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PBGC’S UNFUNDED PENSION LIABILITIES:

WILL TAXPAYERS HAVE TO PAY THE BILL?

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 9, 2005

Serial No. 109–7

Printed for the use of the Committee on the Budget

(

Available on the Internet: http://www.access.gpo.gov/congress/house/house04.html 

(II)

COMMITTEE ON THE BUDGET 

JIM NUSSLE, Iowa, Chairman 

JIM RYUN, Kansas 

ANDER CRENSHAW, Florida 

ADAM H. PUTNAM, Florida 

ROGER F. WICKER, Mississippi 

KENNY C. HULSHOF, Missouri 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

THADDEUS G. MCCOTTER, Michigan 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

ILEANA ROS–LEHTINEN, Florida 

DANIEL E. LUNGREN, California 

PETE SESSIONS, Texas 

PAUL RYAN, Wisconsin 

MICHAEL K. SIMPSON, Idaho 

JEB BRADLEY, New Hampshire 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

CHRIS CHOCOLA, Indiana 

JOHN M. SPRATT, JR., South Carolina, 

Ranking Minority Member 

DENNIS MOORE, Kansas 

RICHARD E. NEAL, Massachusetts 

ROSA L. DELAURO, Connecticut 

CHET EDWARDS, Texas 

HAROLD E. FORD, JR., Tennessee 

LOIS CAPPS, California 

BRIAN BAIRD, Washington 

JIM COOPER, Tennessee 

ARTUR DAVIS, Alabama 

WILLIAM J. JEFFERSON, Louisiana 

THOMAS H. ALLEN, Maine 

ED CASE, Hawaii 

CYNTHIA MCKINNEY, Georgia 

HENRY CUELLAR, Texas 

ALLYSON Y. SCHWARTZ, Pennsylvania 

RON KIND, Wisconsin 

PROFESSIONAL STAFF

JAMES T. BATES, Chief of Staff 

THOMAS S. KAHN, Minority Staff Director and Chief Counsel 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, June 9, 2005 ................................................... 1

Statement of: 

Hon. David M. Walker, Comptroller General of the United States ............. 6

Hon. Douglas Holtz-Eakin, Director, Congressional Budget Office ............. 22

Prepared statement of: 

Mr. Walker ........................................................................................................ 7

Mr. Holtz-Eakin ................................................................................................ 26

(1)

PBGC’S UNFUNDED PENSION LIABILITIES: 

WILL TAXPAYERS HAVE TO PAY THE BILL? 

THURSDAY, JUNE 9, 2005

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 9:31, in room 210, Cannon House Office Building, Hon. Jim Nussle (chairman of the committee), presiding. 

Members present: Representatives Nussle, Ryan, Conaway, 

Chocola, Spratt, Moore, Neal, Edwards, Cooper, Davis, Case, and 

Schwartz. 

Chairman NUSSLE. The budget hearing will come to order. 

I understand that there are members who are still trying to get 

to the Hill as a result of the early morning fire at the Rayburn 

Building, but we will begin the hearing. 

Our witnesses have time constraints. I know members will have 

time constraints as a result of votes on the floor being done today, 

approximately 1 o’clock. 

This is a full committee hearing on PBGC’s [Pension Benefit 

Guaranty Corporation] unfunded pension liabilities, and we have 

an opportunity today to hear from two expert witnesses who have 

testified often before our committee. We welcome back: David 

Walker, the Comptroller General, and Douglas Holtz-Eakin, the Director of the Congressional Budget Office [CBO]. 

Good morning, and welcome to this hearing. 

I understand that you, General Walker, have a plane to catch, 

I believe at 11:30 a.m. So we will try and get into this as quickly 

as possible. And I ask members to be as succinct as possible. 

The focus of today’s hearing is really three-fold. 

First, to look at the magnitude of the problems facing our Nation’s system of pension benefits and the implications of those problems, not only for future pensioners, but also for taxpayers as a 

whole. 

Second, to discuss how the Federal budget might better account 

for unfunded obligations or the enormous projected shortfalls of our 

Nation’s pension guarantee system. 

Third, to review some of the areas likely in need of reform. And 

I am not talking about any specific proposal today that I am offering or that I would assume any other members are offering, but 

rather what key areas we need to look at or address if we are going 

to try and tackle this. 

I think most people of working age have a pretty good grasp of 

what the pension plans are all about. And while maybe not to the 

2

extent of my father’s generation, many of us in their 40’s and 50’s 

who are planning for or getting ready, near retirement, are counting on at least pensions to be a portion of that retirement. 

So I don’t have to tell anybody why the guarantee of promised 

pension benefits is a very critical issue, for not only our Nation’s 

workers and retirees, but we will find out today, as well for our 

taxpayers. 

The subject has been gaining quite a bit of steam in the press 

in the last few weeks. I am not sure that there is a clear understanding of why pension benefits are facing such a large shortfall 

in the future as I read the press accounts. So I will just give a 

quick overview from the way I see it, and this is in part why we 

have a hearing today. 

For about the last 30 years, the Employee Retirement Income Security Act mandated companies that offered employee defined benefit pension plans to obtain insurance for these plans through the 

PBGC Corporation, or the Pension Benefit Guaranty Corporation. 

The intent was to ensure that the promised retirement benefits 

of U.S. workers would be maintained, even if the company became 

insolvent or for some reason the pension plan failed. 

So in a nutshell, if the pension plan collapsed, the PBGC would 

take over, pool its current assets with those of other failed plans, 

then use the resources, coupled with premiums from other participating companies that are purchasing the insurance, to pay for 

benefits. 

Now in theory, the PBGC was supposed to be completely self-financing. The assets it assumed when it took over the failed pension 

plan, combined with the insurance premiums that were paid to the 

corporation by the participating companies, were supposed to be 

adequate to supply the resources to satisfy the pension promises. 

But as we are discovering, and as most of us here know, that is 

not what has been happening. According to PBGC, its current total 

assets fall short about $23 billion of the amount needed to pay all 

of the benefits currently promised to pension beneficiaries. 

As equity values declined during the recession of the 2000-2001 

time period, several major pension benefit plans were terminated 

and turned over to PBGC with substantial underfunding, including 

the LTV Corporation, Bethlehem Steel and the now-terminated 

United Airlines plan. 

Because these plans are large and also substantially underfunded, they have created a significant shortfall for the PBGC. And 

according to the Congressional Budget Office, that is not even half 

the story we are going to hear today from their soon-to-be-released 

report that I think is going to be part of the testimony today. Just 

to peek at that a moment, we understand that CBO is going to estimate that it could rise another $75 billion, or the difference between projected future obligations of the PBGC and the agency’s 

projected resources. 

All told, PBGC is expected to run about $100 billion short of the 

resources needed to pay promised benefits from failed private pension plans, according to the report, as I understand it. To make 

matters worse, the Center on Federal Financial Institutions, which 

tracks pensions, tells us that on the current path, all PBGC assets 

3

will be exhausted, completely gone, by 2021, just 15 years from 

now. 

So where does that leave us? Well, under the current scenario, 

if and when PBGC’s assets fall short, the choice is really one of two 

right now. Either for pension holders to lose about $100 billion in 

promised retired benefits, or for the taxpayers to get slapped with 

about a $100 billion bill for failed private pension plans. 

In the realm of fairness, I don’t think either one of those choices 

is going to be very palatable, and in the realm of politics, probably 

very difficult. So I think we need to talk about how we are going 

to solve this problem, and if you look at how the budget fails to recognize the problem, it even gets worse. 

First, we have a problem accounting for the balances in PBGC. 

The current budget figures do not reflect the true cost to the Government of taking over failed plans. It only reflects the agency’s annual cash flow, which in 2004 showed that the agency had a net 

surplus of $247 million, even though it was carrying $23 billion in 

unfunded liabilities from pension plans it had already taken over. 

And that doesn’t include the unfunded liabilities from pension 

plans it will likely take over, which again, according to CBO, would 

be as much as about $75 billion. 

The PBGC’s so-called unfunded obligations are a prime example 

of similar problems in other large government programs, especially 

insurance programs. 

Most of us recall the enormous tax burden that came to us in the 

1980s when the savings and loan debacle occurred, and when savings and loans collapsed. Due in large part to insufficient accounting, we missed the warning signs on that one, and it led to a major 

fiscal crisis. Policy experts have long advocated finding ways to report these obligations regularly, and if possible, to budget for them. 

Back in 1997, Congressman Cardin and I began an effort to have 

the budget reflect actual costs of government liabilities, including 

likely risks. So I am especially looking forward to the discussion 

today, particularly in light of the warnings that we have received, 

looking at the shortfalls for PBGC. We need to talk about accrual 

accounting. There are many members who are leaders in that regard and have bills and legislation and ideas. 

One final note: I am sure that this is a good area for finger pointing. If that is the case, not only today and in coming months, as 

to who is to blame for the state of the Nation’s pension systems, 

but I think we need to keep a couple of things in mind. 

One is that defined benefit plans and the PBGC were created in 

a different time, really for a different economy. American companies were competing with other American companies, who were 

also figuring pension benefits into their bottom line. 

Today, companies are competing in a global marketplace, which 

is much different than when these plans and PBGC were developed. As of today, many newly industrialized nations have little or 

no employee benefits to add to their bottom line. 

These same companies are also competing with new American 

companies, who don’t offer defined benefit pensions, but rather defined contribution plans, which are less expensive and don’t burden 

the company with the risk of those plans. So while defined benefit 

pension plans are becoming less and less common in newer compaVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
4

nies and nearly nonexistent overseas, companies who still offer 

these plans can find themselves at a substantial financial disadvantage to those companies who don’t. 

The second point I would make is that the same demographic 

changes that are putting enormous stress on Social Security, such 

as the static workpool, the aging population, the longer life 

expectancies and significantly higher wages and thus higher benefits are causing some of the imbalances in the pension system. 

Point three, and perhaps most important, would be that PBGC 

was set to be self-financing, yet it cannot achieve that goal if a 

number of large, severely underfunded pension plans fail. A plan 

underfunding destabilizes the whole system, and yet the rules we 

have created to prevent it are complicated, ineffective, and too 

often easily evaded. 

All of that said, for the loyal workers who were promised benefits 

and are counting on those benefits to help fund their retirement, 

that explanation provides exactly no relief. They expect, and rightly 

so, that the benefits that are the ones they were promised are received. And the American taxpayers are the ones who stand to be 

the biggest losers in all of this, simply through default, I will guess 

that bailing out private pension plans is not high on their priority 

list of how they would like to have their tax dollars spent. 

So no question, I can’t imagine anyone that can find an easy answer to correct this problem. It is going to be a difficult balancing 

act, but nevertheless, we have to start understanding this problem 

and its fiscal consequences for our economy and for our budget immediately. 

I would like to thank the leadership of my friend and colleague 

Mr. Spratt, who requested this hearing. I was eager to join him in 

holding the hearing, but he requested it. I appreciate his leadership 

in coming forward and asking that we hold this very important 

hearing today. And with that, I would turn to him for any comments he would like to make. 

Mr. SPRATT. Mr. Chairman, thank you very much, first of all for 

holding the hearing as I requested and also for your opening statement, because I think you have stated the problems squarely that 

we have to confront. 

I also want to thank our two witnesses, Comptroller General 

David Walker and CBO Director Douglas Holtz-Eakin. They are 

regulars at our hearings, but we always are the beneficiaries for 

their wisdom and advice and their analytical input to the decisions 

we have to make. 

Rather than repeat or plow over ground that the chairman just 

covered, let me simply say that we clearly have more things to do 

on the Budget Committee than just priorities about spending and 

revenues. We need to be one of the committees in Congress that 

looks forward to problems that are not yet fully fleshed out and try 

to bring timely attention to them so that they can be resolved earlier, at a lesser cost and with better solutions than we do typically 

when we leave things to the crisis stage to be addressed. 

And PBGC, the Pension Benefit Guaranty Corporation, falls 

squarely in that realm. 

We have the largest cash budget in the world, the Federal budget. As a consequence, there are a number of accrual that we simply 

5

don’t recognize, don’t accommodate, don’t even include, except in 

appendices nobody ever reads, to our budget. 

So one of the questions that we have to ask ourselves today and 

in future hearings of this kind is with our cash budget, our nonaccrual budget, how do we nevertheless make budget issues like 

the accumulation of accrued liabilities for the pensions of the 

United States, the defined benefit pensions, something that is annually considered, particularly when the system is not adequately 

assessing the risk, underfunding, the health of corporate sponsors. 

One of the problems clearly we have here that you can discern 

just from a superficial reading of the testimony of the two witnesses that is about to be presented, is that there are so many factors that we don’t yet have a good handle for. 

The statement of the shortfall in the Pension Guaranty trust 

fund may relate to the fact that a financially healthy and very able 

corporation has simply not funded adequately its pension plan, but 

nevertheless, it is a corporate parent or sponsor of that plan, 

stands liable for the assets it may not reflect any kind of necessary 

liability to the Government. 

Secondly, the plan may be invested in gilt-edge assets, or it may 

be invested in assets whose net realizable value cannot be achieved 

with the liquidation of those assets. 

There are a whole host of problems like this what we simply 

haven’t resolved. We have coasted along with this program for a 

long time, and now we have some hard questions to ask: 

How do you adjust the premiums to reflect the financial and economic reality? How do you baseline those premiums so that when 

we do the budget every year, we can tell the policy changes actually affect or improve or worsen the baseline, which the CBO is trying to develop now. 

But Dr. Holtz-Eakin, as I read your testimony, I think you would 

describe it as a work in progress. You aren’t really through with 

it, which is an illustration of how difficult it is to get your hands 

around this problem. 

As difficult as it may be, politically and simply institutionally, to 

address the proper response to is, we need to be paying close attention to it and bending every effort to get this done, not only to get 

it done, but done right, so that we can put this plan on a firm basis 

for the future. 

With that, let me end, and I will welcome again our two witnesses and say we look forward to your testimony today and your 

help in the future as we address this problem. 

Chairman NUSSLE. Thank you, Mr. Spratt. 

And my understanding is that, General Walker, you will go first 

with your testimony. 

Welcome back to the committee. Thank you for your leadership 

in not only bringing this problem to our attention, but also in giving us ideas of solutions. We are pleased to receive your testimony. 

Your written testimony will be made part of the record. And I 

would also ask unanimous consent that all members have the opportunity to place an opening statement in the record. 

Mr. Walker. 

6

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER 

GENERAL OF THE UNITED STATES 

Mr. WALKER. Thank you, Mr. Chairman, Ranking Member 

Spratt, and other members of the House Budget Committee. It is 

a pleasure to be back before you, this time to talk about the Pension Benefit Guaranty Corporation and related issues. 

In the interest of full and fair disclosure, let me remind the 

members that in a prior life, before I was Comptroller General of 

the United States, I was a head of the PBGC, Assistant Secretary 

of Labor for Pensions and Health, and a Trustee of Social Security 

and Medicare. I think that all of those are relevant to today’s topic. 

I would respectfully suggest that what we have before us is a 

subset of a much greater challenge, namely the Pension Benefit 

Guaranty Corporation is a subset of a broader challenge, which is 

the state of retirement security in the United States, which includes Social Security, Medicare, private pensions, retiree health, 

long-term care, and that that is a subset of the broader fiscal challenge that the United States faces because of known demographic 

trends, rising health care costs and revenues that mismatch promises that have made. 

So it is very appropriate and important for this committee to 

have this hearing to understand how this issue fits within the 

broader context. 

Unfortunately, while this is a significant challenge, it is one of 

the less material challenges, as you will see. With the aid of your 

technology, I would like to just show you a few graphics to make 

several points that I think might be helpful. 

I would note that each member should have received this morning this report on a forum that we recently held at GAO (Government Accountability Office) on PBGC and the defined benefit pension system. This report is being released this morning and has 

been posted to our website. 

The first slide, please. 

You have seen this before. This is the disembodiment chart. This 

is the U.S. budget in the long term. Due to known demographic 

trends, rising health care costs and lower revenues as a percentage 

of the economy, depending upon what assumptions you use—in this 

particular case, that discretionary spending grows by the rate of 

the economy, that all tax cuts are made permanent and that the 

Social Security and Medicare trustees’ estimates of the costs of 

those programs under the intermediate assumptions are realistic—

you can see this is a very sour outlook and an unacceptable path 

for the only superpower on Earth. 

Next, please. 

This represents the PBGC. The left bar is assets. The right bar 

is liabilities. The line represents their accumulated deficit. 

They have gone from a $9.7 billion surplus in 2000 to a $23.3 billion accumulated deficit in 2004. I could show you another graphic 

which would look very similar, which is the Federal budget. 

Next. 

This represents the state of defined benefit pension plans, based 

upon GAO’s recently issued report. The bottom line is that the 

most recent data that was available to the Government was 2002. 

7

This is 2005; 2003 data is just now becoming available. That is a 

problem in and of itself. 

Based upon the trends from 1995 to 2002, the bottom line with 

this chart is that the overall state of funding in the defined benefit 

system deteriorated during that period of time. 

Next, please. 

This chart shows that very few cash contributions were made by 

the 100 largest plans in the system during the period 1995–2002, 

in part because of flaws in the current funding rules. 

There are fundamental flaws in the current funding rules. People 

are not required to deliver on their promises. People are making 

promises that they realistically cannot keep. People are doing what 

the law minimally requires, versus what is the right thing to do. 

As we all know, the law represents the minimum standard of acceptable behavior. Hopefully, people should do what is right. Unfortunately in this case, many are not. 

Next, please. 

This represents how the state of underfunding in the entire defined benefit system has deteriorated dramatically since 2000. The 

purple represents the possible losses to the PBGC, in other words, 

entities that are deemed to be high risk as it relates to PBGC. 

You can see that the PBGC’s exposure has increased significantly. At the end of 2004, it represented about $100 billion. That 

is in addition to the $23.3 billion accumulated deficit. 

Next, please. 

This is an example of the problem with the funding rules. Two 

of the largest losses in PBGC’s history, Bethlehem Steel and LTV, 

and I am going through the period 2002, because that is the data 

that we had. These represented two of the largest losses in the history of the PBGC insurance system. These companies made no cash 

contributions in the last years of their life. 

And guess what: They weren’t required to, based upon the law. 

In fact, they had significant credits available to them, such that at 

least one of these plans wouldn’t have had to make contributions 

the next year and possibly thereafter. At the same time, on termination they were only funded at about 50 percent of the level of accrued benefits. 

If that doesn’t illustrate that the system is broken, I don’t know 

what would. 

I think that is it, I believe, with regard to the graphics. 

Thank you very much, and I appreciate the opportunity to be 

with you. I look forward to having the opportunity to answer any 

questions that you may have. 

[The prepared statement of David Walker follows:] 

PREPARED STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE

UNITED STATES

Mr. Chairman and members of the committee, I am pleased to be here today to 

discuss the problems and long-term challenges facing the defined benefit (DB) pension system, the Pension Benefit Guaranty Corporation (PBGC), the retirement security of workers and retirees covered by DB plans, and American taxpayers. In particular, I will discuss the factors contributing to those problems and suggest elements of the comprehensive reform necessary to address them.1 As I have noted before, these problems are a subset of the broader challenges facing the Federal Government and our nation’s retirement income system.2 These programs, which include Social Security, Medicare, and Medicaid, represent large, growing, and 

8

unsustainable claims on the Federal budget because America’s population is aging, 

life expectancies are increasing, workforce growth is slowing, and health care costs 

are rising. 

The long-term effect of Federal retirement programs on the budget is so significant that neither slowing the growth of discretionary spending nor allowing tax cuts 

to expire—nor both options combined—would by themselves eliminate our long-term 

fiscal imbalance (see fig. 1). Therefore, as we discussed in our 21st Century Challenges report,3 tough choices need to be made about the appropriate role and size 

of the Federal Government—and how to finance that government—and how to bring 

the panoply of Federal policies, programs, functions and activities into line with the 

realities of today’s world and tomorrow’s challenges. More specifically to Federal retirement policy, we need to make choices about how to promote current and longterm economic security in retirement. In that latter context, comprehensively considering our citizens’ needs for income, health care, and long-term care is important. 

From our nation’s overall fiscal perspective, continuing on our current 

unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, 

our standard of living, and ultimately our national security. 

Therefore, we must fundamentally reexamine major spending and tax policies and 

priorities in an effort to recapture our fiscal flexibility and ensure that our programs 

and priorities respond to emerging security, social, economic and environmental 

changes and challenges. 

FIGURE 1: COMPOSITION OF SPENDING AS A SHARE OF GDP ASSUMING DISCRETIONARY SPENDING GROWS WITH GDP AFTER 2005 AND ALL EXPIRING TAX PROVISIONS ARE EXTENDED

Notes: Although expiring tax provisions are extended, revenue as a share of gross domestic 

product (GDP) increases through 2015 due to (1) real bracket creep, (2) more taxpayers becoming subject to the alternative minimum tax, and (3) increased revenue from tax-deferred retirement accounts. After 2015, revenue as a share of GDP is held constant.

