Casey-Pomeroy Bill Would Bail Out PBGC, Union Pensions

Pension Benefit Guaranty Corporation, like Fannie Mae and Freddie Mac, is a case of “too big to fail.” At least various members of Congress see it that way. And they are planning a push for legislation designed to shore up underfunded multiemployer private-sector pension funds, but which would put taxpayers on the hook for billions, if not tens of billions, of dollars over the long term. Sen. Bob Casey Jr., D-Pa., and Reps. Earl Pomeroy, D-N.D., and Patrick Tiberi, R-Ohio, the driving forces behind this measure, seek to shift the primary responsibility of keeping pensions adequately funded from unions and unionized employers to the general public. It’s another example of the bailout culture in action.

National Legal and Policy Center covered this issue at length last November. Late that October, Rep. Pomeroy had introduced his Preserve Benefits and Jobs Act (H.R. 3936). The measure would bail out the deficit-ridden Pension Benefit Guaranty Corporation (PBGC), itself a de facto ongoing bailout agency, and make it easier for trustees of troubled private-sector pension plans to dump their liabilities onto the corporation.

Congress created PBGC in 1974 as part of the Employee Retirement Income Security Act (ERISA). The corporation acts as an insurance company for traditional pension funds. In a manner similar to Federal Deposit Insurance Corporation, PBGC derives its operating revenues through insurance premiums rather than public expenditures. And just as FDIC is charged with the responsibility of taking over failing commercial banks, PBGC is charged with the responsibility of taking over private-sector defined-benefit plans (i.e., those with employer-determined asset allocation) whose sponsors are unwilling or unable to continue as fiduciary agents. In most cases, a sponsor voluntarily terminates a plan and requests a PBGC takeover, though in certain extreme situations the corporation forcibly takes over a plan. Either way, the corporation pays promised annuities according to statutory per-worker limits.

There are now nearly 30,000 PBGC-insured defined-benefit private-sector pension plans in operation affecting a combined 44 million workers, retirees and family members. That might seem a lot. But back in the Eighties there were more than 100,000 plans in force. The decline is attributable mainly to the rise of the 401(k) and other defined-contribution (i.e., employee-driven) retirement instruments and to Pension Benefit Guaranty Corporation takeovers. The Washington, D.C.-based PBGC currently manages about 4,000 plans, providing monthly benefit checks to about 750,000 persons, not including money it owes to another nearly 750,000 future participants. Pensions previously sponsored by Bethlehem Steel, the Chicago Sun-Times, Delphi, LTV Steel, and United Airlines are among the agency’s more dramatic recent acquisitions.

There are two kinds of defined-benefit pension plans: single-employer and multi-employer. The Casey-Pomeroy-Tiberi legislation deals with the latter. Here, employers within a specific industry pool their resources to minimize the impact of a plan meltdown by one of its participants. Typically, a plan involves joint employer-union management. Multi-employer plans account for only about one-fifth of all existing defined-benefit plans, covering about 10 million current and future beneficiaries. They also are less generous in the event of a government takeover. Under a single-employer plan, the annual maximum benefit varies by age of retirement and other factors, but can reach as high as $54,000. In multiemployer funds, however, the maximum is only $12,870. The Casey-Pomeroy-Tiberi legislation would raise the latter to $21,000.

So why is there a need for this bailout legislation? Put simply, it addresses a crisis largely of the government’s own making. The very concept of social insurance, whether for pensions, savings accounts or cropland, undercuts self-discipline of the firm. Moreover, the institution of a bailout often may make for a bigger problem later on – and another bailout. The Senate bill, the Create Jobs and Save Benefits Act, unveiled this March, like its House companion measure, explicitly authorizes taxpayer support for “orphan” multiemployer pension plans; i.e., plans to which one or more (and conceivably all) employers have stopped making contributions.  Rather than raise employer premiums on sponsor participants, which Congress did four years ago as part of the Pension Protection Act, the new legislation would stick taxpayers with additional risk in two ways.

