Multi-employer pensions are in financial trouble—and any solution is likely to mean workers end up with smaller retirement benefits.
The window is closing on our last best chance to protect the pensions of 10 million American workers and retirees.
These workers are in multi-employer plans—traditional defined benefit pension plans jointly funded by groups of employers in industries like construction, trucking, mining and food retailing. Although many of the country’s 1,400 multi-employer plans are healthy, 1.5 million workers are in plans that are failing. And that threatens the broader system.
Losses during the crash of 2008-2009 left those plans badly underfunded. In many cases, the problems have been compounded by declining employment in their industries, which leaves sponsors with a growing proportion of retirees to current workers paying into the pensions funds.
The plans are insured by the Pension Benefit Guarantee Corporation, the federally sponsored agency funded through insurance premiums paid by plan sponsors. But the level of PBGC protection for workers in multi-employer plans is—by design—much lower than for single-employer plans. Multi-employer plans historically have been stable, so policymakers set premiums, and benefits, at a lower level than for single-employer pension plans.
But the PBGC projects that about 200 plans will become insolvent over the next two decades. If it has to fund benefits for those plans, many beneficiaries will suffer. That’s because the maximum benefit for these retirees is much lower than for those in single-employer plans—it’s capped this year at $12,870 for a worker retiring at age 65, compared with $59,318 for workers in single-employer plans. PBGC estimates that multi-employer workers with 30 years or more of service would lose an average of $4,000 in annual benefits.
Policymakers, legislators, business and labor groups have debated the issue for two years. Now we’re at a key turning point, argues Josh Gotbaum, the PBGC’s director. “If Congress doesn’t act this year, it is very likely that major plans will fail and the multi-employer system will collapse,” he told me in an interview this week.
It’s not that plans will run out of money this year or next, Gotbaum says. Instead, he says employers could start scrambling off a sinking ship, accelerating pressures on the system. Under the Employee Retirement Income Security Act (ERISA), one employer departing a multi-employer plan must make an exit contribution capped at two years of annual contributions. With a mass exodus, each employer pays a full proportionate share of the plan’s underfunded liability.
“We have a prisoner’s dilemma going on,” Gotbaum says. “Employers are looking at the other employers and thinking that they want to beat the rush—they don’t want to be the last one standing.”
Fixes would require revisions to ERISA, which governs private sector pension plans. Gotbaum says that needs to happen this year because “virtually all the congressional talent that has focused on this issue for the last year is leaving.”
Representative John Kline (R-Minnesota), chairman of the House Education and Workforce Committee, will rotate out of that position next year. Two others aren’t seeking re-election—House Ways and Means Chairman David Camp (R-Michigan) and Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin (D-Iowa).
If Congress doesn’t act this year, employers may be encouraged to quit the system, Gotbaum says, because they’ll conclude that change will be postponed until after the 2016 presidential elections.
Gotbaum hopes a reform package will include a mix of higher multi-employer insurance premiums, to beef up the agency’s ability to backstop plans that fail, and ERISA reforms that help other plans restructure so they can remain solvent. But he won’t be on the scene to help craft a solution; he leaves next month after four years at the PBGC to return to the private sector.
A coalition of employers and labor unions has been pushing for changes that would let healthy plans adopt more flexible plan designs aimed at keeping them in the system. But one controversial element has drawn strong pushback from pension advocates; it would give plan trustees wide latitude to cut the benefits of current retirees—albeit at levels slightly higher than PBGC guarantees.
Gotbaum is optimistic that an agreement could be forged after this year’s midterm elections. “Congress is taking this seriously,” he says. “It’s been difficult for them to reach agreement, but they clearly are trying. Democrats and Republicans both know something needs to be done.”
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