Reform is Needed, But Not This Way: Multi-Employer Pensions
While large banks were given a Christmas gift in the 2015 federal appropriations bill, retired union members are going to find coal in their stockings. Congress decided to deal with the long-term deficit facing some multi-employer pension plans. These are pension plans offered to trade and service union employees which are funded by a host of different employers in the same industry. It’s been evident for quite some time that about a quarter of these plans are in deep financial trouble. In addition, the federal insurance backing these pensions (Pension Benefit Guaranty Corporation) is woefully inadequate. At the 11th hour a bi-partisan group slipped a series of reforms into the mammoth budget.
It’s not easy to explain all the changes contained in the bill without writing an extremely lengthy post. Here are some of the highlights of the bill. Unions and employees claimed two small victories in the bill. The maximum employer insurance premiums will double to $26 per employee, although this figure is still a fraction of what employers pay for single-employer (conventional corporate pension plans). They also gained an exemption from any benefit cuts for any retiree over the age of 80.
However, the rest of the legislation solves this particular pension problem by putting the entire burden on employees and retirees. The new law creates a mechanism for troubled multi-employee pensions to reduce the benefits for retirees who have already earned those benefits. Let me be clear about this provision. A 65 year old retired bricklayer can have his monthly pension reduced under the procedures of this bill. I am not talking about changing the future benefits of a 35-year old union employee. Moreover, the pension plans covered by this new law aren’t necessarily on death’s door. If a pension is projected to be insolvent in 15 or 20 years, the trustees can pursue a plan to slash the benefits. Employees and retirees get to vote on the plan, but they must come up with a majority, including folks who don’t vote, to reject the plan. And, even if employees reject the plan, the US Treasury can override the vote if the government deems the pension’s demise to be a systemic threat to the PBGC.
If the government had attempted to impose this kind of reform on troubled corporations you would have heard conservative and business lobbyists complain about the overreach of the federal government into the private sector. Imagine giving the US Treasury the authority to unilaterally declare that a business should be downsized. This bill will give the government that power when it comes to multi-employer pensions.
Congressional concern is warranted. The unions would no doubt agree that many multi-employer pensions aren’t sustainable and that the PBGC needs additional cash. With union membership in a steady decline, many of these pensions have a high proportion of retirees to employees. As a result, cash is steadily draining out of the pensions. However, this is not a problem that required a radical or precipitous solution. Even if a bunch of these pensions went under, the liability wouldn’t require a massive bailout. The long-term problem is probably measured in the tens of billions of dollars: relatively small potatoes compared to the bailouts of the savings & loans, commercial banks, and auto industry. However, unions are on the decline and didn’t have the political clout to fight this reform.
Since most of you aren’t union members, you probably don’t think this Congressional reform applies to you. However, there are plenty of other pension and insurance programs running much larger deficits. If this is how Congress deals with multi-employer pensions, you should be very afraid.