PBGC is an excellent example of the need for Congress to reconsider the role of 

government programs, in general, and Federal retirement programs, in particular, 

in light of past changes and 21st century challenges. In 1974, Congress passed the 

Employee Retirement Income Security Act (ERISA) to respond to trends and challenges that existed at that time.4 Among other things, ERISA established PBGC to 

pay the pension benefits of defined benefit plan participants, subject to certain limits, in the event that an employer could not.5 When ERISA was enacted, defined 

benefit pension plans were the most common form of employer-sponsored private 

pension and were growing both in number of plans and in number of participants. 

Today, defined benefit pensions cover an ever-decreasing percentage of the U.S. 


gao1a.eps
9

labor force, a fact that raises questions about Federal policy on pensions in general, 

and defined benefit plans and the PBGC, in particular. 

I would now like to outline the challenges facing the defined benefit pension system and PBGC and suggest a framework for evaluating potential policy responses. 

In summary, a combination of recent events, long-term structural problems, and 

weaknesses in the legal framework governing pensions has left PBGC with a significant long-term deficit and many large plans badly underfunded. Lower interest 

rates and equity prices since 2000 have combined to significantly increase pension 

underfunding through an increase in the present value of pension liabilities, and decreases in the value of pension plan assets. Meanwhile, intense cost competition as 

a result of globalization and deregulation has led to bankruptcies of plan sponsors 

in key industries like steel and airlines, and is exposing PBGC to the risk of significant future losses in these and other industries. This competitive restructuring has 

occurred simultaneously with a long-term decline in defined benefit plan participation that threatens PBGC’s revenue base. In addition, the basic legal framework 

governing pension insurance and plan funding has failed to safeguard the benefit 

security of American workers and retirees and the PBGC’s financial condition. Too 

many companies are making pension promises that they are not required to deliver 

on, in part because of perverse incentives and ‘‘put options’’ created under the current pension insurance system. 

PBGC’s current premium structure does not properly reflect the risks to its insurance program and facilitates moral hazard by plan sponsors. Further, as we have 

shown in a recent report, current pension funding rules have not provided sufficient 

incentives, transparency, and accountability mechanisms for plan sponsors to properly fund their benefit obligations and deliver on their promises.6 As a result, bankrupt plan sponsors, acting rationally and within the rules, have transferred the obligations of their large and significantly underfunded plans to PBGC. These weaknesses in the legal framework contribute to and are exacerbated by a lack of transparent information that makes it difficult for interested stakeholders to understand 

the true financial condition of and risk associated with selected pension plans. 

Given pension plans’ crucial significance to our nation’s retirement security net, 

it is useful to compare the challenges facing PBGC’s insurance program and Social 

Security. Both systems require meaningful, comprehensive reform that restores solvency, assures sustainability, and protects the benefits of participants. Similar to 

that of Social Security, PBGC’s current condition does not represent a crisis, though 

delaying reform will result in serious adverse consequences for individuals, the Federal budget, and our economy. Furthermore, like Social Security, PBGC has plenty 

of cash on hand today to pay benefits to participants in the short term, but it faces 

large and growing unfunded obligations and escalating cash flow deficits in the future. 

The termination of United Airlines’ defined benefit pension plans is just the latest 

in a recent series of large, underfunded plans taken over by PBGC, and will not 

be the last. In July 2003, GAO designated PBGC’s single-employer insurance program as ‘‘high-risk,’’ given its deteriorating financial condition and long-term 

vulnerabilities.7 At the end of fiscal year 2004, PBGC estimated that it was exposed 

to almost $100 billion of underfunding in plans sponsored by companies with credit 

ratings below investment grade. Though smaller in scale than Social Security, Medicare, and Medicaid, PBGC’s deficit threatens to worsen our government’s long-term 

fiscal position.8 While PBGC is not explicitly backed by the full faith and credit of 

the U.S. Government,9 policymakers would undoubtedly face intense pressure to 

provide PBGC the resources to continue paying earned pension benefits to millions 

of retirees if PBGC were to become insolvent. 

In light of the intrinsic problems facing the defined benefit system, meaningful 

and comprehensive reform will be needed to ensure that workers and retirees receive the benefits promised to them and to secure PBGC’s financial future. At this 

time, the Administration, Members of Congress, and others have proposed reforms 

that seek to address many of the problems facing PBGC and the defined benefit system. This is a promising development that can be a critical first step in addressing 

part of the long-term fiscal problems facing this country. 

BACKGROUND

Before enactment of the Employee Retirement Income Security Act of 1974 

(ERISA), few rules governed the funding of defined benefit pension plans, and participants had no guarantees that they would receive their promised benefits. Among 

other things, ERISA created the PBGC to protect the benefits of plan participants 

in the event that plan sponsors could not meet the benefit obligations under their 

plans. ERISA also established rules for funding defined benefit pension plans, instiVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
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tuted pension insurance premiums, promulgated certain fiduciary rules, and developed annual reporting requirements. When a plan is terminated with insufficient 

assets to pay its guaranteed benefits, PBGC takes over the plan and assumes responsibility for paying benefits to participants. According to PBGC’s 2004 annual report, PBGC provides insurance protection for over 29,000 single-employer pension 

plans, which cover 34.6 million workers, retirees, and their beneficiaries.10

PBGC receives no direct Federal tax dollars to support the single-employer pension insurance program. Instead, the program receives the assets of terminated underfunded plans and any of the sponsor’s assets that PBGC recovers during bankruptcy proceedings.11 PBGC finances the unfunded liabilities of terminated plans 

with premiums paid by plan sponsors and income earned from the investment of 

program assets. Premiums have two components: a per participant charge paid by 

all sponsors (currently $19 per participant), and a variable-rate premium that some 

underfunded plans pay based on the level of unfunded benefits.12

The single-employer program has had an accumulated deficit—that is, program 

assets have been less than the present value of benefits and other obligations—for 

much of its existence. (See fig. 2.) In fiscal year 1996, the program had its first accumulated surplus, and by fiscal year 2000, the accumulated surplus had increased 

to about $10 billion, in 2002 dollars. However, the program’s finances reversed direction in 2001, and at the end of fiscal year 2002, its accumulated deficit was about 

$3.6 billion. In fiscal year 2004, the single-employer program incurred a net loss of 

$12.1 billion, and its accumulated deficit increased to $23.3 billion, up from $11.2 

billion a year earlier. Furthermore, PBGC estimated that total underfunding in single-employer plans exceeded $450 billion, as of the end of fiscal year 2004. 

FIGURE 2: ASSETS, LIABILITIES, AND NET FINANCIAL POSITION OF PBGC’S SINGLE- EMPLOYER INSURANCE PROGRAM

In defined benefit plans, formulas set by the employer determine employee benefits. DB plan formulas vary widely, but benefits are frequently based on participant 

earnings and years of service, and traditionally paid upon retirement as a lifetime 

annuity, or periodic payments until death. Because DB plans promise to make payments in the future, and because tax-qualified DB plans must be funded, employers 

must use present value calculations to estimate the current value of promised benefits.13 The calculations require making assumptions about factors that affect the 

amount and timing of benefit payments, such as an employee’s retirement age and 

expected mortality, and about the expected return on plan assets, expressed in the 

form of an interest rate. The present value of accrued benefits calculated using mandated assumptions is known as a plan’s current liability. Current liability provides 

an estimate of the amount of assets a plan needs today to pay for accrued benefits. 

ERISA and the Internal Revenue Code (IRC) prescribe rules regarding the assumptions that sponsors must use to measure plan liabilities and assets. While different assumptions will change a plan’s reported assets and liabilities, sponsors 

eventually must pay the amount of benefits promised; if the assumptions used to 

compute current liability differ from the plan’s actual experience, current liability 

will differ from the amount of assets actually needed to pay benefits.14


gao2a.eps
11

Funding rules generally presume that a pension plan and its sponsor are ongoing 

entities, and plans do not necessarily have to maintain an asset level equal to current liabilities every year. However, the funding rules include certain mechanisms 

that are intended to keep plans from becoming too underfunded. One such mechanism is the additional funding charge (AFC), which applies to plans with more than 

100 participants.15 The AFC requires plan sponsors to make additional contributions to plans that fall below a prescribed funding level. With some exceptions, 

plans with reported asset values below 90 percent of current liabilities are affected 

by the AFC rules. 

PBGC’S PROBLEMS STEM FROM RECENT EVENTS, LONG-TERM STRUCTURAL TRENDS, AND

WEAKNESSES IN THE LEGAL FRAMEWORK GOVERNING DB PENSIONS

A combination of recent events, long-term structural problems, and weaknesses in 

the legal framework governing the DB system has left PBGC with a significant 

long-term deficit and many large plans badly underfunded. Lower interest rates and 

equity prices since 2000 have combined to significantly increase pension underfunding through an increase in the present value of pension liabilities, and decreases in the value of pension plan assets. Meanwhile, intense cost competition as 

a result of globalization and deregulation has led to bankruptcies of plan sponsors 

in key industries like steel and airlines, and is exposing PBGC to the risk of significant future losses in these and other industries. This competitive restructuring has 

occurred simultaneously with a long term decline in defined benefit plan participation that threatens PBGC’s revenue base. In addition, the basic legal framework 

governing pension insurance and plan funding has failed to safeguard the benefit 

security of American workers and retirees and the PBGC’s financial condition. Too 

many companies are making pension promises that they are not required to deliver 

on, in part because of perverse incentives and ‘‘put options’’ created under the current pension insurance system. 

PBGC’s current premium structure does not properly reflect the risks to its insurance program and facilitates moral hazard by plan sponsors. Further, current pension funding rules have not provided sufficient incentives, transparency, and accountability mechanisms for plan sponsors to properly fund their benefit obligations 

and deliver on their promises. As a result, bankrupt plan sponsors, acting rationally 

and within the rules, have transferred the obligations of their large and significantly underfunded plans to PBGC. These weaknesses in the legal framework contribute to and are exacerbated by a lack of transparent information that makes it 

difficult for interested stakeholders to understand the true financial condition of and 

risk associated with selected pension plans. 

RECENT ECONOMIC FACTORS EXACERBATED THE UNDERFUNDING OF LARGE

TERMINATED PLANS BY BANKRUPT SPONSORS

Over the last 5 years, many large pension plans have been adversely affected by 

simultaneous declines in broad equity indexes and long-term interest rates, as well 

as by the financial difficulties of their plan sponsors.16 Poor investment returns 

from stock market declines affected the asset values of pension plans to the extent 

that plans invested in stocks. According to the ERISA Industry Committee, assets 

in private sector defined benefit plans totaled $2.056 trillion at the end of 1999, 

dropped to $1.531 trillion at the end of 2002, and climbed back to $1.8 trillion by 

the end of 2004.17 Lower equity values since the end of 1999 have been particularly 

problematic because interest rates have also declined and thus increased the 

present value of plan liabilities.18 Some sponsors of large pension plans that were 

terminated were not in sufficiently strong financial condition to meet their pension 

funding requirements because of weaknesses in their primary business activities. 

Bankruptcies and pension plan terminations increased around the U.S. economic recession of 2001 and around prior recessions.19

These conditions played a part in increasing the unfunded liabilities of plans terminated by bankrupt sponsors since 2000. For example, according to the filing of 

its annual regulatory report for pension plans, Bethlehem Steel’s plan went from 86 

percent funded in 1992 to 97 percent funded in 1999. From 1999 to its plan termination in December 2002, plan funding fell to less than 50 percent as assets decreased and liabilities increased and sponsor contributions were not sufficient to offset the changes. 

LONG-TERM DECLINES OF KEY INDUSTRIES AND IN DEFINED BENEFIT PENSION

COVERAGE HAVE CONTRIBUTED TO PBGC’S WEAKENING FINANCIAL CONDITION

Long-term trends in some sectors of the economy and in defined benefit pension 

coverage are threatening both PBGC’s future solvency and the economic security in 

12

retirement of workers and retirees. PBGC’s risk of inheriting underfunded pensions 

largely stems from the fact that more than half of the pension participants it insures are in the manufacturing and airline sectors, which have been exposed to 

lower cost competition because of several factors including globalization and deregulation.20 A potentially exacerbating risk to PBGC is the cumulative effect of bankruptcy in these industries: if a critical mass of firms go bankrupt and terminate 

their underfunded pension plans, their competitors may also declare bankruptcy to 

similarly avoid the cost of funding their plans. 

PBGC also faces the possibility of long-term revenue declines from demographic 

changes in the population of defined benefit plan participants and a shrinking number of DB plans. Over the long term, an aging population of defined benefit plan 

participants threatens to reduce PBGC’s ability to raise premium revenues as participants die and are not replaced by enough new participants. The percentage of 

participants who are active workers has declined from 78 percent in 1980 to just 

under 50 percent in 2002. Furthermore, PBGC cannot effectively diversify its risk 

from the terminations of plans in declining economic sectors because companies in 

other growing industries have generally not sponsored new defined benefit plans. As 

plan sponsors in weak industries go bankrupt and terminate their pension plans, 

PBGC not only faces immediate changes in its financial position from taking over 

underfunded plans, but also faces losses of future revenues from these terminated 

plans. 

A related factor eroding PBGC’s premium base is the growth of lump-sum pension 

distributions. More and more plan participants are exiting the defined benefit system by taking lump-sum distributions from their plans. After a lump-sum distribution is paid, the participant is out of the defined benefit system and the plan sponsor no longer has to contribute to the pension insurance system on the participant’s 

behalf. In addition, lump-sum distributions to participants in underfunded plans can 

create the effect of a ‘‘run on the bank’’ and worsen a plan’s underfunding. In such 

cases, the plan may terminate without enough assets to pay full benefits to other 

participants and PBGC may incur losses. 

The increasing prevalence of lump-sum distributions in defined benefit plans and 

the growth of defined contribution plans also raise significant questions about 

whether many Americans will enjoy an economically secure retirement.21 Many 

Americans are at risk of outliving their retirement assets as life expectancies, 

health care, and long-term care costs continue to increase. 

LEGAL FRAMEWORK HAS NOT ENCOURAGED ADEQUATE PLAN FUNDING, CONTRIBUTING

TO PBGC’S FINANCIAL DIFFICULTIES

Existing laws and regulations governing pension funding and premiums have contributed to PBGC’s financial difficulties and exposed PBGC to greater risks from the 

companies whose pension plans it insures. PBGC’s current premium structure does 

not properly reflect the risks to its insurance program and facilitates moral hazard 

by plan sponsors. Further, the pension funding rules, under ERISA and the IRC, 

have not ensured that plans have the means to meet their benefit obligations in the 

event that plan sponsors run into financial distress. First, the current rules likely 

allowed plans to appear better funded than they actually were, in both good years 

and bad years. And even these reported funding levels indicated significant levels 

of underfunding in our study of the 100 largest DB plans.22 Second, plan sponsors 

often substituted ‘‘account credits’’ for cash contributions, even as the market value 

of plan assets may have been in decline. And third, the AFC, the primary mechanism for improving the financial condition of poorly funded plans, was ineffective 

in doing so. These weaknesses contribute to and are exacerbated by a lack of transparent information that makes it difficult for plan participants, investors, and others to have a clear understanding of their plan’s financial condition. As a result, financially weak benefit plan sponsors, acting rationally and within the current law, 

have been able to avoid large contributions to underfunded plans prior to bankruptcy and plan termination, thus adding to PBGC’s current deficit. 

PBGC’S PREMIUM STRUCTURE DOES NOT PROPERLY REFLECT RISKS TO THE INSURANCE

PROGRAM

PBGC’s current premium structure does not properly reflect risks to the insurance 

program. The current premium structure relies heavily on flat-rate premiums, 

which, since they are unrelated to risk, result in large cost shifting from financially 

troubled companies with underfunded plans to healthy companies with well-funded 

plans. PBGC also charges plans a variable-rate premium based on the plan’s level 

of underfunding. However, these premiums do not consider other relevant risk factors, such as the economic strength of the sponsor, plan asset investment strategies, 

13

the plan’s benefit structure, or the plan’s demographic profile. PBGC is currently 

operated somewhat more on a social insurance model, since it must cover all eligible 

plans regardless of their financial condition or the risks they pose to the solvency 

of the insurance program. 

In addition to facing firm-specific risk that an individual underfunded plan may 

terminate, PBGC faces market risk that a poor economy may lead to widespread 

underfunded terminations during the same period, potentially causing very large 

losses for PBGC. Similarly, PBGC may face risk from insuring plans concentrated 

in vulnerable industries affected by certain macroeconomic forces such as deregulation and globalization that have played a role in multiple bankruptcies over a short 

time period, as has happened recently in the airline and steel industries. One study 

estimates that the overall premiums collected by PBGC amount to about 50 percent 

of what a private insurer would charge because its premiums do not adequately account for these market risks.23 Others note that it would be hard to determine the 

market-rate premium for insuring private pension plans because private insurers 

would probably refuse to insure poorly funded plans sponsored by weak companies. 

PBGC IS SUBJECT TO MORAL HAZARD

Current pension funding and insurance laws create incentives for financially troubled firms to use PBGC in ways that Congress likely did not intend when it formed 

the agency in 1974. At that time, PBGC was established to pay the pension benefits 

of participants, subject to certain limits, in the event that an employer could not. 

However, since that time, some firms with underfunded pension plans may have 

come to view PBGC coverage as a fallback, or ‘‘put option,’’ for financial assistance. 

The very presence of PBGC insurance may create certain perverse incentives that 

represent what economists call moral hazard—where struggling plan sponsors may 

place other financial priorities above funding up their pension plans because they 

know PBGC will pay guaranteed benefits. Firms may even have an incentive to seek 

Chapter 11 bankruptcy in order to escape their pension obligations. As a result, 

once a plan sponsor with an underfunded pension plan experiences financial difficulty, these moral hazard incentives may exacerbate the funding shortfall for 

PBGC. 

This moral hazard effect has the potential to escalate, with the initial bankruptcy 

of firms with underfunded plans creating a vicious cycle of bankruptcies and terminations. Firms with onerous pension obligations and strained finances could see 

PBGC as a means of shedding these liabilities, thereby providing these companies 

with a competitive advantage over other firms that deliver on their pension commitments. This would also potentially subject PBGC to a series of terminations of underfunded plans in the same industry, as we have already seen with the steel and 

airlines industries in the past 20 years. 

Moral hazard effects are likely amplified by current pension funding and pension 

accounting rules that may also encourage plans to invest in riskier assets to benefit 

from higher expected long-term rates of return. In determining funding requirements, a higher expected rate of return on pension assets means that the plan needs 

to hold fewer assets in order to meet its future benefit obligations. And under current accounting rules, the greater the expected rate of return on plan assets, the 

greater the plan sponsor’s operating earnings and net income. However, with higher 

expected rates of return comes greater risk of investment volatility, which is not reflected in the pension insurance program’s premium structure. Investments in 

riskier assets with higher expected rates of return may allow financially weak plan 

sponsors and their plan participants to benefit from the upside of large positive returns on pension plan assets without being truly exposed to the risk of losses. The 

benefits of plan participants are guaranteed by PBGC, and weak plan sponsors that 

enter bankruptcy can often have their plans taken over by PBGC. 

CURRENT FUNDING RULES DO NOT PROVIDE SUFFICIENT INCENTIVES FOR SPONSORS TO

ADEQUATELY FUND THEIR PLANS

The pension funding rules, under ERISA and the IRC, have not provided sufficient incentives for plan sponsors to properly fund their benefit obligations. The 

funding rules generally presume that pension plans and their sponsors are ongoing 

entities and therefore allow for a certain extent of plan underfunding that can be 

made up over time. However, the measures of plan funding used to determine contribution requirements can significantly overstate the true financial condition of a 

plan. And even these reported funding levels indicated significant levels of underfunding in our study of the 100 largest DB plans.24 Furthermore, when plan sponsors make contributions to their plans, they can use account credits, rather than 

cash, even in cases when plans are underfunded. The funding rules include certain 

14

mechanisms—primarily, the AFC—that are intended to prevent plans from becoming too underfunded. However, our analysis shows that for several reasons, the AFC 

proved ineffective in restoring financial health to poorly funded plans. 

RULES MAY ALLOW PLANS TO OVERSTATE THEIR CURRENT FUNDING LEVELS

Current funding rules may allow plans to overstate their current funding levels 

to plan participants and the public. Because many plans in our sample chose legally 

allowable actuarial assumptions and asset valuation methods that may have altered 

their reported liabilities and assets relative to market levels, it is possible that funding over our sample period was actually worse than reported. 

Although as a group, funding levels among the 100 largest plans were reasonably 

stable and strong from 1996 to 2000, by 2002, more than half of the largest plans 

were underfunded (see fig. 3). On average, each year 39 of these plans were less 

than 100 percent funded, 10 had assets below 90 percent of their current liabilities, 

and 3 plans were less than 80 percent funded. In 2002 there were 23 plans less than 

90 percent funded. 

