A “Critical” Issue with Pensions

Chantel Sheaks
Vice President, Retirement Policy, U.S. Chamber of Commerce

Published

February 10, 2022

Recently, this blog highlighted the continuing decline in union membership. There are likely many explanations for that decline. Nevertheless, unions have some selling points to recruit new members. One is the promise of a stable pension in retirement. But this promise doesn’t always bear out. Take, for example, the main pension plan of the Retail, Wholesale, and Department Store Union (RDSWU).

On its website, the RWDSU states that “union workers are 54 percent more likely to have employer-provided pensions…” And indeed, most RWDSU members are part of the Retail, Wholesale & Department Store International Union and Industry Pension Fund (Pension Fund).

But there’s a bit of a problem. The Pension Fund is considered in “critical” status by the federal government. It is just 68.4% funded and has a nine-to-one ratio of retirees to active employees—meaning simply that more people are taking out than are putting in. Finally, union pension plans typically have a five-year vesting window, in an industry where workers switch jobs frequently. So a worker could put money in without a chance to take it out at retirement, unless they take a job at another company that is part of the same pension plan.

These problems are not unique to the RWDSU, of course. To understand why, a little context will help.

Unionized workers typically are part of what’s called a multiemployer pension plan, and it works much differently than what most people are used to. Most workers today contribute some of their paycheck to a 401(k) account, money that is always theirs, and their employer makes a matching contribution that also belongs to the employee, generally after working three years. When the employee leaves, the account belongs to the employee to do what she wants with it.

Multi-employer plans work differently. With these plans, numerous employers make contributions on behalf of their employees, and, if the employees stay in the plan long enough, the pension plan will pay a monthly benefit for life. But again, that only works if an employee remains part of the plan long enough – usually at least five years. If not, all contributions made on the employee’s behalf stay in the pension plan, and the employee doesn’t get anything.

Even for employees who work long enough, for plans that are in critical status, the final benefit probably will be much less than the contributions made on the employee’s behalf. This is because plans that are in critical status are required to come up with a rehabilitation plan. This is done by a combination of cutting benefits, increasing employer contributions, and adding a surcharge on all participating employers.

The reality is that the rehabilitation plan makes the contributions much higher to cover not only the current employees’ future benefits but also to pay benefits for retirees and inactive employees, including employees whose employer left the plan.

Given the high costs associated with multiemployer plans that are in critical status and the risk that workers will see benefits that are less than contributions, assuming they actually meet the five-year vesting requirement, a much better solution would be for workers and employers to contribute to a 401(k) individual account that the employee owns. But don’t expect unions to embrace that solution any time soon.