Readers, there’s a lot more to write about multi-employer pension plans. But I want to skip ahead briefly to talk about the question of what a potential fix might look like. The bottom line: there’s no easy fix, no way of finding free money somewhere. The best we can hope for is that everyone is unhappy in a reasonably equitable way.
To review where we are right now:
The PBGC’s latest forecast is that multi-employer pension insurance program will become insolvent in the year 2025, as a consequence of various individual plans becoming insolvent, most prominently the Teamsters’ Central States plan. Should that come to pass, the PBGC will no longer be able to maintain its guarantees to participants in failed plans, as it will become a de facto pay-as-you-go system with the ability to pay out benefits only in the amount of new premiums coming in, which amount to a fraction of the sums provided in the PBGC system to insolvent multiemployer plans. And even absent PBGC insolvency, insolvency of particular plans is a bitter pill as the benefits guaranteed by the PBGC are much smaller than in the single-employer system, topping out at $12,870 instead of over $60,000.
The Butch Lewis Act hoped to solve this through a series of loans made to troubled plans but modeling showed that these plans simply do not have enough ability to generate new revenue for this plan to succeed. A draft proposal by the Joint Select Committee tapped to solve this impending crisis (as described by the Washington Post) came under criticism from all sides, either for making too many demands of the plans themselves or for making too few demands of those plans and consequently subsidizing those plans with additional taxpayer dollars.
Now, it is clear that there is no low-hanging fruit to be found. In the case of the single-employer PBGC fund, deficits have been remedied by the simple device of increasing premiums owed by employers (which has hastened the end of employer-sponsored pensions as they factored this cost into their overall assessment and determined they were better off buying annuities for their retirees, but that’s another story), but for the multi-employer fund, the math simply doesn’t work, to imagine extracting enough money from the remaining employers to fix the system and support retirees from bankrupt and vanished or much-shrunken-in-size companies.
And at the same time, to shrug off the financial distress that these retirees will inevitably experience simply as a fact of life no different than financial losses one might experience in a market crash, because, too bad so sad, they should have read the fine print about the limitations of PBGC guarantees, is no better an answer.
Those who have been following along with my prior articles, however, might have a guess as to my suggestion on a path forward: we know that there were serious flaws in the basic regulatory structure for multi-employer plans, which followed the single-employer structure regardless of the substantial differences between a plan ultimately sponsored by a union for the benefit of its members and a plan sponsored by a company.
- Plans were not permitted to intentionally overfund their plans during good years to provide a cushion for future declines but were instead obliged, if collective bargaining agreements meant they had “excess” money coming in, to “spend” that money on benefit increases.
- Plans had no means of making moderate reductions in benefits as needed over time, but could only wait until they were already in a serious crisis.
- And the minimum funding rules set forth a 30-year amortization for retroactive plan amendments rather than requiring they be “paid for” immediately.
To be sure, no one can guarantee that multi-employer plans would have made prudent decisions if they had been afforded the ability to have done so — but the entire structure was designed for plans which are ongoing, with a steady stream of new employees to continue to contribute, fund plan amendments, and make up for any losses over time.
Which means that, first, rather than framing the discussion in terms of “government bailouts” what we’re really talking about is Congress making restoration payments to certain multi-employer plans to restore them to funding levels they may have had were it not for this past inappropriate legislation. Every dollar spent on a benefit payment, or on a benefit increase that can’t be undone, is another dollar that’s lost from the pension fund, and these dollars add up to such a significant sum that time is very much of the essence.
And, second, rather than, or at least prior to, speaking of deep across-the-board benefit cuts in troubled plans, we might start by evaluating the effect of eliminating the cost of retroactive benefit increases. One might, in fact, say that because these were retroactive, workers couldn’t have counted on them in making decisions about supplemental retirement savings, though this isn’t entirely true depending on the particular circumstances.
Finally, there exist two separate issues: first, the question of underfunding for existing liabilities, and, second, ensuring the long-term stability of plans as a means of providing retirement benefits for current workers. These two challenges likely have two different solutions, and trying to solve both at the same time, by placing the burden on existing workers via salary they sacrifice for pensions in their collective bargaining contracts, is likely to fail.
There is no cure-all. The funding deficits these plans face are made more complex by the effect of the market crash on plans with few active employees, the impact of more or less equitable methods of calculating payments required by companies leaving the plan (yes, UPS and Central States), and a host of other factors. More than anything, this is a suggestion for an alternate way to try to think through the problem, rather than simply coming up with a menu of revenue sources and benefit reductions.
Seventh (yikes!) in a series. Please read my prior articles:
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