FIGURE 3: ALMOST ONE-FOURTH OF THE LARGEST PENSION PLANS WERE LESS THAN

90 PERCENT FUNDED ON A CURRENT LIABILITY BASIS IN 2002

Reported funding levels may have been overstated for a number of reasons. These 

include the use of above-market interest rates, which leads to an understatement 

of the cost of settling benefit obligations through the purchase of group annuity contracts. Also, actuarial asset values may have differed by as much as 20 percent from 

current market value of plan assets. The funding rules allow for smoothing out yearto-year fluctuations in asset and liability values so that plan sponsors are gradually, 

and not suddenly, affected by significant changes in interest rates and the values 

of their assets. When current interest rates decline, the use of a 4-year weighted 

average interest rate lags behind, and thus measurements of the present value of 

plan liabilities do not accurately reflect the cost of settling a plan’s benefit obligations.25

The terminations of the Bethlehem Steel and LTV Steel pension plans in 2002 

(two of the largest plan terminations, to date) illustrate the potential discrepancies 

between reported and actual funding. In 2002, the Bethlehem Steel Corporation reported that its plan was 85.2 percent funded on a current liability basis, yet the 

plan terminated later that year with assets of less than half of the value of promised benefits. In 2001, LTV Steel reported that its plan for hourly employees was 

80 percent funded, yet when the plan terminated in March 2002, it was only 52 percent funded. From these terminations PBGC’s single-employer program suffered 

losses of $3.7 billion and $1.6 billion, respectively.26

MOST SPONSORS MOST YEARS MADE NO CASH CONTRIBUTIONS TO PLANS BUT SATISFIED

FUNDING REQUIREMENTS THROUGH USE OF ACCOUNTING CREDITS

The amount of contributions required under IRC minimum funding rules is generally the amount needed to fund benefits earned during that year plus that year’s 

portion of other liabilities that are amortized over a period of years. This minimum 

contribution requirement may be met by the plan sponsor putting cash into the plan 


gao3a.eps
15

or by applying earned funding credits. These funding credits are not measured at 

their market value and are credited with interest each year, according to the plan’s 

long-term expected rate of return on assets.27 When the market value of a plan’s 

assets declines, the value of funding credits may be significantly overstated. 

For the 1995 to 2002 period, the sponsors of the 100 largest plans each year on 

average made relatively small cash contributions to their plans (see fig. 4). Annual 

cash contributions for the 100 largest plans averaged approximately $97 million on 

plans averaging $5.3 billion in current liabilities (in 2002 dollars). This average contribution level masks a large difference in contributions between 1995 and 2001, 

during which period annual contributions averaged $62 million (in 2002 dollars), 

and in 2002, when contributions increased significantly to $395 million per plan. 

Further, in 6 of the 8 years in our sample, a majority of the largest plans made 

no cash contribution to their plan. On average each year, 62.5 plans received no 

cash contribution, including an annual average of 41 percent of plans that were less 

than 100 percent funded. 

FIGURE 4: MOST LARGE PLANS RECEIVED NO ANNUAL CASH CONTRIBUTION, 1995-

2002

Note: Average contributions for 2002 are largely driven by one sponsor’s contribution to its plan. Disregarding this $15.2 billion contribution reduces the average plan contribution for 2002 

from $395 million to $246 million.

As stated earlier, Bethlehem Steel and LTV Steel both had plans terminate in 

2002 that were only about 50 percent funded. Yet each plan was able to forgo a cash 

contribution each year from 2000 to 2002, instead using credits to satisfy minimum 

funding obligations, primarily from large accumulated credit balances from prior 

years. Despite being severely underfunded, each plan reported an existing credit 

balance at the time of termination. 

AFC, PRIMARY MECHANISM FOR IMPROVING FUNDING OF UNDERFUNDED PLANS, PROVED

INEFFECTIVE

The funding rules’ primary mechanism for improving the financial condition of 

underfunded plans, the additional funding charge proved ineffective in helping underfunded plans for four main reasons: 

1. Very few plans in our sample were actually assessed an AFC because the rules, 

despite the statutory threshold of a 90 percent funding level for some plans to owe 

an AFC, in practice require a plan to be much more poorly funded to be subject to 

this requirement.28 From 1995 to 2002, an average of only 2.9 of the 100 largest 

DB plans each year were assessed an additional funding charge, even though on average 10 percent of plans each year reported funding levels below 90 percent. Over 

the entire 8-year period, only 6 unique plans that were among the 100 largest plans 

in any year from 1995 to 2002 owed an AFC. These 6 plans owed an AFC during 

the period a total of 23 times in years in which they were among the 100 largest 

plans, meaning that plans that were assessed an AFC were likely to owe it again. 

2. AFC rules also specify a current liability calculation method that may overstate 

actual plan funding, relative to market-value measures, thereby reducing the number of plans that might be assessed an AFC. The specified interest rate for this calculation exceeded current market rates in 98 percent of the months between 1995 

and 2002. 


gao4a.eps
16

3. The AFC rules generally call for sponsors to pay only a percentage of their unfunded liability, rather than requiring restoration of full funding. On average, by 

the time a plan was assessed an AFC, it was significantly underfunded and was 

likely to remain chronically underfunded in subsequent years. Among the 6 plans 

that owed the AFC, funding levels rose slightly from an average of 75 percent when 

the plan was first assessed an AFC to an average of 76 percent, looking collectively 

at all subsequent years. All of these plans were assessed an AFC more than once. 

4. Plan sponsors can meet the AFC requirement by applying funding credits 

earned in prior years in place of cash contributions. The account value of these credits, which accumulate interest, may not reflect the underlying value of the assets 

in the plan. Many plans experienced significant market value losses of their assets 

between 2000 and 2002 while they were able to apply these funding credits. Among 

the 100 largest plans, just over 30 percent of the time a plan was assessed an AFC, 

the funding rules allowed the sponsor to forgo a cash contribution altogether that 

year. 

The experience of two large terminated plans illustrates the ineffectiveness of the 

AFC. For example, Bethlehem Steel’s plan was assessed an AFC of $181 million in 

2002, but the company made no cash contribution that year, just as it had not in 

2000 or 2001, years in which the plan was not assessed an AFC. When the plan 

terminated in late 2002, its assets covered less than half of the $7 billion in promised benefits. LTV Steel, which terminated its pension plan for hourly employees in 

2002 with assets of $1.6 billion below the value of benefits, had its plan assessed 

an AFC each year from 2000 to 2002, but for only $2 million, $73 million, and $79 

million, or no more than 5 percent of the eventual funding shortfall. Despite these 

AFC assessments, LTV Steel made no cash contributions to its plan from 2000 to 

2002. Both plans were able to apply existing credits instead of cash to satisfy minimum funding requirements. In addition, both sponsors had unused funding credits 

at the time their plans were terminated. 

WEAKNESSES IN FUNDING RULES AMPLIFIED BY LACK OF TRANSPARENCY HINDERS

SOUND POLICY MAKING

Unclear measures of pension funding and a lack of timely information have made 

it difficult for plan participants, investors, regulators, and policy makers to accurately assess the financial condition of pension plans. Without timely and reasonably accurate data about the financial condition of pension plans, the various stakeholders cannot make timely and informed decisions on retirement savings, employment, and other key life issues. The primary regulatory filing for pension plans—

the Form 5500—requires multiple measures of pension assets and liabilities, yet 

none of these measures tell PBGC and plan participants what share of the benefit 

obligations are funded in the event of plan termination. Furthermore, by the time 

these regulatory reports are publicly available, the information is usually at least 

2 years old.29 In a time of significant changes in interest rates and equity prices, 

it is possible that reported measures of pension funding will substantially differ 

from current measures of plan funding. PBGC does receive more current information about plans that are underfunded by at least $50 million. This more current 

information includes estimates of funding measures if the plan were to be terminated; however, by law this information is not disclosed to the public. 

Our cash-based budgetary framework for Federal insurance programs also contributes to a lack of transparency that, at worst, may create disincentives for policy 

makers to enact reform measures.30 With the current cash-based reporting, premiums for insurance programs are recorded in the budget when collected, and outlays are reported when claims are paid.31 This focus on annual cash flows generally 

does not adequately reflect the government’s cost for Federal insurance programs 

because the time between the extension of the insurance, the receipt of premiums 

and other collections, the occurrence of an insured event, and the payment of claims 

may extend over several budget periods. As a result, the government’s cost may be 

understated in years that a program’s current premium and other collections exceed 

current payments and overstated in years that current claim payments exceed current collections. This is especially problematic in the case of pension insurance because of the erratic occurrence of plan terminations as well as the mismatch between premium collections and benefit payments that can extend over several decades. 

Cash-based budgeting also may not be a very accurate gauge of the economic impact of Federal insurance programs. Although discerning the economic impact of 

Federal insurance programs can be difficult, private economic behavior generally is 

affected when the government commits to providing insurance coverage. In the case 

of PBGC, the existence of pension insurance may encourage plan sponsors and emVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
17

ployees to agree to pension benefit increases in lieu of wage increases when the plan 

sponsor faces economic difficulties.32

Cash-based budgeting for Federal insurance programs may provide neither the information nor incentives necessary to signal emerging problems, make adequate cost 

comparisons, control costs, or ensure the availability of resources to pay future 

claims. Because the cash-based budget delays recognition of emerging problems, it 

may not provide policy makers with information or incentives to address potential 

funding shortfalls before claim payments come due. Policy makers may not be alerted to the need to address programmatic design issues because, in most cases, the 

budget does not encourage them to consider the future costs of Federal insurance 

commitments. Thus, reforms aimed at reducing costs may be delayed. In most cases, 

by the time costs are recorded in the budget, policy makers do not have time to ensure that adequate resources are accumulated to pay for them or to take actions 

to control them. The late budget recognition of these costs can reduce the number 

of viable options available to policy makers, ultimately increasing the cost to the 

government. 

RETIREMENT INCOME SECURITY REQUIRES MEANINGFUL AND COMPREHENSIVE REFORM

In light of the intrinsic problems facing the defined benefit system, meaningful 

and comprehensive pension reform is required to ensure that workers and retirees 

receive the benefits promised to them and to secure PBGC’s financial future. While 

PBGC’s current financial condition does not represent a crisis, delaying reform will 

result in serious adverse consequences for plan participants, the Federal budget, 

and our nation’s economy. At this time, the Administration, Members of Congress, 

and others have proposed reforms that seek to address many of the problems facing 

PBGC and the defined benefit system.33 Such comprehensive effective pension reform would likely include elements that would improve measures of pension funding 

and enhance transparency of plan information, strengthen funding rules (while preserving some contribution flexibility for plan sponsors, modify certain PBGC guarantees, develop an enhanced and more risk-based insurance premium structure, and 

resolve outstanding controversies concerning hybrid plans, such as cash balance 

plans.34

GAO HAS SUGGESTED ELEMENTS OF PENSION REFORM

Pension reform is a challenge because of the necessity of fusing together so many 

complex, and sometimes competing, elements into a comprehensive proposal. Ideally, effective reform would 

• improve the accuracy of plan funding measures while minimizing complexity 

and maintaining contribution flexibility; 

• revise the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; 

• develop a more risk-based PBGC insurance premium structure and provides incentives for sponsors to fund plans adequately; 

• address the issue of underfunded plans paying lump sums and granting benefit 

increases; 

• modify PBGC guarantees of certain plan benefits (e.g., shutdown benefits); 

• resolve outstanding controversies concerning hybrid plans by safeguarding the 

benefits of workers regardless of age; and 

• improve plan information transparency for pension plan stakeholders without 

overburdening plan sponsors. 

Furthermore, if policy makers decide to provide measures of relief to sponsors of 

poorly funded pension plans, there should be mechanisms built into such laws that 

would prevent any undue exacerbation of PBGC’s financial condition. 

Developed in isolation, solutions to some of these concerns could erode the effectiveness of other reform components or introduce needless complexity. As deliberations on reform move forward, it will be important that each of these individual elements be designed so that all work in concert toward well-defined goals. Even with 

meaningful, carefully crafted reform, it is possible that some defined benefit plan 

sponsors may choose to freeze or terminate their plans. While these are serious concerns, the overarching goals of balanced pension reform should be to protect workers’ benefits by providing employers the flexibility they need in managing their pension plans while also holding those employers accountable for the promises they 

make to their employees. 

The debate over defined benefit pension reform should not take place in isolation 

of larger related issues. Challenges in the defined benefit system, together with the 

recent public debate over the merits of including individual accounts as part of a 

more comprehensive Social Security reform proposal, should lead us to consider funVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
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damental questions about how who should bear certain risks and responsibilities for 

economic security in retirement. 

• Individual savings require greater responsibility and offer greater potential rewards and the possibility of bequeathing any unused retirement savings. However, 

longevity risk—the risk of outliving retirement savings—and poor investment choice 

are significant concerns, particularly as health care and long-term care costs and 

life expectancies continue to rise. 

• The Federal Government is in the best position to share risk across the population, and social insurance programs, including Social Security, Medicare, and Medicaid already reflect this fact. However, the current structure of existing Federal retirement programs is unsustainable. 

• Employer-sponsored pensions can alleviate longevity risk for plan participants 

and are generally presumed to be better placed to manage investment risk. However, poor management of plans can lead to shortfalls in funding that can damage 

the competitiveness of the plan sponsors. Furthermore, many employers are cutting 

or reducing retiree health benefits, and even employee health benefits, as growing 

health care costs threaten their competitiveness. 

EXPERTS IDENTIFIED A VARIETY OF BROAD PENSION REFORMS

Earlier this year, GAO convened a forum on the future of the defined benefit system and the PBGC that included a diverse group of about 40 pension experts, representing various interests, to discuss various reforms to the defined benefit pension 

system.35 In addition to debating changes to the funding rules and PBGC premiums, 

participants also talked about ways to address pension legacy costs (the costs of terminated and underfunded pension plans) and features of pension plans that government policy should encourage. 

According to participants in the GAO forum, resolution of pension legacy costs 

and clarification of the legal status of cash balance and other hybrid pension plans 

could play a significant role in shoring up the defined benefit system.36 Separating 

legacy costs from the existing and future liabilities of the remaining defined benefit 

plans might encourage plan sponsors to remain in the defined benefit system. Many 

plan sponsors are concerned that through increased PBGC premiums, they may be 

required to pay for the failures of other companies to responsibly fund and manage 

their pension plans. Some participants added that resolving legacy costs could be 

a key component of any pension reform legislation that tightened the funding rules 

and assessed premiums according to PBGC’s risk. Also, some participants supported, and other participants opposed, the idea of separately addressing the pension legacy costs of specific industries, such as airlines and steel, which have imposed the most significant costs on PBGC. Separately addressing pension legacy 

costs does not necessarily imply a taxpayer bailout, as some participants suggested 

other ways to cover their cost, such as through an airline ticket fee to cover the airlines’ share of PBGC’s deficit. Others noted that resolving the uncertain legal status 

of cash balance and other hybrid pension plans could encourage greater participation in the defined benefit system. Expanding the universe of pension plan sponsors 

could lead to an increase in PBGC’s premium income. 

Some forum participants also suggested that the debate over Federal retirement 

policy needs to move beyond distinctions between defined benefit and defined contribution plans. Others added that discussions of retirement policy need to focus on 

ways to create incentives and remove barriers for employers to set up retirement 

plans, and how to get American workers to build adequate retirement savings and 

security. This may be achieved by thinking about the interaction of private pensions 

and Social Security and by looking at hybrid pension plans, such as cash balance 

plans and plans that combine the best features of defined benefit and defined contribution plans. Participants suggested new pension plan designs be developed that 

explore the following features: 

• allowing automatic participation of the covered population in order to expand 

pension coverage generally; 

• improving the portability of pension benefits to accommodate workers who frequently change jobs; 

• providing for professional money management and pooled investment risk; 

• minimizing early withdrawals and borrowing—a problem known as leakage—

from retirement savings; and 

• providing incentives to receive benefits in the form of a fixed annuity, rather 

than a lump-sum distribution. 

19

CONCLUSIONS

Widely reported recent large plan terminations by bankrupt sponsors and the resulting adverse consequences for plan participants and the PBGC have pushed pension reform into the spotlight of national concern. Our analysis here suggests that 

a variety of factors have contributed to the current state of affairs: recent declines 

in interest rates and financial markets, a soft economy, industry restructuring because of changes in the national and world economies, weaknesses in the legal 

framework governing pensions that has encouraged moral hazard by sponsors, the 

underfunding of plans, and a lack of timely, accurate, useful and transparent information that limits participants, unions, investors and other stakeholders from being 

able to make accurate and timely decisions. 

In light of the intrinsic problems facing the defined benefit system, meaningful 

and comprehensive pension reform is required to ensure that workers and retirees 

receive the benefits promised to them. At this time, the Administration, Members 

of Congress, and others have proposed reforms that seek to address many of the 

problems facing PBGC and the defined benefit system. This is a promising development that can be a critical first step in addressing part of the long-term fiscal problems facing this country. Such reform will demand wisdom and patience, given the 

necessity of fusing together so many complex, and sometimes competing, elements 

into a comprehensive proposal. Ideally, effective reform would • improve the accuracy of plan funding measures while minimizing complexity 

and maintaining contribution flexibility; • revise the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; • develop a more risk-based PBGC insurance premium structure and provides incentives for sponsors to fund plans adequately; • address the issue of underfunded plans paying lump sums and granting benefit 

increases; • modify PBGC guarantees of certain plan benefits (e.g., shutdown benefits); • resolve outstanding controversies concerning hybrid plans by safeguarding the 

benefits of workers regardless of age; and • improve plan information transparency for pension plan stakeholders without 

overburdening plan sponsors. 

However, it is also necessary to keep in mind that pension reform is only part 

of the broader fiscal, economic, workforce, and retirement security challenges facing 

our nation. If you look ahead in the Federal budget, Social Security, together with 

the rapidly growing health programs (Medicare and Medicaid), will dominate the 

Federal Government’s future fiscal outlook. These are far larger and more urgent 

challenges, representing an unsustainable burden on future generations. Furthermore, pension reform should be considered in the context of the problems facing our 

nation’s Social Security system. How we reform DB pensions has crucial implications for directions taken in reforming Social Security. For example, pension reforms 

that reduce the scope of the private pension system or change the dominant form 

of private pension design may have consequences for those elements of Social Security reform packages that reduce benefits or include an individual accounts feature. 

This also means that acting sooner rather than later will make reform less costly 

and more feasible. Though smaller in scale than actuarial deficits in Social Security, 

Medicare, and Medicaid, PBGC’s deficit threatens to worsen our government’s longterm fiscal position. Finally, as with Social Security, it is also important to evaluate 

pension reform proposals as comprehensive packages. The elements of any reform 

proposal interact; every package will have pluses and minuses, and no plan will satisfy everyone on all dimensions. If we focus on the pros and cons of each element 

of reform by itself, we may find it impossible to build the bridges necessary to 

achieve consensus. 

We look forward to working with Congress on these crucial issues. 

Mr. Chairman, this concludes my statement. I would be happy to respond to any 

questions you or other members of the Committee may have. 

ENDNOTES

1. Many of these elements are explored in greater detail in a report that GAO 

is releasing today. GAO, Comptroller General’s Forum: The Future of the Defined 

Benefit System and the Pension Benefit Guaranty Corporation, GAO-05-578SP 

(Washington, D.C.: June 9, 2005). 

2. GAO, Long-Term Fiscal Issues: The Need for Social Security Reform, GAO-05-

318T (Washington, D.C.: Feb. 9, 2005). 

3. GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP (Washington, D.C.: Feb. 2005). 

20

4. One impetus for the passage of ERISA was the failure of Studebaker’s defined 

benefit pension plan in the 1960s, in which thousands of plan participants lost most 

or all of their pensions. 

5. Some defined benefit plans are not covered by PBGC insurance; for example, 

plans sponsored by professional service employers, such as physicians and lawyers, 

with 25 or fewer employees. 

6. GAO, Private Pensions: Recent Experiences of Large Defined Benefit Plans Illustrate Weaknesses in Funding Rules, GAO-05-294 (Washington, D.C.: May 31, 

2005). 

7. GAO, Pension Benefit Guaranty Corporation Single-Employer Insurance Program: Long-Term Vulnerabilities Warrant ‘‘High Risk’’ Designation, GAO-03-1050SP 

(Washington, DC: July 23, 2003). 

8. For additional discussion of these broader fiscal challenges, see GAO, Our Nation’s Fiscal Outlook: The Federal Government’s Long-Term Budget Imbalance, at 

http://www.gao.gov/special.pubs/longterm/longterm.html. 

9. PBGC is authorized to borrow up to $100 million from the U.S. Treasury to 

cover temporary cash shortfalls. 

10. PBGC also guarantees a smaller pension benefit for approximately 10 million 

participants in multiemployer pension plans. 

11. According to PBGC officials, PBGC files a claim for all unfunded benefits in 

bankruptcy proceedings. However, PBGC generally recovers only a small portion of 

the total unfunded benefit amount in bankruptcy proceedings, and the recovered 

amount is split between PBGC (for unfunded guaranteed benefits) and participants 

(for unfunded nonguaranteed benefits). 

12. The additional premium equals $9.00 for each $1,000 (or fraction thereof) of 

unfunded vested benefits. A plan’s sponsor may be exempt from paying the variable 

rate premium if the plan met a specified funding threshold in the previous plan 

year. 

13. Present value calculations reflect the time value of money—that a dollar in 

the future is worth less than a dollar today, because the dollar today can be invested and earn interest. Using a higher interest rate will lower the present value 

of a stream of payments because it implies that a lower level of assets today will 

be able to fund those future payments. 

