A Stitch in Haste

I have blogged previously about the "other pension crisis," namely the Pension Benefit Guaranty Corporation, which is a sort of FDIC for insolvent corporate pension plans.

If you want a thorough briefing on the crisis (and you should), U.S. News has a lengthy report on the piece, especially how the airline profitability crisis may push the PBGC over the edge into a full-scale government bailout comparable to the S&L crisis fifteen years ago.

The U.S. News piece has some glaring omissions and some typical MSM biases, especially regarding the role of labor unions in the crisis (the two biggest drains on the PBGC are the steel and airline industries, many of whose firms were "collectively bargained" straight into bankruptcy). Still, it provides a comprehensive overview of the history, current status and outlook for the troubled agency.

Meanwhile, the relevancy of the PBGC crisis to the Social Security crisis has not been overlooked by George Will:

Moral hazard exists when government policy creates incentives that make bad behavior rational. One example is the policy of bailing out countries whose reckless spending policies are encouraged by banks' reckless lending. Another example is a PBGC that assumes substantial responsibility for pension promises that companies have found convenient to make.

The PBGC will reduce its potential contribution to moral hazard by increasing fees paid by companies with poor credit ratings. Even more important, the administration wants the PBGC empowered to prevent financially parlous companies from making pension promises they are apt to eventually make a government burden. All this could cause some companies to abandon defined benefit plans.

This is an exact replica of the Social Security crisis (or more correctly, the Social Security Meta-Crisis), except that corporate moral hazard is replaced by political moral hazard. As I blogged previously:

[T]he growing crisis in private defined-benefit pensions, especially those of the airlines, demonstrates in microcosm how the Social Security crisis will play itself out if reform does not materialize. Supposedly "guaranteed" benefits accumulate faster than contributions can pay them, the government steps in with a buffer program (a.k.a. a phantom "trust fund"), then the government's program itself faces a crisis that can only be solved with general revenues (i.e., higher taxes).

Now note how the unreliability of actuarial assumptions cuts both ways -- yes, insolvency may be pushed back if certain assumptions are changed. But it may also accelerate if unforeseen strains are added to the system, as the airline bankruptcies are doing to the PBGC at this very moment.

(Compare and contrast: As George Will noted today on "This Week," government actuaries consistently and significantly underestimate the rate at which Americans are quitting smoking -- to paraphrase him: "If every smoker quit tomorrow, then the Social Security crisis would arrive, not in 2042, but next month.")

PBGC Archive:
Airline Pensions and Social Security
Airline Pensions, Part 2
The Other Pension Crisis
PBGC Continues to Foreshadow the Social Security Crisis
Government Takes Over United Pilots' Pension