The Senate Joint Select Committee on Solvency of Multiemployer Pension Plans missed its November 30 deadline for a proposal to address the multiemployer plan financial crisis. In a joint statement Senators Orrin Hatch, R-Utah, and Sherrod Brown, D-Ohio, reaffirmed their commitment to solving the multiemployer pension crisis and said that they had made significant progress but that more time is needed to find a solution.
How big is this problem?
In its most recent annual report, the Pension Benefit Guaranty Corporation (PBGC) stated that “the Multiemployer Program is likely to run out of money by the end of FY 2025.” It estimated the Multiemployer Program deficit to be around $59 billion. That, however, is just the PBGC guarantee fund, and those guarantees are minimal—the current maximum guarantee is $35.75 per month per year of service.
In a 2016 report, the Society of Actuaries estimated the unfunded liabilities of the multiemployer pension plan system to be “approximately $115 billion when measured for purposes of determining funded status ‘zones’ under the Pension Protection Act of 2006 to $500 billion when measured using Treasury rates and the market value of assets.”
One of the issues with multiemployer plans (perhaps, the issue) is the way they (under) measure liabilities. I don’t think it’s unreasonable to think about this as a half a trillion-dollar problem. To put that number in perspective, Joshua Rauh of Stanford estimated 2013 state-sponsored pension plan underfunding to be (on a similar basis) $3.28 trillion.
Some (conceivably, even the majority) of these plans are viable—so some piece of that half trillion dollars in underfunding will ultimately be funded.
All of which is to say that the problem is bigger than $59 billion and less than half a trillion dollars.
How did this happen?
To quote the Government Accountability Office (GAO): “Discount rates for sponsors of public-sector plans and private-sector multiemployer plans differ from those of private-sector single employer plans, resulting in different incentives for both and, for the former, higher reported funded ratios and lower reported costs.” Amen.
Like state-sponsored plans, multiemployer plans generally use an “assumed rate of return” to value liabilities, rather than the high-quality corporate bond yield curve used by corporate single-employer plans. This much baggier valuation concept—to speak bluntly, valuing liabilities based on how much you think you can earn in the market—has enabled these plans and their actuaries to ignore one of the most significant financial changes in our lifetime: the secular decline in interest rates that began in 1982.
For the last 35 or more years, medium- and long-term interest rates have headed in one direction, down. And—to this day—many of the individuals responsible for managing these plans are “assuming” that interest rates and returns will revert to a theoretical (and retrospective) mean.
This was a case of massively mistaking a very loud signal as simply “noise.”
Many in the multiemployer plan industry will point to other factors. The plans reported to have the biggest problems are those of the United Mine Workers of America (UMWA) and the Teamsters. Without re-hashing energy policy and the “war on coal” meme, it’s fair to say that coal is regarded by many as nearing its sell-by date. And the transportation industry is facing, at a minimum, significant disruption.
But, to me at least, this sort of excuse-making sounds like saying “I’m late because of traffic on the 5.” These sorts of fundamental changes afflict every industry. Indeed, you can count on nearly every industry to at some point mature and then become obsolete. Your pension funding policy should be robust enough to survive that sort of change. In other words, pension bankruptcy can’t be excused because “the economy moved my cheese.”
Who isn’t to blame?
There is so much blame to go around here. My list would include those unions that thought they should themselves be in the pension business, rather than (like, say, the United Steelworkers and the United Auto Workers) simply bargaining for employer-provided retirement benefits. I understand why certain industries (where most employers are small and the union is big) don’t naturally lend themselves to employer-provided plans. But putting a union in charge of a pension fund has not proven to be a very good solution to this problem.
In this regard—as uncomfortable as it may be to say—we have to acknowledge that some of these unions, in some respects, were operated as criminal enterprises. There’s a reason why they can’t even find Teamster leader Jimmy Hoffa’s body. And the UMWA didn’t start to clean up until 1960s mine workers reformer Jock Yablonski was murdered.
I would also include the accounting and actuarial industries, which allowed the sorts of funding policies that got us to this point.
And I’m sure there are some employers that must also share some blame—those that negotiated agreements premised on funding policies they would not have tolerated in their own plans. But a lot of employers—especially smaller ones—were very much involuntary participants in this system. When the Teamsters organize your loading dock, you sign the deal, whatever it says, or you’re out of business.
I don’t believe, however, that the participants are to blame. Many of them, like many small employers, didn’t have a lot of choice—they had to join the union just to get a job. They are generally not financially sophisticated—that is, sophisticated enough to understand the irresponsibility of the decisions their leaders were making. And even if they did understand, these unions have not always functioned as democracies.
Towards a solution
I think we should simply draw a line and write off this entire experiment in mismanagement, corruption and wishful thinking. Shut down all the failing plans and, within some reasonable limit, pay off their debts out of employer contributions and taxpayer revenues.
Benefit cutbacks may be reasonable, up to a point. There’s a proposal being circulated to increase the PBGC guarantee to $70 per month per year of service—that seems like a fair number to me.
One thing, however, I think we should not do: ask current employees to pay for the retirement benefits of retirees. In a declining industry, that is, in my humble opinion, simply immoral.
There are some multiemployer plans that are currently doing fine, that don’t need help. I think we can let them stay in business, but the funding and liability valuation methodology for these plans should be changed to something that looks more like the one used by corporate America.
Finally, I think we have to ask if the multiemployer defined benefit (DB) plan is a good idea going forward. If a union wants to organize an industry and bargain for retirement benefits, fine. But a more transparent, less risky design—less risky for participants, employers and the system as a whole—would be a multiemployer defined contribution (DC) plan.
And, obviously and as a necessary corollary, policymakers should start doing something to make small-employer DC plans more affordable and efficient.
Michael Barry is president of October Three (O3) Plan Advisory Services LLC, and author of the new book, “Retirement Savings Policy: Past, Present, and Future.” He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
« Plan Sponsors Could Consider a Different Solution to Provider Woes