Attention OMB Director Ross Vought: Target Agency for Elimination — Pension Benefit Guaranty Corporation (PBGC)

Guest post by a concerned citizen

The Pension Benefit Guaranty Corporation (PBGC) was created in 1974 as part of the Employee Retirement Income Security Act (ERISA) under the Ford administration.

It arose in response to private pension collapses, most notably in the automotive sector, which left workers without promised retirement benefits.

PBGC’s mission is to insure private-sector defined benefit pensions — both single-employer plans and multi-employer union plans.

Today, PBGC backs pensions for about 33 million participants in 25,000 plans, or roughly 11% of the U.S. workforce, while the remaining 89% rely on Social Security and personal retirement savings without any comparable guarantee.  When PBGC was created 25% of the US workforce was part of a union.

The agency collects insurance premiums from these pension plans, but the guarantees it offers are far from full protection: retirees typically receive only 20-25% of their promised benefit if PBGC takes over the plan. Despite being funded by premiums, PBGC has exposed taxpayers to enormous liabilities.

The 2021 $40 billion bailout of the Teamsters’ Central States Pension Fund, funded by bail-out legislation, is the latest and most egregious example. The irony is glaring — taxpayers without defined benefit pensions are subsidizing generous union pensions, including those historically looted by organized crime.

Today, there are approximately 130 union plans with their 1.2 million participants at risk or receiving an extremely discounted pension.

Though the authorizing legislation does not place the full faith and credit of 6the United States Treasury backing these pensions, over time this full faith and credit became implied, similar to Fannie Mae and Freddie Mac.

If not addressed, PBGC will become another financial rescue project protecting certain classes of people at the expense of others.

Financial Picture

• PBGC’s multi-employer program had a reported deficit of over $63 billion before the 2021 bailout, making it one of the most underfunded federal insurance programs.
• Each year as new union members are enrolled in these failing plans, the liability for taxpayers increases.  Rather than enrolling new members in a defined contribution plan, the financial risk continues to grow for the Federal Government to bail out these plans like the precedent set with Central States pension.
• The single-employer program, though in better shape, only shows surpluses because the agency provides deeply reduced benefits relative to the original pension promises.
• The PBGC’s “insurance” model fails to function like true insurance: premiums collected do not adequately reflect the risks posed by chronically underfunded plans, effectively socializing losses while privatizing gains for poorly managed pensions.
• The premiums for single employer plans (think single companies like large banks) is higher than premiums for the multi-employer plans (Unions) as though they invest in different universes with Unions earning a higher rate of return than their single employer ‘cousins”.  Current law prevents one group of pensions cross-subsidizing the other.  So while the single employer plans and fund is largely funded, premiums cannot be used to “assist” the union plans in paying out their benefits in case of pension failure..

Legal and Constitutional Concerns

PBGC’s structure raises serious constitutional and legal questions:

• No clear constitutional basis exists for the federal government to guarantee private contractual pension obligations. There is no enumerated power granting Congress authority to underwrite private retirement benefits in this fashion.
• The PBGC is chartered as a federal corporation governed under the small business laws of the District of Columbia, an arrangement that further blurs the lines between federal authority and private-sector obligations. This structure arguably evades accountability and invites legal challenge, as it shields the agency from some forms of oversight typically applied to federal agencies while drawing on public funds.

The Birth of Moral Hazard

PBGC’s operations distort the retirement savings market, misallocate taxpayer dollars, and incentivize irresponsible pension management. The agency’s continued existence ensures that future pension failures, whether due to mismanagement, corruption, or changing economics, will fall on taxpayers who themselves may lack similar protections or benefits.

Proposed Solutions for Replacing or Disbanding PBGC

Several paths could responsibly eliminate PBGC while protecting current beneficiaries and taxpayers:

1. Divestiture from the Federal Government
   Transition PBGC’s responsibilities to private insurers and pension managers who have both the expertise and infrastructure to administer pensions and annuities. Firms such as Vanguard, State Street, and Fidelity could be licensed to provide pension guarantee services under strict Department of Labor oversight. This would align risk with those who can manage it while removing the federal government’s implicit guarantees.
2. Assignation to Labor Unions
   Shift the responsibility for insuring multi-employer pensions back to the unions that negotiate these benefits. Unions would self-insure, perhaps through jointly funded risk pools, forcing them to price the true cost of pension promises and hold themselves accountable. This model would reduce moral hazard while aligning incentives.  Congress could provide legislation to protect retirees from vulture capitalists and union mismanagement with financial disclosure and conversion to a defined contribution plan after a union and retiree vote upon reaching a certain value of unfunded benefits (e.g. 65%).
3. Downsizing and Redistribution of Functions
   The PBGC could be significantly reduced in scope:
   • Legal and enforcement activities could be reassigned to the Department of Justice.
   • Premium collections and pension check processing (or Direct Deposit) would be managed by the Treasury Department, leveraging existing federal payment systems.
   • Even today, PBGC pays a private financial firm $1 million per year to mail checks to retirees even though the Secretary of the Treasury is on the Board of Trustees.  Treasury issues mire checks and electronic payments than any financial organization in the US, yet PBGC pays for this service.
   • Oversight of remaining pension plans could remain with the Department of Labor, ensuring that plans meet fiduciary and funding standards without federal guarantees.
   • This distribution of effort could result in savings of $200 million per year with the elimination of human resources, procurement and technology departments with these functions transferred to existing resources in their respective Executive Departments. Over 10 years this could result in cost avoidance of $2 billion with 6those funds redirected to the PBGC premium investment portfolio which is currently underfunded by about $60 billion.
4. Phased Wind-Down with Fund Payouts
   Congress could legislate a sunset for PBGC, with a mandatory wind-down period during which plans would be offered the option to:
   • Transfer premiums paid back the their respective unions pension investment portfolios.
   • Enable participants to purchase private annuities.
   • Convert to defined contribution accounts, distributing assets directly to participants.
   • Liquidate and pay out current value of guaranteed benefits.
     A transitional fund, financed by existing PBGC reserves and a final risk-based assessment on remaining plans, could ensure an orderly closure.
5. Creation of State or Regional Pension Guarantee Associations
   Responsibility for pension guarantees could be devolved to the states, in line with their broader role in regulating insurance and retirement systems. This would restore constitutional balance and allow for solutions tailored to local labor markets and industries.

PBGC represents a failed experiment in federal pension insurance, rife with constitutional ambiguity, moral hazard, and financial mismanagement.

Continued taxpayer exposure to private pension risk is both unjustified and unsustainable. It is time for a serious policy action on how to responsibly end this arrangement before the next pension crisis triggers another massive federal bailout.

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