Federal Taxpayer Bailout Likely For Big Union Pension Funds

A pension fund administered by the Teamsters union, with more than 43,000 participants in Michigan, expects to run out of the money it needs to pay its beneficiaries by 2025.

Due to the size of this fund and the benefits it has promised to pay out, some experts project that its insolvency will single-handedly bankrupt the federal body created to insure private pension funds, the Pension Benefit Guarantee Corporation.

The Teamsters fund is among the largest union-sponsored multiemployer retirement plans that are underfunded and in danger of not being able to meet their obligations in the next decade. This fund, called the Central States Pension Fund, is estimated to have assets sufficient to cover only 33 percent of its promises. It has $36 billion in unfunded liabilities, according to a recent filing with the federal government.

When this and similar multiemployer pension plans fail to meet their pension obligations, the PBGC is supposed to pay a portion of the benefits promised to retired workers. But the PBGC itself projects that it will no longer have enough money to pay retirees by 2025.

To avoid reduced benefit payments to their members — or seeing no benefit payments at all — labor groups are lobbying Congress for a bailout. Earlier this year, congressional leaders created a committee of senators and representatives to look at the multiemployer pension problem.

The PBGC estimates that as of 2015, multiemployer pension plans in the United States had a combined $638 billion in unfunded liabilities. Further, 96 percent of the more than 10 million workers and retirees affected are in multiemployer pension plans that have less than 60 percent of the funding needed to pay benefits.

The only legislative proposal introduced so far is a bill called the Butch Lewis Act. According to Rachel Greszler, a fiscal policy expert at The Heritage Foundation, the bill is essentially a taxpayer bailout of the underfunded plans.

“The Butch Lewis Act is to just stand behind these plans 100 percent and that would, of course, create the incentive for any defined benefit plan that’s out there today to not [make proper funding assumptions] because they know there’s no consequences,” Greszler said. “Congress needs to be careful because whatever they do for the private sector is going to set the precedent for what they do with state and local plans.”

To put the magnitude of the issue in context, the debt of multiemployer pension plans is a fraction of that accumulated by states and municipalities across the nation. That amount was around $6 trillion as of 2017, according to a report from the American Legislative Exchange Council.

U.S. Rep. Debbie Dingell, D-Dearborn, pushed back against the claim that the Butch Lewis Act is a bailout but also said she doesn’t want to take a “single penny” from the retirement pay workers were promised. Dingell is a member of the bipartisan, bicameral group of federal lawmakers investigating the issue.

“The bill calls for long-term, low-interest loans to critical and declining plans that will be paid back over time. This is not a union bailout. The collapse of these pensions will have repercussions across the whole economy,” Dingell said in an emailed statement. “If we do not act now to provide a loan and Central States goes under, the retirees who have lost their pensions will have to turn to the government to put food on the table and keep the lights on in their homes, which will increase government spending.”

Dingell said she would be open to solutions other than the Butch Lewis Act that “protect benefits people earned over a lifetime of work, and prevent the failure of a large pension plan which could take down the PBGC.”

Richard Dreyfuss is an actuary and consultant who serves as an adjunct scholar with the Mackinac Center for Public Policy. He said that while some steps could be taken to mitigate the pension fund’s insolvency, he doesn’t believe a bailout can be avoided, though he is opposed to one.

According to Dreyfuss, when the number of pension plans seeking insurance from the PBGC overwhelms it, Congress will be forced to come up with additional cash to avoid cuts to promised benefits. Currently, the PBGC is funded by annual premiums paid by pension plans. As of 2016, the PBGC was projected to be $79.4 billion short of what it should have on hand to pay promised benefits, according to a 2017 report from the Government Accountability Office.

Dreyfuss said the underfunded pension funds should cut benefits, and the PBGC should raise the yearly premiums it charges the plans.

In May 2016 the U.S. Department of Treasury rejected an application Central States made to reduce benefits, saying the proposal it received would not prevent the plan from becoming insolvent.

Zachary Christensen, a policy analyst with the Reason Foundation, added that trends in the investment market have increased the pressure on pension funds.

“The trend in lower investment returns — often called the ‘new normal’ — is creating pressures for public and private pension funds. To fulfill promised retirement benefits, contributions must be higher than previously estimated. Simply put, pension funds won’t have as much available as previously projected, and plan managers are struggling to adjust to the need for more funding,” Christensen said in an email.

While Greszler said that the Central States is no longer eligible to apply for benefit reductions, she believes other reforms could prevent taxpayers from picking up the tab for private sector union promises.

“Look, you have to start reducing benefits, even for people that are receiving them today, so that future workers don’t get zero and everyone before gets 100 percent,” Greszler said.