14. A plan’s current liability may differ from its termination liability, which measures the value of accrued benefits using assumptions appropriate for a terminating 

plan. For further discussion of current versus termination liability, see appendix IV 

of GAO, Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance 

Program Faces Significant Long-Term Risks, GAO-04-90, (Washington, D.C.: Oct. 

29, 2003). 

15. The AFC was introduced by the Omnibus Budget Reconciliation Act of 1987. 

See Pub. L. No. 100-203 (1987). 

16. Broad equity indexes in the U.S. have risen since 2002 but remain significantly below their peak levels of 2000. 

17. ERISA Industry Committee, Consensus Proposals for Pension Funding, PBGC 

Reform, and Hybrid Pension Plans, (Washington, D.C.: May 2005). Asset totals in 

2002 and 2004 include billions of dollars in contributions by plan sponsors since 

1999. 

18. Falling interest rates raise the price of group annuities that a terminating 

plan must purchase to cover its promised benefits and increase the likelihood that 

a terminating plan will not have sufficient assets to make such a purchase. A potentially offsetting effect of falling interest rates is the possible increased return on 

fixed-income assets that plans hold. When interest rates fall, the value of existing 

fixed-income securities with time left to maturity rises. 

19. Three of the last five annual increases in bankruptcies coincided with recessions, and the record economic expansion of the 1990s is associated with a substantial decline in bankruptcies. Annual plan terminations resulting in losses to the single-employer program rose from 83 in 1989 to 175 in 1991, and after declining to 

65 in 2000, the number reached 93 in 2001. The last three recessions on record in 

the United States occurred during 1981, 1990-91, and 2001 (See www.bea.gov/bea/

dn/gdpchg.xls). 

20. The causes of restructuring are likely industry-specific. For example, the U.S. 

airline industry, which has many pension plans in poor financial condition, has 

faced profit pressures as a result of severe price competition, terrorism, the war in 

Iraq, and the outbreak of severe acute respiratory syndrome (SARS), creating bankruptcies and uncertainty about the future financial health of the industry. 

21. A major factor contributing to the increase in lump-sum distributions from defined benefit plans is the growing prevalence of hybrid plans, such as cash balance 

21

plans, which typically offer lump sums. Hybrid plans are a form of DB plan that 

determines benefits on the basis of hypothetical individual accounts. 

22. GAO-05-294. 

23. Boyce, Steven, and Richard A. Ippolitio, ‘‘The Cost of Pension Insurance,’’ The 

Journal of Risk and Insurance, (2002) Vol. 69, No. 2, pp.121-170. 

24. For further details of this study, covering 1995-2002, see GAO-05-294. These 

100 plans are not a closed group. The 100 largest plans, as measured by current 

liability, changed from year to year for various reasons, including mergers and 

divestitures of plan sponsors. A total of 187 distinct plan identifiers were included 

in our sample, and 25 of them were in each year’s sample. 

25. Conversely, when interest rates rise, the opposite would be true, and the 

weighted average would make the cost of settling plan liabilities higher than the 

current market rate would indicate. 

26. Several factors may explain the wide discrepancy between reported funding 

levels and actual funding levels at termination. Reported funding levels may use an 

actuarial value of assets, which may exceed the market value at termination. In addition, termination liabilities are valued using a different interest rate than that 

used for current liabilities. Further, current liabilities and termination liabilities 

may be measured at different times. Unfunded shutdown benefits may also raise 

termination liabilities. For more discussion of the differences between termination 

and current liabilities, see GAO-04-90, appendix IV. 

27. See 26 U.S.C. 412(b). 

28. A plan is not subject to an AFC if the value of plan assets (1) is at least 80 

percent of current liability and (2) was at least 90 percent of current liability for 

at least 2 consecutive of the 3 immediately preceding years. 

29. For further information about problems with the content and timeliness of 

regulatory reports on pensions, see GAO, Private Pensions: Government Actions 

Could Improve the Timeliness and Content of Form 5500 Pension Information, 

GAO-05-491 (Washington, D.C.: June 3, 2005), and Private Pensions: Publicly Available Reports Provide Useful but Limited Information on Plans’ Financial Condition, 

GAO-04-395 (Washington, D.C.: Mar. 31, 2004). 

30. GAO, Budget Issues: Budgeting for Federal Insurance Programs, GAO/TAIMD-98-147 (Washington, D.C.: Apr. 23, 1998), and Budget Issues: Budgeting for 

Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997). 

31. PBGC’s premium collections and benefit payments are recorded in the budget 

on a cash basis, regardless of when the commitments are made. The premiums paid 

by participants are held in a revolving fund. PBGC’s budget treatment is complicated by the use of a second account for some activities which is not included in 

the Federal budget. This account records the assets and liabilities that PBGC acquires from terminated plans. As a result, the budget only reports PBGC’s net annual cash flows between its on-budget account and all other entities, including the 

other PBGC account. It does not provide information on liabilities PBGC incurs 

when it takes over an underfunded plan or other changes in PBGC’s assets and liabilities. 

32. GAO-05-578SP. 

33. For example, earlier this year, the Administration released a proposal that focuses on reforming the funding rules; improving disclosure to workers, investors, 

and regulators about pension plan status; and adjusting premiums to better reflect 

a plan’s risk to PBGC. See U.S. Department of Labor, Employee Benefits Security 

Administration, Strengthen Funding for Single Employer Pension Plans, February 

7, 2005. 

34. For greater detail, see GAO-04-90. 

35. GAO, Comptroller General’s Forum: The Future of the Defined Benefit System 

and the Pension Benefit Guaranty Corporation, GAO-05-578SP (Washington, DC: 

June 2005). Participants included government officials, researchers, accounting experts, actuaries, plan sponsor and employee group representatives, and members of 

the investment community. 

36. Cash balance plans are a type of defined benefit plan that look more like a 

defined contribution plan to participants. As with other defined benefit plans, the 

sponsor is responsible for managing the plan’s commingled assets and complying 

with the minimum funding requirements. However, information about benefits is 

communicated to plan participants through the use of hypothetical account balances, which makes the plan appear like an individual account-based defined contribution plan. The hypothetical account balances communicated to plan participants do not necessarily bear any relationship to actual assets held by the plan.

Chairman NUSSLE. I thank the witness. 

22

Next we will hear from the distinguished Director of the Congressional Budget Office. 

Welcome back. Your entire testimony will be made part of the 

record, and you may proceed. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, Mr. Spratt and 

members of the committee. 

The CBO is indeed pleased to be here and have a chance to testify once more. The PBGC issue is an important and timely one, 

and there is an enormous range of issues which we might explore, 

perhaps in the question-and-answer. 

I am going to restrict these remarks to the work that is ongoing 

at the CBO at the request of the committee, which is focused on 

budgeting for loans, guarantees and insurance in the Federal budget. 

I will make three main points. The first will be to provide a 

sense of the scale of the economic commitment represented by insurance for defined benefit pension plans. 

The second will be to raise the question of just how much of this 

commitment will be picked up by the U.S. taxpayer. 

And the third will be to explore effective ways to inform the Congress and other stakeholders of the budgetary resources that might 

be involved in these commitments. 

Now I want to echo the comments of Mr. Spratt and emphasize 

at the outset that this is a work in progress. As we continue our 

work, and refine our approach, the numbers will change. 

Nevertheless, we believe that our work is sufficiently mature 

that one can get a sense of the magnitudes involved. We are here 

today to talk about that. 

The numbers that you will see and hear today have in front of 

them labels like economic costs. These are different, and deliberately different, from traditional budget estimates. 

Indeed, our goal is to step back and look at cost in a different 

and broader context. In fact, we try to estimate the market value 

of the financial resources that are being transferred to or within 

the pension system. 

So with those opening warning labels, let’s take a look at the 

three questions. 

Question No. 1: How big is the insurance problem represented by 

the PBGC? And here the technique is to try to estimate market 

values. Figuratively, we are trying to answer the question, how big 

a check would you need to write to the financial markets to purchase the insurance policy of the PBGC? 

I will skip the financial rocket science buried in the computations 

and simply point out that we are going through the steps a financial analyst would go through in deciding how large an insurance 

premium to demand. 

Step one is to estimate the probability of a sponsor’s bankruptcy. 

Our estimates are based on the initial assets and liabilities of those 

firms that sponsor defined benefit plans. Using projected evolutions 

in the value of those assets and liabilities, we calculate the probabilities of bankruptcy, given economic conditions in the future. 

23

Step two is to estimate the distribution of underfunding which 

will be present in any plan, given that bankruptcy did occur. 

To do that, we need to take into account both the current funding 

rules and any potential changes that the Congress might wish to 

consider, so as to be able to project the contributions that would 

have been made by these firms before they arrive at bankruptcy. 

Step three is to do the valuation of that particular underfunding. 

When a plan goes into bankruptcy and it is handed over to the 

PBGC, economic conditions are likely to be bad. And markets demand greater compensation for agreeing to give up valuable cash 

in bad times than they do in good times. 

The experience of recent years is illustrative. Bad times are characterized by broad economic dips which place pressures on cash 

flows for firms. Revenues tend to be weak and equity market performance is typically less than stellar, which in this case would reduce the value of assets in pension plans. 

Poor economic times are also typically characterized by low interest rates, which raise the valuation of the liabilities of pension 

plans. 

So in the circumstances where markets are most unwilling to 

hand over valuable cash are exactly those same circumstances in 

which pension plans would likely end up at the PBGC. Markets 

will price that risk and they will charge a premium in order to 

come up with money in those circumstances. 

Given those three broad pieces of the analysis, we can gauge the 

costs facing the PBGC from an economic point of view. The first 

slide gives you a notion of two kinds of costs. 

The first is what we refer to as sunk costs. These are the costs 

of those plans which are in actuality or in effect already at the 

PBGC. This is the $23 billion number of the liabilities of the PBGC 

in excess of assets that they have collected already. And those cannot be avoided by prospective policy changes. 

Mr. SPRATT. And that is for the duration of the plans that the 

government has taken over, then. There is no time limit to that, 

except that eventually all the employees who have an inexorable 

benefit get their adjusted benefit payment, and that is it. 

Mr. HOLTZ-EAKIN. That is right. And that is that bottom number. 

But the remaining numbers are forward-looking costs over different horizons: 10, 15, or 20 years. Those are the likely value of 

insurance to defined benefit plans over the next decade or two decades. 

So the first number indicates that markets would require a $48 

billion check to cover claims in the next 10 years at the PBGC. 

Clearly, as one allows time to go forward, the probability of more 

plans arriving at the PBGC——

Mr. SPRATT. And this is the present value of expected terminations over a 10-year period of time. Going out for 10 years. 

Mr. HOLTZ-EAKIN. This is the check now——

Mr. SPRATT. Present value. 

Mr. HOLTZ-EAKIN. The check now, present value, to cover terminations over the next 10 years, in market terms. Or 15 or 20. 

It gives you a sense of the scale of the financial resources that 

will be necessary at the PBGC in order to cover the future obligations of the defined benefit pension system. 

24

Now those estimates assume the continuation of current funding 

policies and premiums. 

One could imagine changing policy and looking at the effects on 

cost. 

The next slide shows 10-year effects of some illustrative policies. 

Raising the flat-rate premium, currently $19, to $30 would lower 

prospective net costs over the next 10 years in present value from 

$48 billion to $45 billion, a saving of $3 billion at the PBGC. 

You could also change the risk of portfolios held by pension 

plans. 

Currently portfolios are about 70 percent invested in equities. 

Limiting them to a maximum of 30 percent equities would make 

the assets of the pension plan safer in financial terms. This change 

produces larger savings, $7 billion over the 10-year horizon, bringing the prospective costs to $41 billion. 

Or going in the other direction, one could make permanent the 

temporary discount rate increase that have been in place for the 

past 2 years, as a result of using corporate rates to replace the rate 

on 30-year Treasury bonds. If that change were made permanent, 

it would raise the prospective costs of insurance by $5 billion, to 

a total of $53 billion. 

Although estimates are not yet available, I would note that some 

other policy changes have potentially larger effects than changing 

premiums and discount rates. Those changes involve funding rules 

or definitions of liabilities. 

In the former category are policies like the administration’s proposal to distinguish for funding purposes between the investmentgrade firms and those firms that have fallen below investment 

grade. Those kinds of funding changes could have a dramatic impact. 

Changing funding requirements through changes in the definition of liabilities could also reduce PBGC costs. The examples of 

Bethlehem and LTV that Mr. Walker pointed to are situations in 

which shut-down benefits, lump-sum cashouts, all the things that 

go on close to termination, raised liabilities dramatically. Bringing 

those factors more fully into the funding requirements would in 

fact be a beneficial step. 

Next slide. 

The second important question is just what is the taxpayers’ exposure to this potential liability? Under current law, it is in principle zero. The law requires that the PBGC be self-financing. The 

taxpayer has no legal liability to pick up any residual claims on the 

PBGC. 

Nonetheless, when its assets are exhausted the PBGC will find 

itself in uncharted territory. 

Mr. SPRATT. If I could interrupt, I think what you are assuming 

there is that our liability is to the extent of the trust fund and no 

further, are you not? 

Mr. HOLTZ-EAKIN. That is right. It would be confined to the assets that the PBGC has taken from failed plans, plus any premiums that they have built up. 

There is no statutory provision that would allow PBGC to automatically go to the general fund of the Treasury or to the taxpayers 

as a whole. That would require congressional action. 

25

Mr. SPRATT. If the PBGC in fact guarantees the scheduled percentage of pension benefit payable, then we have a substantial cost 

beyond the liability of the trust fund, the resources of the trust 

fund. 

Mr. HOLTZ-EAKIN. Absolutely. And the question then is how 

would that cost be picked up? Would it be borne by the workers in 

the form of dramatically reduced pension benefits? Or, would pressures rise to the point where the Congress would consider devoting 

more resources, going to the taxpayer and funding the PBGC? 

There are clearly pressures of that sort. 

In some industries, notably airlines at present, proposals have 

been made to stretch out payments to the pension plans. In fact, 

this would raise PBGC’s cost. And if Congress goes that route, it 

would be hard to imagine turning around and not actually honoring that kind of a commitment to the worker. 

Mr. WALKER. With your indulgence, Doug, if I can, having been 

head of the agency, the PBGC is not backed by the full faith and 

credit of the U.S. Government. The PBGC has the ability to borrow 

up to $100 million from the U.S. Government. That is all they 

have. 

But from a practical standpoint, if the PBGC becomes insolvent—and I think it is only a matter of when, not a matter of if, 

unless there is dramatic and fundamental reform, then there would 

be tremendous political pressure put on you to be able to step in. 

The numbers that CBO has come up with, which I think are excellent, show you the potential exposure to the budget and to the 

taxpayers if the Government came in to bail out the PBGC. Legally 

the Government is not required to do so, but practically you would 

so under tremendous pressure to do so. 

Mr. HOLTZ-EAKIN. And that would lead you to what would happen under different policy changes. And there, the range is enormous. Literally, the sky could be the limit. You could pick up the 

entire economic price tag that we have tried to sketch out. Or, you 

could stick to current law and have zero. 

It is important in thinking through any policy changes to recognize both the scale of the commitment that we have tried to lay 

out, but also that there will be feedback from other parts of the 

budget. 

In particular, large increases in premiums which reduce measured profitability will have revenue effects. And the committee 

would be served well to think comprehensively about the impact of 

those proposals. And we would be happy to help you with that. 

One of the issues that would arise there as well would be the degree to which it should be an explicit policy to subsidize insurance 

to defined benefit pension plans. 

Is it a policy goal to provide resources to the defined benefit system as a whole? Or should it be the case that the insurance should 

not cost the taxpayer anything? If the latter, then should it be 

priced and regulated in a way that the firms come up with the full 

cost? 

And then finally, let me close and turn to the question of what 

is the best way to present this information to the Congress and to 

this committee? 

26

The next slide shows two vehicles for presenting the information. 

One is the standard budget documents including the appendices. 

And the second would be the financial statements of the U.S. Government. 

Under current law, as has been noted, all that is shown in the 

budget are the cash flows of one part of the PBGC, the on-budget 

fund, which is an incomplete financial picture of the agency as a 

whole. 

The financial statements for PBGC include a report of probable 

claims and a contingent liability for claims that are reasonably possible, which is disclosed in a footnote. 

So the current reporting is far short of the kinds of numbers that 

might be available if one were to adopt the structure we have outlined. 

On the budget, you could stick with the current setup. Or one 

could move toward the direction that the chairman proposed several years ago and actually accrue the costs, including perhaps the 

market risks of providing insurance in bad times. 

Or you could pick a middle ground, which would be to reflect in 

the budget the de facto subsidy on an annual basis to the premiums that firms are paying for this valuable insurance against 

the risks of default on employee compensation. 

So there are a variety of stylized budget options that one could 

go to there, and we could work out more. 

And finally, in the financial statements, it would be straightforward to reflect the full market value of this insurance, the economic costs de facto being borne by the system as a whole. And 

that would improve the nature of the reporting as well. 

So I am pleased to have a chance to present this preliminary look 

at our work. It is work that we have done under the leadership of 

the committee. We are quite pleased with the status of things and 

look forward to working further with you to bring it to fruition. 

[The prepared statement of Douglas Holtz-Eakin follows:] 

PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL

BUDGET OFFICE

Chairman Nussle, Mr. Spratt, and Members of the Committee, I am pleased to 

discuss the ongoing work that the Congressional Budget Office (CBO) is doing at 

the request of this Committee on budgeting for loans, guarantees, and insurance. 

Today, I will focus on the economic costs, Federal costs, and budgetary treatment 

of the Pension Benefit Guaranty Corporation’s (PBGC’s) insurance of defined benefit 

pension plans. 

At the outset of my statement, however, I would emphasize two important caveats. First, CBO’s efforts to estimate the costs of PBGC and to identify alternative, 

potentially more effective budgetary treatments constitute a work in progress. With 

further refinements, CBO’s estimates and findings are likely to change somewhat. 

Second, the estimates that I will be reporting today are market measures of the 

value of financial resources being transferred to or within the defined-benefit pension system under current law. They are not budget cost estimates, nor do the estimates of the effects of changes in policy represent the budget scoring for legislation 

that would effect those changes. 

As economic—rather than budget cost—measures, the estimates provide an opportunity to think broadly about Federal policy toward defined-benefit pension plans. 

Under current policy, the full cost of those pensions is not being shouldered by the 

plans’ sponsors. Rather, because the current rules permit plans to be underfunded 

and because pension insurance is underpriced for many plans, some of the costs are 

being borne by the plans’ beneficiaries and, potentially, by taxpayers. From a budgetary perspective, the key question is, how much should taxpayers be required to 

contribute to the defined-benefit pension system? 

27

Under current law, PBGC is liable for insured benefits only to the extent that it 

has resources from insurance premiums, investment income, the assets of terminated plans, and recoveries from sponsors. However, because PBGC is a Federal insurance agency, there is a widespread belief that its obligations have at least an 

implied Federal guarantee that commits the government to use general revenues to 

honor insured claims. 

In pursuing the objective of reducing or eliminating Federal costs, policymakers 

have several general types of approaches available. One group consists largely of 

regulatory instruments, including raising premiums and adjusting them for risk, 

tightening the pension funding rules, improving the measurement and reporting of 

pension liabilities, and attempting to increase the discipline of private sponsors’ 

funding decisions. Higher premiums—in particular, ones linked to PBGC’s risk exposure—would offset losses on future claims. More accurate measurement of plans’ 

liabilities would make the existing funding rules and premium schedule more effective. 

If beneficiaries understood that they were at risk from plans’ underfunding, they 

would have incentives to press for higher funding or perhaps another form of compensation. Accordingly, increased requirements for plans to publicly and frequently 

disclose sufficient information about their financial condition could be useful in reducing Federal costs. Alternatively, privatizing PBGC so that losses were absorbed 

by its shareholders or by private reinsurers would also bring the force of market 

discipline to the task of controlling PBGC’s losses. 

Policymakers could also use budget instruments to help move toward eliminating 

Federal costs for PBGC. Increasing the transparency of PBGC’s own financial condition and performance could be as useful as doing so for the pension plans. For instance, the agency’s budget accounts could be reconfigured to recognize the accruing 

cost to the government from pension insurance. 

The Congress may also decide that, for various reasons, subsidizing the definedbenefit pension system is desirable. In that case, policymakers may be willing to accept some level of expected funding through general revenues. The same policy instruments could be used to limit taxpayers’ exposure as would be used to eliminate 

it. 

The economic costs of PBGC insurance to taxpayers (if the implicit guarantee is 

honored) are substantial. In thinking about reducing those costs, however, it is critical to distinguish between costs already incurred and prospective costs. PBGC had 

accumulated losses of $23.3 billion at fiscal year-end 2004 for single-employer plans 

that had been terminated or whose termination the agency regarded as probable. 

‘‘Sunk’’ costs for plans that have been terminated (in actuality or in effect) cannot 

be avoided, and policy decisions can determine only who will bear those costs. However, policy changes can reduce prospective costs. 

CBO estimates that the economic costs to the public of PBGC insurance for singleemployer plans net of premium collections over the next 10 years is $48 billion. That 

figure describes the estimated net present value of the financial resources that the 

program will be transferring to sponsors of and participants in defined-benefit pensions. It is also the price that the government would have to pay to private insurers 

bidding in competitive markets to take on the obligations that PBGC will assume 

in that period with current premiums and funding rules. Adding sunk costs and prospective costs together results in a total of $71 billion for the upcoming decade, $83 

billion for 15 years, and $91 billion for 20 years. 

