The latest annual report from the Pension Benefit Guaranty Corporation makes for some very uncomfortable reading.
The deficit in PBGC’s multi-employer program quintupled in 2014, soaring to $42.4 billion from “only” $8.3 billion in 2013. That massive deficit is problematic for millions of workers who now stand to receive mere pennies on the dollar in promised pension benefits. It’s a huge headache, too, for federal taxpayers, who could be charged with bailing out underfunded private-sector pensions that were never intended to become public liabilities.
For years, both policymakers and the public have paid relatively little attention to the deteriorating financial status of PBGC’s multi-employer program, mainly involving groups of businesses working with unions to provide pension coverage for workers and retirees. But this year’s fivefold increase in the deficit should send alarms ringing throughout the land.
The huge jump in deficit reported this year arises primarily as a consequence of 10-year budgeting. Like other government entities, PBGC subscribes to a 10-year budget window. Its reports exclude all potential liabilities incurred beyond that window. Thus, PBGC’s reported deficit never takes into account the stream of future benefit payments promised by plans that are expected to become insolvent 11 or more years down the line.
Of course, the pension agency has known about the impending insolvency of a few large multi-employer (i.e., union) pension plans for quite some time. But only this year did the expected date of insolvency for those plans start to fall within the budget horizon. As the PBGC report noted, just two very large plans expected to go insolvent within the next decade accounted for $26.3 billion of the deficit increase. The expected insolvency of 14 other plans added another $9 billion in liabilities to PBGC’s multi-employer program.
Although not specifically cited in the report, the two largest plans are identified elsewhere as the Teamsters Central States and the United Mine Workers. According to testimony from the Government Accountability Office, if only one of these very large pension funds went broke, it would quickly bankrupt the PBGC’s multi-employer program, leaving many PBGC beneficiaries with mere pennies on the dollar in promised benefits.
For example, PBGC normally would guarantee up to about $13,000 in benefits per person under a covered plan. But if the agency’s multi-employer program were stripped of its reserves to cover the insolvency of a large pension fund, the “normal” $13,000 maximum benefit would be reduced to less than $1,500 per year, based on incoming PBGC revenues. Such drastic cuts in benefits would be devastating for many current and future retirees. That is, unless taxpayers are forced to bail them out.
While the financial status of PBGC’s multi-employer program took a nosedive, the deficit in PBGC’s single-employer program did the opposite, declining by nearly 30 percent to $19.3 billion. The stark differences in financial trends between the single-employer and multi-employer programs suggests that the special preferences and provisions given to unionized employers — through federal regulation as well as through PBGC’s different program structures — should be curbed.
In general, the agency’s multi-employer plans receive far more leeway in selecting factors — such as interest-rate assumptions — that dictate required contributions. They charge significantly lower premiums — just $12 per year compared to the single-employer program’s normal premium of about $58 annually. The single-employer program also charges a risk premium based on a firm’s financial status; the multi-employer program does not.
Additionally, insolvent multi-employer pension plans are allowed to continue operating outside PBGC’s authority — even after bankruptcy. In contrast, PBGC takes over insolvent single-employer plans. Although some differences in plan governance may be warranted, the drastically different financial trends of multi-employer vs. single-employer plans suggest stricter rules are needed for multi-employer pensions.
Policymakers should seek immediate reforms, such as stricter rules governing multi-employer pension plans and transforming PBGC to a more private-like insurance structure. Without significant reforms, millions of workers’ promised pension benefits could be drastically cut or a federal bailout could force taxpayers to bear private-sector pension costs.
• Rachel Greszler is a senior analyst in economics and entitlements policy at The Heritage Foundation.