Pension safety net's deficit reaches $33.5B and may rise
DETROIT -- The agency that backs the pensions of 44 million American workers and retirees says its deficit is soaring, and may only get worse.
The Pension Benefit Guaranty Corp. said looming bankruptcies in the auto industry, retail sector, finance and health care industries could make the historic $33.5 billion deficit it posted Wednesday balloon even higher. The agency blamed soaring bankruptcies and low interest rates for the shortfall, which was $22.5 billion more than the deficit it posted in October.
The PBGC is a federal agency that acts as a backstop for pensions at 29,000 companies. As its deficit swells, the government will have to decide if it will cut retiree benefits, ask healthy companies to pay more to insure pensions, or rely on taxpayers to make up the deficit.
The auto industry is particularly worrisome: Pensions are underfunded by about $77 billion, the agency estimates. If the entire auto industry were to terminate pension plans due to bankruptcies or liquidations — admittedly, an unlikely scenario — the PBGC would have to pick up $42 billion to pay retirees.
Bankruptcies among auto suppliers are on the rise, putting increasing pressure on the PBGC. And Chrysler's bankruptcy filing in April could add $9 billion to PBGC's tab. General Motors, which could file for bankruptcy as soon as next week, has a $20 billion shortfall in its pension accounts.
"There is a systemic risk that isn't only in the automotive industry," says Edward Altman, professor of finance at New York University's Stern School of Business. "It is a situation that has been growing for the last 18 months due to the huge increase in bankruptcy rates among larger companies in the United States."
PBGC acting Director Vince Snowbarger says the agency isn't losing money on its investments, and has enough money to pay its obligations for many years. The losses are amplified because the formula used to determine the health of the fund relies on current interest rates, which are at historic lows. When rates are high, pension funds can look healthier.
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