In terms of the particular instruments that could be used, CBO’s calculations suggest the following: 

• Premium collections would have to rise fivefold in order to cut net Federal costs 

to zero through increases in premiums alone. For well-funded plans, which do not 

pay a premium for underfunding, the increase would be relatively modest, but for 

severely underfunded plans, which do pay an underfunding premium ($9 per $1,000 

of underfunding per year), the increase could constitute a large increase in costs. 

• Some proposals that the Administration has made, if enacted, could measurably 

reduce the economic costs of the system. For example, increasing premiums from 

$19 to $30 per participant would reduce 10-year net economic costs by $3 billion, 

while the proposed tighter rules for calculating pension liabilities and the proposed 

requirements for increased funding by financially distressed sponsors could reduce 

prospective economic costs significantly. 

• Other policy changes such as reducing the maximum share of a pension plan’s 

assets that could be invested in equities (stocks) to 30 percent from the current unregulated level of about 70 percent would reduce costs by $7 billion over 10 years. 

• Some changes currently being considered could increase prospective costs. For 

example, making permanent a legislated increase in the discount rate used to calculate the present value of pension liabilities would increase PBGC’s net costs by 

28

$5.3 billion. Increasing the average time permitted for closing a plan’s funding gap 

by 2 years would raise net costs by $6 billion. • Changing the budgetary treatment of PBGC or changing its ownership by paying a private entity to take it over would not directly affect net costs but could increase the visibility of those costs and contribute to improved monitoring by the 

Congress. 

ESTIMATING THE COSTS OF PBGC 

The recent takeover of several airlines’ pension plans by the Pension Benefit 

Guaranty Corporation has focused attention on and raised concerns about this program’s costs to the government, taxpayers, the plans’ sponsors, and the plans’ participants. However, the budgetary and financial information currently available 

about PBGC is not very informative about the likely costs of the takeovers or the 

incidence of those costs. 

One reason for the absence of such information is that Federal pension insurance 

gives a large number of beneficiaries valuable but highly uncertain claims to future 

payments. A natural approach to determining the costs of such claims is to find 

market prices for equivalent uncertain commitments. Although no exact match is 

currently available in private markets, finance specialists have developed techniques for using the prices of securities that are bought and sold to price contracts 

that are not traded. In the case of PBGC, the value of defined-benefit pension insurance is equivalent to a type of put option. Specifically, the option held by a pension 

plan’s beneficiaries is to sell, or put, the assets of the plan to PBGC at a price equal 

to the value of the insured liabilities, contingent on the financial distress of the 

sponsor. 

CBO has used those techniques along with publicly available information to 

project the three key determinants of PBGC’s costs: the probability of a sponsor’s 

bankruptcy, which is necessary before the put can be exercised; the probability distribution of the plan’s underfunding (the plan’s liabilities minus its assets) at termination, which is the value of the put option when it is exercised (or when the plan 

is transferred to PBGC); and market risk (the correlation of PBGC’s claims with bad 

economic conditions), which affects the discount rate used to calculate the present 

value of the option. 

The resulting estimated costs are the market value of the financial resources 

transferred to the defined-benefit pension system by PBGC. The estimates are based 

on information contained in Securities and Exchange Commission filings by publicly 

traded sponsors of defined-benefit pension plans. (Data on privately held companies 

and confidential filings that sponsors of publicly traded companies with significantly 

underfunded plans submit to PBGC are not available to CBO.) In the data available 

to CBO, plans’ total liabilities amount to about 88 percent of those reported by 

PBGC. Therefore, CBO has scaled its estimates of PBGC’s costs by a factor of 1.14 

to adjust them to the size of the defined-benefit pension system. 

The estimates are subject to considerable uncertainty for many reasons. CBO’s estimates rely on firms’ reports that are based on generally accepted accounting principles of pension assets and liabilities, whereas PBGC’s figures rely on firms’ reports 

for the Internal Revenue Service and under the Employee Retirement Income Security Act, which indicate a higher initial level of underfunding. Also, CBO’s estimates 

are based on assumptions that simplify the complexities of the defined-benefit pension system. For example, all plans are assumed to fund pensions with the same 

mix of assets and to exhibit the same jump in liabilities at termination. 

Using those assumptions, CBO estimates that under current policy, the market price of PBGC insurance going forward for existing plans for 10 years is $48 billion 

(net of premiums and assets of terminated plans and recoveries). That figure conveys the present value of the commitment to take on PBGC’s net obligations for existing single-employer plans for the next 10 years. With the $23.3 billion in accumulated losses reported by PBGC at year-end 2004, the combined total of historical and 

prospective 10-year costs is about $71 billion. The $23.3 billion in accumulated losses are sunk costs that cannot be avoided by 

policy changes now and that will be difficult to recover from surviving sponsors. As 

a consequence, policymakers have greater latitude in focusing on the second component of costs: claims that are prospective under current policy and, therefore, may 

be avoided. 

MEASURES TO REDUCE THE FEDERAL COSTS OF PBGC 

Two general regulatory approaches may be useful in reducing the future net costs 

of PBGC insurance. The first is to raise insurance premiums and adjust them for 

risk. The second is to reduce the level of risk in the defined-benefit pension system. 

29

RAISING PREMIUMS

Raising premiums would require sponsors to pay a larger share of costs. To cut 

Federal costs to zero through higher premiums alone would require a fivefold increase in PBGC’s receipts from premiums. Those higher premiums might be manageable for well-funded plans, which currently pay only a flat charge of $19 per year 

per participant for insurance. However, for firms with plans that are significantly 

underfunded, their current annual premiums also include a charge of $9 per $1,000 

of underfunding. A hypothetical firm with 1,000 participants and $50 million in 

underfunding would pay premiums of $469,000 per year, of which $450,000 is the 

charge for underfunding. Therefore, for some firms, the increase in premiums could 

be significant—perhaps to the point of causing them to adjust the form and level 

of compensation that they offer. 

REDUCING OR CHARGING FOR RISK

An alternative to a proportionate increase in premiums for all sponsors would be 

to make premiums more sensitive to the risk that various plans pose for PBGC. Although the extra charge for underfunding currently provides some adjustment based 

on risk, increasing the variation in premiums on the basis of risk could reduce the 

current cross-subsidies from low-risk sponsors and plans to high-risk ones. Some 

risk-adjusted premiums could also strengthen incentives for sponsors to reduce 

risk—which could lower the premium rate required to achieve any given level of net 

costs. 

With this approach, premiums would be higher for sponsors that were more likely 

to encounter financial distress and whose plans would tend to be more deeply underfunded at termination. For example, premiums could vary with the volatility of 

the market value of a firm and its pension assets, the ratio of the firm’s liabilities 

to its equity (leverage), and the firm’s credit rating. The resulting range of premiums could be substantially wider than it is under current policy because risk varies significantly among plans. If, for example, premiums were set so that PBGC’s 

expected net cost for insuring an investment-grade company (which is within the top 

four broad ratings categories) was the same as that for a lower-rated company, they 

would need to be about 20 times higher per dollar of liability for the lower-rated 

company. 

Another important correlate of plans’ risk that could provide a basis for adjusting 

premiums is the ratio of a pension plan’s assets in equities to its total assets. Sponsors appear to prefer a high proportion of equities because they expect higher average returns on stocks than on bonds. If realized, that risk premium would reduce 

the cash contributions a sponsor must make to its plan in order to fund the promised pension benefits. Of course, such investments entail the risk that the stock 

market will do poorly and the plan will become underfunded. 

Plans with a high proportion of common stocks, rather than high-quality bonds 

or other fixed-income securities, exhibit more volatility in the value of their assets 

than do plans holding more debt securities. Plans with a high share of stocks are 

thus at greater risk of underfunding when the sponsors encounter financial distress. 

That increase in risk to PBGC means that fair (full-cost) premiums would be about 

16 percent lower for plans with an equity share of 30 percent rather than the average of almost 70 percent currently found in defined-benefit pension plans. Such an 

adjustment in premiums could create incentives for firms’ investment decisions that 

could lower costs and improve the match between the risk posed and the premiums 

paid. An alternative to relying on the incentive effects of risk-based premiums to 

reduce risk would be to limit, through law or regulation, the share of assets that 

plans could invest in stocks. 

The current structure of premiums tends to disconnect them from risk because 

PBGC’s costs vary more closely with plans’ liabilities rather than their number of 

participants. The per-participant charge also tends to lower the premium per dollar 

of insured liabilities for firms with a high proportion of older or high-wage employees compared with firms whose workforce is predominantly younger or lower paid 

and therefore has few accumulated pension benefits. At the current rate of $19 per 

participant, those effects may be small, but if rates were raised to be fair on average, the effects on firms’ behavior could be significant. 

A major source of risk to PBGC is the potentially large gap between the level of 

pension liabilities reported under the current definitions and funding rules and the 

economic value of those liabilities at plans’ termination. PBGC often reports that 

plans that appeared to be well-funded prior to termination turn out to be deeply underfunded when they are transferred to the agency. For example, Bethlehem Steel’s 

plan was 84 percent funded on the basis of current reporting requirements but was 

30

1Statement of Bradley D. Belt, Executive Director, Pension Benefit Guaranty Corporation, before the Senate Committee on Finance, March 1, 2005. 2President’s Commission on Budget Concepts, Report of the President’s Commission on Budget Concepts (October 1967), p. 36. 

only 45 percent funded at termination.1 Underfunding can increase as a sponsor approaches bankruptcy for several reasons, including the discretion that the law allows in calculating the present value of a plan’s liabilities and in valuing assets at 

their purchase price rather than current market value. (Those same funding rules 

also permit many plans that are effectively underfunded to avoid paying the variable-rate premium of $9 per $1,000 of underfunding.) Changing the definition and 

measurement of liabilities and tightening the funding rules, especially for sponsors 

with a greater chance of financial distress, could lessen the risk to PBGC and to 

the defined-benefit pension system. 

INCREASING THE VISIBILITY OF PBGC’S COSTS

The policy changes needed to reduce the costs of pension insurance might be facilitated by increasing the visibility of PBGC’s costs through changes in the budgetary treatment of pension insurance or other means. The present budgetary treatment focuses on the cash inflows to PBGC’s on-budget account, primarily from premiums, interest income, and transfers from an off-budget trust fund, which holds 

the assets of plans taken over by PBGC. The inflows are netted against Federal outlays for pension benefits in plans run by PBGC’s trustees and for administrative expenses. That treatment delays the recognition of insurance claims, often for decades, 

from when they are realized at a plan’s termination to when benefits are paid. As 

a consequence, and despite large losses, PBGC’s budgetary position has contributed 

to reducing the Federal deficit in every year except for fiscal year 2003, when the 

on-budget account recorded net outlays of $229 million. For fiscal year 2004, net 

budget outlays for PBGC were once again negative, representing a net cash inflow 

of $247 million. Such budgetary treatment is not designed to indicate or suited to 

describing the expected risk and magnitude of losses in the pension insurance system. 

The financial statements issued by PBGC include losses on plans that have been 

terminated and those whose takeover the agency can foresee. In addition, PBGC 

publishes financial projections based on its Pension Insurance Modeling System, 

which indicate that the midpoint of the agency’s distribution of accumulated deficits 

in 10 years is about $30 billion. Although both of those indicators of PBGC’s financial status provide useful information to policymakers and are good starting points 

for further analysis, the first focuses primarily on losses that have occurred, including losses on probable terminations (the $23.3 billion cited earlier); and the latter 

excludes the cost of market risk. 

Information on the present market value of future transfers to the defined-benefit 

pension system net of future premiums might be provided to the Congress through 

a supplementary reporting system or through changes in budget presentation. The 

first approach would offer the advantage of avoiding the need for changes to the 

budget, which are difficult to make piecemeal; the second, the advantage of citing 

budget numbers, which are more frequently used for policy decisions than supplementary information is. 

Budgetary treatments of pension insurance that would better indicate full costs 

should be the following: 

• Timely. According to a recommendation of the President’s Commission on Budget Concepts, the budget should reflect outlays when the government incurs the obligation to pay.2 In the case of PBGC, that point suggests that costs should include 

losses on pension plans when they are terminated. 

• Based on Market Value. In general, the budget uses market prices to measure 

the value of inputs consumed by various Federal programs. For consistency, market 

prices should be used in estimating insurance costs. For PBGC, the market price 

of risk is significant because the events that precipitate a transfer of pension liabilities to PBGC, including low investment returns, high rates of financial distress, 

and low interest rates, occur when the market value of all assets is down. 

• Prospective. The costs relevant to budgeting are those to which the government 

is committing in the budget period. Although sunk costs need to be recorded and 

paid, it is those costs that are being incurred in the budget period that are the focus 

of decisions. Of course, the extent to which the government is committing to pay 

under current law is restricted to the resources available to PBGC from premiums, 

assets of terminated plans, and recoveries from sponsors. 

31

3Details are available at www.dol.gov/ebsa/pdf/sepproposal2.pdf. 4This estimate does not reflect the budget saving that would be credited to this provision. 

The current budgetary treatment of PBGC recognizes the inflow of premium collections during the budget period but not the value of claims arising under the insurance. It thus falls short of having the attributes outlined above. CBO is currently 

exploring budgetary alternatives that might attain those qualities. One possibility 

would be to estimate the net prospective economic costs of PBGC over a specified 

period and to treat those values as the budget baseline costs of the program. Future 

year budgets could recognize the changes in the value of the insurance due to 

changes in law, regulation, or variables such as insured liabilities or interest rates. 

In the language of credit reform, those changes in costs might be treated either as 

reestimates (the result of unexpected economic changes) or modifications (the result 

of policy changes). 

Another possibility would be to structure the accounts to recognize as budget costs 

the unpaid fair-value premiums for PBGC insurance. That is, estimates of the annual premiums required to cut the net budget costs of insurance to zero could be 

compared with the premiums expected to be paid by sponsors, and the difference 

could be shown as the budget costs of PBGC. 

A more extreme approach would be to transfer PBGC to private owners. That step 

would probably accelerate the recognition of past losses in the budget because the 

current deficit would have to be covered, presumably by Congressional appropriations, before a private entity would be willing to assume the program’s obligations. 

In addition, a private owner might require either an annual or lump-sum payment 

from the government to continue to operate the insurance program under current 

funding rules and premiums. Because PBGC insurance is mandatory for definedbenefit pension plans, the government would probably remain involved in regulating 

the terms of the insurance—which raises the question of the amount of risk and responsibility the government effectively could transfer to private owners. Nevertheless, the risk to the government would most likely be less than it is under current 

policy. 

THE ADMINISTRATION’S PROPOSALS

The Bush Administration has proposed several changes in the defined-benefit 

pension system intended to reduce its financial shortfall and increase transparency.3

Generally, the Administration would raise premiums and permit further risk-adjustment of them; change the measure of plans’ liabilities and funding requirements; 

and increase public disclosures of plans’ funding status. Plans’ sponsors would also 

be permitted to fund the liabilities at higher levels during good economic conditions 

(without loss of tax benefits) as a buffer against underfunding during bad economic 

conditions and to use a higher discount rate to calculate plans’ liabilities. Most of 

those changes are consistent with the objective of reducing the Federal costs of pension insurance. More specifically, the major provisions being proposed would do the 

following: 

• Raise the fixed premium per participant from $19 to $30 per year and index 

the premium to future wage growth. CBO estimates that this change would reduce 

the prospective 10-year economic costs of PBGC insurance by $3 billion.4

• Authorize PBGC’s directors (the Secretaries of Labor, Treasury, and Commerce) 

to adjust the variable-rate portion of the premium so that PBGC’s income would 

cover expected losses. The change would require more than a sixfold increase in the 

premiums paid by plans’ sponsors. 

• Require that plans’ liabilities reflect the effects of early retirements, lump-sum 

distributions, and increased longevity. The proposal would also require sponsors 

with credit ratings below investment-grade to calculate pension liabilities by assuming that employees retire at the earliest opportunity, thereby increasing estimated 

liabilities. Such sponsors would also be required to fund completely any increases 

in the plans’ benefits. Although it is difficult to estimate the effect of the tighter 

rules for calculating liabilities, they are potentially the largest source of savings 

among the Administration’s proposals. 

• For the purpose of discounting in calculating pension liabilities, funding requirements, and premiums, mandate the use of a 3-month average of interest rates 

on corporate bonds whose duration matches the scheduled payments to beneficiaries. The proposal would make permanent the change from a Treasury rate to 

a corporate rate for discounting pension liabilities. It would permit plans’ sponsors 

to avoid making up the additional underfunding that resulted from the legislated 

increase in discount rates for 2004 and 2005. According to CBO’s estimates, this 

proposal would increase PBGC’s costs by $5 billion over 10 years. 

32

The Administration’s proposals incorporate many of the policy options discussed 

here to reduce PBGC’s risk exposure and to improve the transparency of the system. 

However, they also omit several options that are relatively important for reducing 

risk exposure and cross-subsidies between sponsors. First, premiums would continue 

to be unrelated to the risk of how pension assets are invested. Second, no new limitations would be placed on sponsors’ investment policies. Third, the proposals retain 

a fixed charge per worker, rather than establishing charges per dollar of coverage, 

which would perpetuate a transfer from plans with younger, lower-paid workers to 

those with a higher proportion of older workers, higher-paid workers, and retirees.

Chairman NUSSLE. Thank you to both of our witnesses for their 

testimony. 

Let me begin by welcoming a new member to the committee, 

Chris Chocola, who is here from Indiana. He is filling the slot that 

was vacated as a result of Mr. Portman’s appointment as U.S. 

Trade Representative. We welcome you to the committee, look forward to your tenure. Welcome to the committee. You have a $100 billion liability to 

deal with. That is just today. [Laughter.] 

I look forward to your answer to that. We always give those problems to the new members. 

Let me begin by asking, we have a draft report that I requested 

on PBGC, on the liability. And as I have seen—and it is not, as 

I understand it, ready for public announcement, because you are 

going through the final analysis of the report before it is realized. 

But could you give the committee an understanding of the $23 

billion versus $100 billion numbers that are going to be compared, 

that you have talked about a little bit today, but just to punctuate 

that one final time. Is it $23 billion that we are looking at as a 

long-term liability or are we really talking about $100 billion, or 

near $100 billion, as a long-term liability? 

Mr. HOLTZ-EAKIN. Well, $100 billion is a much more sensible estimate than $23 billion. The $23 billion is done, it has already happened. Nothing can change that. There will be more in the future. 

And the $100 billion number is a forward-looking estimate of what 

we know about already and the additional claims likely to arrive 

in the future. 

Chairman NUSSLE. And my understanding is for those who were 

not here during the S&L crisis—and I was not here during it, but 

just coming in at the end of it, my recollection is that it was approaching a $100-billion concern or crisis as well. 

So we are talking about a gigantic challenge that as you were 

speculating, while there may not be a legal statutory obligation, 

chances are there will be a political answer and a practical answer 

that needs to be provided. 

We have put in reconciliation for—as far as I am concerned, and 

this is the reason I was so adamant about making sure that we 

had this instruction available to the Education and Workforce 

Committee—available to their jurisdiction, as I remember, about 

$12.6 billion of jurisdiction, so that they can begin to address the 

problem. Our thumbnail budget estimate was in the $5 billion 

range, although that is not a number that is obligatory to the committee to follow. 

Given the opportunity to begin to address this today in a vehicle 

such as reconciliation, what would be your recommendations of a—

and I understand there is no such thing as a quick fix, but would 

be your first things first if we could approach this, what would be 

33

your recommendations to us as a committee and to the Congress 

of the first things first? 

Given an opportunity of some jurisdiction now and a vehicle to 

accomplish it in reconciliation, what should we consider approaching first this year, in the next 3 or 4 months, in order to begin to 

address the problem? 

Mr. HOLTZ-EAKIN. You go first, I will go second. 

Mr. WALKER. Mr. Chairman, just a point of clarification. Are you 

talking about this committee and what is within your jurisdiction, 

or are you talking about the Congress as whole? 

Chairman NUSSLE. Both, but we gave the Education and Workforce, we also obviously have jurisdiction in Ways and Means that 

can be used, but let’s keep it to the Congress as a whole. 

Mr. WALKER. First, I think it is absolutely critical not just for 

this area but for other areas within the Federal budget that we 

need to have more transparency over the true discounted presentvalue cost and exposure associated with this and other types of 

Federal programs. 

Secondly, I think it is very important that when Congress is 

thinking about making changes in the law that it consider the discounted present-value dollar cost, not just the 10-year cash flow 

numbers, for what the potential implications are, positive or negative, with regard to the Federal budget. 

Thirdly, with regard to dealing with the structural imbalance, as 

you saw from the excellent CBO analysis, some of the proposals 

that people are discussing, like increasing base premiums, making 

a few adjustments with regard to the guarantees, won’t come close 

to solving the problem. 

