The PBGC in its fiscal year 1993 annual report presented three different forecasts of future claims and resulting deficits and surpluses to indicate the potential variability of its financial condition. Forecast A is based on the average annual net claim over the entire PBGC history ($505 million per year) and projects a deficit of $1.9 billion by the end of fiscal year 2003. Forecast B is based on the average annual net claim for the most recent 12 fiscal years ($695 million per year). Under Forecast B, PBGC's projected deficit would grow to $5 billion by the end of fiscal year 2003. Forecast C assumes $1.2 billion of net claims each year and assumes that termination of the plans with approximately $13 billion of underfunding that represent reasonably possible losses will occur over the next 10 years. Under Forecast C, PBGC's deficit is projected to reach $13.8 billion by the end of fiscal year 2003.

TABLE 17-4-YEAR-BY-YEAR PROJECTIONS OF PBGC DEFICITS UNDER VARIOUS FORECASTS, SINGLE-EMPLOYER PROGRAM 1

[Amounts as of September 30; in billions of dollars]

1 PBGC's fiscal year-end deficit equals the amount by which PBGC's liabilities exceed PBGC's assets. The largest component of PBGC's total liabilities is the present value of future benefit payments, including amounts owed to participants in terminated plans and plans with a high probability of termination. Source: PBGC.

PBGC's current method of forecasting future claims is based on PBGC's experience over the last decade. This method fails to take into account the uncertainty facing PBGC regarding future economic conditions. Because of the limitations of the current method, PBGC is building a simulation model to improve understanding of the uncertainty of its future claims forecasts. The model is being designed to simulate bankruptcy rates and pension funding over a 30-year period and will forecast PBGC's financial conditions over a broad set of possible economic scenarios. PBGC anticipates its model will measure the uncertainty surrounding forecasts of future claims, and also will have the capacity to measure the impact of various proposals to change PBGC's program.

RECENT CONGRESSIONAL AGENCY OVERSIGHT REPORTS

In response to growing concerns about the financial stability of the PBGC, the agency has been the subject of oversight investiga

tion by the Congressional Budget Office (CBO), the General Accounting Office (GAO), and by the Congressional Research Service (CRS).

On February 4, 1993, CBO released its report, "Controlling Losses of the Pension Benefit Guaranty Corporation." The report examines the causes of PBGC's losses and offers options for reforming the program. The report concludes that the PBGC currently has $2.5 billion more in liabilities than it has in assets, and that, without reform, this deficit can be expected to increase by tens of billions of dollars. CBO notes that there is no serious possibility that the Federal Government will allow the PBGC to default on its obligations to plan participants, but that the prospect of a taxpayer-financed bailout is increasingly likely.

CBO offers three major reasons for the persistent and increasing PBGC losses. First, the PBGC premiums are too low to cover the administrative costs and underfunding associated with terminated, insured plans. Second, the Employee Retirement Income Security Act of 1974 (ERISA) permits companies to underfund their defined benefit pension plans. Third, neither the PBGC nor the Congress have established a system to properly assess and manage the losses that inevitably result from permitting companies to underfund their plans.

Finally, CBO offers several suggestions to help ensure fiscal balance in the PBGC insurance system. CBO notes that over the short-term Congress must make adjustments to ensure that PBGC has sufficient assets with which to meet its pension liabilities. Over the long-term Congress must improve the structural capacity of the Federal Government to operate the pension insurance program by gathering better information about risks, giving immediate budget recognition to these liabilities as they accrue, allowing PBGC to adjust premiums more quickly to reflect changes in risks of loss in the system, and by requiring that private capital be at least partially at risk to increase the incentive of companies to monitor and control losses under the pension insurance program.

On December 30, 1992, GAO released its report, "Hidden Liabilities Increase Claims Against Government Insurance Program' (GAO/HRD 93-7). The report reviews the factors that cause hidden liabilities, assesses the impact of these factors on recent claims against the pension insurance program, and analyzes PBGC's ability to control these factors.

The report concludes that the Federal Government's exposure to unfunded liabilities in private pension plans is much larger than plans have indicated on their annual reports to the Internal Revenue Service (IRS). In a survey of 44 terminated pension plans trusteed by the PBGC, underfunding was $1 billion (58 percent) higher at the time of termination than most recently reported to the IRS. Therefore, when a pension plan terminates with insufficient assets, PBGC is likely to absorb unfunded liabilities considerably greater than the plan previously reported.

GAO found that 80 percent of this discrepancy was due to differences in actuarial assumptions used to value plan liabilities, the payment of special shutdown and early retirement benefits, and earlier-than-anticipated retirements of plan participants. The remaining 20 percent of the hidden liabilities were due to PBGC's re

ceipt of fewer assets than reported by the plan primarily as the result of benefit payments from the plan and missed contributions to the plan.

