A Wall Street Journal editorial notes,
Congress and the White House produced a big, fat bailout for the most financially shaky companies, and some of those same companies are now joining the queue to dump their liabilities on the feds. Meanwhile, PBGC's [Pension Benefit Guaranty Corporation] deficit was left to balloon, as it now has -- by $12 billion with 155 company plans terminating.
...One popular solution is to raise the premiums paid by companies -- which haven't been increased since 1994 -- along with adjusting those premiums for risk. But a premium increase would make it more likely that healthy companies will drop out of the system, and risk-adjusted premiums give those financially fragile companies a strong incentive to terminate their plans.
The big problem is that the agency, by insuring private pension plans, has created its own moral hazard. Essentially, PBGC is writing a put option for which any private plan that is not fully funded is in-the-money; therefore, exercising the put by dumping liabilities onto the PBGC is attractive. Ultimately, of course, the put is written by taxpayers to the tune of tens of billions of dollars.
A friend who once did consulting for the PBGC says that its policies are completely irrational. It tells companies with overfunded pension plans that they can take every dollar of overfunding out the plans, and it tells companies with underfunded plans that it will bail them out. There is no risk-based pricing or other incentive mechanism to make companies want to maintain sound plans. He says that it makes the pre-S&L-crisis FSLIC seem well-run by comparison.
UPDATE: Bruce Bartlett emailed me with a link to coffi.org, which has a lot of useful stuff on the PBGC.
For Discussion. Any insurance involves writing a put option. How can the PBGC avoid giving out a free put option?