You need to have a package of reforms, just like Social Security, 

you need comprehensive pension reform—things like enhanced 

transparency with regard to underfunded plans for both plan participants as well as other key stakeholders, including the Government; much tougher funding rules for plans that really represent 

exposure yet additional flexibility to make tax deductible contributions in good times, especially for plans that may not be in trouble 

today but could be tomorrow; additional restrictions on the ability 

to pay lump sum benefits when a plan is underfunded, therefore 

having a rush on the bank potentially; additional PBGC reforms, 

not just premium reforms, both flat and variable rate, which should 

be more risk-related than it is today, but also issues associated 

with what types of benefits are guaranteed, and under what circumstances are they guaranteed. 

You may also need to look at the interaction of the bankruptcy 

law and the pension rules, as well as certain other provisions. 

One of the things that the Congress is going to need to consider 

is the fact that an overwhelming majority of PBGC’s losses are concentrated in a relatively few firms in less than a handful of industries. 

That is also likely to be the case going forward. 

Historically, it has been steel and airlines. 

Going forward, it is likely to be more steel, airlines, autos, and 

auto-related. Therefore, to a certain extent one of the things the 

Congress is going to have to debate is is the PBGC serving as a 

backdoor industrial policy mechanism? Should the PBGC and the 

34

premium payers of the PBGC be funding the cost of global competition and domestic deregulation in some of these industries, and 

frankly poor management in others? 

There are some very important issues to think about. Clearly 

comprehensive pension reform is absolutely essential, just as Social 

Security reform is essential. 

Last comment, Mr. Chairman. The challenges here are strikingly 

similar to Social Security. The only difference is the numbers. 

Every day that we wait, the bigger the numbers are going to get. 

Thank you. 

Mr. HOLTZ-EAKIN. I think that it is important to recognize that 

the kinds of economic costs that are present under current law are 

reflective of the reporting environment, the ability to actually understand the net asset position of these plans, the regulatory environment, and then also the pricing of that insurance, that comes 

last. 

The reality is that if one moves to a reconciliation target in the 

current budgetary framework, with the cash flow of the on-budget 

fund as the centerpiece, the focus will have to be premiums, specifically on raising premiums. 

Our estimate is that it would take an enormous increase in premiums as a whole, a five-fold increase, in order to bring the net 

economic costs down to zero. But this is underpriced insurance. 

Raising the premiums would show up in reconciliation. It would be 

a desirable policy from this perspective. 

It is also possible to affect the pace at which underfunded plans 

make up the shortfall, do their catch-up contributions, or their 

DRCs. And that would have some cost-saving implications as well? 

The rest, over a 5-year horizon, is largely baked in the cake. It 

is servicing the benefit payments that are going out. And that is 

very difficult to affect with policy in the near term. It is more desirable to think longer term from that perspective. 

The last thing to remember in doing both those is to remember 

there will be feedback to the revenue side of the budget. And you 

won’t get everything that you might think if you just focus on the 

outlay side. 

Chairman NUSSLE. Well, it gives us an opportunity this year, as 

a result of reconciliation. It is a floor, it is not a ceiling, meaning 

that the reconciliation process gives us an opportunity to open the 

door a crack, but we could, in fact, go to a much more comprehensive approach, as you are requesting or suggesting in your advice 

to Congress. 

I would hope that the committees of jurisdiction hear your concerns today. And I will make sure that I relate them to the chairman as well, that we have a challenge here that can be addressed 

in the near term with some policies that similar to Social Security 

are easier now than they will be 5 years from now or 10 years from 

now, if we even get that far before the crisis manifest itself. 

So thank you for your testimony. 

Mr. Spratt. 

Mr. SPRATT. Thank you both for your testimony. If we could go 

back, first to General Walker, with the last chart you showed, 

which related to the Bethlehem and I believe the LTV collapse and 

35

the consequent assumption of liability by PBGC. If we could have 

that chart on the screen, please. 

You indicated that, No. 1, I think you averted to this, when the 

PBGC finally took hold of the plan assets of Bethlehem and LTV, 

they found out that there was a lot less there than they had previously thought. 

Why is that? Does it have something to do with the fact that 

4010, Section 4010 of ERISA (Employee Retirement Income Security Act), provides confidentiality to these numbers and they don’t 

get the attention they would get in full public scrutiny? How is it 

we can delude ourselves about the balances in a plan that we are 

insuring? 

Mr. WALKER. That is part of the problem, Mr. Spratt. Right now, 

if you look in the pension area, you will find that there are a number of different numbers that are calculated, some of which are disclosed, some of which are not disclosed. 

You will calculate numbers with regard to the funding status of 

the plan for determining what your required contributions are 

under the minimum funding standards. You will calculate numbers 

for purposes of PBGC variable rate premiums. You will calculate 

numbers for purposes of public reporting, especially if you are a 

public company and file a 10–K. 

You will generally find that certain things tend to happen in connection with troubled companies. No. 1, they use very optimistic 

discount rates to determine what their liabilities are, so they serve 

to understate their liabilities. 

Secondly, and when they had good times with regard to their 

asset increases, during times of good markets, they carried forward 

those credits, and they are allowed to do that under current law, 

even though those gains could have totally evaporated and turned 

into losses since then. However, under current law they are still allowed to consider them for purposes of meeting their funding requirements. 

In the case of LTV Steel, there were shutdown benefits, those are 

benefits that arise when a plant shuts down. Therefore the degree 

of underfunding can increase dramatically overnight. As you can 

see in this graphic, it did. 

The bottom line with regard to your premise is, one of the first 

things we have to start with is transparency. All too frequently, the 

information that is provided to plan participants and beneficiaries, 

to the Government and to other key stakeholders is outdated and 

misleading. 

We need to provide more timely, accurate and useful information. 

Transparency is a powerful force in trying to encourage people to 

do things that they otherwise should do. 

And right now, 4010 is a problem. 

Mr. SPRATT. As I understand it, there is a provision in FASB 87, 

Financial Accounting Standard Board Rule 87, which deals with 

the actuarial present value of benefits. And if the plan assets are 

beneath the actuarial present value, then the difference has to be 

recorded as a liability on your balance sheet. I guess it gets booked 

to revenues for that time period, too. 

But in any event, why is that not enough? And if it is not 

enough, are you saying then that we need to rescind, we need to 

36

radically change the disclosure rules with respect to the shelter, 

the veil that is allowed by Section 4010 of ERISA? 

Mr. WALKER. There is clearly a need for a change in the law 

here, Mr. Spratt. The fact of the matter is, you are correct that 

there is a different accounting treatment under generally accepted 

accounting principles for pension costs, versus what has to be provided to plan participants and beneficiaries. It is also very different 

than what the funding rules are. 

The amounts that are provided in the 10–K, the annual report 

filing with the SEC (Securities and Exchange Commission) for public companies, is usually a lot more reflective of reality. It is important that more realistic information be provided in a more timely 

manner to plan participants and beneficiaries and other interested 

parties than is the case under current law. 

Mr. SPRATT. Do you agree with that basically, Dr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. Yes. I think this is a two-step process. The 

first is to make sure there is transparency to workers, to the 

PBGC, and to shareholders, so they can monitor better the status 

of these plans. Similarly, you would like to have better transparency of the PBGC to the Congress itself, so you can monitor the 

status of that commitment. 

And second, once you have transparency, what is it that you 

would like to reveal? Given that this is an insurance product and 

insurance products are about volatility, I think it is desirable to 

recognize these things as close to market value as possible so that 

you can know when a bad thing is happening and insurance is 

going to kick in. 

The current reporting structure which emphasizes smoothing is 

at odds with providing good information about an insurance product. 

Mr. SPRATT. What is the policy behind it? Is there a concern 

there would be a run on the stock if there were a substantial liability or unfunded actuarial value? 

Mr. WALKER. I think it is important to note that PBGC does receive certain information under this section——

Mr. SPRATT. Confidentially. 

Mr. WALKER (continuing). Yes, it is confidential. That is correct. 

I think it is important to note that a lot of key stakeholders 

aren’t like plan participants. Presumably, if they were very sophisticated investors and they were very familiar with FASB 87 and 

FASB 88, if they read the financial statements of the company 

closely, and if they looked at the footnotes of the financial statements, a sophisticated player might be able to understand what is 

going on. 

However, a vast majority of workers and retirees aren’t in that 

category. Therefore, we need to provide it in a more timely and 

user-friendly fashion, because ultimately this is not just about 

PBGC. Ultimately, it is about the retirement income security of 

American workers and retirees, because PBGC does not guarantee 

all benefits. 

There are limits as to what PBGC guarantees. As a result, significant losses can be imposed on workers and retirees. 

Mr. SPRATT. Dr. Holtz-Eakin, you have made reference to premium increases, but you didn’t talk about the two types of preVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6602 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
37

miums—the fixed-rate and the variable-rate premium—and you 

also didn’t indicate what sort of magnitude of increase would be 

necessary to truly mitigate this problem. 

Could you address that? 

Mr. HOLTZ-EAKIN. Well, our rough estimate is that overall, if you 

take both of them, it is about a fivefold increase. The fixed-rate increase looks far less burdensome on average than does a variablerate increase. 

The variable rate is hitting those firms which have underfunded 

plans. They are typically in less than stellar financial health themselves. And so imposing that kind of a premium increase is a far 

more problematic initial step. I mean, that is just too abrupt. 

Both are appropriate policy instruments. It is important to use 

the variable rate to reflect the risk to the PBGC. 

Whether you tie that to the kinds of assets in the plans, or 

whether you tie it to underfunding, there are a variety of ways you 

can go. I think both premiums can be used more fully to price better. The fixed rate is easier to adjust in the near term. The variable 

rate should be structured to provide good long-term incentives. 

Mr. SPRATT. Well, just for basic clarification, the fixed rate applies to every defined benefit plan that is insured by PBGC. It is 

$19 per plan participant. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. SPRATT. And one of the proposals, then, would be to increase 

that amount. 

Obviously, to the extent that it becomes an onerous increase, you 

risk the possibility that healthy, financially solid and stable firms 

might decide to withdraw as opposed to paying and convert to defined contribution rather than defined benefit plans. Is that a concern? 

Mr. HOLTZ-EAKIN. For the fixed premium, ballpark numbers— suppose you use the $19 to $30 as the canonical proposal, that 

looks like a couple of pennies per hour in terms of labor compensation. 

Since this is about ensuring that labor compensation promised at 

one point in time is actually delivered at another, that doesn’t 

strike many people as a really big increase from the point of view 

of making sure that, that commitment is honored. 

The variable rate is very different; $9 per $1,000 of underfunding, a sixfold increase in that, or something that would be necessary to make our kinds of numbers dramatically smaller, would 

be a big financial burden if instituted——

Mr. SPRATT. And the downside risk is that plans would terminate 

and withdraw and then you lose all their contributions. 

Mr. HOLTZ-EAKIN. Yes. 

Mr. SPRATT. Fixed and variable. 

Mr. WALKER. If I can, Mr. Spratt? 

Mr. SPRATT. General Walker? 

Mr. WALKER. The $19 has not changed since the early 1990s, so if you index it for inflation it goes to $30. Obviously, people would 

prefer for them not to go up, just like people do not like tax increases—but the relative burden is not likely to be that significant. 

One has to be careful, however, because you have to decide how 

much money you need and then how to raise that money. 

38

The current variable-rate premium right now does not reflect 

risk. The current variable-rate premium right now is based solely 

on the degree of underfunding. 

It does not consider the assets in the plan. It does not consider 

the nature of the plan and potentially pop-up liabilities that can 

come due. It does not consider a number of important factors that 

really correlate with risk. 

For example, 80 percent of PBGC’s losses that have occurred to 

date for big plans have been attributable to companies that had a 

junk-bond status 10 years from the date that they terminated—80 

percent. 

Therefore, actual losses bear a very high correlation to the financial condition of the sponsor. 

Yes, additional premium revenues are necessary, but there ought 

to be more of a risk-based variable-rate premium. 

You have to be careful not to raise the base rate too much, to 

where you encourage the exodus that you talked about. If we are 

going to have a variable or so-called risk-related premium, it really 

ought to relate to risk—it doesn’t right now. 

Mr. SPRATT. Well, we have got a chart up here now which indicates how low the premium used to be. 

I used to fill out a 5500 C, as I recall it, for a small firm, a bank, 

a small bank that we ran. And I think my time engaged in filling 

out the form was more expensive than the premium we had to 

remit with the form, particularly when you tried to understand 

what OMB (Office of Management and Budget) was putting in the 

fine print on it. 

But thank you both for your testimony. I may have further questions, but I want to allow others the opportunity. 

Thank you very much for your presentations. 

Chairman NUSSLE. Before I turn to the next member, let me welcome a special guest that is here with Director Holtz-Eakin. I understand your son is here, welcome Colin. Your dad does a great 

service to our country and for our Congress, and we welcome you 

to the Budget Committee. 

Mr. Chocola for 5 minutes. 

Mr. CHOCOLA. Thank you, Mr. Chairman. 

First time showing up early in Congress has been rewarded. 

Thank you. I appreciate the opportunity to serve on the committee 

with you. 

And thank you both for being here today. I just quickly want to 

follow up on some of your comments, especially Mr. Walker. 

You talked about transparency a lot. You talked about this is a 

subset of greater challenges. 

I used to work with a publicly traded company, and we were required to follow things like accrual accounting practices. And it allowed us to plan for things. And I think in order to meet a challenge, you have to be able to define a challenge. 

If we budgeted on an accrual basis, would we be able to achieve 

some of that transparency and be able to plan for these challenges 

in a better fashion? 

Mr. WALKER. No question. 

It would make your reconciliation process tougher, because the 

numbers would be a lot bigger than you are seeing right now. 

39

But as you know, there are certain things right now that are on 

an accrual basis, certain kinds of credit activities. But this is not 

on an accrual basis. 

I agree with Doug Holtz-Eakin that we not only need changes in 

the budget process, we need changes in the financial reporting 

process, and I am trying to make that a reality. 

Mr. CHOCOLA. Do you agree, Mr. Holtz-Eakin? 

Mr. HOLTZ-EAKIN. I am more cautious than some about moving 

the Federal Government full-scale to an accrual framework, for a 

whole variety of reasons, and I will spare you the sermon—we can 

talk about it later. 

I think it is important that the information be entered in the policy process, that this committee and the Congress in general know 

the accrual status of Federal programs. 

Budgeting is, in the end, a year-by-year event. The delivery of 

budget authority is a management tool by which you allow people 

to exercise policy options, and that is a cash flow operation. 

And so I think there is a place for both in thinking about how 

the Congress does its business. 

Mr. CHOCOLA. Mr. Walker, would you talk about it in the terms 

of the bigger challenges that you referred to earlier? There is a 

sense of Social Security—I mean, this is a subset of bigger challenges. The need for transparency is a much bigger issue than just 

this, isn’t it? 

Mr. WALKER. Absolutely. Let me give you some numbers. 

PBGC has a $23.3 billion accumulated deficit based upon the 

numbers we have seen from CBO, which are very similar to the 

numbers that PBGC has disclosed itself. 

You can easily add another $90 billion to $100 billion on top of 

that, so that gets you about $120 billion or so. 

Social Security has a discounted present-value unfunded commitment right now of about $4 trillion. There are 12 zeros behind that. 

It is going up every year. That number is just for 75 years, not for 

perpetuity. 

The U.S. Government has liabilities and unfunded commitments 

of $45 trillion, which went up over $13 trillion in the last year 

alone. 

So this is a subset of a range of issues, and we need to start dealing with them. 

Mr. CHOCOLA. And if the Federal Government were a publicly 

traded company and it reported its liabilities like the Federal Government reports its liabilities, it would be understating its liabilities, wouldn’t it? 

Mr. WALKER. Well, let’s talk about what current rules are and 

what I am trying to get changed. 

By the way, both GAO and CBO sit on the Federal Accounting 

Standards Advisory Board (FASAB), which is the body that recommends accounting and reporting changes. 

Right now, there is a separate statement which contains many 

of the numbers that I gave you. You can go to and see the $4 trillion, for example, for Social Security; you can see the almost $30 

trillion for Medicare. They are not currently deemed to be liabilities 

for a lot of reasons. 

40

One of the things that we need to do is we need to provide better 

transparency over trust fund versus nontrust fund activity, because 

as we all know they are not really trust funds; they are subaccounts of the general ledger. 

We need to provide more transparency with regard to the total 

liabilities and unfunded obligations, the related burden on a percapita basis, and how it fits intergenerationally. 

We are dedicated to further improving Federal financial reporting. In addition to that, because not enough people read the financial statements, I am not going to ask you to raise your hand. But 

I can tell you in the last month, I have given speeches to hundreds 

or thousands of people, and less than five people have read the financial statements of the U.S. Government. 

One of the things we need is a user friendly and concise summary annual report, in plain English, and with charts and graphs. 

I am working with Treasury and OMB to make that happen. 

You need to change the budget process too. You don’t have to go 

to full accrual budgeting—there are pluses and minuses there. 

My understanding is you were just talking about this area rather 

than overall. 

I do, however, think that there needs to be more transparency 

with regard to these commitments and contingencies, and they 

need to be accrual numbers. And that would be a positive first step 

to help ensure that these issues are actually considered, discussed 

and debated. 

Mr. CHOCOLA. Mr. Chairman, if I could, I have been baited into 

this, I cannot resist. 

The PBGC, like many, in principle, private entities, is different. 

It was intended to be a funded system. Firms were either supposed 

to self insure, by putting aside sufficient funds to meet the promise 

of this deferred compensation, or purchase insurance against adverse economic events that allowed them to meet that commitment 

as well. That is standard operating procedure. And it was intended 

to be funded either through internal resources or purchased resources in that fashion. 

Government programs are very different and in some cases, were 

never intended to be funded—Social Security and, in particular, 

Medicare. 

And my reservation with full accrual accounting is best exemplified by Medicare and Medicaid, where if one takes at face value the 

history of the growth of health care costs and simply extrapolates 

that into the future, you cannot compute the present value. 

And so the unfunded liability—the funded or unfunded liability 

is infinite. 

The only way to actually make the computation work is to assume that at some point in the future health care costs grow more 

slowly, and that would be a technical assumption made by someone—either GAO, CBO, OMB—in consultation with committees. 

It strikes me as extraordinarily arbitrary to place the budgeting 

framework of U.S. Government on something that capricious as an 

assumption that 30 years from now health care costs will grow 

more slowly. 

That is a reservation I have about implementing that kind of 

thinking in the government context. 

41

Mr. WALKER. The trustees have to do that every year, and they 

have been doing it for many years. Under generally accepted accounting principles for public-sector companies, as you know—you 

used to be involved—you have to do the same thing. 

Nothing is perfect, but I think we need to see some numbers. 

They need to be on the radar screen. Right now, they are not. 

You can’t solve a problem until you agree that you have a problem. You also need to see whether or not you are making progress 

or making it worse. 

Chairman NUSSLE. Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. 

Mr. Chairman, let me congratulate you for holding this hearing 

this morning. It is timely, and I think it speaks to one of the fundamental problems with this Congress. I frequently refer to this Congress, as you know, as the Stepford Congress. Whatever the administration says, the majority in this Congress goes along with. 

As the war in Iraq goes badly, we insist it is going fine. Cut 

taxes five times with two wars, and we would say, well, the budget 

is fine, we don’t have to worry about the deficits. And then the argument becomes, well, it would have been worse if we didn’t cut 

taxes in terms of the temporary recession we experienced. 

It seems as though that transparency reference that you made at 

least 25 times in your opening statement, Mr. Walker, really is 

something that Congress has been very slow to come to. 

And the chairman indicated he came here at the end of the S&L 

issue. I was here in the middle of it and I remember what that was 

like as we deregulated the industry, we allowed people to get into 

businesses which they had no former experience and certainly no 

discipline, as they began to loan money. 

And now we find ourselves here with the pension problems that 

we have, and in some measure it is a reflection, I think, of the lack 

of will by the Congress to do what they are supposed to do, and 

that is to ask questions. 

Now, having said that, let me point out that I recall when President Clinton offered his health care plan, that was vetted from 

every conceivable angle. People like myself opposed it because we 

didn’t think that the questions were being answered in the right 

way. 

The current Congress goes along with everything the administration says. Never is there a question. We hear time and again answers from the administration that cause Members of Congress to 

swoon in front of them rather than to ask them about the true 

problems. 

And now we have this issue here in front of us about pension liability. 

And let me specifically speak to the issue of the multi-employer 

pension plans. 

We have done some things here in the last few years to address 

the issue of single employer pension plans. But we really haven’t 

addressed the multiple employer pension plan. 

Would the two witnesses care to speak to those issues? 

Mr. WALKER. I can speak to it, having been head of the PBGC. 

There are two principal kinds of defined benefit plans that the 

PBGC insures. One is the single employer pension plan, which 

42

typically is sponsored by a particular company for its employees 

and retirees. Another is a multi-employer pension plan, which typically is sponsored by a trade union. It could be the Teamsters, it 

could be other types of unions, and where the nature of the benefit 

promised is somewhat different, but it is a defined benefit promise. 

Importantly, the insurable event is different for multi-employer 

plans versus single employer plans. For single employer plans, it 

is termination. That was the use for LTV, Bethlehem, and United. 