First, it would create a “fifth fund” within PBGC. The language of the bill is clear: “(O)bligations of the corporation that are financed by the [fifth fund] shall be obligations of the United States.” In other words, the bill would shift the burden of paying orphan fund claims from the sponsor to the general public. And benefit levels would be guaranteed to be no lower than before. The proposed per-retiree ceiling hike from $12,870 to $21,000 would create an additional incentive for individual sponsors to terminate their pensions and hand the ball over to PBGC.

Second, the legislation would allow trustees of union-sponsored multi-employer pension funds to form alliances with trustees of plans in unrelated industries. Currently, multiemployer plans must be in the same industry group. The purpose behind allowing a broader pooling of resources is to enable unions to evade the “last man standing” rule. This regulation, based on 1980 legislation to amend ERISA, stipulates that if a sponsor pulls out of a multiemployer plan, all remaining firms must cover that employer’s liabilities or pay a large exit fee. Unions and union-friendly employers like the arrangement because it gives workers an opportunity to keep their pensions if they change jobs within the same industry. Unfortunately, the rule unwittingly has encouraged plan terminations.

Multiemployer plans are in trouble, especially since the onset of the current recession. In 2006, when the stock market was rapidly rising, only 6 percent of all multiemployer plans were fully funded; i.e., assets matched or exceeded liabilities. This compared with 31 percent of all single-employer pensions. Reports in 2009 issued by the Hudson Institute and Moody’s Investor’s Service indicate that with the onset of recession, the problem has gotten worse. The number of multi-employer plans in “critical” condition, defined by the Pension Protection Act of 2006 as plans whose assets are less than 65 percent of liabilities, has risen. Whereas 230 plans were in this red zone at the end of 2008, fully 640 were there by the end of 2009.

But this crisis was in the making well before 2008. The lead author of the Hudson Institute report, Diana Furchtgott-Roth, several months ago explained the role of organized labor:

Why the persistent underfunding? Some union leaders like to achieve wage increases and new benefits when they renew collective contracts, in order to make their reelection more likely. Ensuring that pension plans are kept well-funded takes more work for little visible effect – and may well work against winning more benefits by underscoring their cost to the employer.

In other words, union officials and employers under union contract prefer to paint an overly rosy picture to members than jeopardize their confidence. Accentuating the positive keeps members in the fold and contributions coming in. In the meantime, employers continue to scrap their plans because they can’t afford to keep them over the long run, especially in the automobile, steel, airline and other union-dominated industries. Given that the Pension Protection Act requires participating employers to be solvent within seven years starting in 2008, more than ever they are facing the choice of going broke or handing over operations to PBGC.

How much money potentially is involved? The Moody’s study indicated that some 1,500 multiemployer plans, a great many of them representing unionized firms, were a combined $165 billion short. Cumulative assets stood at only 56 percent of liabilities at the end of 2008. True, that doesn’t automatically mean that each individual plan won’t deliver on promised benefits. But even with a bull market on the horizon (not too likely given recent health care and other mandates on employers), 56 percent full funding, collectively speaking, represents a looming disaster. Meanwhile, taxpayers may still be liable for losses at Pension Benefit Guaranty Corporation. Fannie Mae and Freddie Mac, for example, thus far have cost taxpayers a combined $145 billion to keep afloat, with the final tab projected by the Congressional Budget Office at $389 billion. What makes anyone think PBGC can’t become a fiscal black hole in its own right?

The dynamics of the natural phenomenon, the ‘tipping point,’ raises the likelihood of a taxpayer-funded bailout of multiemployer pensions. As more pension sponsors terminate their plans, especially with premiums rising, they will leave an ever-shrinking band of sponsors with the responsibility of paying benefits. Those survivors in turn would become more likely to have PBGC carry the load. Nobody wants to be the last man standing. The accelerating flight from commitment ultimately makes PBGC the manager of the last resort. As it is, the corporation now operates at a deficit of about $22 billion, a figure it projects to reach $34 billion by 2019. Multiemployer plans by then would comprise $4 billion of the deficit, up from the current $870 million.

