The $30 billion deficit of the Pension Benefit Guaranty Corp. highlights the difficulties the federal government faces in balancing different constituent interests.

On the one hand, the PBGC protects the defined benefit pensions of nearly 44 million American workers. On the other hand, the probable use of general tax revenues to defray the liabilities of PBGC would burden the “have-nots” — the 70 percent of Americans not enjoying defined benefit pensions. This would be tantamount to a bailout.

Q:What is the PBGC?

A:The PBGC is a federal corporation of the U.S. government that was created by the Employee Retirement Income Security Act of 1974, or ERISA, to encourage the maintenance of voluntary private defined benefit pension plans. Defined benefits guarantee specific annuity payouts.

Q:How does the PBGC function?

A:It guarantees pension promises made by businesses. It takes over the pension plans (including assets) of bankrupt companies. The PBGC primarily funds itself by collecting premiums from employers that offer defined benefit pension plans and taking over whatever investments remain in the pension fund of failed companies.

Q:What are the PBGC’s operating shortfalls?

A:The PBGC has approximately $30 billion under funding. This deficit could expand to more than $100 billion given the problems of the automobile industry.

Q:How did the PBGC become insolvent?

A:It failed to charge enough premiums, especially to companies having underfunded pensions. Also it did not force companies to insert enough cash to cover shortfalls in their pension plan. PBGC also suffered from low investment returns because of the decline in its equity holdings and the low rate of interest from bonds.

Q:Does the financial problem of the PBGC require immediate cash infusions?

A:No. Since pension liabilities are long term — 30, 40, 50 years in the future — the requirement by the government to make cash infusions is at least a decade away. Nevertheless, the clock is ticking.

Q:Why did the PBGC not take remedial action when funding problems surfaced a number of years ago?

A:The PBGC put public relations before fiscal rectitude. It feared that corporations might drop their defined benefit programs if it raised premiums. Alternatively, the PBGC worried that it could push struggling companies into bankruptcy if they demanded these companies fund pension shortfalls.

Q:Is the underfunding of the PBGC part of a larger problem?

A:Yes! For several decades the government has promoted programs in order to achieve a Great Society-type agenda without imposing fiscal constraints. The present value deficits of entitlement programs such as Social Security, Medicare and Medicaid approach $53 trillion, almost $500,000 per family. The Medicare Trustee 2008 report forecast inadequate funds within the next 10 years.

The government maintains the myth that Fannie Mae and Freddie Mac are independent of the government despite its recent takeover of both organizations. Thus, their $5.3 trillion dollar debt is not included when tabulating government indebtedness.

Adam Smith predicted the follies of social engineering and unbridled largesse. The genesis of the PBGC was to prevent the loss of defined pension benefits, but it failed to impose large enough fees to cover impending liabilities. The American taxpayers, most of whom never stood to benefit from the program, will in the future pay for the PBGC’s mistaken actuarial assumptions.

Originally published in the Sarasota Herald-Tribune