(FORTUNE Magazine) – BY NOW, you must have heard that there is another crisis brewing of savings and loan-like proportions, this one in the nation's private pension system. Thousands of corporate plans do not have enough money in them to pay the retirement benefits promised to vested employees. Indeed, the funds are shy by billions. Worse, the Pension Benefit Guaranty Corp. (PBGC), the government agency that insures these plans much the way the Federal Deposit Insurance Corp. insures bank deposits, is running a $2.8 billion deficit -- and it's growing. Hang on to your wallets, taxpayers. You can see what's coming. Sounds pretty upsetting, doesn't it? Welcome to the world of government hype, where if you want Congress to act on a small problem before it becomes enormous, you must frighten the nation into believing crisis is imminent. Happily, the truth about the corporate pension system is not nearly so terrifying. At least, not right now. Says Secretary of Labor Robert Reich, who oversees the PBGC: ''The problem is not dire, but the trend is disturbing and now is the ideal time to fix it.'' Nearly everyone concerned with the issue agrees that something must be done to force corporations to fund their pension obligations adequately because severe underfunding is a growing risk to the government-sponsored insurance program. But by no measure is an S&L-type meltdown waiting to happen. For one thing, far smaller sums are at risk. Some 25% of government-guaranteed corporate plans -- about 16,000 -- are underfunded, with the cumulative deficit in the neighborhood of $53 billion. That means these plans are on the hook over the next few decades to pay out $53 billion more than they have now in assets. But most have tiny deficits. Only 300 are short by $25 million or more, and these are the ones the PBGC is concerned about. Moreover, in the world of pension funds, where long-term liabilities are disbursed as small benefit payments over many years, numbers are supremely manipulable and deficits will bounce up and down as shifting interest rates increase or decrease the value of pension assets. Says Joseph F. Delfico, director of income security issues at the General Accounting Office: ''The drop in interest rates has been a major factor in the growth of unfunded pension liabilities.'' When rates decline as they have over the past few years -- for example, 30-year Treasury bonds recently yielded 6.8%, vs. 8.4% in June 1991 -- pension plans seem much more in the hole than they will be in the long run. To determine how much money must be in the plan to meet future obligations, corporate sponsors make certain assumptions about what the assets will earn over time. When interest rates decline below those assumptions, the fund has a shortfall. The Clinton Administration has already sent Congress a fairly comprehensive package of pension plan reforms, drawn up by a task force of economists and pension and other experts supervised by Reich and chaired by PBGC executive director Martin Slate. Known as the Retirement Protection bill of 1993, it calls for tightening the funding rules and increasing penalties on laggards. Corporations pay insurance premiums to the PBGC, with fully funded plans contributing $19 per beneficiary and underfunded ones up to $72. The new premiums would likely double the levy for the most underfunded. Business generally supports this legislation. Says Lynn Dudley, director of retirement policy at the Association of Private Pension and Welfare Plans, a trade group that represents dozens of FORTUNE 500 companies: ''This is about stopping some companies from promising benefits they will not be able to fund.'' At the center of pension reform is the PBGC. A federal agency created in 1974, it guarantees the pensions of some 41 million Americans, capping their benefits at almost $31,000 annually for plans terminated in 1994. (That cap is adjusted annually and will likely rise for plans terminated next year.) The agency allows a business in bankruptcy to shut down its plan, or the PBGC itself will do so -- even if the business is still operating -- when it determines that the underfunding represents too big a risk to the pension insurance system. After termination, the PBGC becomes the legal trustee responsible for plan assets, payments to beneficiaries, and financial management of the fund. Currently the agency serves as trustee for more than 1,800 plans. Overall, the PBGC insures 65,000 defined-benefit pension plans sponsored by individual employers; these have total assets of more than $830 billion to cover roughly $780 billion in liabilities. (The agency also guarantees about 2,000 multi-employer plans -- most of them operated by unions -- covering nine million workers, but these are such a small portion of the PBGC's insurance program that, even though some are underfunded, they pose little risk to it.) Defined-benefit plans are funded by the employer and provide pensioners with a fixed monthly benefit usually determined by salary and years of service. The government does not insure defined-contributio n plans, such as 401(k)s, that provide benefits based solely upon the amount the worker, and often the company, contributes. The PBGC took in over $1 billion in premiums in the fiscal year that ended September 1993. It is solvent, and talk of a taxpayer bailout is just that -- talk. The agency has $8.4 billion in assets and enjoys a positive cash flow; last year it was $633 million. Says Paul Jackson, a retired Wyatt Co. actuary and expert on pensions: ''The PBGC can keep paying benefits for 20 to 25 years -- more than enough time to fix anything that has gone wrong.'' For most of the past 20 years the agency has been poorly run, although it is now getting its own