Multiemployer pension plans in the United States are in dire financial straits.
It’s estimated that the retirement plans of workers and retirees covered by these plans in the mining, retail trade, construction, transportation and other such sectors face a $54 billion shortfall today.
If that weren’t serious enough, when the accounting is done properly using the same standards that are applied to single-employer pensions, the system’s projected underfunding may exceed $600 billion.
The federal agency charged with insuring defined benefit pensions (those promising a specified benefit formula to retirees) is the Pension Benefit Guaranty Corporation (PBGC). Because of flaws in the legislation structuring the multiemployer insurance program, these pension plans and the employers who sponsor them have been permitted to:
- vastly understate retirement plan liabilities;
- avoid contributing what should have been paid to keep the plans solvent;
- pay far too little for the insurance premiums backing the plans in case of insolvency;
- withdraw from the business without ponying up what was owed to the plans; and
- invest in risky assets thus putting benefits in doubt.
These policies are tailor-made to create underfunded plans that would need to rely on the PBGC, while leaving the PBGC financially unable to back these plans.
Single-employer plans cannot follow such practices and are required to make higher contributions, address unfunded liabilities more rapidly and pay higher premiums to the PBGC. Yet multis are permitted to take advantage of lower funding rules and continue making promises they cannot keep.
For instance, single employers that go out of business are required to cover pension promises out of company assets, while in the multiemployer system, a bankrupt employer’s obligations are passed on to surviving firms.
Single-employer plans must use corporate bond rates to measure their liabilities, but multiemployer plans across the board have assumed much higher rates to cut “required” pension contribution rates.
Problems with the Butch Lewis Act
The Butch Lewis Act (BLA), a bill currently before Congress named after the late Teamsters union leader, is a Band-Aid, not a solution. Most importantly, it fails to fix the multiemployer underfunding problem while actually digging the hole deeper.
The bill would have the federal government lend billions of dollars to multiemployer plans to cover their liabilities for all inactive members, retirees and deferred vested members.
Yes, the money is supposed to be repaid in 30 years with interest, but if the pension plan cannot do so, the bill permits loan “forgiveness” or “refinancing” of some as yet unforeseen obligation.
This is a plan that leaves the taxpayer on the hook of an unmeasured — but likely very large — size. Additionally, when the PBGC was established in 1974, it was — by design — not backed by the full faith and credit of the U.S. taxpayer. By contrast, the BLA imposes a dramatic re-ordering of private-sector claims against federal taxpayers.
Moreover, there is no mandate to undertake a proper valuation of plan liabilities and assets, so taxpayers as well as participants have little idea of what the true problems are facing these plans now and in the future.
BLA also permits plans to keep making new pension promises, despite already-widespread multiemployer sector underfunding. And BLA fails to reform permissive funding rules and too-low premiums leading to this juncture, nor does it require that plans’ claims be made whole when employers withdraw from a plan.
What should be done?
Of course it would have been far better if workers and retirees — as well as their representatives and employers — had paid for their pension plans in advance, thus ensuring that the PBGC would be properly financed when the benefits were needed. This is a terrible state of affairs with no easy solution. But the BLA is not the right approach.
Before lending the plans taxpayer money, Congress should start by requiring multiemployer plans to do a full and proper accounting of their liabilities and assets marked to market using corporate bond rates. The current list of “current and declining” plans may be just the tip of the iceberg — many more multis may be in far worse trouble than we think.
Next, it should require the PBGC to charge higher and more risk-related insurance premiums to multis, reflective of the true value of the insurance likely to be used. I’d also recommend that the PBGC start to proactively take over failing multiemployer plans and prohibit them from making additional benefit promises until they are fully funded.
It also makes sense that the PBGC should disallow benefit increases as long as a pension plan is underfunded. Moreover, there needs to be greater standardization of benefit entitlements. For instance, the PBGC should not promise to guarantee benefits payable at retirement ages much younger than permitted in the remainder of the economy.
What’s the alternative?
The BLA is a step in the wrong direction unless the multiemployer retirement plan system can be overhauled dramatically before taxpayer-backed pension loans are issued. This is becoming even more critical since, even in a strong economy, jobs in trucking, mining, transportation and the like, are unlikely to come roaring back. Instead, those are the sectors most susceptible to future automation.
One glimmer of hope is that variable benefit pensions are being explored by some groups, and these may become a pattern for multiemployer plans of the future. Moving to 401(k)-type plans is another sensible option.
Olivia S. Mitchell is an economist who has worked on pension and Social Security reform around the world for four decades. She teaches at the Wharton School of the University of Pennsylvania.