Protecting Retirement: A Quick Guide to Bipartisan Victory

“Bipartisan” has largely become a phase used to describe ancient history. Yet the Republicans and Democrats on the House Committee on Education & the Workforce just negotiated complex compromise legislation that affects the basic rights of retirees—and last week it became law as part of the Cromnibus.

What they did was controversial: They amended the Employees Retirement Income Security Act. ERISA’s purpose is to protect retiree benefits, but the changes would make it easier for some distressed pension plans to cut retirees’ benefits—if doing so would save the plan and prevent even greater cuts. In an only slightly less controversial move, they also doubled the premiums these plans pay to the Pension Benefit Guaranty Corporation, the federal agency that insures them.

Many pension advocates were outraged. AARP, one of the best advocates for seniors, organized a nationwide campaign in opposition. They were joined by the Teamsters union, the Machinists union and other advocacy groups. Opponents reminded Congress of ERISA’s purpose, that pensions are a commitment for which people work decades, that retirees can’t afford significant cuts, and that for many the option of going back to work or living on their investments is a fantasy. (They also claimed, entirely inaccurately, that retiree benefit cuts have never been allowed in ERISA’s 40-year history. More on that later.)

So why did America’s largest union, the Service Employees International Union (SEIU), and most other unions support the compromise (or chose not to oppose it)? Why did both conservative Republican committee chair John Kline and the ranking Democrat George Miller, a stalwart advocate of progressive causes for decades, negotiate it?

They did so to preserve these pensions, which provide some of the best retirement benefits in America.

Before I go much further, some disclosure: Until Labor Day, I was director (CEO) of the Pension Benefit Guaranty Corp., which insures these plans and which would, absent legislation like that negotiated in the House, go bankrupt itself and be unable to continue to support them. While I was a government official, I could not express my personal views, although we at PBGC worked hard to provide analysis showing the catastrophe that would happen if Congress didn’t act and suggested ways to avoid it. Now that I am out of the government, I can express my personal views, which are that Congressmen Kline and Miller are heroes and that millions of people are in their debt. (Unfortunately, most of those people don’t know it, and so Messrs. Kline and Miller will probably hear only from those who mistakenly think they’ve hurt retirees instead of protected them.)

Why would I, a passionate advocate of pensions who led the agency in charge of preserving them, support reforms that would allow them to be cut?

Explaining that requires both some pension geekery and some history. Follow on—it’ll be more interesting and less complicated than you think.

Multiemployer plans are negotiated between a union and an employer association (largely in industries like construction or trucking or food stores where there are many small business employers who cannot take on the responsibility of running a pension). The plans themselves are run professionally and unions and businesses are equally represented as trustees. Individual companies can and do go in and out of plans if they move or go out of business, but if one employer left, in the past there were plenty of others to cover any shortfall.

Unfortunately, in the past decade, multiemployer plans were hit by a double whammy: Like virtually all pensions, the stock market crashes of 2001 and 2008-2009 left them seriously underfunded. (As with other plans, this was mostly due to bad luck and bad timing, not bad investments.) However, unlike most pensions, many of the retirees in these plans now are “orphans”: they earned their pensions while working for companies that are no longer in the plan. Those companies made contributions then that were thought to be enough to pay the promised pension benefits. Nobody did anything wrong, but the market crashes meant that the plans became underfunded later.

So who is left holding the empty bag to make up the shortfalls? The companies who are still in the plan. They are making pension contributions for their own workers that are still working, but now those contributions have to cover pensions for orphans, too. Impressively, those companies responded by increasing their payments, and those workers who are still working have accepted the fact that their future benefits are being cut. But there are limits to that response. If these companies and their employees are forced to pay more and more, not only to cover their own costs but also the costs of “orphans,” at some points they’ll give up. They will withdraw and the plans, severely underfunded, will continue to pay benefits until they collapse.

The PBGC was created for just this situation. PBGC is the government’s pension insurance agency of last resort—when a plan fails, PBGC steps in and pays pension benefits. It’s funded by insurance premiums paid by plans it insures. Over four decades, PBGC has—at no cost to the US taxpayer—helped almost a million retired workers from companies like United Airlines and Bethlehem Steel receive tens of billions in benefits.

Unfortunately, for most people in multiemployer plans, PBGC covers only a fraction of their pension benefits (and it doesn’t provide retiree health benefits at all). Even worse, Congress set PBGC premiums so low that PBGC itself will run out of money—when plans fail multiemployer pensioners stood to lose virtually their entire pensions.

