Federal legislation to help deal with the unexpected COVID-19 pandemic has, in large part, wisely taken the form of direct relief to employers. Paycheck Protection Program loans, Main Street lending, direct Treasury grants, Federal Reserve liquidity, etc., have all served to keep employers in business for the duration of the shutdown. The idea is that they will be there — damaged, but repairable — on the other side of this.
One missing piece of employer relief has been helping businesses make mandatory pension requirements. While most employers have long since converted to defined contribution retirement plans such as 401(k)s, there is still a large defined benefit pension industry out there, even in the private sector. There are about 1,400 private sector multiemployer pension plans, with 10 million participants, still in existence. Industries in which these plans persist are varied, from building and construction trades, to retail and service industries, to manufacturing, mining, trucking, and transportation, as well as in the entertainment sectors.
Unlike a defined contribution retirement plan, these pensions have a legally required contribution amount employers must make to them based on a complex mathematical formula. This formula results in a higher payment from employers the lower government-set interest rates go. With the federal funds rate set to zero, the employers saddled with these old-school pension plans are now seeing their payment obligations rise at the worst possible time, when they are facing government-mandated layoffs and an unexpected recession.
To the extent that these employers go under, and by extension that these multiemployer pensions face insolvency, we have a national problem. The backstop for these pensions, the federal Pension Benefits Guaranty Corporation, was already underfunded and on the brink of bankruptcy this decade. That was before the pandemic and its associated increase in pension funding pressure. If a plan has to be taken over by the Pension Benefits Guaranty Corporation, its retirees normally get far less in benefits than was promised them before the rescue.
Moreover, when a business has to devote more of its labor costs to pension funding, that necessarily means it has less to give to workers in wages and benefits, assuming those workers have a job at all. The ripple effects of big bills owed to legacy pension plans are very real, and they affect the great majority of us who will never participate in one.
Congressional Democrats have long called for a bailout of these pensions, and for a good political reason — the retirement plans are more often than not the domain of unionized industries. That’s always been an unacceptable outcome for congressional Republicans, who have no interest in commandeering taxpayer dollars to bail out the unwise investing legacy of Big Labor. But nonetheless, we are where we are. So, what is there to do?
One path might be to extend a loan to these plans in order to keep them going. Such a loan could be a win-win for taxpayers. In exchange for getting a burst of funding now, the pension would have to pay the Treasury back with interest. This is a way in which today’s low interest rates could be turned to the advantage of everyone.
For example, the Congressional Budget Office projects that the 10-year Treasury note is expected to remain under 1% for the next several years before climbing back up to a 3% rate by the end of this decade. A solvency loan could be offered to a pension plan at a rate higher than the Treasury benchmark. The pension (and the employers and the workers and the taxpayers looking to avoid a bailout) win because the retirement plan is fully funded. The Treasury and taxpayers win because they are receiving a loan repayment at a rate of interest higher than the debt interest they needed to incur to issue the loan. At the end of the repayment window, pensions would be fully solvent, and taxpayers would have their loan money back plus net interest.
To be sure, pension plans would need to make sure they enacted reforms as a condition of getting these loans. The loan should not be a way for a fundamentally flawed pension plan to be let off the hook. Any plan receiving such a loan should be required to look at benefit reductions for higher-income participants, movement in a more defined contribution direction (especially for younger participants), or even deeper reforms for plans in the biggest trouble (including freezes).
Unlike their more sickly multiemployer plan cousins, single-employer defined-benefit pension plans are in comparatively good shape. The Pension Benefits Guaranty Corporation says these plans have a funding surplus of nearly $9 billion today and just under $30 billion by 2028. Yet the same mathematical formula that requires higher pension funding for multiemployer plans also requires it for single plans. A commonsense idea that has been floated is to allow these much healthier single plans to “smooth” their funding contribution over several years to reflect a more normal interest rate environment. Considering the health of these plans, that seems like a prudent way to keep capital in the economy.
The point is that today’s historically low interest rates are a double-sided plan for both employers and taxpayers. On the one hand, rock-bottom rates mean debt is cheap, and refinancing liabilities is a smart idea. On the other hand, low interest rates mean giant pension plan payments just as the time when employers can least afford them. Marrying these two sides of the sword could mean smart public policy attractive to both parties.
Ryan Ellis (@RyanLEllis) is the president of the Center for a Free Economy.
