Time bombs - possible future problems in federal economic situation

Time Bombs

CONTINUED ECONOMIC growth and falling interest rates have brought a sort of fiscal nirvana to Washington, with talk of a "peace dividend" heard on both sides of the aisle. Yet the potential for unpleasant surprises, a la the S&L fiasco, is greater now than ever before:

1. The Pension Benefit Guarantee Corporation (potential federal liability: $2.0 trillion). This shadowy government corporation insures the private pension benefits of 66 million Americans, taking over if employers cannot meet their pension obligations. In theory such pension plans are required to police themselves by undergoing periodic outside audits, but in November the General Accounting Office reported that nearly half of the plans it surveyed had never been audited, and that 43 per cent of the pension-plan assets involved were officially unaccounted for. The corporation's potential exposure is greater than that of the Social Security Trust Fund and the savings and loan industry combined.

2. Federal Mortgage Insurance (potential federal liability: $0.9 trillion). During the Eighties the share of mortgages directly held by federal agencies rose from 17 per cent to 29 per cent. (This is over and above the 49 per cent of all mortgages currently held by S&Ls and commercial banks where deposits are federally insured.) Unfortunately, while the government acted to shore up the private thrift industry, its own mortgage agencies were allowed to deteriorate. Technically they are insolvent. Mortgage defaults, which in the case of the Federal Housing Administration (FHA) went from $2.6 billion in 1986 to an estimated $6.7 billion in 1989, have long since overwhelmed their cash reserves. And a bill sponsored by Senators D'Amato and Cranston would aggravate the situation by lowering the required down payment on FHA-insured mortgages to 1 per cent from the already far too low 3 to 5 per cent, while simultaneously increasing the loan limit from $101,250 to as much as $190,000 in some sections of the country.

3. Federal Pensions (potential federal liability: $0.8 trillion). Imagine the condition of the Social Security Trust Fund a few decades hence if it hadn't accumulated a surplus to help pay for future benefits. That is exactly what awaits the Civil Service and Military Retirement Systems, where benefits will exceed income by a combined $775 billion (in 1988 dollars) over the next forty years. Of course, many believe that there is no real need to fund these liabilities now. After all, the Federal Government--unlike a private company, where such underfunding would be illegal--is never going to go out of business. Six years ago the Grace Commission warned that to amortize the unfunded liability of the Civil Service Pension System would require setting aside an amount equal to 85 per cent of the federal payroll for each of the next forty years, compared to the 30 percent of payroll spent on pensions now.

4. Federal Deposit Insurance Corporation (FDICe (potential federal liability: $1.7 trillion). In 1988 the FDIC registered its first loss--$4.2 billion--which reduced its reserves to $14.1 billion, the lowest level it has ever been at relative to insured deposits. Meanwhile, the commercial banks the FDIC insures have devoted increasing shares of their loans to real-estate and corporate-takeover ("junk bond") ventures. Ironically, therefore, the S&L bailout exacerbates the problem faced by commercial banks, since much of the property owned by insolvent thrifts will be auctioned off over the next few years, keeping real-estate prices depressed.

COPYRIGHT 1990 National Review, Inc.
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