Could PBGC Premiums Be Part of a Budget Deal?

With Budget chairs Ryan and Murray apparently close to a deal, they may turn to PBGC premiums as a way to raise money without increasing taxes.

For background, the Pension Benefit Guarantee Corporation (PBGC) was created by the Employee Retirement Income Security Act of 1974 to insures defined benefit plans which have insufficient assets to pay promised benefits. It is self-funded through premiums which are composed of a flat-rate premium of $42 in 2013 and a variable-rate premium of $9 for each $1,000 the plan is underfunded. Those premiums will increase to $70 and $25, respectively, by 2023.

In 2003 and 2004 and between 2009 and 2012, these premiums were insufficient to cover PBGC’s costs, creating a $17 billion net liability from 2002-2012. A premium increase from last year’s highway bill saved $11 billion, which is projected to produce temporary surpluses through 2019. However, the program still has a $34 billion unfunded liability.

There are a few different options for increasing PBGC premiums. A CBO Budget Option would increase the flat-rate fee by 15 percent and increase the variable-rate fee by one-third, saving $5 billion over ten years.

The President's budget would simply give the PBGC the authority to raise premiums as necessary to ensure solvency and direct PBGC to take into account the risk that a plan poses to future retirees and the PBGC. This proposal would both encourage companies to fully fund pensions and improve financial soundness of the PBGC. CBO estimates that the President's proposal would save $13.6 billion. A similar policy was included in the original Simpson-Bowles report.

The Senate budget resolution appears to assume reforms along the lines of the President's proposal, with the report accompanyng the resolution calling for "establishing risk-based premiums for under-funded companies' pension plans." While the House budget resolution explicitly states that it does not assume the President's proposal, it suggests savings of $950 million.

Policymakers could also increase the flat-rate fee, variable-rate fee, or both by whatever amount they deem acceptable.

PBGC Premium Options
SourcePolicy2014-2023 Savings
President's BudgetAllow PBGC to increase premiums as necessary and take into account risk pension plans pose to PBGC$14 billion
CBO Budget OptionIncrease fixed-rate premium by 15%$2 billion
Increase variable-rate premium by one-third$3 billion
Increase fixed-rate premium by 15% and variable-rate premium by one-third$5 billion
House BudgetDoes not specify$1 billion
Senate BudgetEstablish risk-based premiums to take into account risk pension plans pose to PBGCUnknown

Source: CBO, HBC

As we’ve explained before, replacing temporary sequester cuts with permanent deficit reduction would represent a small step forward in improving the budget situation.