The Pension Benefit Guaranty Corporation (PBGC) may be the next subject of a federal bailout — if General Motors Corp. (GM) doesn't get its own speedy injection of Uncle Sam's cash.
GM's own auditors doubt the survival potential of the auto giant. What's more, GM concedes that on top of money to cover operations, it needs to make $12.3 billion in pension contributions by 2014. Is GM the looming iceberg that will sink the already swamped Pension Benefit Guaranty Corporation (PBGC)?
Recently, GM Chief financial officer Ray Young said the company was "trying to understand what our options for pension funding are," according to the Detroit News.
One of those options is to fall back into the arms of PBGC.
The PBGC insures the retirement future of nearly 44 million people in more than 30,000 private-sector defined benefit pension plans. At last count, the Government Accountability Office (GAO) has the insurer firmly planted on its high risk list with a financial deficit estimated at over $13 billion.
If and when GM goes under and is faced with underfunded pension plans, it will join ranks with such former luminaries as United Airlines, Bethlehem Steel, US Airways, LTV Steel, National Steel, Pan American Air, Weirton Steel, Trans World Airlines, Kaiser Aluminum, and Kemper Insurance — just to mention the top 10 companies with their hands already out to PBGC.
These top 10 claims alone currently account for nearly two-thirds of all of PBGC's claims and are concentrated among firms representing the steel and airline industries, says the GAO.
In its last formal report to Congress, GAO voiced strong concern that PBGC may "be exposed to another spate of claims from sponsors of very large severely underfunded plans."
Another Federal Bailout on the Horizon?
According to GAO, PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income of assets from pension plans trusteed by PBGC and recoveries from the companies formerly responsible for the plans.
Under current law, other than statutory authority to borrow up to $100 million from the Treasury Department, no substantial source of funds is available to PBGC if it runs out of money. In the event that PBGC were to exhaust all of its holdings, benefit payments would have to be drastically cut unless Congress were to take positive action to provide support.
Say officials at GAO: "PBGC's single-employer program faces financial challenges both from past claims resulting from bankruptcies and plan termination, which have been concentrated in a few industrial sectors, and structural problems such as weak plan funding rules and a premium structure that does not fully reflect the various risks posed by plans.
"While the claims presented by the steel and airline industries were due in some part to restructuring and competitive pressures in those industries, it is important to recognize other economic and regulatory factors affected PBGC and DB plan sponsors as a whole," conclude the GAO authors of a recent report to Congress.
(A DP plan is a Defined-Benefit Plan — an employer-sponsored retirement plan where employee benefits are sorted out based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company, according to Investopedia.)
"These problems included cyclical factors like the so called 'perfect storm' of key economic conditions, in which declines in stock prices lowered the value of pension assets used to pay benefits, while at the same time a decline in interest rates inflated the value of pension liabilities.
"The combined 'bottom line' result was that many plans were underfunded at the time and had insufficient resources to pay all of their future promised benefits," instructs the GAO.
Whatever the details, the reality world bottom line is that if GM went belly-up, retirees, workers, and taxpayers could all take a painful hit. GM's 450,000 retirees may end up with smaller pension payouts, and their medical benefits, as well as the health care plans of existing workers, would most likely be whittled back, according to BusinessWeek.
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