Last week, the House Ways and Means Committee approved a massive taxpayer bailout of private sector multiemployer defined benefit pension plans, or MEPs, as part of a budget reconciliation package that is purportedly meant to deal with COVID-19. Senate Budget Committee Chairman Bernie Sanders claims MEPs are underfunded because “of the greed on Wall Street.” But MEPs are troubled because of mismanagement, not because of COVID-19 or Wall Street.
MEPs are jointly sponsored by a union and companies employing members of that union. It is not clear why taxpayers, who had no role in making these pension promises, should be funding them.
The proposal would saddle taxpayers with unfunded pension promises made by eligible MEPs, which are underfunded by more than $100 billion, while providing perverse incentives for other MEPs to subsequently qualify. This would be extremely expensive as MEPs are already underfunded by $673 billion as of 2017 (a funding ratio of 42%).
The proposal would worsen MEP dysfunction instead of making the fundamental reforms needed to protect participants. Ninety-five percent of the 10 million MEP participants are in plans less than 60% funded, while 75% are in plans less than 50% funded. The multiemployer insurance program of the Pension Benefit Guaranty Corporation (PBGC), which is not backed by taxpayers, will run out of funds in 2026 and has a fiscal year 2020 deficit of $63.7 billion ($70 billion absent taxpayer assistance to the UMW plan).
The proposal provides taxpayer funding to the MEPs that are most severely underfunded and/or close to cash insolvency to pay benefits (including future promises) due for 30 years, including retroactively reversing benefit reductions under bipartisan legislation signed by President Barack Obama. MEPs receiving taxpayer funds would be allowed both to increase benefits, including for retirees, and decrease contributions, restrained only by PBGC authority to issue “reasonable” regulations. It is not clear what restrictions would be “reasonable” — if the Biden administration were inclined to issue any such regulations.
Given this precedent, MEPs would be well justified in believing that future bailouts will cover promises payable after 30 years. More disturbingly, the eligibility window is open through 2022. This provides other MEPs perverse incentives to increase underfunding in order to qualify, further enabled by the bill’s temporary relaxation of the funding rules. The proposal completely unravels the few remaining common sense MEP safeguards, including covering plan benefit increases adopted in the 60 months prior to receiving financial assistance.
This appears to allow most otherwise non-qualifying plans to become eligible by adopting extreme benefit increases, such as $230,000 pensions for current workers and even retirees at an annual cost to taxpayers exceeding one trillion dollars. The price tag would be far higher if this helps unions attract new members, which may be the intention. To minimize the upfront budget cost, eligible plans must exhaust all assets, including incoming contributions needed for new benefit promises, by 2051. Thus, the proposal is designed to ensure retirees lose virtually all of their benefits starting in 2052, absent additional taxpayer bailouts. Although it seems highly improper for MEP trustees to promise pensions they know they cannot provide, they are already doing so without challenge.
MEP trustees have vast discretion over contributions, accruals, and investments. Employers have joint liability in that contributions are comingled and used to pay participants regardless of their employer. But if a plan becomes underfunded, employers can avoid higher contributions by withdrawing and paying withdrawal liability, which is based on past contribution levels and simultaneously often insufficient to cover the employer’s share of underfunding and extremely harsh to the employer. Prior to 2006, one employer exiting a plan potentially left the remaining employers with increased contribution requirements for the unfunded benefits of individuals who never worked for those employers. This incentivized remaining employers to withdraw also to avoid increased contributions, creating a negative reinforcing cycle.
Given this structure, trustees should follow the basic principle that pensions have sufficient assets to fulfill prior promises without new contributions. But unions and employers wanted relatively generous promises and low contributions, while disregarding the long-term consequences of underfunding. Trustees gambled on high investment returns and contributions from active workers to pay retirees, facilitated by generally, and very unreasonably, interpreting the requirement to use a “reasonable” assumption to discount liabilities as the assumed rate of return on plan assets, just like public pension plans. Therefore, MEPs measure the annuities they promise at 40 cents on the dollar compared to insurance companies, which is asking for trouble.
By the mid-2000s, unions and employers were ready to terminate some MEPs because withdrawal liability was less than contributions required to fund the plans. To avoid this result, 2006 legislation provided a waiver from required contributions to plans claiming they cannot meet required contributions, creating a moral hazard exploited by the plans. Plans haven’t terminated, but at the price of increasing MEP underfunding by more than three-fold and exploding PBGC’s deficit by a multiple of more than eighty. Severely underfunded plans, even those that have run out of money and can only pay benefits (reduced to the PBGC guarantee level) with cash from PBGC, continue to make new pension promises they know they cannot meet. Eliminating required contributions absolves employers of any responsibility for underfunding so long as they do not elect to withdraw. And for ongoing employers, trustees have generally kept contributions below new costs instead of addressing underfunding.
MEPs require fundamental reforms similar to single-employer plans (sponsored by one company) to protect participants while also making MEPs attractive to new employers. Single-employer plans are 79% funded, and their separate PBGC insurance program (with premiums 20 times those in MEPs) has a fiscal year 2020 surplus of $15.5 billion. MEP contributions needed for new promises should be walled off instead of being diverted to pay retirees. Promises must be accurately measured using corporate bond yield curves to discount liabilities. Each employer should be fully responsible for promises made to its own employees, but not others — while also allowing workers to switch between participating employers and remain in the plan. Safeguards are needed to prevent underfunded plans from deteriorating, including benefit freezes for underfunded plans and PBGC termination of plans not meeting required contributions. Significant PBGC premiums increases proposed by the Obama and Trump administrations should be adopted.
Providing government funding to MEPs, including for promises they will make in the future, while weakening funding rules and rewarding MEPs for future misconduct is abusive to taxpayers. Doing so while essentially forcing plans to cut off all pension payments starting in 2052 is abusive to workers and retirees. To add insult to injury, the proposal threatens the pensions of participants in single-employer plans by allowing such plans to use higher discount rates to measure liabilities, one of the main causes of the MEP disaster. The Committee approved the proposal without a CBO estimate of the cost to taxpayers.
In the long-run, it would be far less expensive for taxpayers to write a $673 billion check to cover existing underfunding and fix MEPs going forward. Even if MEPs can resist fully exploiting the provisions providing trillion dollar plus annual taxpayer funding, the bill’s theme is not even to provide taxpayer funds to reduce cuts to retirees while fixing the dysfunction that caused the underfunding. But to the victor and its union allies go the spoils.
Aharon Friedman has worked on tax policy issues for more than a decade. He served as senior adviser to the assistant Treasury secretary for tax policy and as senior tax counsel to the House Ways and Means Committee.