GAO found that PBGC has little ability to control its exposure from these hidden liabilities. Further, GAO found that financially troubled plan sponsors sometimes take actions that increase the burden on PBGC, such as raising benefits in lieu of increasing wages or failing to make contributions to their plans. In subsequent congressional testimony, GAO reported that in a separate review of the underfunded pension plans sponsored by eight companies with significantly underfunded pension plans during the 199091 time period, it found that aggregate underfunding increased by over $5 billion, of which nearly $2.2 billion was attributable to benefit increases in these plans.

On February 1, 1993, CRS released its report "Are Pension Guarantees Another Savings and Loan Collapse in the Making?" (93121 EPW). In this report, CRS examines the similarities and differences between PBGC today and the Federal Savings and Loan Insurance Corporation (FSLIC) in the years before the S&L collapse. The report concludes that while not strictly analogous, there are similarities. CRS notes that just as deposit insurance weakened the incentive of depositors to remove funds from risky thrifts, pension insurance creates a similar "moral hazard" incentive for pension plan sponsors and participants to allow plans to become underfunded. In addition, just as FSLIC was reluctant to act promptly to shut down insolvent thrifts, the PBGC is reluctant to cut its losses by terminating pension plans. Finally, the primary financial information presented to Congress in the Federal budget for the illfated FSLIC was, and for PBGC is, short-term cash flows that do not reflect the long-term liabilities that are accruing and can fail to give an indication of a deteriorating long-term situation.

The CRS report concludes by noting that the PBGC has only limited power to act on information about its own financial health since Congress has set in statute PBGC premiums and rules governing pension insurance and plan funding standards. The PBGC has limited control over its financial condition, and ultimately the solvency of the PBGC depends on how Congress responds to information about the financial status of the pension program. Unless significant changes are made in the way pension insurance is priced and benefits funded, it may be necessary to curtail the pension promises that the Government guarantees. Otherwise, taxpayer revenue ultimately may be needed.

Section 18. Description of Other Major Federal Assistance Programs Not Within the Jurisdiction of the Committee on Ways and Means

Several Federal programs outside of the jurisdiction of the Committee on Ways and Means provide benefits to some share of those people who also benefit from assistance programs that are within the jurisdiction of the committee. This appendix describes several such programs: food stamps; Medicaid; housing assistance; school lunch and breakfast programs; the supplemental food program for Women, Infants, and Children (WIC); assistance provided_under the Job Training Partnership Act; Head Start; the Low-Income Home Energy Assistance Program (LIHEAP); Veterans' Benefits and Services Programs; and Workers' Compensation programs.

Most families receiving AFDC would have incomes low enough to qualify them-or particular members of their families-for assistance under these programs. Unlike the principal assistance programs under the jurisdiction of the Committee on Ways and Means, participation in Head Start, LIHEAP, and other programs are limited either by appropriations, or, in the case of the school feeding programs, by the willingness of schools to participate. Income received from AFDC is counted in determining eligibility for these programs—as well as benefit levels, in some cases. However, because these programs provide in-kind rather than cash assistance, benefits received under these programs are not counted in determining eligibility for AFDC.

Tables 18-1 and 18-2 describe the overlap in recipients between programs within the jurisdiction of the Committee on Ways and Means and other major Federal assistance programs. Table 18-1 illustrates that 86.2 percent of AFDC recipient households received food stamps some time during the first quarter of 1992; 21.5 percent received WIC; 96.2 percent received Medicaid, 55.5 percent received free or reduced-price school meals; and 29.5 percent received housing assistance of some form.

Table 18-2 illustrates the reverse. For example, 47.5 percent of food stamp households received AFDC benefits at some time during the first quarter of 1992; 24.8 percent of food stamp households received SSI; and 6.4 percent of food stamp households received unemployment compensation benefits.

TABLE 18-1. PERCENT OF RECIPIENTS IN PROGRAMS WITHIN THE JURISDICTION OF THE COMMITTEE ON WAYS AND MEANS RECEIVING ASSISTANCE FROM OTHER MAJOR FEDERAL ASSISTANCE PROGRAMS

Note: Table reads that 86.2 percent of AFDC households, also receive food stamps. The 994,000 SSI recepients living in California receive a higher SSI payment in lieu of food stamps, and thus are not inIcluded in the food stamp percentages.

Source: U.S. Bureau of the Census, Survey of Income and Program Participation.

TABLE 18-2-PERCENT OF RECIPIENTS IN OTHER MAJOR FEDERAL ASSISTANCE PROGRAMS RECEIVING ASSISTANCE UNDER PROGRAMS WITHIN THE JURISDICTION OF THE COMMITTEE ON WAYS AND MEANS

Note: Table reads that 47.5 percent of food stamp recipient households receive AFDC. The 994,000 SSI recepients living in California receive a higher SSI payment in lieu of food stamps, and thus are not inIcluded in the food stamp percentages.

Source: U.S. Bureau of the Census, Survey of Income and Program Participation.