The deficit at the federal agency that guarantees pensions for 44 million Americans tripled in the last six months to a record high, reaching $33.5 billion, largely as a result of surging bankruptcies among companies whose pensions it expects it will soon need to take over.
The agency, the Pension Benefit Guaranty Corporation, faced a shortfall of just $11 billion as of October. The combined effect of lower interest rates, losses on its investment portfolio and rising numbers of companies filing for bankruptcy produced the jump in its projected deficit, officials said Wednesday.
Because the agency has $56 billion in assets — most of which is invested in Treasury bonds — it is not facing any prospect of default in the short term, officials said.
“The P.B.G.C. has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums,” the agency’s acting director, Vince Snowbarger, testified Wednesday at a Senate hearing. “Nevertheless, over the long term, the deficit must be addressed.”
The financial troubles are just a small part of the challenges facing the pension agency, which was created by Congress in 1974 and today is responsible for pension programs covering 1.3 million people. It pays about 640,000 people actual benefits worth about $4.3 billion a year.
The P.B.G.C.’s former director, Charles E. F. Millard, was subpoenaed to testify at the hearing Wednesday. But he cited his constitutional right to avoid self-incrimination and declined to answer any questions.
Mr. Millard, who resigned in January, has been accused by the agency’s inspector general of having inappropriate contact with companies including BlackRock , JPMorgan Chase and Goldman Sachs , all of which competed for and won contracts to help manage $2.5 billion of the agency’s funds. Those contracts will now most likely be canceled.
Employers nationwide with so-called defined-benefit, or traditional, pension plans pay fees to the P.B.G.C. in return for a promise that it will take over their pension plan if a company fails.
On Tuesday, for example, the agency announced that it had assumed the pension plan once run by the Lenox Group, a bankrupt maker of tableware, giftware and collectibles based in Eden Prairie, Minn. Assuming control of pensions for this company’s 4,300 workers will cost the agency an estimated $128 million — the difference between what Lenox had in its pension fund and what the total estimated obligations are.
In the last six months, 93 companies whose pension plans are covered by the agency have filed for bankruptcy, including Chrysler, whose failure alone could cost the agency $2 billion. A bankruptcy by General Motors would make the situation worse. G.M. had 670,000 workers as of late last year in its pension system, whose collapse would cost the agency an estimated $6 billion.
Options to close the $33.5 billion deficit include a federal bailout by taxpayers, a change in insurance premiums it charges employers or increasing its investment returns.
Last year, the agency’s board voted to allow it to shift its investment strategy to put more money into stocks, private equity and real estate, in an effort to reduce the deficit.
If that shift had taken place, the losses would most likely have been larger. But only a relatively small amount of the funds have already been shifted to stocks, so the losses on the investment portfolio were responsible for just $3 billion of the jump in the deficit in the last six months.
Senator Herb Kohl, Democrat of Wisconsin and chairman of the Senate Special Committee on Aging, which held the hearing Wednesday, blamed poor supervision by the agency’s board and management, at least in part, for the troubles, adding that he intended to introduce legislation that would expand the board and require it to meet at least four times a year. The board has not met in person since February 2008.
“The role of P.B.G.C. is too crucial to allow its governance to slip through the cracks,” Mr. Kohl said.