While national attention has been focused on more visible consequences of the economic downturn and volatility of the stock market, a quasi-governmental agency that secures pension funds for private companies is running a record deficit.

And if Congress doesn't act quickly to change the formula in which companies contribute to the Pension Benefit Guaranty Corporation (search), millions of workers could be left without retirement funds or taxpayers may be asked to foot the bill, pension experts testified before Congress on Monday.

The PBGC, which insures benefits for an estimated 44 million workers, is assuming higher losses as unhealthy companies terminate underfunded pension plans or file for bankruptcy, said Steven A. Kandarian (search), executive director of the PBGC.

“If companies do not fund the pension promises they make, someone else will have to pay — either workers in the form of reduced benefits, other companies in the form of higher PBGC premiums or taxpayers in the form of a PBGC bailout," Kandarian told the Senate Government Affairs Subcommittee on Financial Management.

While agreeing that the PBGC is in fiscal turmoil, representatives of companies contributing to the agency warned Congress not to overreact by layering the system with more rules and penalties that would encourage otherwise healthy companies to desert the system.

“The real security of the PBGC lies not in imposing new rules that force cash-strapped companies to choose between growth, or even survival, and putting more money into their pension plans,” said Christopher O’Flinn, chairman of the Employment Retirement Investment Act Industry Committee (search) (ERISA).

“The funding rules are already a collage of confusion,” added John P. Parks, a representative of the American Academy of Actuaries. “Simplification is necessary.”

The PBGC, established under ERISA in 1974 as a federal corporation, was set up to ensure that workers would still get benefits even if their underfunded pension plans were suddenly cancelled.

Participating companies pay an annual $19-per-employee fee into the fund as well as calculated minimum payments into their workers’ plans. If companies fail to fund at least 90 percent of their plans, they are penalized with additional payments. For now, the PBGC is not funded by taxpayer dollars; rather it runs solely on the fees and the interest generated on its assets.

Currently, the PBGC insures workers' benefits worth $1.5 trillion and covers payments for 783,000 workers whose companies — including Bradlees, Polaroid, TWA Airlines and a host of steel manufacturers who recently terminated their plans — no longer provide for them. As a result, PBGC's benefit payments are expected to rise by $1 billion to $2.5 billion in 2003.

Kandarian said a record number of plans — as much as 80 percent of the 32,000 single-payer plans — are now underfunded by companies, to the tune of $400 billion as of December 2002.

Those losses contributed to the agency's drop from a $7.6 billion surplus in 2001 to a $3.6 billion deficit in 2002. The deficit had risen to $5.7 billion as of July 31 of this year.

“Financially weak companies have for years made pension promises that they could not deliver and then simply dumped their unfunded pension promises off on to the PBGC. The PBGC is now being crushed under the weight of those claims,” said subcommittee Chairman Peter Fitzgerald, R-Ill.

But company retirement representatives say they believe the government is overstating the financial crisis, and have urged Congress to fix what they see is the real problem — a funding structure that forces healthy companies to pay too much into the system while enabling unhealthy companies to hide their problems until its too late.

“The best recipe for a stable PBGC is to encourage healthy companies to remain in the defined benefit system" and to create policy changes that will more fairly define contributions to the system, said Kathy Cissna, director of retirement plans for R.J Reynolds, and spokeswoman for the American Benefits Council.

“While the PBGC’s deficit is serious, we do not see cause for alarm,” she added.

The Bush administration, PBGC and lawmakers have acknowledged that the funding rules are unfair and are considering three proposals — all of which offer new methods for calculating company contributions — to correct the inequities.

“Making Americans’ pensions more secure is a big job that will require comprehensive reform of the pension system,” said Peter R. Fisher, U.S. Treasury Undersecretary for Domestic Finance, who added that the administration's proposed funding formula is part of a larger reform package aimed at bringing the PBGC back into the black and more companies back into the fold.

“Our pension rules should be thus structured in ways that encourage, rather than discourage, employer participation,” Fisher said.

Experts say they expect Congress to act on funding formula proposals this year, but long-term fixes will likely take some time to sort out.

“Congress needs to proceed with caution, after thorough analysis, to adjust the funding and related rules in a way that carefully balances the competing considerations,” J. Mark Iwry, a tax lawyer and Brookings Institute pension analyst, said. “I do think there is reasonable middle ground.”