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On Wednesday, July 24, the U.S. House of Representatives passed H.R. 397, The Rehabilitation for Multiemployer Pensions Act of 2019, which would establish a federal loan program for financially troubled multiemployer pension plans. The U.S. Chamber of Commerce is encouraged by the House’s recognition of the multiemployer pension funding crisis; however, solving this multibillion-dollar problem for now and into the future will take more than H.R. 397.
The first step in solving a problem is recognizing that there is a problem. According to the Congressional Research Service, in 2015, there were 1,413 multiemployer pension plans covering approximately 10.3 million people. According to the same report, approximately 10 to 15 percent of participants are in plans that will become insolvent within 20 years. At the same time, the Pension Benefit Guarantee Corporation (PBGC), the federal backstop that insures these plans, estimates that it will become insolvent by 2025. Once insolvent, the PBGC will only be able to pay benefits based on premiums received. According to a 2013 GAO report, the “amount [of benefits] would be further reduced to an extremely small fraction of what PBGC guarantees, or nothing.” This means that approximately 1.3 million people will have their benefits slashed, perhaps to nearly nothing, in the very near future.
The current financially strapped plans are not the only concern. The collapse of one such plan could cause very large withdrawal liability assessments for employers in that plan, which could cause severe financial distress, including bankruptcy, for those employers. In turn, that scenario could affect that employer’s ability to contribute to other plans, which could bring down a once financially healthy plan. Given that many employers contribute to more than one plan, this “contagion effect” is a very real possibility.
Multiemployer plans are an integral part of today’s economy. According to the National Institute on Retirement Security, in 2016 pension payments from multiemployer plans collectively supported:
- Nearly 543,000 American jobs that paid nearly $28 billion in labor income;
- $89 billion in total economic output nationwide;
- $50 billion in GDP; and
- $14.7 billion in federal, state, and local tax revenue.
The multiemployer pension funding crisis is not just a threat to these plans and retirees, but it is a threat to the entire economy.
H.R. 397 would put money into the system, which is a start. However, more must be done so that 10, 15 or 20 years from now we are not exactly where we are today. This is why the U.S. Chamber, along with over 100 employers, trade associations, unions and plans, signed onto a letter to Congressional leadership urging them to take a holistic approach to this problem.
Unfunded liabilities related to withdrawn employers must be removed. These plans did not become underfunded overnight. As noted in the 2013 GAO Report, “as a result of investment market declines, employers withdrawing from plans, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future.” Unfunded liabilities from withdrawn employers have created a unique problem that causes the cost for these liabilities to be spread across other employers that remain in the plan, which in turn makes exiting the plan almost impossible while at the same time strongly discouraging any new employers from joining. According to the Society of Actuaries, this liability has increased six-fold from 2001 to 2015. As such, any solution must find a way to remove these liabilities (also known as partition) to allow both the plans and employers to start fresh.
PBGC Funding Must Be Addressed in a Thoughtful, Systematic Way. A large part PBGC’s funding is from premiums and investments on premiums. The entire PBGC multiemployer premium system must be reviewed and revised to address the current situation and how the PBGC will function in the future. However, increasing premiums alone will not solve this problem. In fact, a dramatic increase could make the problem worse by forcing employers out of the system. Any premium increase must be capped at a level that does not force employers out of the system, or worse, out of business. And, most importantly, before any increases are put in place, the PBGC must show the financial need for the increase and only after consideration of all funding sources, including from participants in high risk plans that will be the beneficiaries of outside aid.
This Situation Should Not Be Repeated. Over the years, Congress has tried to address multiemployer pension funding issues. However, many of the solutions have addressed the problem only after it has occurred. In addition, the solutions have not provided tools to the trustees running these plans that would enable them to manage their plans more proactively when they know that the plans will face financial uncertainty. As such, any legislative solutions must allow trustees to address projected funding deficiencies before the deficiencies happens instead of waiting until the plan is in crisis. These tools also should include the option to implement new plan designs that will better suit today’s workforce and that reflect bargaining agreements between employers and unions.
Withdrawal Liability Should Not be Increased. Most employers agree that if they decide to withdraw from a multiemployer plan, they should pay for any unfunded vested liabilities of their own employees. However, because of bankrupt employers leaving the system and the withdrawal liability rules, the cost of withdrawing may be too steep for current employers because of the need to account for those who withdrew before without fully funding their employees’ benefits. By removing unfunded liabilities of withdrawn employers and giving trustees tools to manage these in the future, withdrawal liability should become more manageable. As such, any solutions need to make sure that changes to withdrawal liability do not have unintended consequences and make the multiemployer system less stable, including making it more difficult to leave or join a plan.
There is no one magic bullet for solving the multiemployer pension funding problem. However, a thoughtful, holistic approach that takes into consideration all aspects of the problem from all interested parties will go a long way in not only solving this problem in the near future but also ensuring economic stability for employers, employees and these plans in the years to come.