The Pension Benefit Guaranty Corporation (PBGC) was established under ERISA to insure retirement benefits promised by private-sector defined benefit retirement plans. There is a cap on the amount of pension benefits guaranteed by PBGC — currently over $5,000 per month, payable as lifetime income to someone who retires at age 65 — with reduced guarantees for earlier retirement ages and increased benefits at older ages.
PBGC is an independent agency not funded by general tax revenue. Instead, PBGC collects insurance premiums from employers that sponsor defined benefit pension plans, receives funds from the pension plans it takes over, and earns money from investments. This income covers operational expenses, as well as the unfunded portion of the liability for benefits “dumped” on PBGC by companies that go out of business, or reorganize, with underfunded retirement plans.
PBGC premiums originally were set at $1 per participant. Since then, Congress periodically has increased this basic flat-rate premium and added an additional variable-rate charge for underfunded retirement plans. PBGC premium rates have been significantly increased in recent years and a provision in the Bipartisan Budget Act of 2013, signed into law on Dec. 26, 2013, raises premiums even further.
For plan years beginning in 2015, all single-employer pension plans will pay a basic flat-rate premium of $57 per participant per year. This will increase to $64 per participant in 2016. After 2016, PBCG flat-rate premium increases will be indexed to wage growth. Underfunded pension plans currently pay an additional variable-rate charge of $24 per $1,000 of underfunded vested benefits. This will increase to $29 per $1,000 in 2016, subject to a cap of $500 per participant that will also be indexed to wage growth.
Supporters of these premium increases argue that PBCG has a projected deficit, and that additional premiums are needed to keep the PBGC solvent. Although PBGC does project a deficit, at least part of that deficit is due to current low interest rates, and the deficit will shrink when interest rates rise. Because of this, there is no consensus that the PBGC needs additional revenue.
These increases will discourage defined benefit plan formation, particularly among small businesses that may adopt new plans but face a significant addition to annual plan administrative costs due to higher PBGC premiums. Also, businesses with existing defined benefit plans will be further encouraged to terminate, freeze, or “de-risk” their plans to offload the increased PBGC premium costs. PBGC premium increases are a well that Congress is running dry.
Not only should Congress avoid further increases, but PBGC premiums should be rolled back for plans that pose little risk to PBGC, such as small plans. In addition, PBGC premiums should be phased in for new defined benefit plans for the same reason.