And this could be on the low side if the retiree-to-worker ratio continues to rise – as it likely will. At the end of 2008, for example, the Teamsters’ Central States Pension Fund had 200,000 retirees but only 80,000 active workers. Even a one-to-one – never mind five-to-two – ratio puts a retirement plan in a virtually inescapable hole. Barring a sudden burst of new participants, benefit payouts eventually will overwhelm contributions. Pension trustees, at some point or another, will decide to give their plan to the government. Pension Benefit Guaranty Corporation is headed for a bailout.

Supporters in Congress argue that the proposed legislation isn’t really a bailout, but a fair-minded way of removing crushing burdens on sponsors. By absolving employers and unions from having to keep unsustainable plans afloat, the legislation gives troubled funds a fresh start and provides an alternative to a government company takeover, a la General Motors or Chrysler. “Multi-employer plans face unique challenges that are overburdening pension plans and the bottom lines of companies,” said Senator Casey when he introduced his bill five months ago. Rep. Pomeroy noted at last year’s unveiling: “The cornerstone of this bill is temporary pension funding relief that eases an employer’s obligation to make up for the investment losses that pension plans experienced in 2008 by making significantly greater contributions in the coming years. At the same time, employees would get important assurances that their retirement benefits will continue to grow.” Rep. Tiberi also stated at the time: “It’s about the economy; it’s about jobs.”

Employers and union officials who stand to benefit similarly argue that the issue is fairness. Mike Smid, chief operations officer of the financially-troubled Overland Park, Kan.-based Teamsters-contracted trucking company, YRC Worldwide, likewise remarked that the Casey bill “will protect our employees’ retirements and lead to a more competitive retirement contribution system for the industry…This is an opportunity to protect jobs and pensions.” Joel Anderson, president of the Teamsters-affiliated Central States Working Group, International Warehouse Logistic Association, cites the ‘last man standing’ rule as the prime culprit. “We are willing to meet our own obligations, but don’t ask us to serve as deep pockets for ill-conceived congressional policy,” he writes. “We only seek to pay for those workers who worked for us.”

All this is nominally true – which is to say, misleading. What supporters overlook here is that the proposal “solves” the funding gap in the short run by exacerbating it the long run. Vincent Vernuccio, labor policy counsel for the Competitive Enterprise Institute, notes the bailout likely would produce three highly negative consequences. First, though PBGC covers only private-sector employers, the proposed rescue would establish a legal precedent for bailouts of public-sector pensions. And those would be expensive. According to a paper released this spring by the American Enterprise Institute, the true combined liability of state employee retirement plans in 2008 (the vast majority of which were of the defined-benefit variety) was in excess of $3 trillion. What’s more, state and local pension plans on average had a 16 percent probability of covering all accrued liabilities. Second, even assuming the “fifth fund” would be constrained to the private sector, the bailout could be expanded anyway. That’s because as PBGC’s overall deficit rises, so would the amount of money it would need to operate. Finally, the proposed legislation has no statutory limit on the amount of taxpayer money to be committed. Without such a ceiling, there would be little to stop PBGC from using the fifth fund as a way of covering losses in its other funds.

Thus far, the Casey-Pomeroy-Tiberi legislation has yet to be reported out of committee in either the House or Senate. But congressional Democrats, sensing their days as a majority party could be over come January, may give it a huge push, and with the sort of parliamentary skullduggery that facilitated passage of President Obama’s health care overhaul. One sign of likely movement is the recent announcement of support by Senate Majority Whip Dick Durbin, D-Ill., a longtime union supporter. Barack Obama, who virtually has defined himself thus far as “the bailout president,” almost certainly will sign the bill if and when it hits his desk. As in so many other areas of the economy, public-private partnerships are costly mainly to those not invited to participate. If Congress really wanted to prevent a rolling taxpayer bailout, it would privatize PBGC instead.


Union Pension Bailout Bill Would Burden Employers and Taxpayers.

Two New Reports Highlight Union Pension Shortfall.

“New Report Shows Union Pension Shortfall in the St. Louis Area.”

“Union-Sponsored Pension Plans May Be Unstable Investments.”