For multi-employer, it is insolvency. In other words, when the 

money runs out and you can’t pay benefits. There are significant 

exposures in the multi-employer plan universe. They are not likely 

to be realized as quickly, just like Social Security. When the trust 

fund runs to zero, that represents insolvency. In the case of Social 

Security today, the program already has a $4 trillion deficit. 

So that is the primary difference. 

Mr. HOLTZ-EAKIN. A good opportunity for me to make clear to 

the committee that our work focused exclusively on the single employer plans. That judgment was made because if you look at the 

$23 billion—sunk costs in the single employer plans—there is 

about a $0.2 billion comparable number for the multi-employer 

plans. 

So we focused on the bigger problem first. 

Mr. NEAL. Thank you. 

Mr. Chairman, I want to reiterate what I said at the beginning. 

I want to thank you for holding this hearing. And I want to say 

that whether—the trouble we have here, I think, in the Congress, 

whether it is global warming or it is tobacco, it is really hard to 

get answers to questions. 

And I want to tell you, for those of you who have an institutional 

memory here, we hammered witnesses on the S&L issue, of all political parties. They were dragged—I was on the Banking Committee at the time, for two painful terms. We clobbered those witnesses as they came before us regardless of their political party or 

their affiliation or who they were close to. During the Clinton 

health care plan, we hammered away at them day after day. 

It is the job of the Congress to ask questions and not to accept 

everything the administration says. And that is why we find ourselves now trying to play catch-up with giving a lot of answers to 

questions. 

So I do thank you sincerely, Mr. Chairman, for holding this hearing. 

Chairman NUSSLE. Mr. Conaway. 

Mr. CONAWAY. Thank you, gentlemen. 

Thank you, Mr. Chairman, I appreciate that. 

The reporting requirement that PBGC gets under law versus 

what FASB requires obviously are not the same. I do not know that 

the FASB disclosures are all that great either. There are some suggestions that additional information, more information as to the 

types of assets within plans and the extent that companies use 

their own stock to fund their annual contributions. 

Could you talk to us a little bit about the nature of the assets 

and the fiduciary responsibilities that the plan trustees have of diversifying investments out of their portfolio? 

43

Mr. WALKER. Having been a prior Assistant Secretary of Labor 

for ERISA, I had to oversee the fiduciary responsibility provisions. 

There are fiduciary responsibility provisions that relate to all private pension plans. Prudence is one of those. Diversification in 

order to minimize the possibility of large and unexpected losses is 

an element of this. 

For defined benefit pension plans, which we are talking about 

here, there is a statutory limitation that employers can not invest 

more than 10 percent of the value of the assets in the plan in 

qualifying employer securities. But that 10 percent is determined 

as of the time that the contribution is made to the plan, so it could 

vary from 10 percent, depending upon market trends. 

There are, however, certain types of plans called floor offset 

plans where you have a defined benefit plan in conjunction with 

the defined contribution plan. By the way, Enron had one. Under 

these plans, you can evade that 10 percent limit in employer stock 

under current law. I think this needs to be addressed. It needs to 

be stopped because it represents undue exposure for plan participants and beneficiaries and to the PBGC. 

You are making a good point that you just can’t look at the assets and you just can’t look at the liabilities and the net difference. 

You have to understand the nature of the assets, the nature of the 

liabilities and that is why I am saying the current deficit——

Chairman NUSSLE. Sorry to interrupt. We are OK. It is the Senate. 

Mr. WALKER. We are OK? 

Chairman NUSSLE. I knew this was a hot hearing. I hope we did 

not catch on fire. [Laughter.] 

You are in a different world. 

Mr. WALKER. Thank you. OK. On the other side of the Hill, 

right? We will not say anymore. 

The fact of the matter is, you need to get below the bottom-line 

numbers, because it makes a difference as to what true risk and 

true volatility are. 

Mr. CONAWAY. As you used Bethlehem Steel and LTV, the differential between what was being reported as the unfunded, about 

85 percent, versus what actually, that 60 percent. 

What role did the plans holding LTV or Bethlehem Steel stock? 

Because once the company goes bankrupt, any exposure to that 

stock means that you have caused a problem. That exacerbated the 

problem. 

Do you know off the top of your head? 

Mr. WALKER. I will have to provide that for the record. The primary difference was, No. 1., the differences in the interest rates 

and No. 2, the fact in the case of LTV or Bethlehem, I think it was, 

there were significant shut-down benefits that popped up overnight 

that caused the funding level to decline dramatically. 

So primarily interest rates and shut-down benefits. I will provide 

the rest for the record. 

Mr. HOLTZ-EAKIN. Congressman, I want to note for the committee again, when we did our work, it was entirely off the publicly 

available information that we can get through the 10–K filings. 

It remains an unfinished task to crosswalk our estimates to the 

estimates of the PBGC. The confidentiality provisions under law 

44

preclude that quite frankly. I think a policy issue going forward is 

the degree to which that confidentiality is an important part of the 

way that PBGC should operate. 

Mr. CONAWAY. Mr. Walker, you showed a chart that was updated 

all the way through 2002 and made some reference to the stale 

date. Why is that information not more readily available? 

Mr. WALKER. Two reasons. Under current law, people are not required to file it until, I think, about 71⁄2 months after the end of 

the year. After they file it, it takes a considerable amount of time 

for the information to be processed by the Government. 

Historically, the Government has waited until all of the returns 

were processed before they provided information publicly. 

So I think there are several issues here. By the way, we have 

issued a report on this which I am happy to make available to you 

and the other members. 

I think you need to look at requiring accelerated reporting, at 

least with regard to plans that represent a risk with regard to their 

financial condition. I also think we need to move to electronic reporting, especially for large companies possibly requiring electronic 

reporting by large companies. Certain other government agencies 

have already done that for other required reports. 

Clearly, the Department of Labor needs to improve their processes and possibly reconsider how they are processing these returns, so they don’t wait until the end. They also need to analyze 

this information more on an installment basis rather than on a 

completion basis. 

Mr. CONAWAY. Thank you, gentlemen. 

Mr. Chairman, thank you. 

Chairman NUSSLE. Mr. Moore. 

Mr. MOORE. Thank you, Mr. Chairman. 

And thank you, Mr. Spratt, for requesting this hearing. 

Mr. Chairman, I also appreciate your convening the hearing. 

Gentlemen, would it be safe and reasonable for us Members of 

Congress to assume that the pension benefits of employees are created basically the same as the pension benefits of corporate executives? 

Mr. WALKER. No. 

Mr. MOORE. Why not? 

Mr. WALKER. Well, two reasons. One, there are two types of 

plans that typically corporate executives have. Many times they are 

covered under the defined benefit pension plan that would be subject to PBGC guarantee limits. Obviously, they have more exposure 

if they are, because the maximum benefit guarantee for PBGC is 

about $45,000 a year at the normal retirement age. Therefore, typically, they would have a lot more lucrative benefits based upon 

their salary. So they would take more of a haircut. 

Secondly, typically, most corporate executives, especially for public companies, have non-qualified deferred compensation plans that 

are not subject to the Employee Retirement Income Security Act. 

They typically provide for very lucrative benefits, and typically, a 

vast majority of their benefits are this way. They may or may not 

be funded. 

45

They may be subject to additional risk in bankruptcy, but there 

are ways to provide funding and security to avoid any problem in 

bankruptcy. That is a very controversial topic. 

Mr. MOORE. And what would those ways be, if you can tell us 

briefly, Mr. Walker? 

Mr. WALKER. Well, there are certain types of tax planning and 

trust vehicles that have been used in the past that have, in some 

cases, withstood bankruptcy. I would be happy to provide details 

for you if you would like. 

Mr. MOORE. Well, the intent of my question was not to give further protection to the corporate executives, but to find out if maybe, 

if they had additional risk and the same risk that employers have, 

that maybe things might change. Any thoughts there, about how 

to make that happen? 

Mr. WALKER. Well, I think there are some people that have 

talked about whether and to what extent there should be more of 

a mutuality of interest with regard to this risk. I would be happy 

to talk to you about that further, because there are some complicating factors. 

I mean, it is one thing if the executives have been there since 

the beginning and maybe they were some that made the promises 

that they could not deliver on or they decided not to fund the pension plan and to do something else with the money. 

It is another issue if you have somebody who is new management, who is coming in to try to help save the company, they 

weren’t part of the problem, and your need to be able to attract and 

retain top talent. 

So I would be happy to talk to you about it further. But I think 

it is a fact and circumstances issue. 

Mr. MOORE. Thank you, Mr. Walker. 

You said to us, go look at the numbers, and they are on a site 

or someplace. And you were talking about a $30 trillion dollar 

Medicare unfunded liability? Is that correct, sir? 

Mr. WALKER. Close to $30 trillion. 

Mr. MOORE. And $4 trillion for Social Security. 

Mr. WALKER. That is correct. 

Mr. MOORE. Where do we go look at those numbers? 

Mr. WALKER. Well, first, they are in the Social Security and 

Medicare trustees reports, which come out every year. 

Secondly, the number for last year, fiscal 2004, which is somewhat lower than that, but still staggering, is in the annual report 

of the U.S. Government, which is also available on Treasury’s 

website and our website as well. 

Mr. MOORE. You also made the statement, I believe, and this 

may not be an exact quote but close, I think, they are not trust 

funds. Did you say something like that? 

Mr. WALKER. If you look at ‘‘Webster’s Dictionary,’’ these do not 

qualify as trust funds——

Mr. MOORE. I understand that. 

Mr. WALKER. They are sub-accounts of the general ledger. In 

fact, if you look at the financial statements of the U.S. Government, you will not find a liability equal to the amount of bonds that 

are in these trust funds, because the left hand owes the right hand. 

46

One of the things that I am pushing for is to provide more transparency over what is going on, because last year, our deficit really 

wasn’t $412 billion, it was $567 billion, because we spent every 

dime of the Social Security surplus. 

Mr. MOORE. I practiced law for 28 years before I came to Congress. And in Kansas and I think probably most other states, there 

is a requirement that attorneys who have client’s funds in their 

possession deposit them in a true trust account. And it is an absolute no-no to touch those funds, because you can be prosecuted perhaps and disbarred for doing that. 

Would there be any benefit to the U.S. Government having a 

true trust fund for deposit of Social Security monies that are later 

to be paid out for benefits? 

Mr. WALKER. I think there are two issues. One, even if you had 

a true trust fund, if you are going to invest the same way that you 

are investing right now, I am not sure that would really change 

anything. 

Mr. MOORE. Of course, we are not investing right now, we are 

spending, are we not, on——

Mr. WALKER. Well, we are spending it——

Mr. MOORE (continuing). A lot of other things, right? 

Mr. WALKER. We are spending every dime of the Social Security 

surplus on other government expenses. We are replacing it with a 

non-readily marketable bond backed by the full faith and credit of 

the U.S. Government, guaranteed as to principal and interest, but 

it is only as good as the ability of the Government to tax, to cut 

other spending, or to go out and borrow, typically from foreigners, 

in order to be able to fund our deficits and debt. 

Mr. MOORE. Thank you, sir. 

Chairman NUSSLE. Mr. Ryan. 

Mr. RYAN. A couple of questions I wanted to ask already were 

asked, such as Mr. Chocola’s on accrual accounting. 

Let me ask you about the difference between multi-employer 

pension plans and single employer pension plans. Mr. Walker, I 

think with multi-employer pension plans, the risk is spread to the 

rest of the employers in the pool, so there is another line of risk 

exposure away from the Government with respect to multi versus 

single, correct? 

Mr. WALKER. That is correct. 

Mr. RYAN. And so looking at the provisions we are facing within 

this Congress on multi-employer pension plans, do you think—and 

this is a question for both of you—that we can, through reforms, 

transparency, smoothing, all these other things—and you have 

seen the proposals up here—that we can reform multi-employer 

pension plans sufficiently in this Congress? 

We are looking at reconciliation. What are the first things first 

that we do? It appears that we can’t fully fix the single-employer 

problem. Can we, in your estimation, fully fix the multi-employer 

problem? 

Mr. WALKER. Well, candidly, it is my understanding, Mr. Ryan, 

that the administration’s proposals do not go to multi-employer 

plans, and I am not familiar if there are legislative proposals up 

here that do. 

47

Mr. RYAN. There are, and they are from multiple sources. I think 

the Teamsters have one for the red zone, the food distributors for 

the yellow zone. 

You know, there are a lot of groups that are involved in multiemployer pension plans who have come up with proposals. Ed and 

Labor, not a committee I serve on, is doing hearings on these 

things. 

So you haven’t had a chance to look at these various multi-employer pension proposals? 

Mr. WALKER. I haven’t, but I will be happy to take a look at it. 

Mr. RYAN. Yes, I would love to hear your opinion as to whether 

or not those cover the job of fixing the plan. 

Doug, have you taken a look at any of these solutions? 

Mr. HOLTZ-EAKIN. We haven’t looked at those. The one distinguishing difference here is the degree to which you can get additional monitoring from the other firms in a multi-employer plan. 

And so if you can make that monitoring more effective, you can 

get a lot of bang for the buck out of things that do not have a lot 

of——

Mr. RYAN. Because they have an incentive to make sure—so 

more transparency is clearly a great starting point for the multis. 

On the singles, should I take away from this testimony, from 

both of you, that at first blush, the premium increase is just the 

first no-brainer? Then we are going to have to look at transparency, 

other things like that. And given where we are with respect to reconciliation, that is the best place to start? 

Mr. HOLTZ-EAKIN. The fixed premium is certainly the place to 

start. Thinking hard about what you want the variable premium 

to do and whether you want it to address underfunding and risk 

and how quickly you move that is a bit harder. 

Mr. RYAN. OK, let us go to accrual quickly. I got the impression 

from the answer to Mr. Chocola’s questioning that, Mr. Walker, you 

think it is right and proper that we do full accrual accounting of 

all the assets and liabilitieson the books. 

Doug, I got from you that you think it is just a tough computation to make, especially when you are talking about health care. 

Mr. HOLTZ-EAKIN. I also think it is different. I mean, it reflects 

an attempt to transfer private sector accounting into the Government, and government is different. It has the power to tax. In the 

end, government programs are funded up to the point of economic 

rationale. You can tax the resources and provide them for the Government budget. 

There is no private entity that has a comparable power, who can 

print money as a government can. 

So I am nervous about simply carbon-copying private sector reporting and budgeting into the government sector. They are different. 

Mr. RYAN. Actually, I think that is a very good argument when 

applied to Social Security, which is when you price benefit guarantees, the cost of pricing a benefit guarantee would be theoretically 

lower for the Federal Government because it has the power to tax 

any given year than versus pricing, say, a benefit guarantee in the 

private sector. Would not the same argument apply? 

48

Mr. HOLTZ-EAKIN. In those circumstances where the Government 

has the ability to pool across a greater set of risks, it will do better 

than the private sector. And what you want to do is look for those 

opportunities where the Government has a comparative advantage 

in risk spreading. 

Mr. RYAN. So you would agree on both sides, the Social Security 

side of the ledger as well? 

Mr. HOLTZ-EAKIN. Not necessarily on all Social Security matters. 

You and I have been there. 

Mr. RYAN. That is why I wanted to bait you into that. 

Mr. WALKER. If I can, Mr. Ryan, there are two issues. One is the 

issue of financial statements, and we do have accrual accounting 

for financial statements. However, right now the only thing that is 

deemed to be a liability on Social Security and Medicare is due and 

unpaid benefits. 

We do disclose the discounted present value numbers of the dif- ference between promised benefits and funded benefits, that is a $4 

trillion number for Social Security and roughly a $30 trillion number for Medicare. 

Mr. RYAN. Is the 30 a 75-year number? 

Mr. WALKER. It is a 75-year number. We do disclose that. It is 

not deemed to be a liability. I would debate whether or not it is 

a liability, because of some of the fundamental differences between 

a pension plan and social insurance program. 

The other side of the coin—but it needs more transparency. 

At the same point in time, the other side of the coin is, what do 

you do for budget purposes? So for financial statements, we need 

accrual concepts. The debate is whether or not it is a liability. We 

need more transparency and enhanced reporting in any event. 

On the budget side, it is different. 

Mr. RYAN. But you both agree that accrual is appropriate when 

we are talking about single employer——

Mr. WALKER. Well, they already have it. They are subject to gen- erally acceptable accounting principles. For example, PBGC’s $23.3 

billion deficit at September 30, 2004, include United Airlines, 

which did not terminate until this year. 

Now, why did it include United Airlines? Because under generally accepted accounting principles, if it is identifiable, probable 

and estimatable, you have to book it as a liability on an accrual 

basis. 

Interestingly, if you end up increasing PBGC’s premiums, that 

will help the Federal budget. That will help PBGC in the short 

term. But they will still have a huge hole. So it might make them 

look like they are better off than they are, but in reality they are 

still in a huge whole. 

Mr. RYAN. And there is some peril to that. 

What is the infinite horizon number on Medicare trustees? I 

don’t know off the top of my head. 

Mr. WALKER. I remember Social Security’s number is over $10 

trillion. I do not remember the Medicare number. 

Mr. RYAN. You don’t know Medicare? 

Mr. WALKER. Not off the top of my head but I will be happy to 

provide it for the record. 

Mr. RYAN. Thanks. 

49

Chairman NUSSLE. Mr. Edwards. 

Mr. EDWARDS. Mr. Chairman, let me first thank you for holding 

this meeting. 

Mr. Spratt, for asking for it. 

I think as an institution, we are good sometimes at addressing 

immediate crises. We are reactive, though, as an institution. We 

are not very good at trying to prevent crises 10, 20 years down the 

line. I think it is important that you start the first process, educating Members of Congress that there is a serious problem here. 

General Walker, I guess this is a request, perhaps, as you play 

a leadership role in addressing this problem, I hope you will address the issue of corporate responsibility and fairness. 

I think our capitalist system, which is the greatest capitalist system in the history of the world, depends on trust, as you know better than I do. 

And while the key issue here is protecting the pension benefits 

of workers and not exposing taxpayers to too much liability, the 

fact is that if corporate CEOs are getting golden parachutes, the 

very same CEOs who in many cases are responsible for making the 

poor management decisions that drove their corporations into 

bankruptcy, they are being protected with golden parachutes by 

boards, and workers are getting the shaft and losing their pensions 

altogether, a great percentage of them, you are really going to lose 

trust in this system. 

And I hope that aspect of it, while the numbers of corporate 

execs may be limited, I think it is a huge issue that Mr. Moore 

dealt with. And I hope somehow we deal with that. 

And I know you have to be careful. You don’t want to punish corporate CEO and executives that were not responsible for driving a 

company into bankruptcy and you don’t want to set up kinds of disincentives to corporate executives so that none of them would ever 

want to set up a defined benefit plan. 

But within those limitations, I hope that issue is seen as not just 

a minor side issue, but an important part of the public’s confidence 

in our system. 

Let me ask this. I haven’t looked carefully at the status of General Motors, but I understand their bonds are at junk bond level 

now. If tomorrow—let us be clear, General Motors is not going to 

go bankrupt tomorrow—but if General Motors would go bankrupt, 

what would be the implications on PBGC of that, in terms of dollar 

exposure? If you were to assume the Federal Government would 

make the benefits, pension benefits of their employees. 

Mr. HOLTZ-EAKIN. I think the honest answer is: We don’t know. 

The PBGC knows, but they can’t tell us. I mean, the filings are 

confidential. It is a substantial pension risk. It is a very big number. 

Mr. EDWARDS. We can generally—we could probably do some decent estimating. You have to do that all the time as an economist, 

and I respect that. I assume you could estimate the average worker’s pension benefit, given an average expected life expectancy, 

would cost so much. And if GM went under, I mean, are we talking 

about $50 billion, $1 trillion, at least just to put it in perspective? 

Mr. HOLTZ-EAKIN. We can produce a rough estimate. 

Mr. EDWARDS. OK. 

50

Mr. WALKER. I think that what one could do, and I will be happy 

to provide something for the record, is to look at the 10–K for General Motors and possibly get a sense as to what the potential magnitude is. 

I don’t know the number off the top of my head. It is my understanding that if that were to happen, it would be a substantial loss, 

possibly the largest in the history of the agency. 

Mr. RYAN. Will the gentleman yield, just for a quick clarification? 

Mr. EDWARDS. Be glad to. 

Mr. RYAN. Is it not true that General Motors is not underfunded, 

and they floated $18 billion of bonds about 2 years, and they are 

not declared an underfunded plan? Is that not the case? 

Mr. HOLTZ-EAKIN. I think that is right. That is what we are 

going to check. 

Mr. RYAN. Yes. But Ford and Chrysler are lower than GM. GM 

does not have an underfunded pension plan, to my understanding. 

Mr. HOLTZ-EAKIN. Yes. And I am not familiar with the nature of 

their investments. 

Mr. RYAN. They are my larger——

Mr. HOLTZ-EAKIN. Right. OK. OK. 

Mr. EDWARDS. Well, we will follow up on that issue. 

Let me ask this. 

Dr. Holtz-Eakin, when we reduced the corporate tax rate in the 

last several years, what was it reduced from, and to what level 

today? 

Mr. HOLTZ-EAKIN. It is 35 percent now. It has been much higher 

in the past. It is now 34 percent for manufacturers. 

Mr. EDWARDS. What role did the economic implications, if you 

were to take those companies that your own report says many of 

the underfunded plans are sponsored by financially healthy firms. 

