Just as Democrats in Congress unveiled actions to save multiemployer pension plans, the Center for Retirement Research (CRR) at Boston College released an issue brief assessing options for helping these plans remain solvent.
The brief notes that while most multiemployer plans have recovered from two financial crises since 2000, a substantial minority face serious funding problems. According to CRR researchers, in addition to being buffeted by financial crises, multiemployer plans generally face three major structural challenges. First, the lack of new entrants leads to a very high percentage of inactive members. Second, withdrawal liability—the payments required when an employer exits a plan—is often inadequate so that orphaned participants—workers left behind when employers exit—create a burden for remaining employers. Finally, the construction industry, which supports the largest component of multiemployer participants, is highly cyclical.
The researchers estimate that “the hole” for plans in critical and declining status is $76 billion, based on the current view of funding that uses the market value of assets and values liabilities using a four-year average yield on 30-year Treasuries for the discount rate.
The Multiemployer Pension Reform Act of 2014 (MPRA) allows multiemployer plans to request a partition from the Pension Benefit Guaranty Corporation (PBGC) and also allows plans in critical and declining status to apply to the U.S. Treasury for suspensions of benefits.
Partitions have some evident appeal, the CRR researchers say, contending it has been clear for decades that the withdrawal liability procedure is flawed and bankrupt firms often pay little to nothing. While researchers found partitions would put tremendous cost on the PBGC—$35 billion for critical and declining plans—their analysis showed it would restore solvency to these plans.
Subsidized loans and tax payer support
According to the issue brief, two organizations, United Parcel Service (UPS) and the International Brotherhood of Teamsters (IBT), have suggested subsidized loans as a way to address the financial challenges facing multiemployer plans. The main issue CRR researchers found with this proposal is the total amount of loans that would be needed and the costs they would incur.
The issue brief notes that the PBGC’s multiemployer program is in a dire financial position. It argues that increasing PBGC premiums would not be a viable solution to the multiemployer plan crisis. The researchers’ analysis indicates that a premium of $156 per participant would eliminate the chance of multiemployer program insolvency. However, the issue brief says, “premiums of $156 could place a burden on severely underfunded plans where employers have already seen substantial contribution increases. Adding this increase to what employers are already paying for their rehabilitation plan may be enough to induce more employers to withdraw.”
Regarding benefit suspensions or cuts, the researchers used as a base case the Central States, Southeast and Southwest Areas Pension Plan—the first plan to apply for, and be denied, suspension of benefits. They first observe that with the cuts, the expected present value of (mostly younger) retirees’ benefits declines substantially, while the present values of the lifetime benefits payable to current participants and new hires all increase. However, while retirees see their benefits decline in net present value terms, their welfare under a MPRA-type approach—in the aggregate—is essentially unchanged. The reason is that retirees receive smaller but steady benefits, which allows them to better smooth consumption over their lifetimes.
Some have suggested taxpayer support for troubled multiemployer plans. One argument for tax revenue is that many of the retirees and inactive vested participants are orphans who worked for companies that are no longer in the plan, according to the CRR researchers. As a result, companies and workers still in the plan are being asked to pay not only their own costs but also the funding shortfalls of others. Employers in the most distressed plans have increased their contributions, but when orphans account for more than half of total participants—as is the case for the Central States plan—the burden can become intolerable and more employers may negotiate to leave, further eroding the contribution base and potentially creating additional orphans.
“Thus, while increasing taxes is never popular, rationales exist for taxpayer money to be part of a broader solution that covers not only those classified as ‘critical and declining’ but also those heading for trouble,” the issue brief says.The Keep Our Pension Promises Act, a precursor to bills just introduced by Congressional Democrats, would involve shifting a portion of liability for the worst-off multiemployer plans to the Pension Benefit Guaranty Corporation, the issue brief notes. The legislation would establish a legacy fund within the PBGC to ensure that multiemployer pension plans can continue to provide pension benefits to every eligible American for decades to come.