Massive underfunding of multi-employer pension programs could lead to the insolvency of the Pension Benefit Guaranty Corporation in less than a decade, according to a report the federal pension backstop released Friday.
A bankruptcy would force a drastic reduction in the benefits going to workers whose own pension funds have gone belly-up.
The problem is simple: Too many of the plans have not been adequately funded. “While multi-employer plans are typically less well funded than single-employer plans, most multi-employer plans are projected to remain solvent over the next 20 years. However, a core group of plans appears unable to raise contributions sufficiently to avoid insolvency,” the report said.
An estimated 14,000 multi-employer plans cover 10 million people in the U.S. The multi-employer pension system is funded at only 41 percent, which translates to an estimated $610 billion in unfunded liabilities, according to the House Education and the Workforce Committee.
Rep. John Kline, R-Minn, chairman of the House Education and Workforce Committee, said the report “put in stark detail” the risks to both workers and taxpayers.
“Today is a reminder of the urgent need to enact additional reforms to strengthen multi-employer pensions, reforms that would modernize the system for workers and provide PBGC additional resources to meet its obligations. There have never been any easy answers, and it’s time for those who oppose recent reforms to be honest about these challenges and put forward responsible solutions,” Kline said.
Multi-employer plans involve several companies and unions jointly managing a pension fund for all their workers. The plans are favored by unions because they remain with workers even if they switch jobs. However, they are risky for businesses because if one employer goes bankrupt, the others are legally obligated to cover its contribution. Reports of the financial woes of some plans have prompted many companies to try to get out of the system. In 2006, the United Parcel Service paid $6.1 billion to pull out of the drastically underfunded Teamsters’ Central States plan.
In a rare example of of bipartisan unity, Congress passed and President Obama signed the union-backed Multi-employer Pension Reform Act in late 2014. Few people were eager to tout the reform, however, since its chief function was to allow businesses to cut benefits in multi-employer plans if necessary to prevent the plan’s insolvency, a move that was previously illegal.
The 2014 reform also required regular reports to Congress on the solvency of the Pension Benefit Guaranty Corporation’s program, which steps in to provide plan recipients with payments if their own plan becomes insolvent. The latest report, issued Friday, said: “Under the current premium structure, PBGC will be unable to meet its average projected financial assistance obligations through 2025 or 2035.” The latter year was the last one it was required to make projections for.
The PBGC is not federally funded. It is an independent agency, and revenue comes mainly by insurance premiums paid by nearly 24,000 insured defined benefit pension plans. However, its directors are appointed by the president and confirmed by the Senate. Both would face considerable pressure to bail out the fund should it become unable to provide adequate payments. Should the corporation become insolvent, it would not stop making payments entirely, but they would have to be drastically reduced.
“Insolvency of PBGC’s multiemployer insurance program would devastate the retirement benefits of 1 million to 1.5 million participants and their families,” Labor Secretary Tom Perez said in identical letters sent Friday to the White House and Congress.