books in order. Last year the General Accounting Office was finally able to audit the PBGC for the first time in its history. Previously the agency's numbers were so unreliable and its record keeping so tangled that government accountants repeatedly refused to audit it. Six months after its 1993 fiscal year ended in September, the agency finally released its financial statements. THE ALARUMS over underfunding, directed mostly at Congress and the press, reached fever pitch under James Lockhart 3rd, who served in the Bush Administration as the PBGC's executive director. Lockhart, given to drawing the parallels between the S&L mess and pension underfunding, and fond of comments like ''there's a looming crisis here,'' was dubbed Chicken Little. He tried to apply more rigorous private-sector casualty insurance standards to the agency and narrow the scope of its coverage. Though he was very successful at improving the administrative operations, Lockhart, with his free-range hyperbole, produced the agency's most potent scaremongering tool, the ''iffy 50'' list of the most seriously underfunded corporate pension plans in the country (for the iffiest 25, see table). Although Reich and Slate have toned down the overheated rhetoric of the past, the agency is taking pains to portray its current condition and its estimated long-term deficit as a crisis requiring speedy congressional action. With health care, welfare, and crime grabbing most of the lawmakers' short attention spans, it's hardly surprising that the PBGC is exaggerating the scope of its problems as it vies for notice. So the Labor Department continues to update and publicize the ''iffy 50'' very widely. PUBLICIZING THE LIST is a salutary embarrassment to the sponsors of these pension plans. But what the list doesn't show is the net worth of the companies (all ongoing concerns, of course). By law the PBGC can impose a lien on 30% of an employer's assets to recover any losses it sustains when it takes over an underfunded plan. Many iffy 50 concerns have substantial net worth, and in the case of a plan termination the PBGC would recover most if not all the underfunded amount. Admittedly, companies such as steelmaker Ravenswood and New Valley, a.k.a. the old Western Union, Nos. 1 and 3 on the list, have little net worth, and those are the truly risky situations. But that's why the PBGC charges them additional premiums. Says Donald S. Grubbs, former director of the actuarial division of the Internal Revenue Service and now a consultant: ''Publishing the list of unfunded guaranteed benefits without a list of the employers' net worth provides almost no clue to the amount of risk involved.'' And it makes the PBGC's exposure seem much larger than it is. For example, Loews Corp., a hotel, tobacco, and insurance conglomerate controlled by the Tisch family, who also control CBS Inc., is No. 6 on the PBGC list with only 48%, or $159 million, of the benefits promised vested employees covered by the assets in its fund. But according to its latest figures, Loews netted $594 million in 1993. Its pension shortfall of $169 million poses little risk to its employees or the PBGC, which guarantees $153 million of it. In fact, says Stuart Opotowsky, Loews' top tax executive, the company had initiated discussions with the agency about contributing more to its fund. The problem is the IRS. It would levy a 10% penalty on the company for making contributions that exceeded the government-imposed limit of 25% of annual compensation, and it would not allow Loews to take any tax deductions on the excess contributions. The truth is that most corporate pension plans are well funded and stable. The underfunding is concentrated in four labor-intensive industries -- steel, autos, rubber, and airlines -- battered over the past decade by recession or deregulation. These account for more than $30 billion of the iffy 50's total underfunding of $38 billion. Cases of the shorts vary widely. General Motors' pension plan is two-thirds funded, but the deficit is still more than -- gulp! -- $20 billion. Unisys, on the other hand, is 95% funded and has only a $307 million shortfall -- peanuts compared with the $883 million in cash and marketable securities on its balance sheet at the end of fiscal 1992. In addition to falling interest rates, government regulations have helped push fully funded plans into the underfunded category. As Loews discovered, the law penalizes well-funded plans that make extra contributions, even though such donations would keep them from coming up with empty pockets in the future. MANY BIG corporations have been contributing large amounts of cash and stock . to their pension funds and taking other steps to reduce the deficits. Over the past two years, Chrysler has been using an aggressive equities investment strategy to help boost returns, and in 1993 it put $3.5 billion in cash into its plan. But because that contribution was offset by increased benefits, Chrysler reckons its unfunded pension liability dropped by only $1.7 billion, to $2.2 billion, last year. GM and others are also attacking their problems. The automaker has announced a proposal to turn 185 million shares of its Class E stock over to its pension fund, though it has yet to file the proposal with the government agencies that must approve it. Westinghouse, with an unfunded liability of some $1.3 billion, according to the PBGC, announced in January that it would contribute $200 million in stock and raise its annual contributions. There's no question, however, that when a severely distressed employer goes down for good with an underfunded plan, the consequences for employees can be devastating. Pan American is a prime example. At the time of the airline's bankruptcy