During a hearing held by the U.S. Senate Committee on Finance, the main issue was the benefit cuts allowed for certain plans under the Multiemployer Pension Reform Act (MPRA).
Under the MPRA, plans that are in “critical and declining status” are allowed to avoid insolvency by reasonably cutting benefits, including those already in pay status. They must apply to the Treasury for permission to cut benefits. Currently, the Treasury has three requests it must consider.
The committee heard from Mrs. Rita Lewis, a beneficiary of the Central States Pension Plan—the first plan to request permission to cut benefits. Lewis noted that Central States says the average cuts are around 22.5%, but other plan members she’s talked to have been told their cuts will be 40% to 70%. She shared stories of plan members or beneficiaries who will be affected by these cuts and are unable to return to work or are too old to make up the loss from investments. Some are considering selling their homes.
But, in his testimony, Joshua Gotbaum, guest scholar, Economic Studies Program, The Brookings Institution, and former director of the Pension Benefit Guaranty Corporation (PBGC), said the alternative to a planned benefit reduction under the MPRA is even worse. “What MPRA did was to allow plans that otherwise would fail entirely to preserve benefits and keep them from falling all the way to PBGC levels,” he said. “Under MPRA, severely distressed plans can propose a plan to cut benefits, but in every case a participant gets at least 10% more than what PBGC would provide.”
Gotbaum contended that in many cases, vulnerable participants suffer no cuts. For example, in the Central States proposal currently being reviewed, about one-third of participants would suffer no cuts at all.NEXT: Solutions other than benefit cuts
“Without MPRA, Central States and other distressed plans will become insolvent—and most participants’ pensions will be cut far more,” Gotbaum continued. “Even worse, the insolvency of Central States would completely drain PBGC’s multiemployer reserves, so participants would end up being cut far below PBGC guarantee levels. One analyst estimated that, if PBGC becomes insolvent, ongoing premiums would only cover about 10% of Central States pension benefits—that would mean a 90% cut.”
Gotbaum advocated for higher PBGC premiums for multiemployer plans, saying the agency has insufficient funds to implement actions allowed by the MPRA to help distressed plans—merging plans or partitioning plans.
Witness Dr. Andrew G. Biggs, resident scholar at the American Enterprise Institute, offered what he calls a solution to the problems with multiemployer plans: switching to robust defined contribution (DC) plans. “If employers wish to provide a solid plan to supplement their employees’ Social Security benefits, they can take advantage of recent enhancements to defined contribution retirement plans,” he said.
He noted that most employers now automatically enroll participants in plans, and most participants are in professionally managed target-date funds (TDFs), which automatically reallocate their portfolios to reduce risk as they approach retirement. He cited a Vanguard study that “showed that, for the five-year period ending in 2012, individual investors holding target-date funds earned the same return as state and local pension plans, which supposedly are much more sophisticated investors.” Biggs also pointed out that fee pressure has pushed down costs for DC plans and introduced more low-cost investments. Finally, he noted the Treasury Department has enacted regulations making it easier for 401(k) plans to incorporate annuities, which convert lump sums into a guaranteed income that lasts for life.
“What employees need are well-designed, well-run defined contribution plans that offer automatic enrollment at responsible contribution rates coupled with simple and low-cost investment options such as target-date funds,” Biggs concluded.