What if we deferred that tax cut until those pension investment 

plans for those corporations were considered adequate enough 

to——

Mr. HOLTZ-EAKIN. I don’t know off the top of my head. I would 

be happy to go through that to the best of our ability and get back 

to you. 

Mr. EDWARDS. OK. Final question: Has anybody looked at the 

270 companies that have underfunding within $50 million as of 

2002, what kind of pension plan that corporate executives in those 

270 companies have? Has anybody looked at that? 

Mr. HOLTZ-EAKIN. We haven’t. 

Have you? 

Mr. WALKER. We haven’t looked at that. 

I think one has to be careful about General Motors, because the 

fact of the matter is, you have to look at the nature of their plan. 

If their plans have shutdown benefits, which it is very possible that 

they could, then they could look fine from the standpoint of the 10–

K, because they are not considering the shutdowns. 

But there could be real problems if in fact they actually terminate and there are huge benefits that pop up overnight. 

We can’t take a whole lot of comfort in the 10–K numbers. You 

have to look below the numbers. You have to look at the nature of 

the assets. You have to look at the nature of the plan and the naVerDate 0ct 09 2002 11:00 Aug 19, 2005 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6602 F:\DOCS\HEARINGS\109TH\109-7\HBU160.000 HBUD1 PsN: DICK
51

ture of the benefit obligations to truly get a true sense as to what 

the real exposure is. 

Mr. EDWARDS. My time is up, but I would just hope someone 

could take a look at that in a broad brush figure, just to get a sense 

of what the numbers would be. 

Chairman NUSSLE. Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

Thank you, Mr. Spratt, for requesting this hearing. 

As always, thank the witnesses. I appreciate your leadership on 

these issues, and even more so on the larger deficit and debt 

issues. 

I would like to reiterate a comment made at the outset of this 

hearing, that as bad as these problems are with PBGC, they are 

relatively small set of problems in comparison with the larger deficit and debt issues that we face. 

And I hope that all our colleagues will take it to heart, some of 

the warnings particularly David Walker has made, because the 

chart that you showed at the outset of the hearing, when by 2040 

it will take all government revenues just to service the debt and 

there will be very little, if any, money left over for national defense 

or Social Security or Medicare or anything, clearly should illustrate 

we are on the wrong path. 

But this Congress is not deviating from that wrong path. In fact, 

we are probably accelerating, because I think General Walker has 

said that, I think this is an exact quote: ‘‘Arguably, 2004 was the 

worst year in American fiscal history,’’ because we promised $13 

trillion worth of stuff that we aren’t paying for. 

Eight trillion dollars of that was in one bill, the Medicare drug 

bill. And that bill, as I recall from the last session, has almost a 

billion in funding to educate Americans about the bill and transition into it and things like that. 

Poor General Walker has hardly any budget to tell people about 

the dangers posed by promising $8 trillion in one piece of legislation that is not paid for. 

So if we put this hearing in perspective, these problems are 

grave, but not nearly as grave as the larger problems. And I would 

hope we could have more hearings on the larger problems. 

And with the chairman’s indulgence, perhaps we can do that. 

Very few issues can shake a society to its foundations, but I 

think this is one. As we fly back and forth to Washington in airports, we are approached by dozens of airport workers, scared, because they are afraid their airline is going to declare bankruptcy, 

and they don’t really know what PBGC will or will not do for them. 

Upper income folks over $45,000 are particularly concerned. 

But is it not true—my understanding is that an employee who 

works for what they thought was a good American company, works 

for 20 or 30 years, has a defined benefit plan, that should that company go bankrupt, that employee, despite a lifetime of work and 

hard service is just an unsecured creditor in the bankruptcy proceedings. So they would come after a long line of secured creditors 

and others who would have a prior claim on the assets of that company. 

Is that a correct understanding? 

52

Mr. HOLTZ-EAKIN. I think the crucial issue is where does the 

PBGC stand in line in bankruptcy. And indeed, they don’t have any 

preferred status in bankruptcy. And as a result, cannot claim assets and other resources to honor the benefit. 

Mr. COOPER. With a woefully underfunded, underprepared 

PBGC, they are going to start looking to us, the U.S. Congress and 

to the American taxpayer almost immediately. 

Because they thought they were already part of an ownership society. They thought they already owned their pension. They 

thought it was due them. 

And these people are waking up and suddenly finding that their 

entire retirement plan is possibly shaken, if not destroyed. 

Mr. WALKER. Mr. Cooper, Doug is correct in saying that the issue 

is not about the individual participants. If the plan terminates, is 

underfunded, and is guaranteed by PBGC, then the PBGC stands 

in line. 

A vast majority of their claims typically are unsecured claims. 

There are certain circumstances in which they could have secured 

or priority claims, but those are generally the exception rather 

than the rule. 

Therefore, that is why it is important not just to think about this 

as a PBGC issue, there are real losses imposed on participants, 

even if PBGC steps in and even if PBGC is adequately funded for 

today and tomorrow. 

Mr. COOPER. If they were listening to this hearing, they would 

have heard already that these multi-employer plans are safer, because there at least you have multiple managements watching the 

store. 

They would have also heard that a lot of our CEOs have made 

sure that they were taken care of through nonqualified plans, so 

they don’t have to worry about PBGC or anything. Their plan is 

funded and safe and removed from bankruptcy and taken care of. 

So the average poor worker, who all they have done is do a good 

job at their job their entire life would have to feel a little worried 

at this point. 

And they realize theirs is a single employer plan, so there hasn’t 

been that level of safeguard. The PBGC is underfunded. Their boss 

or bosses have taken care of themselves and really probably don’t 

care in terms of their own financial interests. That seems to be a 

society in which it is more dog eat dog than the Golden Rule. 

Mr. WALKER. Excuse me, I think we have to be careful, a significant majority of sponsors of single employer defined benefit plans 

are responsible and a majority of the plans are well-funded. 

Regarding multi-employer plans, I think we have to be careful, 

because they are not necessarily better off. It is individual facts 

and circumstances. 

There are troubled multi-employer plans too. 

Mr. COOPER. I would agree. Most plans are properly run. But if 

you are in the airline industry or the steel industry or some of 

these other industries, you are likely to be extremely concerned. 

And I worry that our government looks so out of touch. If we 

can’t even get data that is more than 3 years old, we look clueless 

and hopeless in trying to protect people and their earned benefits. 

So this is the situation. 

53

I appreciate your testimony. I see my time has expired. But this 

should be an urgent matter, not as big as the overall debt crisis 

that we face, but an urgent matter for this Congress to face up to. 

I thank the gentleman. 

Chairman NUSSLE. Mr. Case. 

Mr. CASE. Thank you. 

We are all taking off on Mr. Cooper’s comments about going 

through airports. I am married to a United Airlines flight attendant, who used to be a Pan American flight attendant. That is called 

a double PBGC whammy. Not only do I not want to go through airports nowadays, I don’t even want to go home. [Laughter.] 

Let me ask you a bigger picture question, because I think we obviously have a problem, a looming crisis. And one more large bankruptcy is going to turn it into a full-blown crisis. 

I think it is important for us to understand the generational extent of the problem. Let me make a statement and get your reaction to it. In the next 25 to 50 years, are we going to have a substantial population of defined benefit plans? Because it strikes me 

that in the big picture, they are moving toward some form of obsolescence. 

I am talking about private plans, by the way. State and county 

governments and the Federal Government—well, the Federal Government is pretty much out of it at this point, but State and county 

governments are still in the defined benefit arena, and they can figure that out, that doesn’t really affect us. 

But in the private sector, are we looking at getting through a 

bubble here, a 25-year bubble? I don’t know the figures about 

whether new companies or old companies are creating new defined 

benefit plans, or whether they are primarily trying to shift the risk, 

the overall risk, over to the employees or come up with a different 

program that will somehow yield really the defined contribution 

model being the pension model, if we have that model at all, from 

a private employment perspective. 

Is there any anecdotal or empirical evidence that that is happening? 

Mr. HOLTZ-EAKIN. Well, there is lots of evidence on trends. The 

defined benefit plan used to be the preferred model. But a greater 

fraction of the labor force is now covered by defined contribution 

plans than defined benefit plans. So certainly as a fraction of workers, defined benefit plans are going down, defined contribution 

plans are going up. 

In terms of absolute numbers, there are more workers covered 

than ever by defined benefit plans. 

Defined benefit plans will be an important part of the landscape 

for quite a while to come. Even if they diminish as a fraction of the 

total. 

Mr. WALKER. I differ somewhat on this. First, my wife is a Delta 

Airlines retired flight attendant, so I feel your pain. 

Mr. CASE. Condolences. 

Mr. WALKER. I haven’t felt it yet, but we may in the future. 

Defined benefit plans have been declining in number. The number of participants covered in defined benefit plans are such that 

more and more represent retirees, rather than actives. 

54

Thirdly, the only types of defined benefit plans that have really 

showed any life, as far as creating them, are so-called hybrid plans, 

that look more like defined contribution plans, but they provide 

some type of a defined promise, like cash balance plans. 

One of the reasons is because when the Congress imposed the reversion tax, in other words, when sponsors terminate their plans, 

take out excess money, when they are well-funded, they have to 

pay excise taxes on that. As a result a lot of sponsors, rather than 

going from a defined benefit plan to a defined contribution plan, 

which is clearly where the growth is in the private sector and it 

is likely to stay for a number of years for a variety of reasons, 

many went to a hybrid plan as a way that they could move toward 

the defined contribution world, have potentially less volatility and 

uncertainty with regard to their risk, and be able to obtain the economic benefit of the surplus without having to pay excise taxes. 

I think it is highly unlikely that the traditional defined benefit 

plan will resurge any time in the near future, at least. 

Mr. CASE. Let me ask you, from a perspective of foreign competition, if you know, when our companies go out there and try and 

compete in the world with a defined benefit plan, are they at a distinct competitive disadvantage at that point, because I assume that 

it is true. 

I don’t really know what is happening in China, for example, in 

terms of private pension plans. But it would seem to me that if the 

trend here over time is that the competition in increasingly from 

China, especially in classic defined benefit plan country like manufacturing, that you would see the companies of our country in manufacturing evolve away from defined benefit plans because it is just 

simply uncompetitive when they look overseas at a place like 

China. 

Mr. HOLTZ-EAKIN. I think it is useful to do that in two steps. 

Step one is to determine the nature of overall compensation relative to the productivity of the workers? That determines fundamental competitiveness. 

And pensions are part of that compensation. And the issue with 

the defined benefit plans and the PBGC is, in those circumstances, 

whether at a firm level or at an industry level or an economy level, 

competitiveness changes and compensation needs to be restructured, i.e., you have to change the way you do business. 

How can past promises be preserved for the future? That is the 

nature of the insurance, because you will never be able to fully anticipate whether today’s compensation bargain is the right one for 

tomorrow. 

But given these structures, employees have done the work. You 

have promised the compensation. You have to somehow either put 

the resources aside or buy insurance to make sure that they get 

paid for their past labor. And so you want to break the question 

of competitiveness between total compensation and the competitiveness that that delivers—versus assuring that the commitments of 

the past are honored. 

Those are two different problems. 

Mr. WALKER. The biggest competitive challenge that we face is 

health care, by far. That is truly a competitive disadvantage. 

55

Secondly, if you look at the nature of past losses and exposure, 

in the defined benefit system to the PBGC and the planned participants and beneficiaries, they are concentrated overwhelmingly in 

industries that have one of two characteristics—number one, increasing global competition, and number two, domestic deregulation. 

Those are where a vast majority of the losses are. 

Mr. CASE. Thank you. 

Chairman NUSSLE. Mr. Davis. 

Mr. DAVIS. Thank you, Mr. Chairman. 

General, Mr. Holtz-Eakin, welcome to you today. 

You were saying, General Walker, that your belief is that the 

overwhelming majority of corporate actors are responsible in this 

area and that the overwhelming majority of companies have made 

the appropriate decisions in terms of contributing to their pension 

plans. 

I would contrast that a little bit with some observations that I 

saw in The Washington Post a few days ago, and you may or may 

not want to comment on the veracity of these statements. 

There was an observation from the GAO that said that because 

of the rules and the requirements as to the contributions, that over 

60 percent of the largest companies between 1995 and 2002 did not 

make adequate new contributions to their plans. 

The Republican chairman of the Senate Finance Committee, Senator Grassley, bemoaned the fact that, as he put it, ‘‘the rules 

themselves were full of very serious holes.’’

As I listen to this argument, I have this image in my mind of 

the bankruptcy debate that we had just a couple of months ago. 

And in interest of full disclosure, I voted for the bankruptcy bill because I tend to prefer bright-line standards over no standards. 

But during that debate over bankruptcy, there were a lot of people on, frankly, both sides of the aisle, on my side, on the chairman’s side, who kept using the phrase ‘‘personal responsibility’’ 

over and over again. 

And it sounds great, this idea of personal responsibility, this idea 

that people pay their bills, which is better known as another way 

of keeping your promises, because when you enter an arrangement 

with a creditor and promise to pay them, that is a promise, in effect. 

And we got very outraged about the idea that, well, people making $45,000 a year were shirking their duties and they were trying 

to get in Chapter 7 when they didn’t need to be, and we got all 

bent out of shape about all of these middle-class people walking 

around who just didn’t want to pay their bills, weren’t being responsible. 

It seems pretty clear to me that we are talking about another 

kind of moral responsibility here. 

When a company enters an arrangement with an employee and 

provides a pension, that strikes me that, that is as moral a promise 

as the one a creditor makes with a debtor, and that—vice versa—

and that ultimately there are companies in America, some of them 

with the excuse of hard times, some of them without that excuse, 

who are simply taking advantage of fairly soft rules and not adequately funding their plan. 

56

And I am reminded, frankly, of something that the 42d President 

of the United States, Bill Clinton, used to say a lot. He used to, 

when he was making my party one that identified with personal 

responsibility again, he would use the phrase that for all of our 

talk about personal responsibility, we shouldn’t lose sight of the 

fact that the greatest flight from responsibility in this country in 

the 1980s and 1990s came at the top and not the bottom of the economic sphere. 

And I would submit that, frankly, that is where we are again. 

Frankly, the bankruptcy bill that we passed and that I voted for 

should have given priority to the PBGC. 

Frankly, we ought to be finding ways, across the aisle, to 

incentivize companies to do the right things for their employees. 

We ought to be doing things to incentivize them to contribute to 

their pension plans. 

And we shouldn’t just be so cavalier about this idea that when 

companies get in trouble the first people they ask to sacrifice are 

the people who are earning their profits for them every single day. 

I think that this is a matter of moral responsibility. And would 

either of you care to comment on that proposition? 

Mr. WALKER. Well, let me comment on the GAO report, because 

I reviewed it, and it is referenced in my testimony. 

Basically, overall funding levels have deteriorated during the period 1995 to 2002, but most plans were well-funded. 

Here is what happens. When companies start to get into trouble, 

they start using the rules such that they will do what they are 

minimally required to do under the law, rather than what is right. 

My personal view is, is that people ought to not make promises 

that they can’t deliver on and that the law should be structured to 

maximize the chance that they are held responsible and accountable to do that in the vast majority of circumstances. 

But the simple fact of the matter is, history has shown that 

when people get in trouble, pensions are not a priority, they do the 

minimum, and therefore there is a put option exercised on the 

PBGC which ultimately represents a contingent liability to the taxpayer. 

Last thing. I have been very outspoken on the need for corporate 

governance reform, and on the need for additional transparency 

and accountability in the private sector. GAO and I were very actively involved in Sarbanes-Oxley and other issues, and we will 

continue to be. 

Mr. DAVIS. Well, I appreciate that. 

If I can just wrap up, Mr. Chairman, in just 10 seconds. 

I mean, frankly, all the people in my party who are sitting 

around looking for a big idea for us to talk about, this ought to be 

one of our big ideas, how we keep our commitment to employees 

every day and how we stop companies from shirking their responsibilities by taking advantage of loopholes. 

If it is good enough for people who are filing bankruptcy—you 

know, sometimes I wish that we cared as much about the people 

who vote for us, as we do the people who write us checks. 

Chairman NUSSLE. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. And thank you also 

for this hearing. 

57

And I appreciate the most recent questions, and in particular I 

know there was a lot of discussion about, generally, transparency 

and knowing more about what is going on. 

But I am really interested in that, because of Mr. Davis and Mr. 

Cooper asking very much about the employee, about the plan participants. And I know there has been a lot of discussion about personal responsibility, about individual employees being able to take 

on pretty important decisions about how they invest and save for 

the future. 

I do not agree with the president’s plan to privatize Social Security. But I do agree that Americans should have both flexibility and 

ability to make retirement investment decisions and be given more 

flexibility and information to do that. 

We are now faced with the whole concern you have about pensions and about their not being there. And you have been calling 

for more information to us, Congress, to you, to just make sure we 

don’t end up with too many underfunded pensions. 

But even looking at the president’s proposal and some of his 

ideas, which I think some of them are good ones, how much information is going to be available to employees along the way? To 

what degree do you think they ought to know and have access to 

information in an understandable way? 

Everyone can say, look, stockholders, shareholders, employees, 

can go to annual meetings and they can look through all that information. But I think all of us who have been employees, our eyes 

glaze over when we have our 5-minute meeting with the human resources person when we first get hired, and we never see them 

again, until we retire. 

And then we say, ‘‘Well what did the fine print say?’’ And there 

are a lot of years in between. 

And how can we in an ongoing way provide information to employees or require companies to provide that information to employees about the status of their pension plans, changes that have been 

made, the degree to which they are funded or unfunded,even the 

concern today is, they have been funded adequately, but it has not 

been doing well, so that the value has gone down and maybe appropriately the company says I am going to take some money out of 

there, put it in there, try and invest in the company. It will do better. Employees will ultimately do better and I will be able to pay 

back the pension plan. 

It sounds a little bit like what the Government is doing with 

some Social Security trust funds. 

But it is maybe not an outrageous notion, except when it doesn’t 

work. And when in fact, they are paying far too little in and it ends 

up in a disaster, which then the taxpayers have to pay and employees don’t get all that they should. 

So my question is, what can we and should we be doing to require companies to be more straightforward with their employees 

and provide information in a really consumer friendly way, if you 

could say that, and encourage employees to take all the personal 

responsibility they can to understand the reality that they are in? 

So not just dealing with the fear that everybody has about what 

next, but what can actually be done to help the employee be a part 

of the solution, if they can be at all? 

58

Mr. WALKER. I think it is important to note that under current 

law, plan participants and beneficiaries are required to get a summary annual report. They have the opportunity to receive the Form 

5500, which is the annual report that is filed with the Government. 

They obviously have an opportunity to look, if it is a public company, at the 10–K. 

I think the problem is is that some of the information that they 

are giving is not in a very useful and usable format. It is provided 

as part of a tremendous amount of information and people don’t 

really understand what is important. 

I think one of the answers is, you need to give them more timely, 

more market-based information and in a way that they are more 

likely to pay attention to it, understand about it, and care about 

it. 

I think that should be a key element of any comprehensive reform proposal. 

Ms. SCHWARTZ. OK. You need to be more specific about that as 

we go forward, about what that would mean. 

I guess the next question would be, do you think that they 

should be able to take any action—I am not sure what that would 

be. But what happens when they get all this information and they 

find out that it is going to be pretty tough going forward? What 

then do they do about it? 

Mr. WALKER. Well, it depends. I mean, the fact of the matter is, 

if it is a collectively bargained plan, and if they knew more about 

it, employees could end up bringing more pressure on those who 

represent them to try to be able to make sure that the plan is adequately funded. 

If it is not a collectively bargained plan, employees could bring 

more pressure on management in order to try to make sure that 

people are not just avoiding the problems. 

Transparency and sunshine is a powerful force. A lot of bad 

things can happen if they are done in the dark. So I think we need 

to include this. 

Ms. SCHWARTZ. OK. I appreciate that. And again, the information be in a really consumer-usable way is really the point. So 

thank you very much. 

Thank you, Mr. Chairman. 

Chairman NUSSLE. I thank the gentlelady. 

Thank you very much, both of you, for your testimony today. 

This is an opportunity to be in some ways a canary in the mine 

shaft. And we hope that the warnings will be taken by our colleagues on other committees. 

We will certainly make sure that they understand what happened on some of the testimony here today, and hopefully we can 

begin to use the reconciliation process this year to usher through 

some new proposals with regard to PBGC to help alleviate the 

challenges that are obviously upcoming, from your testimony. 

Mr. Walker. 

Mr. WALKER. One quick thing, Mr. Chairman. 

I just want to refamiliarize you and the other members on the 

committee with our ‘‘21st Century Challenges’’ report. Several of 

the members, including yourself as chair, noted that this is a subset of a much bigger problem. 

59

There are 202 illustrative questions that need to be asked and 

answered about the base of the Federal Government in here. One 

of them relates to PBGC. 

This is an important issue, but it is a subset of a much bigger 

challenge. We look forward to working with you and others to try 

to address them in the future. 

Thank you. 

Chairman NUSSLE. I thank you. 

And without anything further to come before the committee, we 

will stand adjourned. 

[Whereupon, at 11:30 a.m., the committee was adjourned.]

Æ