filing in 1991, the unfunded commitment to its three employee pension plans was a huge $900 million. In its bid to survive, Pan Am had repeatedly petitioned the Internal Revenue Service for a waiver of its mandated pension contribution and had received six between 1983 and 1991. (Companies have since been limited to a total of three waivers.) By the time the plan was terminated, Pan Am had very little net worth for the PBGC to place a lien on. Those who were 55 years old at the point of termination are receiving 100% of their full early-retirement benefits, as the plans call for. But those who had worked for the carrier ten years or more and who were under 55 when the plans were terminated are receiving less than half their benefits. Since they had not reached the early retirement age, the PBGC is paying them only what they would have gotten from Pan Am as a result of leaving the company early. For example, Richard Brooks, 50, had joined Pan Am as a mechanic when he was 21 and piled up 25 years of service. But instead of the $1,100 a month he would have received if he had been able to stay until he was 55, he will have to make do with around $400 when his benefits kick in in five years. Fortunately, he was able to get a job as an optical technician at Computed Anatomy, a topographical mapping firm in New York City, but it pays him only $14.40 an hour, vs. the $21 he used to make. ACCORDING TO a Government Accounting Office study of 93 randomly selected underfunded pension plans, fewer than a third of the corporate sponsors make additional contributions to bring down their deficits. Others use rosy interest rate assumptions and various off-setting credits -- a neat sleight- of-hand whereby companies argue that this year's contributions will be covered by next year's investment gains -- to get away with inadequate annual payments. Many of the sponsors, according to GAO, did not even bother to calculate whether they needed to make additional contributions. The Administration's bill would pressure these flagrant laggards to fund their plans on an accelerated basis. The premium increases on underfunded plans will gladden the hearts of well-funded companies; they often complain that they are being forced to subsidize the others by paying needlessly large premiums themselves. Under the current rules, employers are given broad discretion to decide how much, if anything, they will contribute to their pension plans each year. But the Clinton proposals would limit the interest rate and mortality assumptions -- literally how long beneficiaries and their dependent spouses will be around to collect benefits -- that sponsors must use to calculate their required contribution. The bill has a few other wrinkles. Most significantly, it requires that for funding purposes employers immediately recognize any pension benefit increases they negotiate with labor unions. Under current law, employers are not required to do so, and this contributes mightily to the underfunding problem. Financially pressed companies often use increased pension benefits as cheap bargaining chips for more time and bigger concessions from unions. Every three years new benefits are negotiated before the old ones are funded, and those promises pile up. But why worry? If the company or the pension plan doesn't survive, the PBGC ends up with at least part of the tab. While the reforms are tackling most of the right problems, they could be toughened. In what appears to be a concession to organized labor, there is no effort to address the funding of so-called shutdown benefits, a well- documented source of big losses for the PBGC. Shutdown benefits are special pension payments, in addition to regular retirement benefits, that an employer makes to workers when it closes a plant or lays them off some other way. The PBGC contends that these promises are a small part of the underfunding problem, but the GAO has repeatedly called attention to them as a serious cause of shortfalls. Shutdown benefits are usually not funded because companies don't plan years in advance to close plants and cut staff. Nonetheless, they deplete pension- fund assets. They are often disbursed in a lump sum, sometimes just before a badly underfunded plan is terminated, leaving the PBGC with an even bigger liability. A GAO study of 44 plans that were terminated between 1986 and 1988 said that the PBGC estimated that more than 25% of its deficit was attributable to shutdown benefits from steel industry plans. Shutdown benefits are common in the steel, automobile, and tire and rubber industries, where many pension plans are already scantily funded. The reforms also do little to simplify the Byzantine actuarial formulas and amortization schedules that underfunded plans must follow. Says Edward Goff, who is in charge of employee benefits at Westinghouse: ''You have to ask, 'Does the government really want us to maintain defined-benefit plans?' '' That's a good question. Despite the rhetoric of looming collapse, the nation's defined-benefit pension plans are in remarkably good condition. But employers are increasingly reluctant to shoulder the administrative burdens of these pensions. Many small and mid-size companies are abandoning them altogether in favor of defined-contribution plans that leave the burden of providing for retirement on the employee. If the trend continues, the crisis in the pension system will surely go away because hardly any pensions will be insured. We are all going to be retirees someday; will we think that solution was the best?

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART CAPTION: THE PBGC's $2.8 BILLION SHORTFALL

CHART: NOT AVAILABLE CREDIT: FORTUNE TABLE/SOURCE: PBGC CAPTION: THE 25 MOST UNDERFUNDED PENSION PLANS