insurance Modeling System, the complex that is used for assessing the long-term health of the financially troubled PBGC insurance program.

"There is a lot of debate in the plan sponsor and policy community about whether PBGC's long-term financial projections are excessively optimistic or pessimistic," he said. "This is important because these projections frame the discussion about what steps, if any, Congress should take to strengthen the pension insurance program. Some interest groups believe that PBGC's models overstate the program's exposure, whereas many economists are concerned that the problem may be worse than it appears."

Brown, a former member of the bipartisan Social Security Advisory Board and a senior economist with the President's Council of Economic Advisers in 2001-2002, says that the federal pension insurance agency's model is "likely to substantially understate the degree of fiscal risk to PBGC's insurance programs."

"During a financial crisis or recession, you tend to have clusters of corporate bankruptcies," he said.

According to Brown, these clusters also tend to happen around the same time that the typical plan's funding status is worsening as a result of investment losses that accompany an economic downturn.

"The PBGC's model does not adequately account for these macroeconomic shocks that lead to correlated losses," he said.

Brown says the PBGC is supposed to be self-financing and not receive taxpayer funding – but notes that the same was once true of beleaguered mortgage giants Fannie Mae and Freddie Mac.

"Taxpayers are probably going to have to foot the bill in the same way we bailed out savings and loans in the 1980s and the mortgage agencies during the 2008 financial crisis," he said. "Nearly everyone believes that Congress is ultimately going to have to backstop the PBGC because it's insuring the pensions of tens of millions of people. No one believes they're going to just let it fail."

The paper is titled "A Review of the Pension Benefit Guaranty Corporation Pension Insurance Modeling System."

Explore further: Outside CEOs could rejuvenate struggling businesses

More information: papers.ssrn.com/abstract=2329987

Related Stories

Verizon retirees sue to stop transfer of pensions

Nov 29, 2012

(AP)—Verizon retirees are suing the phone company because it's planning to transfer the responsibility to pay their pensions to an insurance company, where they will have fewer legal protections.

'Credit Crunch' Will Hit Retirees in Unequal Ways

Oct 09, 2008

(PhysOrg.com) -- How severely retirees will be affected by the continuing financial crisis and subsequent "credit crunch" depends to a considerable extent on the kinds of retirement plans they rely on for retirement income, ...

Recommended for you

Outside CEOs could rejuvenate struggling businesses

10 hours ago

CEOs hired from outside a company tend to spend more money on research and development, while CEOs hired from within are likely to make large, strategic acquisitions, new research from the University of Missouri ...

Do government technology investments pay off?

Mar 30, 2015

Studies confirm that IT investments in companies improve productivity and efficiency. University of Michigan professor M.S. Krishnan wondered if the same was true for government.

Study finds assisted housing works, but it could be improved

Mar 30, 2015

Two researchers from the University of Kansas Department of Urban Planning have just completed a study on the locations of assisted housing units and assisted households across the nation. It examines one of the key issues ...

Economist probes the high cost of health care

Mar 27, 2015

When Zack Cooper arrived at Yale as assistant professor of public health and economics, he gained access to a first-of-its-kind dataset. Working with the non-profit Health Care Cost Institute, Cooper and ...

User comments : 0

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.