I was surprised recently when a Singaporean businessman asked me not about reform of Social Security--the government-run pension system dominating Washington debate--but about reforms to the Pension Benefit Guarantee Corporation (PBGC), which backs America's private defined benefit plans.

Sometimes it takes an outsider to see a problem clearly. The two issues are linked. First, both systems are under-funded. The Labor Department estimates the shortfall in private defined benefit plans is Dollars 450bn (Euros 348bn). That is less than the estimated Dollars 11,000bn under-funding of Social Security, but it is hardly insignificant.

Second, both are under-funded for essentially the same reason. Both are defined benefit plans, which promise workers a fixed set of benefits on retirement. Neither plan required these benefits to be "pre-funded" on an actuarially fair basis. Most worker and employer payments into Social Security are used as soon as they are received to pay people who have already retired. Most defined benefit plans used to work in a similar fashion. Since the 1970s, funding has been increasingly regulated, but restrictions have also been placed on over-funding pensions, contributing to the shortfall.

Third, this lack of pre-funding was complicated by incentives to over- promise benefits. Management and union negotiators were tempted to settle contract disputes by making future pensions more generous, which cost nothing up front and made the final package seem sweeter, passing on the problem to future managements and union chiefs. Similarly, politicians in the 1960s and 1970s routinely increased Social Security benefits without increasing the taxes needed to cover the long-term liabilities their actions implied, postponing the issue for future Congresses and future administrations.

But the day of reckoning is close. In both cases, the solution follows the same outline. The defined benefit portion of both pension systems should focus on guaranteeing a minimum benefit while defined contribution systems allow workers to participate in a growing economy or rising corporate profitability. At the same time, ways need to be found to make sure the modified defined benefit plans are funded on an actuarially sound basis.

The crisis in private pensions is more acute--hence the concern about the PBGC. Unlike Social Security, where the choice is between solving the problem now or leaving it for the future, companies with private defined benefit plans have the option of acting now to remove the liabilities from the company by handing them to the government through the PBGC.

Consider the airlines. US Airways is in bankruptcy and has terminated its pension plans, dumping Dollars 3bn of obligations on the PBGC. United Air Lines, also in bankruptcy, had actually proposed increasing benefits for another year and then terminating its plan--which would have left the PBGC with an even larger bill. The PBGC pre-empted this by taking on Dollars 1.4bn of benefit liabilities for the pilots last December. Last month, it assumed Dollars 2.1bn in liabilities for United's ground workers.

Pensions represent a large portion of airlines' total costs, so passing pension liabilities on to the government is a natural way of making a company instantly more competitive. The pressure on competitors becomes intense, pushing more underfunded plans on to the PBGC. Airlines are the most immediate example, but a similar problem--and the same destructive chain reaction--could face other older industries including steel and carmaking.

The first step must be to prevent the problem from getting worse by ruling out the kind of outrageous proposal that United considered. Companies with significantly underfunded plans should be required to freeze existing defined benefit plans. Second, companies facing failure should be required to switch to fully funded defined contribution plans. Third, companies should be required to pay the costs involved in making the transition to the new defined contribution plan model.

But, as with Social Security reform, there is no immediate and costless fix to the problem. The transition plan the US president has proposed for Social Security will be phased in over several decades. Likewise, companies need to be given time to fund the transition to a stable and sound system.

Congress needs to change the requirement that companies make up all of the gap in their current pension system in three to five years. No one would contemplate requiring such an abrupt fix for Social Security. In the case of private pensions, insisting on an unrealistic time period actually accelerates the bankruptcy process. If there is no hope of fulfilling existing obligations or funding the transition to a defined contribution plan system, companies will simply opt for the route taken by USAir and United and shift the entire cost to the government.

The PBGC offers at least as great a short-term challenge as Social Security. Both are in urgent need of fixing. Quick action allows time for adjustment. Delay only makes matters worse.

Lawrence B. Lindsey is a visiting scholar at AEI, former director of the White House's National Economic Council, and president and chief executive of The Lindsey Group.