PBGC Director Explains Retirement Security Challenges

February 3, 2012 (PLANSPONSOR.com) - Josh Gotbaum, director of the Pension Benefit Guaranty Corporation (PBGC), told a House subcommittee Thursday that the combination of living longer, the economy, and changes in pension plans is threatening many people's retirement security. 

Gotbaum also detailed the agency’s financial challenges, and outlined an administration proposal to redress them by reforming how PBGC sets premiums.

“Thanks to better health, better technology and better lifestyles, today we’re living longer, healthier lives,” Gotbaum said during a hearing before the Health, Employment, Labor and Pensions Subcommittee of the House Committee on Education and the Workforce. “That’s great news, but it also means that retirement costs more.”

Gotbaum continued, “Today, most people don’t think they have enough money to retire – and they’re right. The Administration is committed to do what we can do to strengthen retirement security, which is an important priority not only for workers and retirees but also for our economy and our nation.”

Gotbaum noted there are many government efforts to enhance retirement security, including efforts to preserve existing plans by reducing regulatory burdens; helping establish additional options, such as hybrid DB/DC approaches; and continuing to help people understand their plans and choices.

Turning to PBGC’s finances, Gotbaum acknowledged the $26 billion gap between what the PBGC owes and its assets (see Some Positives Exist Amid PBGC’s Dire Financial Picture). Premiums are too low for the insurance PBGC provides, he said. The agency is funded entirely through insurance premiums paid by plan sponsors, assets from failed plans, investment earnings on assets and recoveries in bankruptcy. Gotbaum urged passage of an administration proposal to allow PBGC’s board of directors to set the agency’s insurance premiums based on the risk presented by the insured. The proposal allows premiums to be set as they are in other government insurance programs and in private insurance companies.

To illustrate the disparity in present premiums, Gotbaum cited the case of American Airlines, (see American Airlines Proposes Termination of Pensions) which has paid a total of $260 million over 37 years. American is presently seeking to terminate its four pension plans, adding some $9 billion to PBGC's deficit—after receiving some one billion dollars in pension funding relief.

"Think how hard it is to convince companies to keep their plans while you're asking them to pay for the losses of others," Gotbaum said. "Without the tools to set its financial house in order and to encourage responsible companies to keep their plans, PBGC may face, for the first time, the need for taxpayer funds. That's a situation no one wants to face."

Gotbaum concluded with a call for cooperation in future deliberations to address challenges both to PBGC’s programs and to retirement security in general. "Pensions are so complicated that legislative consensus takes years to develop. Those deliberations must involve all constituencies in a spirit of cooperation. They must be both far-sighted and practical. PBGC has broad expertise both in retirement programs and in business's ability and willingness to provide them, and looks forward to assisting."