A Bailout For Pensions?

This recession has taken a toll on most investments. Even though the stock market has improved recently, it's no where near its 2007 highs. Real estate prices are also still quite low. Given all of that, it probably comes as no surprise that many pension funds are in a lot of trouble. As you might have guessed, the government wants to help.

Pension funds are under certain regulatory constraints to maintain prescribed funding levels. Many have fallen below the levels where they should be, but Congress is considering a bill to extend the time companies have to replenish their funds. The New York Times reports on this possibility:

To discourage companies from joining the many businesses that have frozen pension benefits for workers, Congress would also give employers up to 15 years to fully fund their plans if they agreed not to freeze benefits.

Why might Washington care about this? Well, the obvious reason is that they don't want Americans who were promised pensions to suddenly not get what they expected.

But there's a more subtle reason: businesses that owe former employees pension payments might have to use profits for this replenishment if their investments' value do not rise quickly enough to meet the requirements the funds are under. As a result, revenue will be going towards pensions that could have gone towards more hiring. With unemployment near 10%, that's not good.

So what's the problem with this legislation? It puts the funds at risk. Pension rules are there for a reason -- so that people get the payments they were promised. What happens if pensions begin failing as a result? Well, the government already has a solution for that. Sort of.

In case you didn't know (and I didn't) there's a government body out there called the "Pension Benefit Guarantee Corporation." In a similar way to how the Federal Deposit Insurance Corporation steps in when banks fail, the PBGC steps in when pensions fail. And just like how the FDIC's insurance is funded by fees paid by depository institutions, the PBGC's insurance exists thanks to premiums paid by pensions. According to The Times, since 1974, the PBGC has saved the pension plans of around 4,000 companies.

Sounds great, doesn't it? Until you read this (via the Times):

It has a deficit of $33.5 billion.

If companies and their pension plans continue to collapse at a rapid rate, many economists worry that the (PBGC) would eventually need a taxpayer bailout.

This highlights two problems that I find pretty obvious:

First, the fees that pensions are paying for this protection must not be nearly high enough. If they were, then the PBGC wouldn't run out of money and particularly not by such epic proportions. $33.5 billion is hardly chump change, even by today's bailout standards.

Second, the pension guidelines the government has in place must be inadequate. Pension investments should have very, very little risk. With so many in danger, these funds must have had a lot more risk than they should have.