Saving the PBGC: It need never face another crisis

Since March 2000, a steep drop in stock prices has made clear the risk inherent in investing a large fraction of pension assets in equities. During the same period, interest rates have also fallen, thus increasing the present value of pension liabilities. This so-called "perfect storm" tur...

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Bibliographic Details
Published in:Pensions & Investments 2003-10, Vol.31 (21), p.14
Main Authors: Bodie, Zvi, Gold, Jeremy
Format: Article
Language:English
Subjects:
Accounting and auditing
Asset allocation
Bailouts
Bond portfolios
Cost control
Finance
Funding
Interest rates
Investment policy
Pension funds
Pension plans
Treasuries
Underfunded pension plans
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Summary:Since March 2000, a steep drop in stock prices has made clear the risk inherent in investing a large fraction of pension assets in equities. During the same period, interest rates have also fallen, thus increasing the present value of pension liabilities. This so-called "perfect storm" turned generally adequate pension funding into massive underfunding. The Pension Benefit Guaranty Corp.'s balance sheet net worth went from a surplus of $7.7 billion at the end of 2001 to a deficit today of roughly $5 billion and growing. Although today's dilemma may require transitional relief lest we turn serious stress into an immediate debacle, the permanent solution cannot be further weakness. Congress must signal an end to the mismatched roller coaster that regularly threatens the PBGC and the participants it is designed to protect.
ISSN:1050-4974
1944-7671