June 23, 2014
- Research Commissioned by Council Confirms Adverse Effects of PBGC Premium Increases
- NOTE: This Benefits Byte was also sent in our old format via Outlook.
Research Commissioned by Council Confirms Adverse Effects of PBGC Premium Increases
A new report commissioned by the Council and released on June 23 by Quantria Strategies LLC, an independent research firm, confirmed that proposed Pension Benefit Guaranty Corporation (PBGC) premium increases would harm the defined benefit pension system by driving away plan sponsors that present no risk to the system.
The Council is distributing the report, Further PBGC Premium Increases Pose Greatest Threat to Pension System, to Capitol Hill staff and the news media as a response to the Obama Administration’s budget proposal (described in the March 5 Benefits Byte) and continued concerns that premium increases may be used to pay for unrelated spending measures. As we reported in the May 29 Benefits Byte, increased PBGC premiums appear to be among the potential revenue raising items under consideration as lawmakers negotiate reauthorization of the federal Highway Trust Fund.
The report commissioned by the Council and released today describes in detail various consequences of past and potential premium hikes:
- PBGC premiums are so disproportionately high that they force employers out of the defined benefit plan system, thus eroding PBGC’s premium base.Since 2005, Congress has adopted legislation that by 2016 will have more than tripled PBGC premiums(both flat rate and variable rate).
- Artificially low interest rates inflate purported underfunding of pension plans and the PBGC’s self-reported deficit.On top of that, more than 96 percent of PBGC’s own reported deficit estimates relate to plans that have already exited the defined benefit plan system. So, current sponsors of plans who pose no risk to the PBGC are forced to pay for the actions of employers who long ago terminated their plans.
- Double counting of PBGC premium increases perpetuates long-term deficit spending.Congress in essence“double counts” premium increases by using the revenue to offset the cost of federal spending on initiatives unrelated to pensions, even though the actual premiums collected can legally only be used by the PBGC.
- PBGC is in a financial position to pay benefits for many years into the future. PBGC holds enough assets to pay all benefits to participants in terminated single-employer defined benefit pension plans for many years into the future.
- The mandatory nature of the PBGC program effectively gives employers only one choice to avoid burdensome premiums: exit the system by de-risking.Employers lack a competitive market for the service provided by the PBGC. Other than reducing risk through buyouts and other measures or employer plan sponsors’ only option is to exit the defined benefit plan system completely.
- PBGC premiums represent taxes on employees. While employers face the statutory incidence of these taxes, the impact is ultimately felt by employees if the result is to compel employers to freeze or terminate the pension plan.
Congress has already raised premiums twice in the past three years over the objections of the business community. The 2012 highway legislation, the Moving Ahead for Progress in the 21st Century (MAP-21) Act, included $9 billion in PBGC premium increases, followed by an additional $7.8 billion in increases enacted as part of the late-2013 Bipartisan Budget Act.
PBGC has suggested that its self-reported deficit is indicative of a precarious financial position requiring additional premium revenue. The Council has held more than 75 meetings with congressional offices to dispute PBGC's claims and to make the case opposed to these repeated, unwarranted increases. A new set of talking points detailing concerns with the PBGC’s position is available.
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