The President’s proposed 2020 Budget, released March 11, 2019, would shore up the Pension Benefit Guaranty Corporation’s (“PBGC”) multiemployer pension plan insurance fund by increasing premiums, including “variable-rate” and “exit” premiums in addition to the current “flat-rate” premiums. The PBGC’s separate single-employer insurance program has included such premiums for years.
The Multiemployer System
The nation’s 1,400 multiemployer plans, negotiated by unions and employer groups, cover more than 10 million people. As the Supreme Court has pointed out, multiemployer plans provide “cost and risk-sharing mechanisms” and a portable benefit structure to “help ensure that each participating employer will have access to a trained labor force.”
The PBGC single-employer fund guarantees plan benefits up to $5,608 per month, or $67,295 per year at age 65 (adjusted for retirement age, marital status, and form of benefit). The multiemployer fund guarantees only the first $35.75 of the “accrual rate” per month, or $12,870 per year for a 30-year employee.
In fiscal year 2018, PBGC paid $153 million in benefits to more than 62,000 multiemployer plan retirees or their survivors. At fiscal-year end, PBGC reported a modest “positive net position” in its single-employer insurance fund, but a $54 billion deficit in its multiemployer fund ($56 billion in liabilities and assets of $2 billion).
The Looming Crisis
More than 100 plans – dubbed “critical and declining” – are projected to become insolvent in the near term. The collapse of those plans threatens the retirement income of 1.5 million people.
But the impact on the economy would be far greater. Most pension income is spent immediately, creating a “multiplier” effect. By some estimates, spending by people covered by multiemployer plans accounts for nearly $1 trillion in GDP.
As part of the compromise on last year’s Federal budget, Senators Sherrod Brown (D-Ohio) and Orrin Hatch (R-Utah, Ret.) and others succeeded in establishing a Joint Select Committee to address this looming disaster. The Committee had a November 30, 2018 deadline to produce a bill, which was then to be fast-tracked through the Senate HELP Committee. Unfortunately, the Committee could not reach agreement, and no bill was reported out.
Congress Fixed it Once Before
As risk pools, multiemployer plans have always been vulnerable to employer withdrawals, which saddle the remaining employers with “orphan” liabilities. That can encourage more withdrawals and, eventually sending the plan into a death spiral. To address this concern, in 1980, Congress enacted a withdrawal liability regime.
Withdrawal liability is a withdrawing employer’s share of the plan’s underfunding. It is payable in installments that approximate the employer’s previous contributions. In theory, that neutralizes any incentive to withdraw while preserving the plan’s cash flow.
For three decades, these reforms worked reasonably well. Investment gains allowed plans to increase benefits to keep pace with inflation. And claims on the PBGC insurance system were few and far between.
But Things Fell Apart
In the 2000s, many plans fell on hard times, due to continued declines in unionized work and improvements in longevity, cemented by two major recessions and investment losses that could not be recouped. Congress provided tools to troubled multiemployer plans to improve their funding position in 2006 and 2014. Those reforms helped some plans to right themselves, but 100-plus remain in critical and declining status.
As the problem worsened, the PBGC insurance fund itself joined the endangered list. The PBGC projects that the fund will become insolvent by 2025. At that point, it will have only current premium income to pay benefits, and benefit payments would be reduced to pennies on the dollar.
Some of the largest critical and declining plans are likely to become insolvent in the same timeframe, including the Central States Fund (more than 250,000 members) and the Mine Workers Fund (about 75,000 members). As currently structured, the insurance fund is not designed to handle claims of that magnitude, even if it had the money.
There Are Reasons for Hope
The President’s Budget proposal is a step in the right direction. It’s projected to raise $18 billion over the ten-year budget window and keep the insurance fund solvent for 20 years.
The multiemployer insurance program has charged only “flat rate” (per capita) premiums since its inception in 1974. For more than 30 years, the single-employer program has also charged “variable rate” premiums, based on a plan’s unfunded vested benefits. And since 2006, it has had a “termination” premium that, at least anecdotally, helps discourage unwarranted plan terminations.
But increasing PBGC premiums alone will not save the multiemployer system. A variable-rate premium could encourage better funding. Without other reforms, however, it could drive more employers out of the system.
Among the reforms that have been suggested are stakeholder premiums, changes to funding, withdrawal liability, and benefit adjustment rules, stronger governance rules, and clearer rules on plan termination and windup. Spreading the pain across various constituencies could justify a rescue of multiemployer plans, without setting the precedent of a taxpayer “bailout.”
Ways and Means Chairman Richard Neal (D-Mass.) has reintroduced rescue legislation, H.R. 397, the “Rehabilitation for Multiemployer Pensions Act”, with eight bipartisan co-sponsors. And, on March 7, the House Education and Workforce Committee held a hearing on the cost of delay, with testimony from several stakeholder groups and experts.
But We Can’t Wait Too Long
In PBGC’s Annual Report, Director Tom Reeder stated, “As more time passes, the changes required to prevent insolvency become more disruptive and painful for participants, plans and employers.” Though Congress is rarely of one mind, the looming failure of the multiemployer system and the resulting social and economic disruption are powerful arguments for prompt legislative reform.
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The Wagner Law Group closely follows multiemployer legislation while advising on current-law options for multiemployer plans, participating employers, prospective purchasers, withdrawn employers, active employees, and retirees. We also follow other federal and state legislation that would affect employee benefits. Please contact Israel Goldowitz or your regular Wagner Law Group lawyer for more information.