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US Pension Benefits Guarantee Becoming Heading Towards Insolvency

Posted by Steve Markowitz on December 3, 2014

Milton Friedman once said “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.”  Friedman’s quip was not far from reality.

Alex Pollock recently posted an op-ed in the Wall Street Journal titled “A Federal Guarantee Is Sure to Go Broke” in which he outlines yet another example of a mismanaged government program that will ultimately cost taxpayers billions.  This relates to the near insolvent finances of the Pension Benefit Guaranty Corp (PBGC).  This organization created in 1974 is a private corporation, but with the implied backing US government.  Its goal is to protect pensioners from the failure of private pension funds that pay them.  However, it is but another Ponzi scheme that will ultimately need a governmental bailout meaning that some taxpayers will lose and others will win.

According to economist Pollock:

  • The PBGC insurance fund has a negative worth of $62 billion for 2014, up from a deficit of $36 billion the year before.
  • The PBGC’s total assets are $90 billion with total liabilities of $152 billion. A company disconnected from the government with such a ratio would be shut down.

The government has demonstrated that when these quasi-governmental corporations become insolvent, taxpayers end up bailing them out.  History includes the bailout of Federal Savings and Loan Insurance Corp. costing taxpayers $150 billion in the late 1980s.  More recently it was the Fannie Mae and Freddie Mac debacles that cost taxpayers billions.

One piece of evidence that the PBGC program is a Ponzi scheme is the corporation’s misleading statements to the public.  PBGC’s annual report states: “the U.S. Government is not liable for any obligation or liability incurred by PBGC.”  Its website further states: “PBGC receives no taxpayer dollars and never has.”  Those statements are just not credible.

The type of pension plans guaranteed by the PBGC are high risk since they guarantee returns based on assumptions that are little better than guesswork.  In addition, increasingly frequent and larger governmental interventions have made such plans irresponsible from a financial standpoint.  Governmental interventions into the economy significantly affect the return rates of these pension plans.  Guaranteeing such plans would not be possible without governmental tacit promises.

Was the PBGC created merely out of bad business judgment or as a plan to reward certain taxpayers (mainly union workers) at the expense of others?  This type of discussion is never held when governmental programs fail.  Instead, those that created the programs have long since departed with huge pension supplied by the government.  In addition to this slap in the face, taxpayers of forced to pay the damage through bailouts.

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