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“The most threatening issue to our company’s survival beyond 2020 may not be the pandemic, oil shocks, or civil unrest, but the failure to support and reform the multiemployer pension system.”
In less than five years, the biggest multiemployer plan, Central States, Southeast and Southwest Pension Plan, which covers 400,000 participants, will become insolvent. But it doesn’t stop there. If Central States becomes insolvent, employers participating in that plan could be faced with billions of dollars in liability, causing them to go under as well. Many of these employers contribute to other multiemployer plans, which will also go under when bankrupt businesses stop contributing.
When Central States fails, so does the multiemployer program of the Pension Benefit Guaranty Corporation (PBGC), which insures the benefits of thousands of workers and retirees. By its own projections, the entire multiemployer program will go bankrupt in 2025.
Seeing this, you may think that there is still time left to address this. 2025 after all is still over four years away. However, this issue isn’t new. It has hurt and will continue to hurt businesses and workers even before the bankruptcies hit in 2025.
Over the years, some of these plans have been financially hurt because of the decline in participating employers, bankruptcies, deregulation, and modernization. Although contributing employers have declined, the number of individuals eligible for these benefits has not.
To address the issue of employers leaving these plans, in the 1980s Congress imposed an exit penalty on employers, called withdrawal liability, which locked remaining employers into the system (unless they went bankrupt and left the liabilities to everyone else). Although well-meaning, withdrawal liability also is the biggest reason that no new employers want to join these plans, causing the liability for the remaining employers to increase both with respect to contributions and withdrawal liability.
This is not just an academic exercise. As Congress waits for Central States, the PBGC and other plans to go bankrupt, employers and employees around the country are paying the price of inaction. We asked our members, and this is what they had to say.
With respect to contributions, some employers are paying nearly half of wages as contributions to the plan, even though benefits have been cut. One warehouse employer pays nearly $20,000 per year per employee whose average pay is $40,000 per year. Another small employer told us that their contributions doubled over a 12-year period.
These liabilities also are impacting hiring. One employer told us that their employee count has decreased from 550 in 2008 to 450 in 2020, directly as a result of the risk the multiemployer funding crisis has put on the company. In fact, the same employer said that “We could have another 250 employees if we didn’t have this issue.” Part of the reason is that for every new employee hired, withdrawal liability goes up. For one employer, there would be a $190,000 increase in withdrawal liability for each new full-time employee added to Central States, which is similar to another employer’s liability which is at $200,000 per new hire.
None of our members oppose withdrawal liability if they were simply paying what they owe for their own employees. However, as noted above, because of the way the rules currently work, employers who remain often are paying the liabilities for other employers’ employees, including, at times, those of their competitors. With every year that Congress waits, the liability goes up. For one employer, its withdrawal liability has gone up 67 percent in the past three years, and it is now greater than the total company revenues post-COVID and 10 times their union payroll. For another company with only 35 employees and annual payroll of about $3 million, their current withdrawal liability is $15 million, roughly five times the company payroll.
Even though the full amount of withdrawal liability isn’t due until an employer actually withdrawals, the threat of it hanging over an employer has very damaging impacts. One large Ohio bakery lost its primary banking relationship due to the employer’s withdrawal liability exceeding its company revenues. Not only did they struggle to find a new bank, they also needed to mortgage their business to get financing. Unfortunately, this is not a unique case. Many of our members told us that the mere prospect of withdrawal liability negatively impacts their credit rating, resulting in much higher borrowing costs.
Many small businesses can’t wait it out. Often, for small business owners, the sale of the business will help owners and their families finance their retirement or provide for their children. One small Ohio manufacturing company is planning to sell the company within the next few years. The withdrawal liability will wipe out any gains on their almost 90-year old family business. Similarly, we heard from a son who purchased his father’s concrete construction business only to find out he now has a withdrawal liability 2 times greater than the value of the company.
The need for multiemployer pension funding reform is not new and the problem is not getting better. In fact, the COVID-19 pandemic has only made the issue worse. While Congress waits for the eventual bankruptcies of plans, employers, employees, retirees and the PBGC, companies that are trying to weather the COVID-19 storm will, at best, not hire additional workers or provide raises or additional benefits. At worst these businesses will fail, leaving their employees jobless. All this simply because Congress won’t act. But our employers are acting, and through this letter implore Congress to act.