years. The annual costs include $61 million to retire the deficit, $185 million for claims, and $37 million for administrative expenses. The $7.50 rate was determined by dividing these costs by a projected annual average of 37 million participants. The Corporation's past estimates of future claims have usually underestimated actual experience, and their estimates of the future participant base are, in our view, optimistic. Because of the uncertainties about expected claims and the participant base, we made optimistic and pessimistic assumptions about future events to determine how the rate could change. We found that it varied significantly. By assuming higher annual claims of $255 million and a lower participant base of about 33 million participants (pessimistic), we estimate that the rate would be about $11. By assuming lower annual claims of $102 million and the Corporation's participant base (optimistic), we estimate a rate of about $5.50 would be needed. We used the Corporation's participant base in making our optimistic estimate because of the recent slowdown in participant growth. In The Corporation based its 1982 request on a 5-year deficit retirement period and its 1984 request on a 15-year period. our 1983 report, we concluded that the deficit should be retired in as close to 5 years as possible to minimize the transfer of past costs to future premium payers. Using the Corporation's assumptions about future events, we estimate that a $9 rate would be needed to retire the deficit over 5 rather than 15 years. CONCLUSIONS We believe that a premium increase is needed to put the insurance program on a sounder financial footing. In view of the uncertainties in determining a premium, we believe the Corporation's approach is reasonable if the insurance program's deficit is to be paid over 15 years. We continue to believe, however, that the deficit should be retired sooner. This would better insure that premium payers finance program costs when they are incurred rather than shifting such costs to future payers. We conclude, therefore, that the requested $7.50 premium is the lowest that should be provided. This concludes my testimony Mr. Chairman. We would be glad to answer any questions you or other Members of the Committee might have. INFORMATION ON GAO'S ANALYSIS OF THE SINGLE EMPLOYER PENSION INSURANCE PROGRAM'S FINANCIAL CONDITION AND PREMIUM NEEDS The President's fiscal year 1986 budget requests that the single employer pension insurance program's premium rate be increased from $2.60 to $7.50 for each participant in covered. plans. The Pension Benefit Guaranty Corporation (PBGC) estimates that the $7.50 rate will annually cover $61 million to retire the $462 million deficit over 15 years, and average annual claims and administrative expenses of $185 million and $37 million respectively. The rate is determined by dividing these costs by a projected average participant base of 37 million. The program's future financial condition and premium rate needs are difficult to determine with certainty because future claims and the participant base are based on assumptions about the relationship between future events and the program's past experience. Because of this uncertainty, GAO tested the sensitivity of the Corporation'ş estimates to more optimistic and pessimistic assumptions. This exhibit includes the following illustrations on GAO's analysis of the program's premium needs and financial condition. Table 1 Chart 1 Chart 2 Chart 3 Chart 4 Chart 5 PBGC's estimated premium needs compared PBGC's projected program deficit compared PBGC's projected program assets compared PBGC's projected program claims compared Projected participant bases used by PBGC and PBGC's estimated claims compared to actual Table 1 PBGC'S Estimated Premium Needs Compared to BILLIONS OF DOLLARS Chart 1 PBGC's Projected Program Deficit Compared to GAO's Projections Under the Existing $2.60 Premium (1985-99) At September 30, 1984, PBGC reported a program deficit of $462 million. Under the $2.60 premium, PBGC projects the deficit will grow to $5.5 billion by the end of 1999. The estimate is based on the projected costs and participant base used for its $7.50 rate request. GAO estimates that the deficit could be from $3 to $8 billion by 1999 if more optimistic and pessimistic assumptions about program claims and the participant base are used. (See charts 3 and 4.) |