Democrats now assert their bailout of multiemployer union pension plans in March’s American Rescue Plan Act was deeply flawed and are demanding the Pension Benefit Guaranty Corporation (PBGC) rescue multiemployer union pension plans from the act’s botched rescue. Democrats’ admission this bailout will cost much more than advertised should raise concerns about the real costs of the third massive bill they are rushing to enact this year with new social spending schemes.
The American Rescue Plan Act provided an $86 billion “taxpayer bailout” to some multiemployer union pension plans, according to the Congressional Budget Office, but not enough to make them solvent. Eligible plans will only be given enough money intended to fully pay benefits through 2051, leaving them no assets to meet remaining pension promises (incurred both before and after the act). Even lasting until 2051 can only happen if the act’s questionable assumptions hold true — which is extremely unlikely as the senators who wrote the bill are now complaining.
This is because Democrats entangled themselves in the web of multiemployer union pension plans financial alchemy and based the bailout on optimistic hypothetical investment returns, instead of the market value of liabilities. Plans use this sleight of hand to value pensions at less than half of cost and is a key reason multiemployer union pension plans, along with state and local government pensions, are severely underfunded to begin with.
Majority Leader Charles SchumerChuck SchumerVoting rights failed in the Senate — where do we go from here? Forced deadline spurs drastic tactic in Congress Democrats call on Biden administration to ease entry to US for at-risk Afghans MORE (D-N.Y.) is leading several Democratic senators in a letter demanding PBGC rewrite the flawed rescue to provide untold billions more in taxpayer handouts. Their primary grievance is that act’s bailout is based on 5.5 percent annual investment returns, which PBGC is correctly insisting on. Democrats imposed this requirement in order to misleadingly claim they were saving multiemployer union pension plans through 2051, without providing enough taxpayer funds to do so. But, as Democrats now acknowledge, such returns are very unlikely given market conditions.
To prevent the pension plans from speculating with taxpayer funds, which even Democrats realized was especially unseemly, the act requires multiemployer union pension plans to invest taxpayer funds in investment-grade bonds unless PBGC allows other investments. The return on such bonds is only around 2-3 percent, which means the plans will need much higher returns on other investments in order to hit 5.5 percent and pay promises through 2051. Schumer wants PBGC to ignore the American Rescue Plan Act and lower the rate to take into account the lower returns on safe investments.
PBGC could arguably allow risky investments that may achieve higher returns and give plans a better chance at lasting until 2051, but that also increases the chance of running out of money much sooner. Even the letter effectively recognizes the fundamental financial principle that risky investments do not magically lower the cost of pensions, as it urges PBGC to use a rate lower than provided by the act, even if PBGC allows risky investments.
Forcing taxpayers to bailout plans using 5.5 percent is offensive given multiemployer union pension plans made promises based on 7 percent or 8 percent, thus collecting less than half the contributions needed from employers. The American Rescue Plan Act did nothing to protect workers, retirees and taxpayers by requiring plans to accurately measure promises going forward. Schumer demanding PBGC take more from taxpayers by lowering the act’s rate while allowing multiemployer union pension plans to make new promises at less than half their cost is the height of chutzpah. The bailout creates a tremendous moral hazard giving multiemployer union pension plans the upside of the severe risks they continue to take while subjecting taxpayers to the downside.
In July, PBGC estimated the cost of the bailout at $8 billion more than CBO. In September, it increased the score yet again to $97.2 billion, while projecting that the final cost may be far higher. Absent fundamental reforms, future bailouts for American Rescue Plan Act plans past 2051, and for other plans, will be many times that. PBGC estimated that circumventing the 2051 limitation, as some are requesting, may multiply the score by four.
To limit the cost, the plan’s bailout only includes multiemployer union pension plans in the worst condition, but not other severely underfunded plans. Total multiemployer union pension plan underfunding skyrocketed to $757 billion in 2018 according to the latest PBGC data, with more than 95 percent of the system’s 10.9 million participants in plans that are less than 60 percent funded.
The Democratic senators accuse PBGC of repeating the “very mistakes that have undermined the pensions for decades” by limiting the size of the bailout, but it is the statute written by Democrats and their Big Labor allies that doubles down on those mistakes instead of providing needed reforms. The letter accuses PBGC of wrongfully limiting bailout assistance based on a 5.5 percent assumption that “has failure baked in the cake,” but Democrats required that assumption. And Democrats refuse to stop multiemployer union pension plans and state and local government plans from using 7 percent or even 8 percent assumptions even more likely to fail, thus further endangering workers, retirees and taxpayers.
Aharon Friedman is a director and senior tax counsel at the Federal Policy Group and formerly served as senior adviser and senior tax counsel at the Treasury Department and the Committee on Ways & Means. Follow him on Twitter: @76redwhiteblue