2 million people hope Congress can compromise on pensions

The election’s over and the clock is ticking: Can a divided Congress find a bipartisan compromise to preserve the pensions of 2,000,000 people and their families—within a month?

By the end of November, a special Joint Select Committee on the Solvency of Multiemployer Pensions is due to tell Congress and the public whether they have found a compromise to avoid the bankruptcy of hundreds of underfunded multiemployer pension plans, as well as of the federal agency that’s supposed to bail them out. The committee is evenly divided between Republicans and Democrats, House and Senate. Committee members have held lots of hearings and made lots of speeches, but it’s still far from clear whether they’re willing to accept the difficult compromises by all parties that will be necessary to avoid this disaster.

Normally, anyone counting on bipartisanship under a deadline would be considered foolish, but this situation might be different. Members of Congress should know that “kicking the can down the road” will end up with hundreds of thousands of angry pensioners in 2020, with larger pension cuts, a bill to the taxpayers that’s in the tens of billions of dollars and growing, and—perhaps worst of all—the need to do something before they stand for re-election rather than afterwards.

Multiemployer pensions are a sensible idea. In industries where there are lots of small employers and a union, an industry association can negotiate with a union and jointly offer a retirement plan for all to use. The plans are funded by an employer payment for each hour worked. The funds are invested professionally and overseen by a board of trustees that is evenly divided between union and industry. Despite this, plans covering up to 2 million people will run out of money over the next two decades; some large plans will fail within five years or so.

How We Got This Mess

The 2 million future pensioners didn’t cause this disaster. They just did their jobs and relied on their bosses and their unions to make sure they had a pension. Like those living in the path of hurricanes and fires, for which Congress has appropriated more than $125 billion in the past year, these people are victims.

The responsibility for this mess lies elsewhere. Pension trustees, both union and management, relied on actuaries—professional advisors whose estimates of investment returns turned out to be tragically too optimistic. The resulting shortfall is enormous—in the hundreds of billions of dollars.  However, the actuaries don’t pay if their estimates are too low. These costs will instead be paid by a combination of retiree pension cuts, increased payments from the dwindling number of still-active employers and workers and, very probably, taxpayers.

When multiemployer pensions were set up generations ago, nobody thought they’d ever go bankrupt. Folks figured that, if an employer went out of business, the other employers would pick up the slack. That was why, when the Pension Benefit Guarantee Corporation (PBGC) was created in 1974, multiemployer plans weren’t in the program. They were added in 1980, but even then Congress relied on the assumption that the first line of protection for “multis” was other employers.

What people didn’t count on was a double-whammy: not only had the actuaries’ projections proved disastrously optimistic, but major changes in groceries, trucking and other industries meant that most of the employers who had made the contributions in the 1980s and 1990s are no longer in business: their retirees are “orphans.” In some plans, “orphans” make up 90 percent of the plan, and the remaining active employers and workers simply can’t afford to make up all the losses. As a result, plans covering some 1-2 million people will run out of money within the foreseeable future.

There have been several attempts to preserve these pensions. In 2014, Congress on a bipartisan basis enacted the Multiemployer Pension Reform Act, which allowed plans to make limited benefit cuts immediately if doing so would enable the plan to survive. Unfortunately, the Treasury Department chickened out under political pressure: under the law, it had to review the trustee proposals, and it set standards that most plans couldn’t meet so that Treasury wouldn’t have to approve them.

Taxpayer Loans to Distressed Pensions?

Desperate to avoid the pension insolvencies that were getting ever closer, Democrats and a few Republicans have now proposed that taxpayers provide loans to distressed plans, which could then invest the money at an expected higher return. If the loans were large enough, in place for long enough, and the funds earned an average return expected for normal pension investments, then most distressed plans could avoid insolvency and return the loan money. PBGC, supported by higher premiums, could then take care of the rest.

Loan proponents point out that administrations of both parties made loans to the steel and airline industries when they were in trouble, and those loans were repaid. However, there was more bipartisan cooperation then than there is today. Today, many congressional Republicans balk at the idea of “bailing out union pension plans.”

An Alternative: Fund PBGC to Do Its Job

Recently, some Republicans have come up with an alternative to direct loans: providing funds to PBGC, to make sure that the PBGC has both the legal authority and the funds it needs to be the safety net that Congress said it would be. Charles Blahous, a senior member of the White House staff in the Bush administration, recently endorsed this approach as part of an overall solution.

Here’s how it would work. If PBGC had funds, it could take over responsibility for the pensions of “orphans.” The law already provides for this “partitioning” of multiemployer plans, and, at my suggestion, PBGC’s authority to do so was broadened in 2014.

However, PBGC can’t take responsibility for orphans without money, and the same shortsighted optimism that infected PBGC’s multiemployer program means that PBGC multiemployer premiums have been way too low. They will have to be raised.

Single-employer premiums are now, on average, more than seven times as high per person as multiemployer premiums, so there ought to be room for higher premiums. However, if currently sound employers in relatively healthy plans—which are the majority—are forced to pay the entire bill for the minority of unhealthy plans, they can and will leave the multiemployer system entirely, and PBGC will still be broke(n). The only practical solution is a combination of higher PBGC premiums and taxpayer funds.

Furthermore, PBGC benefit guarantees for multiemployer plans are far lower than for single-employer plans. In order to avoid draconian cuts, those benefits would have to be raised, which in turn would require additional funds.

Why Congress Should Compromise Right Now

Either approach can be made to work, but if Congress won’t compromise, the situation will get worse, and a lot sooner than people think.

Without some solution you can count on employers leaving not just unhealthy plans, but all plans. This employer exodus started some years ago. UPS, to name one visible example, negotiated its exit from the Central States pension fund more than 10 years ago. If and when Central States and other plans go bankrupt, there will be an employer stampede to get out of multiemployer plans. (Some pension advocates deny that this “contagion effect” will lead to employer exits from still healthy plans. These Pollyannas ignore the fact that, for over 40 years, the overwhelming employer impulse is to get out of traditional pensions and move to 401ks. The collapse of major multiemployer plans will, if anything, turn that impulse into an imperative.)

It’s clear why those who worry about retirees and unions support a solution, but why should other members of Congress care? Because acting now will save taxpayers billions in the future. Congress might allow individual pension funds to go bankrupt, but no federal agency has ever done so, and PBGC is a federal agency. PBGC was designed in 1974 to be funded by premiums collected from pension plans but the world has changed a bit in 40 years and employer contributions alone won’t be enough to keep insolvent plans from making the PBGC insolvent, too. As with the FDIC in the 1980s, Congress will sooner or later have to put taxpayers on the hook.

The arithmetic of pensions means that these costs grow and get worse over time, so funds committed today, whether through loans or PBGC, will save money in the future. (Also, sadly, pension cuts today will avoid larger cuts in the future.) If PBGC has the funds to act now, it can focus on the roughly 40 percent-50 percent of participants that are orphans, rather than waiting and ending up paying for everyone. Paying for orphans now will cost tens of billions of dollars less than waiting until all these plans are depleted and PBGC becomes responsible for all the retirees.

Most informed observers look at this dog’s breakfast and think that, even in a lame duck session, Democrats won’t compromise their hope for large loans and no benefit cuts and Republicans won’t compromise on their opposition to taxpayer money as part of the solution. Those observers could very well be right, but if they are, more people will lose their pensions and the next Congress will be faced with even worse choices. Let’s hope the Special Committee comes up with a “November surprise.”