What would have happened if Congress hadn’t acted?

The way ERISA’s “protections” work, companies save money if they leave a plan before everyone else does. (When companies withdraw from an underfunded plan, they are required to make a withdrawal payment; however, this payment is capped if a company leaves before there is a “mass withdrawal.”) Some companies, seeing plans deteriorate and not wanting to be the “last man standing” have already been making plans to quit distressed plans. If Congress hadn’t acted, there would have been a rush for the exits: many severely distressed plans would lose their remaining active employees and run out of money. Those plans as a group cover more than 1,000,000 people and their families.

Nor would the contagion necessarily stop at the severely distressed plans. Companies, knowing that currently healthy plans could become unhealthy in the future, probably wouldn’t wait to find out. They’d leave those plans, too. Without the bipartisan congressional compromise that passed earlier this month, I think it’s likely that the multiemployer system would collapse entirely.

Sadly, in the debate over this year’s congressional changes, many who value pensions chose to ignore the threat that there would be no pensions at all.

They became fixated on the mistaken notion that, under ERISA, earned retiree benefits can never be lost. In fact, ERISA has allowed retiree benefit cuts in failing multiemployer plans for 34 years. The reason they weren’t used is because, until now, they weren’t needed.

Here’s the truth: When plans are failing, not only can pension benefits be cut—they are cut. Just ask the tens of thousands of Delphi salary employees or United Airline pilots whose pensions were taken over by the Pension Benefit Guaranty Corporation.

The way ERISA set up PBGC’s multiemployer program means that, for multiemployer retirees, many more would have their benefits cut and those cuts would be much greater. So, without congressional permission and plan action, multiemployer retirees would have suffered pension benefit cuts on a broad scale.

Even that depressing scenario would have been optimistic, because PBGC’s premiums had been set by Congress too low even to pay for the reduced benefits. As I’ve warned repeatedly over recent years, without higher premiums, PBGC itself will run out of money within eight to ten years. When that happens, retirees won’t just “take a haircut,” they’ll get virtually nothing at all.

There are two ways to avoid this catastrophic scenario. Both are themselves depressing, but not nearly as awful as a complete loss of pension payments.

  • Benefit “Adjustment”: A minority of distressed plans have generous enough benefits and enough assets left so that, if they could cut some benefits for some retirees, they could preserve the plan and avoid having the plan fail and everyone going down to PBGC’s “safety net” levels. They would be preserving benefits by avoiding the greater cuts that PBGC involves.
  • Partition: Most plans have less generous pensions. PBGC could preserve them by taking responsibility for “orphan obligations” now, rather than waiting and paying for everyone once the plan fails; this is called “partition.” It involves a cut in benefits, but these plans’ benefits are low enough that going down to the levels provided by PBGC wouldn’t be as much of a catastrophe—and PBGC payment for orphans now could avoid the plan collapsing entirely in the future. However, the insurance premiums paid by multiemployer plans were so low that PBGC didn’t have the money to do this.

The House compromise—which has now passed the Senate and will become law—makes both of these remedies possible if plans choose to take advantage of them. It authorizes benefit adjustments to preserve benefits above PBGC levels and offers protections to ensure fairness to retirees. It also doubles PBGC multiemployer premiums and orders a study on the agency’s future needs, so that PBGC can preserve plans by paying for orphans.

But—and this is an essential point—the decision to cut pension benefits will not be made by Congress, but by plan trustees who are fiduciaries for the people in the plan. Those decisions will be made in a very public process, reviewed by three separate federal agencies, and in most cases can be overturned by a majority of the people in the plan.

Some people claimed that this agreement was political. It was, in that it helped constituencies that both parties care about. Congressman Kline, a conservative Republican, and Congressman Miller, a liberal Democrat, negotiated their agreement precisely because the collapse of multiemployer plans would have damaged people they care about: union workers and small businesses. Also, since taxpayer bailouts are politically toxic, neither Democrats nor Republicans wanted PBGC to need one; it’s much better if pension plans’ own premiums solve their own problems without any taxpayer funds.

Politics also explains why some of the unions that have the most to lose nonetheless publicly oppose the compromise. Democratically-elected union leaders do not want to be responsible for a decision to cut benefits (even if the result of inaction is worse). They’d rather have Congress pass enabling legislation and let the plan trustees make the ultimate decision.

Thanks to the courage of both Democrats and Republicans on the House committee, under the new legislation that will happen.