Opinion: Band Aids to Bailout

Buried in last month’s $1.9 trillion American Rescue Plan (ARP) was a little-noticed $86 billion bailout for multiemployer union pensions. Democrats, rather than working on a compromise, decided to go it alone, bailing out the plans without any strings attached. It sends a terrible message: underfund your pensions and the feds will come to the rescue, no questions asked.

So, how did we get here? These pension programs were in trouble long before the pandemic. Twenty-nine years ago, as Executive Director of the Pension Benefit Guaranty Corporation (PBGC)—the federal agency that insures corporate pensions—I gave a speech at the AFL-CIO’s pension conference discussing the need for congressional reform of the troubled PBGC to avoid a future bailout. I stressed that too many people were looking at the finances of the single-employer pension insurance program through rose-colored glasses.

President George H.W. Bush’s budget, which had been published the day before, stated: “it is time to stop the band-aid approach to repairs and confront the structural problems of the insurance program once and for all.”

Reform of PBGC’s other program—insurance for multiemployer pensions—had passed several years before that conference. As a result, I said the multiemployer program was a rose in PBGC’s garden (sticking to the horticulture analogy). But as every gardener knows, rose gardens need sunlight, fertilizing, weeding, and pruning. Congress never gave PBGC adequate tools to tend to the growing multiemployer plan problems. Now, instead of making tough decisions, Congress rammed through a bailout for plan sponsors, employees, and retirees alike—unrestricted fertilizer paid by U.S. taxpayers.

Multiemployer plans are collectively bargained pension plans, with many employers sponsoring a single plan. These plans allow union members to move between firms but keep their same pension. There are currently about 1,400 plans covering 10.9 million workers and retirees. The plans have $1.2 trillion in promised benefits, but only $500 billion in assets—42% funded. There are roughly 200 troubled plans, including 50 Teamster plans, which are even further underwater.

Many of the plans have been in trouble for years because of shrinking, or even disappearing, industries; lax funding rules; bad investment decisions; and sponsoring employers leaving through bankruptcy, or otherwise, and not paying their fair share. Too often in both single-employer and multiemployer plans, employers offer future pension benefit increases in collective bargaining in lieu of the wage increases that the employer could not afford. In insurance terms, that creates a moral hazard.

When pensions are taken over by PBGC, benefits are reduced by law. The reductions are more severe in multiemployer plans than single-employer plans. As head of PBGC, it was never a happy situation for me to see benefits being cut. After all, many retirees have worked a lifetime to receive their pensions. However, painful as reductions are, their prospect does add some discipline to the system by helping to discourage excessive, unfunded pension promises.

The ARP’s 30-year multiemployer plan bailout has nothing to do with COVID relief. It removes any disciplines by paying full benefits and even restoring benefits to those whose benefits had already been reduced. PBGC does not have an explicit government guarantee, but for the first time in the agency’s 47-year history, this bailout “hardens” an implicit guarantee. It creates a larger moral hazard problem and sets a dangerous precedent for the PBGC’s much bigger single-employer program as well as other government-sponsored insurance programs.

Perversely, the ARP increased the chance of a single-employer plan bailout, as the law authorized slowing down the catch-up funding in underfunded plans from 7 to 15 years. Under government accounting rules, a near-term reduction in pension funding means more federal tax revenue, as corporations have fewer tax deductions. The Joint Tax Committee scored this change as a $23 billion revenue gain over the 10-year budget window.

Think about this: to help “pay for” the bailout of multiemployer plans, ARP increased the risk in single-employer plans covering 23.5 million workers.

PBGC’s issues are emblematic of government insurance. These programs were established with good intentions, but not based on sound insurance principles, nor were the overseeing agencies given the flexibility to create sustainable programs without further legislation. Then, when the inevitable problems arise, Congress and Administrations are slow to react, resulting in buckets of our taxpayer money being used to paper over the crisis.

Congress did pass remedial multiemployer legislation in 2014, but it has proven too politically hard to implement. More recently, Democrats and Republicans had been working on bipartisan reform, which is the right way to go, but the bailout ignored those proposals.

A better answer would have been to put these programs on a sustainable path. Yes, there is a need for some government funding in the form of contributions and loans. However, that support should have been coupled with tighter funding rules, larger premiums for continuing and departing employers, realistic actuarial assumptions, contributions from unions and workers, and reasonable, not drastic, reductions in retiree benefits for troubled plans. Instead, Congress passed a bailout band aid without even a small dose of reform.

James B. Lockhart III was Executive Director of PBGC from 1989 to 1993. Later he served as COO of Social Security and Director of FHFA. He is now a senior fellow at the Bipartisan Policy Center and writing a memoir about his time in government.