Pension reform: Don’t let inaction ruin the recovery
Suppose you were a member of Congress eager to rebuild the economy and you faced the following dilemma: if you refuse to compromise, more than 1.5 million retirees would lose their pensions, millions of current workers will never see the benefits they paid for, hundreds of employers would go bankrupt, and a system that annually supports over half a million jobs and generates $14.7 billion in overall tax revenue would falter. And, to top it off, many small businesses that fought to survive the pandemic would fail.
Would you compromise?
The urgent problem is the multiemployer pension system, and members of Congress are having a hard time getting to yes, even though most Americans surveyed think Congress should act. Without congressional action, the multiemployer pension system is in grave danger of collapse, and such a failure would have a ripple effect across the country. The system was already in trouble before COVID-19, and now resolving the crisis is even more urgent because revenue coming into the plans has plummeted while benefits must still be paid.
Multiemployer plans were established decades ago mainly to cover workers at small businesses or who changed jobs frequently because of their industry – think construction workers, grocery workers, or bakers – in fact, many of those who are working through the COVID-19 pandemic. Having many employers pay into one fund reduced expenses, helped small businesses offer benefits, and provided workers a portable retirement. Although these plans cover unionized workers, these plans are not union plans—they are jointly managed by employers and unions.
At first, the system worked. Over time, however, the number of participating employers declined, through bankruptcy, deregulation and modernization, while the number of individuals eligible for benefits increased. To deal with this, Congress imposed an exit penalty on employers, called withdrawal liability, which locked remaining employers into the system (unless they went bankrupt and left the liabilities to everyone else). This caused no new employers to come into the plans. Adding to the damage, Congress essentially prohibited these plans from building up reserves for bad economic times, and when recent recessions hit, many plans didn’t have a cushion to weather the storm.
These plans have now been hit with a third “once in a lifetime event” that may be the straw that breaks the camel’s back. Estimates are that the COVID-19 pandemic increased underfunding by $80 billion just since January. As a result, we are now closer than ever to seeing at least 1.5 million (if not more) individuals lose their retirement security and millions more workers have their retirement cut. At the same time, the Pension Benefit Guarantee Corporation, the federal backstop for these pensions is projected to go insolvent.
The biggest multiemployer plan, Central States, Southeast and Southwest Pension Plan, which covers 400,000 participants, will become insolvent in less than five years. But it doesn’t stop there. If Central States goes under, employers participating in that plan could be faced with billions of dollars in liability, which will cause many to go under. Many of these employers contribute to other multiemployer plans, which will also go under when bankrupt businesses stop contributing. This contagion effect will spread the damage far and wide.
But Congress can solve this crisis. Unfortunately, the politics are proving difficult. Democrats don’t want to cut benefits as part of a solution and Republicans don’t want to provide additional funding. But the urgency of the situation necessitates compromise.
Last year, Republicans in the Senate released the Multiemployer Pension Recapitalization and Reform Plan, which, partitions off certain unfunded liabilities to be paid by the PBGC for the plans in the most severe financial trouble. The proposal also includes reforms allowing plan trustees to better manage their plans to avoid future problems but relies on benefit cuts and substantial increases in employer costs. Recently, Democrats offered a solution similar to the Republican partition proposal, but on a bigger scale and without putting any additional money into the system from either employers, employees or retirees or any systematic reforms.
After years of debate, we now have the basis for a solution that everyone agrees on: partition. To make it work, all parties will need to pay in some way. Employers will need to put up more money for these plans, but not so much that they are forced out of business. Retirees will need to chip in, but a solution cannot undermine all of their financial security. Plans will need to accept systematic reform, but the reforms cannot do more harm than good. Finally, public money will be needed to shore up the PBGC.
Failing to address the issue will have predictable consequences. Millions of workers and retirees will lose their retirement. Businesses will go bankrupt as pension plans fail. Taxpayers will still be on the hook for retirees who have lost their pensions and now are eligible for other federal assistance. And the economy will suffer significant damage, just we when we are talking about reopening.
The need for action couldn’t be any clearer. Congress can, and must, get this done.
Neil Bradley is executive vice president and chief policy officer at the U.S. Chamber of Commerce.
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