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One of the most touted components of the Biden administration’s $1.9tn American Rescue Plan was a provision to rescue “multiemployer” blue collar union-sponsored pension plans from threatened insolvency. There are about 1,400 of these plans in the US, which cover the retirement benefits for about 10.8m workers.
Now the rescue is turning into a political and financial disaster. It had been known for years that hundreds of these plans have been struggling to meet their obligations to their beneficiaries. The largest of the troubled multiemployer plans, the Teamsters union Central States Pension Fund, covers nearly 400,000 workers and retirees.
By last year, the financial condition of many plans had become so dire that the federal programme to provide back-up insurance to beneficiaries was itself projected to become insolvent by 2026. Union-friendly members of Congress and senators, in particular Sherrod Brown of Ohio, pushed the team of President Joe Biden to incorporate a relief plan for federally guaranteed pension plans that would provide (forgivable) 30-year federal loan along with other support.
The cost of the bailout was estimated by the Congressional Budget Office to be about $86bn, of which $82bn would be spent in 2022. If everything worked out, that would have been a good talking point for Democratic candidates during the midterm elections next year, especially in the hotly contested rust-belt states.
But rather than specify the actuarial details of how the rescue would work, the congressional sponsors and the administration left this job to the experts at the Pension Benefit Guaranty Corporation, a US government agency. They may regret that decision.
When the PBGC published its “interim final rule” for pension relief in July, it was greeted with a storm of outrage from employers, employees, unions, asset management companies and the bailout’s political sponsors. The PBGC raised the cost estimate for the multiemployer plan rescue, first to $94bn in July, then to $97bn by September. Not good optics.
Worse, though, the PBGC specified that any “special financial assistance” (SFA), such as the grant-like forgivable loans, had to be invested in nothing riskier than investment-grade bonds. According to a comment from the joint employer-employee National Coordinating Committee for Multiemployer Plans: “Today, the expected return on a portfolio of investment-grade bonds is approximately 2 per cent . . . that will create a significant funding shortfall which will result in plans becoming insolvent as early as 2037.”
Even before then, the unions and employers who act as trustees for the multiemployer funds are probably facing legal troubles if they accept bailout money. As the committee went on to point out: “Trustees of such [troubled] plans who decide to take SFA face the risk of litigation from active employees, while those trustees who elect not to seek SFA risk being sued by retirees.”
In other words, what started as a programme to provide some free money for pension bailouts will start a generational war between active workers and retirees. Some of us believe such a war was coming anyway, and maybe the PBGC and its actuaries are right to formally declare hostilities.
You may think the PBGC is being a bit narrow-minded in specifying investments no riskier than investment-grade bonds, but there is some significant history here. Consider the largest prospective recipient of the SFA, the Central States Pension Fund. The Teamsters union general president is James P Hoffa, the son of Jimmy Hoffa, a notorious president of the Teamsters and founder of the Central States fund.
There is rich literature and filmography on the controversies over how Hoffa Senior’s associates managed the fund back in the 1950s and 1960s, including the fund’s investments in casinos in Las Vegas. While the fund has since overcome that notoriety, the truth remains that its beneficiaries have suffered benefit cuts and its long-term solvency is still in question. So perhaps the conservatism of the PBGC’s rule-making is understandable.
The bigger question now is whether the stalled bailout of the multiemployer plans is a preview of a coming struggle over generational equity. Even solvent, conservatively run pension plans are expecting a lot of today’s younger workers.
The demographic reality that working-age populations have peaked in the developed world means that the profits and debt service payments supporting pensioners are being paid by fewer and fewer people over time. I do not believe that is sustainable.
Unfortunately, this year’s shambolic “rescue” of the multiemployer plans is turning into yet another example of failed pension promises. Voters in key industrial states will notice, and remember.
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