Encouraging inequality and reckless risk-taking are the hallmarks of the union multiemployer pension bailout in the American Rescue Plan.
This is highlighted by the coming transfer of tens of billions of taxpayer dollars to what was once known as “the biggest and unfortunately, the baddest and most abused and misused pension plan in America,” as noted at a 1980 Ways and Means Oversight Subcommittee hearing by its then chairman: the Teamsters’ Central States plan.
In 1976, the IRS revoked the tax-exempt status of Central States for highly improper conduct, including extensive ties to organized crime. The IRS reversed the revocation in 1977, after which the Teamsters tried to bribe a senator by offering a pension-owned hotel on the cheap. Central States ultimately signed a consent decree providing government oversight and independent asset managers, but the oversight appears to be limited. And ironically, Jimmy Hoffa and the mob may have provided better financial results.
It is not clear why the plan made highly risky loans in recent years to Nicolas Maduro’s Venezuela and its government petroleum company. Perhaps such “investments” are supposed to be an example of the so-called environmental, social, and governance practices pushed by the Biden administration. Eight such loans, albeit relatively small, comprise all the plan’s loans in default or uncollectible on its latest filing.
Similar to other multiemployer plans, Central States overpromised by using a speculative hypothetical future investment return to discount pension promises at a fraction of the market cost. This enabled employers to make lower contributions and pay higher wages. The Government Accountability Office calculated that had Central States actually earned its assumed investment return from 2000 to 2014, 7.5% to 8%, it would have been 96% funded in 2014.
In 2005, the IRS provided an extremely unusual funding waiver to Central States, allowing the plan to avoid either meeting required contributions or terminating and stopping to make pension promises it couldn’t keep. Unsurprisingly, Central States subsequently became drastically more underfunded and made workers billions more in promises it couldn’t keep.
Pursuant to a bipartisan 2014 law, Central States applied to cut benefits in a manner the plan said matched benefits to actual contributions. This would have dramatically improved the plan’s finances. However, the Obama Treasury Department rejected the application largely on the grounds that the cuts were not deep enough to avoid insolvency over the long term as required by the law — because the plan’s assumed rate of return was too high. The rejection seemed highly questionable given that the plan, and virtually every other multiemployer plan, was using the same or similar rates for many years without challenge by the Treasury Department.
The bailout fully covers all promises of eligible plans, such as Central States, payable through 2051 — even though contributions were only a fraction of those needed. The bailout leaves retirees in terminated single-employer plans who had to forgo a much greater portion of their salaries in exchange for pension promises subject to cuts. Somehow, it was not enough for taxpayer assistance to get multiemployer retirees back their contributions, or even the pensions their contributions were sufficient to purchase.
Proponents claimed that the alternative was leaving retirees in dire poverty at a taxpayer cost of billions in social programs. But the retirees, although generally not among the wealthiest people, are also generally not the poorest. Accordingly, the Congressional Budget Office score reflected zero savings on safety net programs from the bailout.
Democrats could have put wealth or income limitations on recipients or the benefit amounts funded by taxpayers, but they did not. So taxpayers and their grandchildren may be on the hook for Tom Brady’s pension from the NFL, which might qualify for the bailout.
For promises due in 2051, Central States will get $2 for every dollar other plans receive. This is because the bailout is based on investment returns equal to the low end of a plan’s discount rate for 2019 or 5.5%. Central States used 3% for 2019, although pension promises were made in prior years using 7.5% and 8%, while other plans had much higher rates.
Just how many billions of dollars Central States gets will help determine whether the CBO score of $86 billion is anywhere within the ballpark. Using the 3% discount rate, Central States was close to $40 billion underfunded for 2019. But Central States may try using the 2% discount rate it subsequently adopted, which has helped increase its underfunding to almost $50 billion, for bailout purposes. Central States may also attempt retroactively to reverse reductions in certain ancillary benefits, which would increase the bill to taxpayers by at least $1 billion.
But the ultimate heist would be for Central States to flip its interest rate back to 8% for purposes of future contributions while collecting from taxpayers at 3%, which would allow Central States to multiply future promises at taxpayer expense. For new pension promises due in 30 years, Central States would get $4 from taxpayers for every dollar it charges employers.
This would increase the cost to taxpayers by billions more unless prohibited by the Biden administration. Although lacking the drama of the Teamsters mob ties portrayed in The Irishman, such a move would rival in audacity, and surpass in cost to taxpayers, anything the plan did in its incarnation as the mob’s bank.
In these Orwellian times, all retirees are equal, but multiemployer retirees are more equal than others. And even among multiemployer plans, Central States was created most equal of them all.
Aharon Friedman was a senior tax counsel to the Committee on Ways and Means and a senior adviser to the assistant treasury secretary for tax policy.
