A Monster-Sized Problem

A Monster-Sized Problem

By Dewey Pearman, Executive Director, Construction Advancement Foundation (CAF)

In the spirit of the season and the approaching Halloween holiday, here’s a horror story for you. It’s about a disappearance. The vanishing promise of retirement security earned over an entire career of commitment and hard work – gone, swallowed after the ground collapsed beneath it.

This isn’t fiction. It’s a terrifying forecast. Just a few weeks ago, the Pension Benefit Guaranty Corporation (PBGC) – which was created to be the safety net for retiree pension plans – published its most recent report. It displayed strong signals of rapidly approaching insolvency in the multiemployer pension program that will impact millions of retirees and their former employers.


Six Years till Doomsday

The PBGC is a federally chartered organization that insures pension plans. PBGC’s multiemployer pension insurance program covers more than 10 million people, about 4.2 million of which are from the union construction sector (ENR/Horizon Actuarial Services). The other 6 million come from varied types of unions and collective bargaining agreements.

By the end of fiscal year 2025, the parachute that was created to protect millions of retirements is projected to run out of money. According to the report, about 125 multiemployer plans covering 1.4 million people are expected to go broke over the next 20 years. About 35 of those plans are in the construction industry, covering about 30,000 people (ENR/Horizon Actuarial Services).

Those 125 failed plans will trigger an increase in claims that will deplete the program’s assets, leading to insolvency by 2025. The PBGC said that projections for fiscal year 2028 show a wide range of potential outcomes, with an average projected negative net position of about $90 billion in future dollars ($66 billion in today’s dollars).

If the multiemployer program runs out of money, significant decreases in payments will come to millions of pensioners. According to PBGC, they would be only a “fraction of current values.” Federal officials have said this will lead to the “elimination of billions in retirement dollars and tens of thousands of jobs” (CNN).

It’s important to note this projection is not an educated guess – it’s calculated based on hundreds of different economic scenarios as required by the Employee Retirement Income Security Act. In short, things look serious from just about every angle.


What Made this Monster?

This crisis wasn’t supposed to happen. Multiemployer pension plans are supported by contributions from many employers and were thus thought to be more stable than single employer plans. And for a long time, they were. But over the last decade or so, economic downturns led to a reduction in the value of assets invested in the stock markets, causing multiemployer plans to become less stable (Baker Donelson).

Also, investment returns have been lower than projected. Over a 20-year span from 1996 through 2016, multiemployer pensions received investment returns about one point below their projected rates (Stanford). Since the rules allowed plans to credit investment returns before they actually became real, the shortfalls started to grow. As participating employers left the plan, the remaining employers became responsible for guaranteeing the projected return. So, the shortfalls kept growing.


Companies Could Wind Up on the Slab

It’s not just retirees that will be affected. An additional and often overlooked consequence of this situation is the impact it will have on companies. Under federal law, all of the companies that paid into these pension plans over the years could be on the hook for a portion of the underfunded liability.

This is enforceable, too – even against company owners in some cases.

Worse yet, if some of the companies have filed for bankruptcy by the time this bill comes due, then responsibility for the unfunded liabilities could fall on the remaining firms that are still in business.


We Must Dig Our Way Out

Reform needs to happen before the multiemployer system ends in premature burial, and it’s going to require an all-hands-on-deck approach.

“Only bipartisan compromises have a chance of succeeding and it is time to renew such bipartisan efforts to find serious solutions,” said PBGC Director Gordon Hartogensis.

Several proposed solutions are currently in the works:

  • The PBGC says the president’s proposed fiscal year 2020 budget could help shore up the multiemployer program by creating a new variable rate premium and a new exit premium. This could raise an additional $18 billion in premium revenue over the 10-year budget window. Also, this proposal has a provision that provides a waiver of these additional premiums to avoid increasing insolvency risks for the most troubled plans.
  • Second, the Butch Lewis Act is another proposed piece of legislation that could also help save multiemployer plans. This act would allow failing pension plans to borrow money to meet their commitments from the federal government. A new office called the Pension Rehabilitation Administration (PRA) would be established within the Treasury that would sell bonds in the open market to large investors and provide long term, low-interest loans to troubled plans with the proceeds. Thus far, Butch Lewis has passed the House. Next it moves on to the Senate.
  • Congress may also consider legislation soon that would launch a new type of shared-risk multiemployer retirement plan called a composite plan. These include features of defined benefit and defined contribution plans, and have new protections in place designed to handle shocks and stress over time.

This struggle isn’t over yet, and there’s still a chance for things to turn around. Many tales of terror and woe have happy endings. In this pension crisis, we still have opportunity for rescue provided we act decisively and work together. To many have sacrificed too much to let this be our final curtain call.






Sources: PBGC, CNN Business, ENR, U.S. Congress, American Enterprise Institute, The Heritage Foundation, Washington Times, CIO, Baker Donelson, et. al.