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Hikes in PBGC premiums disingenuous

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To label the recent congressional action boosting premiums employers pay the Pension Benefit Guaranty Corp. as a disgrace would, unfortunately, not be an exaggeration.

As we reported, lawmakers included, as part of a broader budget measure signed into law last week by President Barack Obama, provisions that will sharply increase the so-called flat-rate premium paid by all defined benefit plan sponsors, as well as the additional variable rate premium paid by organizations with underfunded plans.

The flat rate premium, now $57 per plan participant, will increase a whopping 40%, to $80 by 2019, while the variable rate premium will jump 70%, from the current $24 per $1,000 of plan underfunding to $41 by 2019.

Why did Congress raise rates so dramatically? It certainly couldn't be because the agency needs more money. Indeed, in late September, the PBGC itself projected that the deficit in its single-employer insurance program, which is largely funded by employer-paid premiums, will shrink to $4.9 billion by 2024, down from last year's actual deficit of $19.3 billion. Last year, the PBGC projected that its deficit would shrink to $7.6 billion by 2023.

The agency's deficit has been shrinking so quickly that some feel it could soon show a surplus.

The real reason has nothing to do with financial need and everything to do with the additional funds being seen as a federal budget deficit offset.

Such gimmickry perhaps could be laughed off if the ramifications of these unwarranted premiums weren't so serious. Does anyone think employers are going to continue to pay ever-increasing premiums to the PBGC?

The short and obvious answer is no. Indeed, pension experts uniformly agree that escalating PBGC premiums are one reason employers are phasing out their pension plans.

It is hard to fault employers for taking such steps. Why should they spend, in the case of those with large plans, hundreds of thousands, even millions, of dollars, to fund an insurance program that legislators see as moving beyond its once-clear intent: protecting pension plan participants' promised benefits? Obviously, as more employers slim down or eliminate their pension plans, PBGC premium income will dry up, with the agency one day running out of money to pay benefits to retirees in failed plans it has taken over.

That is an outcome we hope legislators will want to avoid.