In 2014, the Bipartisan Policy Center (BPC) launched the Commission on Retirement Security and Personal Savings, led by former Senator Kent Conrad and WL Ross & Co. Vice Chairman Jim Lockhart. The commission will consider and make recommendations regarding Social Security, pensions, defined contribution (DC) savings vehicles, strategies to generate lifetime income and other factors that affect retirement security.
This BPC-staff authored post is the eighth in a series that will outline the state of retirement in America and provide a sense of the challenges that the commission seeks to address in its 2015 report.
For more information on the topics below and in the rest of this series, see our recently released staff paper, A Diversity of Risks: The Challenge of Retirement Preparedness in America.
The Pension Benefit Guaranty Corporation (PBGC) is a government-sponsored enterprise that insures private-sector defined benefit (DB) pensions against plan insolvency. To that end, PBGC maintains two trust funds, one each for single-employer plans and multiemployer plans, which are pension plans formed among a union and more than one employer, usually within the same industry.
The multiemployer insurance program was designed with the (incorrect) assumption that the plans would be safe and unlikely to fail because the inclusion of multiple employers offset the risk that any single one would fail; thus, the program was not designed to handle multiple failures of large plans. Unfortunately, the scenario that was deemed unlikely has materialized, with many multiemployer DB plans now in trouble. Extremely low guarantee levels for participants in failed plans, combined with persistent underfunding, place the pensions of more than one million workers and retirees at risk over the coming years.
PBGC’s Multiemployer Fund Faces Financial Difficulty
Approximately 1,500 active multiemployer plans in the United States currently cover just over ten million participants. Under these plans, employees receive pension benefits that are portable among the employers that jointly maintain the plan. Industries with a significant number of multiemployer plans include building and construction, entertainment, garment manufacturing and trucking and maritime transportation.
But the backstop for these plans, PBGC’s multiemployer plan fund, is in bad financial shape, with a projected deficit of $49.6 billion over the next ten years. PBGC recently reported that there is a 90 percent chance that the multiemployer trust fund will run out of money to pay all scheduled benefits in 2025 or before. If PBGC were to exhaust the multiemployer trust fund and not receive additional funding from Congress, the agency would not be able to pay out guaranteed benefits, which in many cases are already substantially lower than participants were promised to begin with, because PBGC does not insure the entire pension amount earned – more on that below.
PBGC Takeover Is an Unattractive Option for Plan Participants
Even absent the severe financial situation of the multiemployer fund, PBGC’s multiemployer-plan takeover process leaves retirees in any underfunded plan at significant financial risk.
When a single-employer plan faces trouble, PBGC has legal authority to take control of remaining assets and manage the plan in order to prevent impending insolvency. In contrast, because multiemployer plans were originally presumed to be more secure than single-employer ones, PBGC is not legally allowed to take any action for a multiemployer plan until it already has exhausted its assets. Even then, PBGC provides financial assistance to the plan but does not take over administrative duties.1
Moreover, PBGC guarantees only very modest pension benefits for multiemployer plans. In contrast to the single-employer insurance program, which guarantees nearly $60,000 of annual pension benefits for an employee who is aged 65 with 30 years of service, the multiemployer fund guarantees a maximum of just under $13,000 annually for a comparable employee. Every person in a multiemployer plan that is taken over by PBGC faces a cut of at least 18 percent to their pension and some could face cuts of well over 50 percent.
Most concerning of all is that even these drastic cuts constitute a “best-case” takeover scenario – in particular, the figures assume that the multiemployer trust fund is solvent and can cover the insured benefits. If, on the other hand, this trust fund is exhausted, PGBC would only be able to pay out a small fraction of even their modest guarantees.
Congress Needs to Get Serious about Dealing with Multiemployer Plans
There’s no easy fix for dealing with multiemployer plan failures or PBGC’s projected insolvency. The best way to improve PBGC’s fiscal situation is to tackle the root of the problem and prevent multiemployer plan failures – not an easy task. A recent Government Accountability Office (GAO) report found that the two main options to avert insolvencies would be to grant plans legal authority to reduce benefits already accrued by participants and for PBGC to provide some resources to plans at an earlier stage through use of particular financial maneuvers.
The first option could induce financial hardship for some retirees, but cuts would be smaller and more equitably shared among participants than if the plans become insolvent, especially if the multiemployer trust fund is exhausted and PBGC cannot pay guaranteed benefits. The second would involve an esoteric power that PBGC has called “partitioning,” which would allow it to take over only part of a multiemployer plan under certain circumstances.2 This may be a viable approach to help underfunded plans become sustainable for remaining employers and participants after some employers have dropped out.
At the time of the GAO report, several large plans that faced insolvency did not meet the criteria for partitioning, and PBGC did not have sufficient financial resources to use this approach anyway. As some large multiemployer plans (and therefore the multiemployer plan trust fund) have experienced further deterioration in their financial situation since that time, partitioning may no longer be a viable option.
For the longer term, GAO recommended: making DB plan designs more flexible, having them share some risk with participants; addressing ongoing issues that occur when companies leave a multiemployer plan and “orphan” the beneficiaries of their plan and encouraging mergers between plans.
Ultimately, PBGC does not have the funding or legal authority to resolve the multiemployer DB pension problems on its own, and if policymakers don’t act, at least one million participants could face major cuts in benefits; many will receive nothing. And some members of congress are beginning to pay attention. The sooner legislation is passed, the better, because every additional year of the status quo means either larger cuts to participants’ benefits or a larger taxpayer bailout down the road. If PBGC can avoid plan insolvencies, retirees, the agency and taxpayers will all be better off.
Alex Gold served as a policy analyst for BPC’s Economic Policy Project.
View all posts in BPC’s Retirement in America series under Related Stories below.
1 Technically, this financial assistance is provided in the form of loans, but they are almost never repaid.
2 PBGC has only ever partitioned two plans. In these cases, PBGC only provides assistance to “orphaned” participants, whose employers are no longer in the plan.