Budget Reconciliation and the PBGC

Budget Reconciliation and the PBGC

Order Code RS22315
Updated April 24, 2006
CRS Report for Congress
Received through the CRS Web
Budget Reconciliation and the PBGC
Neela K. Ranade
Chief Actuary
Domestic Social Policy Division
Summary
The Pension Benefit Guaranty Corporation (PBGC) posted a deficit of $23.1 billion
as of the latest reporting date of September 30, 2005, and its exposure to new probable
terminations remains high in 2006. Higher PBGC premiums would help reduce the
PBGC deficit. PBGC premiums are also an important source of revenue for meeting the
budget reconciliation targets. The House and the Senate passed budget reconciliation
bills H.R. 4241 and S. 1932 in the first session of the 109th Congress. These included
differing provisions for increasing PBGC premiums. Conference agreement was
reached on the two bills, and the Deficit Reduction Act of 2005 (P.L. 109-171) was
signed by President Bush on February 8, 2006. The pension provisions of P.L. 109-171
are estimated to save $417 million in 2006 and $3.56 billion over 2006 - 2010. Two
broad pension bills were introduced in 2005 to reform funding rules for the defined
benefit pension system and to raise PBGC premiums. The House and the Senate passed
H.R. 2830 and S. 1783, respectively, but conference agreement has not yet been reached
on these bills.
Role of the PBGC in the Budget Reconciliation Process
The Pension Benefit Guaranty Corporation (PBGC), the federal corporation that
insures the pension benefits of participants in most private sector-defined benefit pension
plans, posted deficits of $22.8 billion and $335 million for its single-employer and
multiemployer programs, respectively, as of the latest reporting date of September 30,
2005. The large PBGC deficit has raised the specter of a possible taxpayer bailout and
heightened awareness of the need for higher PBGC premiums.1
In April 2005, the House and Senate adopted a joint budget resolution that provided
the House Education and Workforce Committee and the Senate Committee on Health,
1 For additional information, see CRS Report RL32702, Can the Pension Benefit Guaranty
Corporation Be Restored to Financial Health?, by Neela K. Ranade; and CRS Report RL32991,
Defined Benefit Pension Reform for Single-Employer Plans, by Neela K. Ranade and Paul J.
Graney.
Congressional Research Service ˜ The Library of Congress

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Education, Labor, and Pensions (HELP Committee) with target savings numbers for
programs under their jurisdiction. A major program under the purview of both
committees is private sector pensions. Premiums that private sector employers pay the
PBGC are an important source of revenues for meeting budget reconciliation targets.
Because the PBGC’s premiums are recorded as offsetting collections to a mandatory
spending account, an increase in premium collections is reflected in the budget as a
decrease in direct spending.
House Budget Reconciliation Measure. The House passed on November 18,
2005, H.R. 4241, the Deficit Reduction Act of 2005. This budget reconciliation bill was
estimated to save about $50 billion over five years.2 The bill’s provisions with respect to
PBGC premiums were expected to raise revenues of $6.2 billion3 over five years and
included the following:
! Flat-rate premiums for PBGC’s single-employer program would be
increased from the current $19 per participant to $30 per participant in
2006. The rate would thereafter increase at the rate of wage inflation.
PBGC would be given the power to increase premiums by an additional
20% per year, although Congress would be able to reject any of the
increases sought by the PBGC. This provision was estimated to raise
about $5.2 billion in additional resources for the PBGC over five years.
Note that in developing the cost impact of $5.2 billion, the Congressional
Budget Office (CBO) assumed that the full 20% premium increase would
be made each year.
! A new termination premium would be introduced to be paid when a
bankrupt company engages in a distress or involuntary termination of its
pension plan, resulting in the PBGC taking over the plan. The premium
would be $1,250 per participant, payable for three years following the
company’s emergence from bankruptcy. Under current law, an employer
ceases paying premiums to the PBGC when its plan is terminated. The
new termination premium was estimated to generate savings of
approximately $1 billion over five years.
! If comprehensive pension reform legislation were to be enacted in 2005,
it would take precedence over PBGC premium provisions in H.R. 4241.
Senate Budget Reconciliation Measure. The Senate passed on November 3,
2005, S. 1932, the Deficit Reduction Omnibus Reconciliation Act of 2005, which
achieved five-year savings of about $35 billion. S. 1932 incorporated the Senate HELP
Committee’s proposals on pensions. Under the FY2006 Budget Resolution, the HELP
2 See the cost impact developed by the Congressional Budget Office (CBO) at
[http://www.cbo.gov/showdoc.cfm?index=6885&sequence=0&from=6].
3 For details regarding CBO’s cost estimates, see “Reconciliation Recommendations of the House
Committee on Education and the Workforce” at [http://www.cbo.gov/ftpdocs/68xx/doc6827/
EdWrecon.pdf].

