By David Blitzstein
David Blitzstein consults with unions and pension plans on ways to restructure troubled plans and redesign benefits. He has served as a pension trustee for 15 different plans including the Maryland State Retirement System, and he was employed over 35 years by two national unions as pension and health insurance bargaining expert.
There is an emerging financial crisis among multiemployer pension plans in America. These plans are a subset of private sector defined benefit pensions covering 10 million workers and retirees. Most critical are the projected bankruptcies of the Teamsters Central States and the United Mineworkers of America plans, making front page news for the last several months. These plans and many others were undermined by two financial market crashes between 2000 and 2009, corporate bankruptcies, de-regulation, and over-regulation. It will now take more than hope to fix them.
What Are Multiemployer Pensions?
The multiemployer plan universe consists of about 1,300 programs found mainly in the construction, entertainment, health care, manufacturing, retail food, and transportation industries. Plan assets total about $450B, compared to liabilities of $600 B, so these plans face a $150 B deficit or an average funding ratio of 75%, according to the Milliman consulting firm.
Multiemployer plans are insured by the US Federal Government’s Pension Benefit Guaranty Corporation (PBGC). The PBGC keeps separate insurance pools for single and multiemployer plans, with different premium structures and benefit guarantees. The PBGC benefit guarantee for multiemployer plans is much lower than for single employer plans, providing at most $12,870 per year for workers with 30 years of service. By contrast, the insurance guarantee for workers covered by single employer pensions is $64,431 a year for an age-65 retiree.
Until 2004, the PBGC’s multiemployer insurance pool was in surplus. But the 2008-2010 financial crises had a dramatic impact on multiemployer plan funding. The PBGC’s 2016 Annual Report warned that the multiemployer plan insurance pool deficit had spiked to $58 B, and the program is now projected to become insolvent in 2025.
Why Are Multiemployer Plans In Trouble?
Since 2006, multiemployer plans have been subjected to a deluge of laws and regulations, starting with the Pension Protection Act of 2006 (PPA) and ending with the Multiemployer Pension Reform Act of 2014 (MPRA).
The PPA classified plans by funding status, so that multiemployer plans are now required to implement funding improvement plans or rehabilitation plans consisting of benefit reductions and contribution increases if funding falls below specified thresholds.
A decade after PPA was enacted, 3.5 million participants are now covered by 320 plans classified as critical(generally less than 65% funded) or critical and declining (projected to be insolvent in 15 -20 years). To address these shortfalls, the MPRA allowed multiemployer plans to voluntarily reduce accrued benefits. This was contrary to the anti-cutback rules legislated under prior law preventing the elimination of benefits already earned. This break with 40 years of federal pension policy was a desperate measure to help multiemployer plans avoid slipping into insolvency, and to protect participants from having their benefits reduced. Yet the laws have not solved the looming problems facing workers and retirees covered by multiemployer plans.
Since the passage of MPRA, only ten plans have submitted suspension of benefit applications to the U.S. Treasury for approval. Of the six applications acted on by Treasury, only one application has been approved to date. Most notably, the Teamsters Central States plan’s application was denied because the proposal failed to maintain the plan’s long term solvency. The fact that the Central States application failed suggests that Congressional reforms have been too little, too late. Indeed, the funding crisis faced by troubled multiemployer plans has accelerated much faster than Congressional ability to respond with effective reforms.
What Can Be Done?
The reality is that these troubled plans cannot invest their way to financial sustainability nor cut benefits enough to maintain solvency. These plans are in a death spiral, so contrary to those opposed to bail-outs, these plans and their participants will require public financial support to survive.
Their only hope would be a recapitalization of the PBGC with a minimum of $50 B earmarked to allow troubled plans to both partition and spin off their orphan liabilities. These are the accrued liabilities of employers no longer contributing to the plans. Surviving plans might consider strategic mergers facilitated by PBGC financial assistance. Interestingly, these policy prescriptions were legislated in MPRA, but never funded by Congress.
In addition, employers agreeing to pre-fund their pension legacy costs would need help to put their plans back on their feet. Congress could create a special private/public partnership supervised by the U.S. Treasury that guaranteed loans to make those plans financially sustainable. Proceeds from these pension obligation bonds would be required under Treasury conditions that both redesigned benefits and de-risked investments.
The Economist recently summarized the unhappy situation succinctly, saying “setting up an insurance scheme, and then failing to fund it adequately, is a betrayal of its constituents.”
This piece was originally posted on January 11, 2017, on the Pension Research Council’s curated Forbes blog. To view the original posting, click here.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.