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May 17, 2005

Actually, that isn't corporate welfare

Jane Galt, in an article titled More on the PGBC and corporate welfare elucidates a common confusion, that the pension guarantee company (PBGC) is a subsidy of pension insurance rates that amounts to corporate welfare. For those of you learning about this for the first time,the PBGC insures corporate defined benefit pensions against under funding when the company is bankrupt so unable to fund the shortfall. Defined benefit means that a company says how much money you make based on income and retirement, and they can contribute to that in a tax advantaged manner if they obey a slew of rules about how to invest the money. The benefits in the event of default are indexed to the year your plan fails and your social security income, but with a max of about $45,613.68. That means the pilots at The Bankrupt airlines are looking towards a far more turbulent retirement. In the event of a loss of pension pressure, your 401k plan may act as a retirement flotation device.

So, what at first appears to be another horrible example of corporate welfare, turns out to be a fairly targeted and limited version of middle class safety net.
Her argument is as follows. Let's assume that the PBGC rules end up requiring that firms fund an actuarially appropriate amount each year. If times are good for investments then the pension remains solvent, government subsidy has no value. Now, if the market turns, they may have been saving the right amount in probability, but cannot afford to payout the pensions. The company is required to make large catch-up payments. If they can't afford it, they go bankrupt, and a certain amount of the firms assets (which by definition can't cover the liability) go into the PBGC general fund. Then the payouts are capped and paid out of PBGC's assets and income from those assets. All solvent firms pay $19 per worker or retiree plus $9 for each $1,000 of unfunded vested benefits which further funds the PBGC. Are you beginning to see how this subsidy goes to the employees? Either the firm pays what is required or goes bankrupt. If the firm fails, the employees benefit for this guaranteed payout. The firm basically purchases subsidized pension insurance on behalf of all its pension fund beneficiaries. By socializing the risk, they avoid the moral hazard of well funded firms withdrawing from the pool.

One criticism is unaddressed by Jane's comments. Only bigger companies can afford the organizational overhead of a defined benefit program. Since this amounts to a subsidy of the employees of these companies, they can recruit superior talent at the same price. That gives them an advantage in the war for talent, this ends up being yet another factor encouraging the growth of bigger companies at the expense of the small.

Posted by OneEyedMan at May 17, 2005 4:51 PM

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