Why the System Is In Trouble
When an employer declares bankruptcy or cannot meet its pension obligations, the PBGC steps in. If an employer meets a set of criteria, PBGC will assume pension obligations.
Many company pension plans are underfunded. From the Ludwig von Mise Institute
In May, Business Week reported that a Congressional estimate suggests PBGC could face a shortfall of $120 billion over the next decade. PBGC says that it needs $23 billion over the same period.
The Cato Institute warns that PBGC faces a ssavings-and-loan level bail-out: "Pension plan underfunding stands at more than $350 billion, which increases the likelihood that more pension plans will go under and taxpayers will eventually be called upon to provide a bailout."
In 2004, Congress reduced the premiums corporations are required to pay to PBGC by $80 billion over two years. Congress also provided $1.6 billion in relief to airline and steel industries.
And Investor's Business Daily writes (via Vagabondia):
Many company pension plans are underfunded. From the Ludwig von Mise Institute
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During FY 2002 [PBGC's] balance sheet went from a $7.7 billion surplus to a $3.6 billion deficit, a loss of $11.3 billion, more than five times larger than any previous one-year loss.
In May, Business Week reported that a Congressional estimate suggests PBGC could face a shortfall of $120 billion over the next decade. PBGC says that it needs $23 billion over the same period.
The Cato Institute warns that PBGC faces a ssavings-and-loan level bail-out: "Pension plan underfunding stands at more than $350 billion, which increases the likelihood that more pension plans will go under and taxpayers will eventually be called upon to provide a bailout."
In 2004, Congress reduced the premiums corporations are required to pay to PBGC by $80 billion over two years. Congress also provided $1.6 billion in relief to airline and steel industries.
And Investor's Business Daily writes (via Vagabondia):
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All this has happened because the PBGC for years undercharged on its premiums. So companies never really paid for the risks to taxpayers they incurred. It's a well-known problem in economics. There's even a name for it: Moral hazard...
Silver Linings In Cloudy Skies
Two types of pension plans are at play in America: defined benefit pension plans and defined contribution plans.
A defined benefit plan uses a formula to determine an employee's benefit, usually based on a combination of earnings, age at retirement, and length of service. The risk (how much the pension will cost) is borne by the corporation. The employee can plan, knowing the fixed benefit amount. Through the 1980s, this was the most common retirement plan in the US; about 44 million Americans fall in this category.
In a defined contribution plan, the employee or employer (perhaps both) make contributions to a retirement account that grows with each infusion. Employee contributions are exempt from income tax. The cost of these plans is easily calculated; the benefit risk is borne by the employee. Defined contribution plans such as a 401(k) are now the most common, in part due to worker mobility.
Only defined-benefit plans are eligible for PBGC insurance. For most workers (90%) in these traditional plans, guaranteed pensions fall below the PGBC maximum, according to CNN.
Under the two-year law passed in 2004, Congress is required to study the nature and extent of pension underfunding. Things that Congress should take into consideration:
A defined benefit plan uses a formula to determine an employee's benefit, usually based on a combination of earnings, age at retirement, and length of service. The risk (how much the pension will cost) is borne by the corporation. The employee can plan, knowing the fixed benefit amount. Through the 1980s, this was the most common retirement plan in the US; about 44 million Americans fall in this category.
In a defined contribution plan, the employee or employer (perhaps both) make contributions to a retirement account that grows with each infusion. Employee contributions are exempt from income tax. The cost of these plans is easily calculated; the benefit risk is borne by the employee. Defined contribution plans such as a 401(k) are now the most common, in part due to worker mobility.
Only defined-benefit plans are eligible for PBGC insurance. For most workers (90%) in these traditional plans, guaranteed pensions fall below the PGBC maximum, according to CNN.
Under the two-year law passed in 2004, Congress is required to study the nature and extent of pension underfunding. Things that Congress should take into consideration:
- Americans live longer. In 1935, when Social Security was born, the average American man lived to be 65. Today, life expectancy is about 75 for men and 80 for women.
- Because we live longer, we rely on pension income longer. Men who retired from 1950-55 could expect to live on their pensions for 11.5 years. Fast-forward to 1995-2000: the figure had increased 50 percent, to 18.1 years.
