Ten years ago, subprime mortgages went from a little-known form of lending to a precipitating cause of the international banking crisis that led to the Great Recession of 2008 to 2009. Like these mortgages, another relatively obscure financial problem could end up being the next big taxpayer bailout. Unless the funding crisis for multiemployer pension plans is addressed, the “solution” will look more like the savings and loan crisis of the 1980s, under which the taxpayers lost $123.8 billion.
In his testimony last November in the House, Pension Benefit Guaranty Corporation (PBGC) Director Thomas Reeder wrote, “Legislation is needed to address the looming insolvency of PBGC’s Multiemployer Program.” He noted that several proposals have been put forward, some of which would help the plans avoid insolvency and some of which would help the PBGC avoid insolvency.
There are two pension plans subject to the PBGC’s insurance program: multiemployer and single employer. According to Reeder’s testimony, the multiemployer programs have $2.3 billion in assets and liabilities of $67.3 billion, with a “projected 2026 mean present value deficit of about $78 billion” and is “likely to become insolvent by the end of 2025, absent changes in the law.” Single employer plan liabilities are $117.1 billion and assets are $106.2 billion, and they “will no longer be in a deficit position by 2022.”
Multiemployer plans are defined benefit plans that have been created through collective bargaining agreements and cover employees who work for more than one company in industries like transportation, hospitality, mining and construction. There are about 1,400 multiemployer plans covering more than 10 million workers and retirees. The PBGC receives premiums from the plans to pay benefits to retirees if the plans run out of money.
A June 2016 Washington Post editorial pointed out the urgency of addressing the multiemployer pension problem, and a December 2017 Politico article noted that it was raised as an issue that could have been considered in the continuing resolution that was extended last month. Both of those pieces cited the need for action, and both mentioned Sen. Sherrod Brown’s (D-Ohio) proposal to bail out the pensions. His plan has not attracted a single Republican sponsor, because it would rely solely on taxpayers to foot the bill.
The Congressional Budget Office (CBO) and the Heritage Foundation have also analyzed the potential remedies for the pending pension insolvencies. CBO’s August 2016 report on the PBGC’s multiemployer program pointed out that the plans likely to become insolvent have assets of $40 billion and liabilities of $100 billion. The PBGC has insufficient resources to cover those payments.
CBO noted that most proposals to remedy this financial condition call for increasing premiums, reducing benefits, increasing contributions from underfunded plans, and reducing the risk level of plan investments. Other solutions included direct Treasury funding to cover all of the losses, use of federal funds to help recapitalize the PBGC and cover all of the losses with a federal guarantee (there is no such guarantee under current law), or use federal funds to recapitalize the PBGC and privatize the multiemployer program.
A May 2017 report from the Heritage Foundation noted that multiemployer pension plans have promised at least $600 billion more than the funds can pay. This is a result of poor accountability, lenient regulations that have allowed the plans to make contributions that do not match future payments, and the politicization of pension plans. The organization’s proposed solutions included bringing costs in line with benefits, requiring plans to use more reasonable investment assumptions, and requiring the PBGC become more like a private insurance operation.
Another solution to remedy the multiemployer pension plan crisis would be to share the cost through a combination of loans to the troubled pension plans and a reduction in benefits. The loans could only be provided if there is actuarial assurance that it can be paid back, and the number of loans to a single plan would be capped. In order to prevent taxpayers from being exposed, should the plan fail to repay the loans, there would be a surcharge paid by plan participants to set up a reserve fund, which would be the backstop for any loans that cannot be repaid. Unlike plans being proposed by members of Congress such as Sen. Brown, it would not require a dime from the taxpayers.
To prevent the PBGC from turning into Federal Savings and Loan Insurance Corporation and protect taxpayers from a bailout, sharing the costs between the plans and their participants to alleviate the multibillion-dollar multiemployer pension shortfall is a reasonable concept that should be considered sooner rather than later.