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Committee was required to find savings in pension policy of $6.7 billion over five years.4
To satisfy that requirement, the legislation made the following changes to current law:
! The bill would increase the single-employer flat-rate premium to $46.75
per participant and index it for wage inflation beginning in 2007. This
provision was expected to produce savings of $5.4 billion over five years.
! The PBGC premium for multiemployer plans would be increased to $8
per participant, indexed for wage inflation, beginning in 2007. The
premium is currently $2.60 per plan participant. This provision was
projected to raise $300 million over five years.
! As in H.R. 4241, a new termination premium would be required to be
paid when a bankrupt company engages in a distress or involuntary
termination of its pension plan, resulting in the PBGC taking over the
plan. The premium was established at $1,250 per participant and would
be payable for three years following the company’s emergence from
bankruptcy. This provision was estimated to generate savings of
approximately $1 billion over five years.
! If comprehensive pension reform legislation were to be enacted in 2005,
it would take precedence over PBGC premium provisions in the bill.
Conference Agreement. The House-Senate conference drafted a conference
report that merged the disparate bills H.R. 4241 and S. 1932 into a final measure. The
Deficit Reduction Act of 2005 (P.L. 109-171) was signed by President Bush on February
8, 2006, and would cut $38.8 billion of spending over five years. The pension provisions
of the law would save $417 million in 2006 and $3.56 billion over the five years 2006 -
2010.5
The conference report includes the following provisions:
! Effective 2006, flat-rate premiums for single-employer plans would be
increased to $30 per participant. The flat-rate premiums would be
indexed to wage inflation beginning in 2007. The single-employer plan
PBGC premiums required by the Conference report are lower than the
premiums imposed by either the House or Senate budget bills and
accordingly the savings generated by this provision would be lower than
the corresponding provision savings for the House and Senate bills.
! Also effective 2006, flat-rate premiums for multiemployer plans would
be increased to $8 per participant. The flat-rate premiums would be
indexed to wage inflation beginning in 2007. The conference report
follows the Senate bill with respect to this provision.
4 See “Reconciliation Recommendations of the Senate Committee on Health, Education, Labor,
and Pensions” at [http://www.cbo.gov/ftpdocs/68xx/doc6809/HELPrecon.pdf].
5 See [http://www.cbo.gov/ftpdocs/70xx/doc7028/s1932conf.pdf].

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! A new termination premium would be required to be paid when a
bankrupt company engages in a distress or involuntary termination of its
pension plan, resulting in the PBGC taking over the plan. The premium
is established as $1,250 multiplied by the number of participants in the
plan immediately before the termination date. This premium would be
payable for three years following the company’s emergence from
bankruptcy. It applies to plans that terminate after December 31, 2005.
However, under an exception clause, the premium does not apply to a
plan terminating after December 31, 2005, if the bankruptcy filing
occurred before October 18, 2005. The conference report includes a
clause not found in the House or Senate bill that states that the provision
for the termination premium would sunset after five years. The intention
of the sunset provision is to give Congress the opportunity to reevaluate
the impact of the termination premium provision on the incidence of
bankruptcy reorganizations among employers.
! Unlike the House and Senate bills, the conference report does not include
language that the PBGC premium provisions would be superseded by
future enactment of comprehensive pension legislation.
Pension Reform in the 109th Congress
Major pension bills, seeking to reform the defined benefit pension system, were
passed by the House and Senate in the first session of the 109th Congress. These bills aim
at strengthening the funding of defined benefit pension plans and improving the solvency
of the PBGC. The bills include provisions to raise PBGC premiums and would tighten
funding rules, resulting in higher pension funding requirements for many employers.
H.R. 2830, the Pension Protection Act of 2005, was passed by the House on
December 15, 2005.6 H.R. 2830 would raise the base annual PBGC premium from $19
to $30 per participant. The $30 premium would be phased in beginning in 2006, on a
schedule based on the plan’s funded status. For plans that are at least 80% funded, the
higher premium would be phased in over five years. For plans that are less than 80%
funded, the higher premium would be phased in over three years. The premium then
would be indexed to the average national wage growth. Under current law, there is a “full-
funding” exemption under which a plan does not pay the variable-rate premium of $9 per
$1,000 of underfunding if the contribution for the prior year equaled the full-funding
limitation for the prior year. Under H.R. 2830, the variable-rate premium would be
assessed on all underfunded plans, regardless of whether the plan was fully funded in the
prior year.
H.R. 2830 also includes a provision that would impose a fee of $1,250 per
participant per year for employers that terminate their pension plans in bankruptcy. The
fee would apply for three years after the employer emerges from bankruptcy. There is no
5 year sunset provision as under the Deficit Reduction Act of 2005. H.R. 2830 would not
change current law provisions for PBGC premiums for multiemployer pension plans.
6 For additional information, see CRS Report RS22179, H.R. 2830: The Pension Protection Act
of 2005, by Patrick Purcell.

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S. 1783, the Pension Security and Transparency Act of 2005, was passed by the
Senate on November 16, 2005. Under S. 1783, the annual per-capita PBGC premium for
single-employer plans would increase to $30 in 2006. Every five years, the PBGC would
submit to Congress a report recommending any necessary change in the base premium.
The variable rate premium would not be changed, but the bill would eliminate the full
funding limit, and base the interest rate for calculating liabilities on a three-segment spot
yield curve of corporate bond interest rates. S. 1783 does not include provisions for
raising the PBGC premiums for multiemployer pension plans nor for charging a fee for
employers that terminate their pension plans and emerge from bankruptcy.7
The House and Senate have yet to reach conference agreement on the bills.
7 For additional information, see CRS Report RS22221, S. 1783: The Pension Security and
Transparency Act of 2005, by Patrick Purcell.