November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

Mandatory SpendingOption 8

600 - Income Security

Increase Federal Insurance Premiums for Private Pension Plans

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays                        
  Increase flat-rate premium 0 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -1.0 -2.5
  Increase variable-rate premium 0 0 -0.6 -0.5 -0.4 -0.3 -0.2 -0.2 -0.2 -0.3 -1.5 -2.8
  Both of the above policies 0 -0.2 -0.8 -0.8 -0.7 -0.6 -0.5 -0.5 -0.6 -0.6 -2.5 -5.3

Note: This option would take effect in January 2015.

The Pension Benefit Guaranty Corporation (PBGC) is a federal agency that insures participants in defined benefit pension plans organized by private employers against the loss of specified benefits in the event that their plans have insufficient assets to pay promised benefits. Private employers are not required to provide pensions, but those that do must follow rules specified in the Employee Retirement Income Security Act (ERISA) regarding minimum standards for participation, accrual of benefits, vesting, funding, and other issues. If a plan sponsored by an employer is terminated with insufficient assets to pay promised benefits, PBGC assumes the plan’s assets and liabilities up to an annual per-participant limit. (Under current law, plans sponsored by multiple employers are handled differently by PBGC; this option focuses on single-employer plans.) PBGC uses those assets along with insurance premiums from active plans to make monthly annuity payments to qualified retirees and their survivors. At the end of 2012, PBGC reported that the gap between its assets and the present value of the benefits owed to workers and retirees in terminated plans, as well as the assets and benefits of plans whose termination the agency viewed as “probable,” was $29 billion.

Individual employers that offer defined benefit pension plans pay PBGC annual premiums that are equal to a flat-rate payment ($42 in 2013) for each participant (worker or retiree) in the plan and, for underfunded plans, a variable payment equal to $9 for each $1,000 by which the plan is underfunded (capped at $400 per participant). Those premium rates are adjusted each year to account for growth in average wages; additionally, they increase by set amounts specified in law. In 2015, the flat-rate premium is scheduled to rise to $49 per participant, and the variable-rate premium is set to increase to $19 for each $1,000 of underfunding; by 2023, the flat-rate premium will rise to $70, and by 2022, the variable-rate premium will increase to $25 per $1,000 of underfunding (variable-rate premiums due for 2022 are paid in 2023). In 2012, PBGC collected $1.1 billion in fixed-rate premiums and $1.0 billion in variable-rate premiums. Those amounts are recorded in the federal budget as offsetting receipts, which are credits against direct spending.

The first part of this option would increase collections from the flat-rate premiums by about 15 percent. That increase could occur either by maintaining the current system and boosting the charge from $49 to $57 per participant in 2015 and by rising amounts that would reach $80 per participant in 2023, or by changing the way that premiums are assessed (for example, by making premiums a percentage of insured benefits) and setting premiums such that collections would be 15 percent higher than those projected under current law. This component of the option would increase offsetting receipts (that is, reduce direct spending) by $3 billion through 2023, the Congressional Budget Office estimates.

The second part of this option would increase collections from the variable-rate premiums by about one-third. That increase could occur either by maintaining the current system and upping the rate from $19 to $25 per $1,000 of underfunding in 2015 and by rising amounts that would reach $34 by 2022 (with adjustments each year to account for growth in average wages), or by creating a new formula based on a broader range of risk factors (like the financial condition of the sponsors and the share of a plan’s assets allocated to risky securities, for instance) that yields the same overall increase. This component of the option would increase offsetting receipts by $3 billion through 2023, CBO estimates.

Combining both parts of the option would increase offsetting receipts, and thereby reduce direct spending, by $5 billion through 2023, CBO estimates.

A principal advantage of increasing premiums is that doing so would improve PBGC’s financial condition in the long run. For the first component of the option, changing the assessment base for the flat-rate premiums rather than increasing the charge per participant could more directly relate premiums to insured benefits. In particular, that change would help younger companies that have many employees who have not yet accumulated significant pension benefits. Raising premiums for riskier plans, as in the second component of the option, would align premiums more closely with the financial risk posed to PBGC; currently, premiums increase only with underfunding, even though other factors can also generate greater risk for PBGC. By raising the cost of maintaining riskier plans, that change would boost the incentive for employers to fully fund their plans and reduce the risks of their plans in other ways.

A disadvantage of increasing premiums is that the higher costs of underfunding might lead more businesses to restrict growth in the benefits offered in their pension plans. Also, increasing premiums would raise the risk that financially weak employers would terminate their plans. A disadvantage of simply increasing variable-rate premiums as they are currently structured is that the charges limit only one risk factor (underfunding), and changing the formula to incorporate additional risk factors (such as the financial condition of the firms sponsoring the plans) would add complexity.