Chrysler has declared bankruptcy, and General Motors may soon follow. Will taxpayers be expected to cover the costs of the pensions the companies promised their workers? The pension shortfall for GM alone is estimated at $13.5 billion.

At the same time, the agency that provides such coverage has itself made highly risky investment decisions, such that another taxpayer bailout may prove necessary.

This agency is the Pension Benefit Guaranty Corporation, or PBGC, created by Congress in 1974.  Also known as “Penny Benny,” PBGC insures the traditional, defined-benefit pensions of workers whose employers go broke or otherwise come up short.  Some 44 million workers and retirees fall under its protective umbrella.

Earlier this decade, United Airlines, Bethlehem Steel, US Airways, LTV, Delta Airlines, TWA, National Steel, Weirton Steel, Kaiser Aluminum and several other major companies declared bankruptcy and turned their pension obligations over to PBGC. As a result, PBGC paid out $4.3 billion during fiscal year 2008. At the end of the fiscal year, the agency’s liabilities were $72.3 billion; its assets, $61.6 billion. 

To date, general revenues have not been used for PBGC pension payments. Instead, the agency uses funds from three different sources: assets it recovers from failed companies, insurance premiums (currently $33 per worker) collected from companies with defined-benefit pension plans, and investment earnings. In fiscal 2008, the insurance premiums brought in $1.5 billion.

The problem – and what could leave U.S. taxpayers holding the bag for GM and other pension obligations – is that PBGC’s management seems to have “taken a flier” last year on high-risk investments to put the agency back in the black.

Previously, three-fourths of Penny Benny’s portfolio had been in long-term corporate bonds and Treasury securities. These are safe if unexciting investments yielding commensurately low rates of return.

As the chart below shows, the new, more-aggressive allocation put 39 percent into U.S. and foreign stocks and another 25 percent into real estate, private equity, junk bonds (also known as “high-yield fixed income”), and other more exotic assets.

Unfortunately, the agency shifted gears at exactly the wrong time, just as the stock market plummeted. The September 2008 strategic shift had a head-on collision with the October rout. In effect, Penny Benny placed a big bet and lost. How big a loss remains a secret.

What this means is that it is not a good time for GM or Chrysler to try to unload their pension obligations. 

It is also not a good time for taxpayers.

If GM now follows Chrysler into bankruptcy, PBGC could come under intense political pressure to take on their pension obligations, adding to the agency’s woes and increasing the likelihood that taxpayers will face another huge bill.

If that happened, millions of people with no pensions of their own could wind up paying higher taxes to maintain pension benefits for autoworkers.

This commentary is based on a longer discussion of the pensions and the Pension Benefit Guaranty Corporation in the May 4, 2009, issue of Research Reports. This is available free to AIER subscribers or $2 for non-members.

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